Andersons Inc (ANDE) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Andersons, Inc. Earnings Conference Call. My name is Stacy and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [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, Mr. Nick Conrad, Vice President of Finance and Treasurer. Please proceed.

Good morning everyone, and thank you for joining us on the Andersons, Inc.'s 2011 first quarter conference call. As you know, certain information that will be discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in forward-looking statements, as well as, as a result of many factors, including general economic conditions, weather and competitive conditions, conditions in the Company's industries, both in the United States and internationally, and additional factors that are described in the Company's publicly filed documents, including its '34 Act filings and the 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. 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.

During the quarter, the Company re-evaluated its reportable segments. As a result, the Grain & Ethanol Group was separated into two reportable segments in the press release yesterday, specifically the Grain Division and the Ethanol Division. The Company's investment in Lansing Trade Group is included in the Grain Division. Segment information for earlier periods was restated for comparability purposes.

This conference call is being recorded and can be accessed on our website. Mike Anderson, Chairman and Chief Executive Officer; Denny Addis, President of our Plant Nutrient Group, and I will be available for questions at the end of the call. Mike?

Thanks, Nick, and good morning everyone. As we announced yesterday in our press release, we generated record net income of $17.3 million or $0.93 per diluted share on revenues of $1 billion. 2010 we reported net income of $12.3 million or $0.66 per diluted share on $722 million of revenues. Revenues for the quarter were up due mainly to an increase in average grain price.

The Grain & Ethanol Group had a good first quarter with operating income of $18.7 million versus $20.7 million a year ago. Grain Division led these results with record operating income of $15.1 million being reported. This compares to $12.2 million being earned in the same period of the prior year. The division benefited from continued strong space income and record first quarter earnings from its investment in Lansing Trade Group.

Grain Division revenues for the quarter were $638 million, which is up significantly from the $402 million reported in the prior year. This revenue increase was primarily due to the rise in grain prices. The Ethanol Division earned an operating income of $3.6 million this quarter. In comparison, the division earned $8.5 million during the same period last year. The decreased income is the result of a decline in the earnings of the three ethanol limited liability companies. The LLCs have been negatively impacted by lower ethanol margins, as the price of inputs, primarily of corn, have outpaced the increase in wholesale gasoline prices or ethanol prices. Total first quarter revenues for the division were $133 million. In the prior year, revenues were $119 million.

The Plant Nutrient Group achieved operating income of $5.1 million during the quarter. In the same three-month period of 2010, the group reported a $700,000 operating profit. This improved performance was due entirely to an increase in margin. The margin improvement is primarily due to the lagging effect of nutrient price escalation in the second half of 2010. Volume in the first quarter was consistent with what was experienced in the prior year. First quarter revenues for the group were $124 million, which is up from the $103 million reported last year. This revenue growth was impacted primarily by the increase in the average selling price per ton.

The Rail Group reported an operating income of $3.5 million this quarter on revenues of $29 million. Last year, the group reported $1 million of income on revenues of $27 million. This quarter, the group recognized $4.8 million in gains on the sales of railcars and related leases, whereas last year $2.6 million was recognized. The prior year gain was due primarily to the scrapping of railcars. In comparison, this year's gain was due primarily to the completion of non-recourse financing deals.

The average utilization rate for the quarter was 82.4%, which was up significantly from the 70% experienced last year. There are there primary reasons; a larger income impact is not seen from this utilization increase in the first quarter. First, the average lease rates experienced downward pressure, as renewal rates although increasing were not booked at the same high levels as expiring leases. Also, $1.2 million was spent on maintenance to put cars back into service during the quarter, the benefits of which will be seen in future periods. Lastly, the prior year's leasing results included a $1.7 million gain from an end of lease settlement.

As of the end of the March, utilization had increased to 83.3%. The group now has approximately 22,200 cars and locomotives, which is down from its year earlier total due primarily to the purposeful scrapping of some railcars in 2010. The rail repair business, manufacturing business and short-line investment were all profitable during the quarter.

The Turf & Specialty Group earned operating income of $3.3 million this quarter on $47 million of revenue. Last year, the group reported $2.7 million of income on $42 million of revenue. Turf products tonnage was up this year in comparison to the prior year. Conversely, margin per ton was down slightly due to a changing product mix. The group continues to experience positive results from its focus on proprietary products in both its lawn and cob businesses.

As is typical for the first quarter, the Retail Group incurred an operating loss. The loss of $2.7 million was slightly less than the $2.8 million loss incurred in the prior year. Total revenues increased $1 million to $31 million in 2011. Customer counts decreased slightly from year-to-year, however, the average sale per customer and margins have increased.

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

Thanks, Mike. Turning to taxes. For the first quarter 2011, the Company's effective tax rate was 36.1%, down 6.6% from the 2010 first quarter rate of 42.7%. This decrease is primarily attributable to the one-time increase in income tax expense of $1.5 million recorded in the first quarter 2010 that resulted from the Patient Protection and Affordable Care Act. We are projecting our 2011 full-year effective tax rate to be 36.4%.

Next as to interest, for the first quarter 2011, the Company's interest expense totaled $7.3 million, up approximately $2.7 million from the same period in 2010. This increase was attributable to increased short-term borrowings. In the first quarter, average short-term borrowings were at $466.7 million compared to 2010's first quarter short-term borrowings of approximately $300,000.

The Company's average short-term borrowing rates for the quarter were 2.8%, down 1% from the same period last year. During the first quarter, the Company was also an investor of excess funds with short-term investments averaging $26.5 million.

Earnings before interest, taxes, depreciation and amortization, EBITDA for the first quarter 2011 was $44.3 million versus $36.1 million for the same period in 2010. The first quarter's pre-tax earnings include $7.2 million in equity in earnings of affiliates, down $2.7 million from 2010's first quarter equity in earnings of affiliates of $9.9 million. Other income net was $2.3 million for the first quarter, down $1.3 million from last year's first quarter. EBITDA has been adjusted for the non-controlling interest.

Turning to the balance sheet, at March 31st, current assets totaled $1.3 billion, an increase of $565.9 million from a year earlier balance of $708.6 million. This increase was driven by inventories and short-term commodity derivative assets. Inventories ended the first quarter 2011 at $775 million. Compared to the 2010 first quarter, inventory changes were as follows. Grain inventories were up $364.9 million, Ethanol inventories were up $3.3 million, Plant Nutrient inventories were up $30.6 million, Turf & Specialty inventories were up $783,000, Retail inventories were up $511,000, and Rail inventories were about unchanged at $24,000.

Commodity derivative assets current entered the quarter at $178.8 million, an increase of $152.8 million from the same period last year. Since the 2010 first quarter, the Company's cash and cash equivalents decreased $52.1 million, ending the first quarter at $22.3 million. Restricted cash was up $9 million in the quarter ended compared to the same period a year ago. As we discussed at our year-end conference call, this restricted cash balance is the result of a Build America Bond, the bond is for capital improvements at our Indiana facilities, which are planned for 2011.

Accounts and notes receivable totaled $220.7 million at quarter-end, up $78 million from March 2010. The changes in accounts and notes receivable as compared to the 2010 first quarter were Grain receivables were up $61 million, Ethanol receivables were up $8.4 million, Plant Nutrient receivables were up $5.6 million, and Turf & Specialty receivables were up $5.5 million. Rail and Retail receivables were down $2.4 million and $600,000 respectively.

Net working capital at March 31, 2011 was $309.6 million, an increase of $8.1 million from first quarter 2010. Total assets at March 31, 2011 were $1.8 billion compared to $1.2 billion at March 31, 2010. Along with the change in current assets, other assets ended the quarter at $234.8 million, up $41.6 million from the same period in 2010, commodity derivative assets non-current increased $12.8 million as compared to the same period last year to end the first quarter 2011 at $13 million.

Other assets and notes receivable net ended the quarter at $47.8 million, an increase of $22 million from 2010's first quarter balance of $25.8 million. Investments in and advances to affiliates were up $6.8 million over last year's first quarter, ending the 2011 first quarter at $174 million. Railcar assets leased to others along with property, plant and equipment increased a total of $11.6 million in the 2011 first quarter compared to the 2010 first quarter.

Depreciation and amortization totaled $9.9 million at the end of the first quarter 2011. Purchases of property, plant and equipment during the first quarter totaled $4.2 million and $4.9 million for the 2010 first quarter. Railcar purchases and sales were $10.8 million and $9.2 million respectively through March 31st. Railcar purchases were $10.8 million and $9.2 million respectively through March 31st. Railcar purchases and sales for the 2010 first quarter were $8.4 million and $6 million respectively.

Our long-term debt totaled $263.2 million, a decrease of $24.6 million from 2010's first quarter ending level. Our total long-term funded debt-to-equity was 5.3 to 1. The Company's 2011 average interest rate for our long-term debt was 5.48% versus 5.37% for Q4 2010.

At March 31, 2011, the Company's total equity was $481.1 million, an increase of $61.4 million from the 2010 first quarter. On April 22nd, we paid our second quarter 2011 dividend of $0.11 per share. Finally, we continue to enjoy good support from our bankers. Currently, we have short-term lines of credit under our syndicated facility that total $992 million.

Company also has a long-term line of credit under the same syndicated facility in the amount of $150 million. Total lines of credit available under the bank's syndicated facility are $1.1 billion. Also, I want to make a brief correction, retail receivables are down $64,000, I mistakenly said they were down $600,000. Thank you.

Thank you, Nick. A few concluding remarks before we take questions. I want to mention that corn planting progress in our region and the U.S. is well behind the five-year average. As of Monday, the USDA Crop Progress Report indicates that the U.S. corn crop is 13% planted, which compares to 67% last year at the same time and a five-year average of 40%.

There is still ample time to plant the crop, however, wet weather continues to prevent planting. This could impact the 2011 results in several of our groups. I will be closely monitoring the planting progress over the next four weeks. As the delay has me a little more nervous than usual, but I guess this is all part of being in the agricultural business, some things are just not within our control.

We're pleased to be able to report record earnings this quarter. Our results were led by the Grain Division, however, the Plant Nutrient Group also had impressive first quarter results. This demonstrates that the investments made in our agricultural businesses over the last several years, including Lansing Trade Group, are paying off nicely.

I also want to mention that each of our other three business groups, Rail, Turf & Specialty and Retail, had improved first quarters as well. Many of you may be wondering what does the reminder of 2011 hold? First, we expect the Grain & Ethanol Group to continue to do well as long as the current planting delay is resolved by the end of the month.

I also see our Plant Nutrient Group having a good year, as the demand for nutrients remain high and the high commodity prices being seen encourage the application of nutrients. I see our Rail Group benefiting from the increase they have seen in their utilization rate and the recent improvement in lease rates. This along with other factors could lead to a considerable income improvement for this group in 2011. Further, I believe our Turf & Specialty Group's proprietary product strategy both in its lawn and cob business will likely lead to continued earnings growth.

That concludes my prepared remarks. Now, Nick, Denny Addis, President of our Plant Nutrient Group and I will be happy to answer any questions you may have. So, Stacy, we'll turn it back to you.

Thank you. (Operator Instructions) Farha Aslam, Stephens, Inc.

Hi. Good morning.

Good morning, Farha.

Mike, maybe you could expand on your comments about the weather. How long do you think it will take farmers to get into the field, we've heard recently that weather in your area has improved a bit and how do you read the likelihood of them getting that crop in?

That's a great question. And I mentioned the average 13% corn planted, in Indiana last Monday it was 2% versus a five-year average of 31%, Michigan 1% versus 27%, Ohio 1% versus 33%, Illinois 10% versus 46%, Nebraska 15% versus 35%.

The weather has improved a bit and has not - there's a broad answer, which may not be the best answer, a lot depends on soil type and a lot depends on the amount of saturation in any given region, at specific area.

Just south and west of here, where you get sandier soils and we have a few days, literally a few days of decent weather, especially those who have tiles in the ground, whatnot and we'll be in and we'll be in fast. You go east of here and you have heavy clay grounds where it tends to stay saturated and in fact, most years it's planted later than kind of the rest.

We've got I would say a solid, good month, 30 days in which to realistically plant ground and most of the area that were in that jibes with historical, attitudes around planting also jibes with preventive planting dates with most crop insurance. And I think it'd be pretty clear if we continue with what we had, then we would have a lot of ground not planted.

I'd say that's highly unusual, among other things we will -- we are getting warmer, we will get warmer. In the near term, that is six to 15-day prospects are much improved although there is some rain in the forecast. So the window of planting that normally might be two months is down to a month. It's an adequate window, but it's just getting a lot tighter. So this next several weeks is really, really important.

Okay. And then, Denny, thanks for joining us on the call. Maybe you could follow up on Mike's comments. Your volumes in the first quarter were surprisingly flat in Plant Nutrients and then with the compacted planting season, do you think that's going to impact how much fertilizer is used by farmers?

Thanks. Hi, Farha.

Hi.

The reason the first quarter -- we're not surprised that the first quarter was flat. We had a tremendous fall of 2010. Had early harvest and the weather was picture perfect. So we -- our shipments in the second half were far greater than the prior year. So we expected a little slower first quarter and dealers are still a bit reluctant to take positions any earlier than they actually have to.

In terms of the second quarter, as Mike said, there's ample time. Yes, we'd rather have maybe a 45-day window than a 30-day window, but this corn crop can be planted extremely fast, I think eight to 15 days in the field crop can get planted. Now, ahead of planting the crop, farmers typically apply additional PNK and as the time gets convinced, they may be forced to forgo that application. I don't think we're there yet, but that's the danger that might -- refers to as really related to PNK.

Okay. And then my final question, and I'll pass it along, relates to ethanol. Recently in Washington we've seen a lot of headlines out about the $0.45 tax credit, whether it's going to go away, whether it's going to be reduced to $0.20, kind of your commentary around that? And then just your kind of the level of hedges that you have in your Ethanol Division?

Yes. I'll speak specifically to corn-based ethanol and the VEETC, Volumetric Excise Credit. At $0.45 today, I think there is not anyone that believes that it will stay there. The question is what will it go to, when will it go and what will we end up with?

Senator Grassley just this week submitted a bill that suggests reducing the credit to $0.20. I believe it's -- I'm going from memory here and I don't have the bill in front of me, but I believe that it goes -- it would go to $0.20 for two years and then go to a three-year window where depending on the price of oil, the credit could be anywhere from zero to $0.30 and then it would disappear after that.

I think I'm in the ballpark on that. It wouldn't surprise me if something like that exists. Our hope -- given that this industry was heavily induced to grow from Washington, our hope would be the rug would not be pulled out totally, but that if we would ease out relative to support of the credit and -- I would say what was submitted is reflective of that.

I'd also add today probably as important as anything, we also have a mandate and there's been no discussion of change in the mandate for corn-based ethanol. We also have the reality of the authorization to move to E15 for certain year's car types that's about to be expanded for earlier car types. We're limited, today the market for ethanol -- I'm not up to speed in today's market, but for the last several weeks, wholesale ethanol without any credit has been trading $0.50, $0.60 below wholesale unleaded and if we were able to blend at higher levels, then we would be blending more.

So we've got a lot of things working together. I think if the VEETC goes away or is reduced substantially and we can have the ability to increase blends up to E15, there is no reason to think that we wouldn't be able to exist at margins that we have today or a little better with maybe the exception of E85, that would be a little bit more challenged.

I don't want to get into the specifics of the next thing I'm going to talk about, because I don't know enough, but it's deals with proposals around support for advanced biofuels. That's a whole another -- and next generation ethanol, that's a whole another discussion I'm just not comfortable enough or knowledgable enough to really speak to that.

And your ethanol positions?

Oh. Yes, as you know, we don't give specific numbers on that. And we've not really had the opportunity to crunch it, I had at what I would call really, really attractive margins. But we've selected -- we selectively put on some things at what I would call maybe lower margins that we would like given the current environment of the limitation of E10s and the building of stocks -- a slight building of stocks that we've had in ethanol that we got to get through this time period until we can -- are able to blend a little more into the gasoline.

So we're willing to be more conservative or more willing to lock in approximately breakeven or a little better margins. The margin structure has improved the last couple days. But it's been in the red the last several weeks and then in near buy. It's roughly depending on type of ethanol plant, roughly breakeven or little below or little above.

Fourth quarter's quite a better and I would say that's simply because there's nothing that really changes -- simply because corn price is lower out there, so you've got a different dynamic, but there is still not what I would call robust margins at all because those wanting to buy ethanol see no reason to pay up at this point in time. But we're going to -- we'll go a little bit at a time and if we need to we'll stay in the spot market.

Thank you. That's very helpful.

Yes.

Heather Jones, BB&T Capital.

Good morning.

Hi, Heather.

Hey, good quarter.

Thank you.

A couple of questions. I was wondering first, Denny, on fertilizer volumes, let's assume the optimistic view prevails and we get the corn in the ground. Do you think -- do you have enough of a window left that your volumes could be up year-on-year, as farmers return to more normal application rates or is that just not going to happen at this point?

I presume -- hi, Heather.

Hi.

I presume your question is not quarter two, right? Not the whole year --

Yes, I'm referring to quarter two.

Okay. Coming into this quarter we were of the frame of mind that we would at least meet, if not and exceed Q2 2010 quarter. And given the conditions we had in April, we kind of revised our expectations down to very optimistically match quarter two 2010 volume.

Okay.

However, this kind of a season plays into our hands. The more condensed the season, the more our warehouses come to the forefront, because we can ship a lot of product very quickly. And frankly, we have enough on hand right now to match last quarter without restocking.

Last year.

Excuse me, last year Q2. Could we exceed last year Q2? I think I wouldn't rule that out. It just depends how weather unfolds here. Supply for us won't be the issue because we have got ample on hand to -- but I wouldn't say we would do multiples than last quarter, but we expect to match 2010 second quarter.

Okay. And on the pricing front, if I remember your model correctly, it's sort of like a balance sheet type thing and since at this point in time, so like if there is no more price appreciation between the end of March and the end of June, then your profitability, it's going to be more driven by volumes as opposed to further inventory appreciation, right?

In Mike's comments, he mentioned I think a lagging effect or maybe it was Nick's comments, it's a lagging effect of our margins. We had good appreciation and prices second half of '10 and that was reflected in the first quarter. However, there is -- we're still -- we've got a lot of contracted volume that was booked earlier that will be shipped in the second quarter, they have pretty good margins.

I would say on new sales the margins will be more tempered, because what you just said, prices in the first quarter of 2011 did not advance near as much, in fact they're almost flat in a composite basis at the end of the fourth quarter 2010.

Okay. Okay. Then moving on to the Grain business, it looks like, I mean hardwood winter crop is obviously at risk, but the softwood winter crop looks like it's going to be very robust and you all are one of the biggest -- it's not the biggest stores. And so -- and then VSR, it looks like it's just set to move up again.

And so, I guess I'm wondering at the front end, how much discretion do you have with the farmer as far as to take ownership or just a store and just be able to clip the coupon. And I would assume that would be your preference right now would be just a store, but just wondering how much discretion you have to drive that?

For the most part, most of the grain that we take in from farm customers is grain that we buy. The farmer will store some here in delayed price or actually some actual storage and we will charge based on our view of market rates. When it -- so other than our primary delivery point for Chicago Board of Trade's warehouse receipts is Maumee/Toledo and that's totally in our discretion as to whether we want to deliver and satisfaction of the futures or maintain ownership of those bushels and we make that decision every expiring futures period.

The crop does look good. I think if you go further and further southwards much further ahead, this rain has got some concerns again around quality, but in general, winter wheat until it gets to the stage it's called heading responds extremely well to rain and tends to have a -- create a boost to yield.

Acres were up, so we're looking forward to a great crop. You didn't make the comment about the VSR, it looks like it was set to increase again. I would say I'm not so sure it's -- to me it's more of a borderline situation. Whether it does or doesn't, the level of opportunity around carry in the market and space income is substantial.

In the wheat market specifically?

In the wheat market. In the wheat market, yes.

So you're ambivalent as to whether you store or you take ownership and benefit for the space income, could you think the opportunity is considerable either way?

Correct.

Okay. And my final question is on the rail business. You talked about leasing profitability being impacted by maintenance expense. When should we expect that issue to be behind us so that you start getting some leverage on the earnings line?

Yes, there is -- and I'll -- I'm sure you have no problem if I elaborate beyond the maintenance problem. The maintenance that I referred to in the conference call is what I would call the maintenance that's required when we bring cars out of -- into service that we've parked.

And there's two things that hit, one is the freight to move the cars, which is substantial, but not as large as the maintenance and the maintenance to get it all already. I would say we were at 83% utilization at the end of the quarter, we're more than half -- well more than halfway back towards what we would say -- if we get that 94%, 95%, it's hard to get it above that.

And we have cars already that we are incurring cost with it aren't yet back in service. So I would say the bulk of it's behind us, although affect this quarter, second quarter. We'll have some results of the maintenance that I would say is much harder to predict, which is the ordinary -- ongoing and ordinary maintenance, which varies considerably from period-to-period and it's just based on at any given point in time the condition of a car and the need to do some major repairs on it.

So I really can't speak to exactly what will happen there in the next month or a quarter or several quarters. We would hope and expect that it stays within historical ranges, but we'll have variability from quarter to quarter. I would say this, just a thing on the lease rates. We still -- the average lease rate that we're experiencing now is less than it was a year ago, not a lot, but some.

And sometime this year we'll expect that line to cross as we work off most of the leases that we put out here in the last year as things were coming out and we didn't get low rates in order to get cars in service. Most of those were relatively short term in nature. And as we're now coming off some of our older leases and some of these new leases and putting stuff out, we're about to cross the line where I would expect our average lease rate to have increased year-over-year. I'm not sure what quarter that is. I don't know if it's second or third, but it's coming relatively, relatively soon.

The average maintenance cost that we had per car on cars in service not counting, just bringing them back into service was a little over $90 in the first quarter of this year. And it was a little under $100 in the first quarter of 2010. But we've seen that range as -- that's per car per month. We've seen that range as high as I think in the $120 range and we've seen it in the $80 range. So that's the piece that will be variable. Was that enough color commentary?

It was. Thank you.

Okay. You're welcome. We feel pretty good about where we're sitting right now and hopefully we can get some more cars into our fleet.

Good, good. Thank you.

Yes.

Stephen Share, Morgan Joseph.

Good morning.

Good morning, Stephen.

Thanks for breaking out Grain & Ethanol. I think it makes it more easily transparent to understand your Company.

You're welcome.

And along those lines, in the Grain business, gross profit was up almost 50%, however, I'm a little surprised that if you kind of exclude Lansing, it looks like it was -- results were kind of flat on the operating income line. Could you talk about that, were there unique operating expenses?

I sure would. I was hoping somebody would ask that and I wasn't -- and bear with me as I get into some complicates of -- maybe it's not that complicated. But it really, what it shows on the seg data is that, none of the increase in gross profit fell to the bottom line in Grain when you adjust for the equity earnings.

And I'm going to go through a few specific things that if you want some follow-up with Nick later, you could. But the gross profit that we report in the seg data very appropriately is, I mean is accurate and it's GAAP gross profit. However, one of the elements of gross profit for our Grain business relates to the ownership of grain that we put in our elevators that we carry and we pay for and we have to pay interest for in order to earn that space income.

The interest that relates to that in our internal reporting, we break out and we segment and we netted against the space income, we cannot do that for GAAP external reporting purposes and there is a -- that interest shows up in the interest line on the face of the income statement.

In the first quarter of this year, with higher grain prices, we had $2.2 million of increased short-term interest that for external purposes cannot be netted against the gross profit and is in our interest expense. So that's one element. There's another element that again has to do with the technical way that we need to record certain items, some of which hit gross profit and some of which hit expense.

We had in the first quarter of this year versus last year a $2.1 million -- I'm sorry, it was a -- let me just make sure I get the number. Yes, $2.1 million improvement in gross profit year-over-year. It was actually last year our gross profit was lower and we didn't have the impact this year of what we call a contract fair value adjustment, we're looking at our contracts if we think there is reason to have the contract written down, but it's not in bad debt, it's not a write-off, not a reserve, it shows as a reduction of gross profit. So in last year's number, we were $2.1 million lower gross profit than we were this year.

One other item has to do with actual bad debt and reserves that hit expenses. This would be my last detailed explanation. Last year we had a $1 million recovery in the first period that actually was a reduction in expense. This year we took a $2 million increase round numbers in reserves. So we had that increased expense.

So we have a number of things that are kind of going between the two. If you go through the math and you do that and you take into account all of what I said, you'll come to the conclusion that in fact gross profit did -- internal gross profit, not GAAP gross profit did in fact drop to the bottom line.

Okay. That's helpful.

I know that's a bit complicated, but you can tell we anticipated that question because it just stands out.

Sure. Sure. I appreciate that. And then just on the Rail business, you said you had -- the gain was $4.8 million this quarter versus $2.6 million last quarter?

Yes. Yes.

Okay. And then did you say what your ending capacity utilization was?

Yes, let me address -- let me address it, because I also said last year's was for purposeful scrapping of railcars and it turned out it was a gain. Those cars are gone, they're out of our fleet. This one has to do with refinancing of leases where -- into -- and as a result of that, those cars are now in service and out on lease.

We get a gain from the financial transaction. Those cars are still on our fleet, those still were earning lease income and then we're in a position at the end of the lease -- they all have options to purchase, which we may or may not execute on depending on the circumstance. So they're similar in the sense that they're kind of a one -- a gain -- there are a gain, but they're different in their substance.

I see. I see.

Okay. So what's your second question? I wasn't listening.

Okay. I just -- you had mentioned capacity utilization for now average, but I was wondering (inaudible) throughout the quarter?

83% -- 83.3% at quarter-end.

83.3%, okay. And then my last question is back on ethanol, I believe you said last quarter that you had a what, did you price 30% of your corn need for ethanol and I was wondering if you could talk that number?

I will -- whatever you said we said it, because I don't have the record on exactly what we said, but it sounds -- it sounds reasonable that we would have said that as we're -- as we entered into this year that we were in the vicinity of that much and we would have said crunch, not to just price corn where we would have bought the corn and sold the ethanol and bought the natural gas around that to secure the margin.

And I would just say that we've stayed in similar levels. As we went through first quarter, of course ultimately we priced 100% of it and we were able to do some more forward contracting, but we've not materially changed our net position of the amount of margin that we've protected going forward other than it's -- now there is nine months to go, not 12 months to go.

Sure. Got it. Okay. Thanks a lot.

Yes.

Ian Horowitz, Rafferty Capital Markets.

Hi, good morning guys.

Hi, Ian.

Hi, Ian.

Mike, I may have missed it, but did you mention the actual or Nick, maybe, the number of cars and the number of locomotives in the fleet now?

Yes, I did mention. I said 22,000 -- we're getting it right in front of us here just a second. We've got about 22,000 -- a little over 22,200 of cars and locomotives and that's principally cars.

Okay. Okay. And maybe the question is for Denny or maybe for Mike. Have you seen -- we've heard some of it going on in other regions, but has there been a lot of replanting of the new crop in your area or are people still waiting to get out? Was there a moment where they could get out and try and then it's -- the crop's failing or is this still waiting to get out and do the work?

Ian, this is Denny Addis. Virtually no corn have been planted in April in our area, so I've not -- there may have been a few fields replanted, but it's not much on the radar.

So I guess my question was if there is some tightness in terms of the window of opportunity, there isn't some sort of counterbalancing effect of being able to double-apply or -- in a replanting situation, correct?

If you're suggesting will they double-apply fertilizer?

Yes. If you tried once and it's not working, would you go back and reapply fertilizer as well as replant the corn?

Well, you really shouldn't, if you use proper ergonomic techniques and apply in the fertilizer, most of it still should be there.

Okay.

You wouldn't need to go back and reapply fertilizer.

Okay. And Mike, you talked about -- everyone's kind of talked about this window and 30 days of planting, what have you seen historically in your region if you move beyond that window and --

Yes.

A rule of thumb to look at?

Rule of thumb. Right now, corn in our region is a big, big income producer. And all things being equal, there will be a lean to try and plant the corn and to go forward. Now, let's just say you've got crop insurance, a good revenue base crop, a good crop insurance and you've got a preventive plant date that's June 5.

You have a decision point at that time to run your pencil on, well, what can I get in the way of a guarantee if I can prove that it's preventive planting, what can I get in the way of a guarantee versus what can I get, what do I believe I should be able to earn if I can still plant my ground. And I would contend that in general even at that point in time if the ground is good producing ground, is in a position to be planted at or very shortly after that date, there will be -- the revenue that can come, the net revenue, the net income that can come from planting, the corn is still pretty good.

But if you were saying, I don't think I can get in for a week and then I'm worried about mudding it in and compacting the soil and dramatically affecting my yield and I've got -- well, it's just -- it's a tight window.

Now historically, you could talk about the ability to switch from corn to beans, which in fact I shouldn't say historically, currently. That is a real factor too where that ground can still be productive. But a similar process the farmer will go through relative to the benefits of the insurance policies around preventive planting versus converting over to another crop. So it's getting to be a pretty hard window at that point in time with some swap depending on the things that I just talked about.

So the good news is the American farmers live with weather for their entire careers and they've seen similar patterns in the past and have the agility and the flexibility to move quickly. That's not meant to be a Pollyanna answer. I don't want to mitigate the tight window that Mike's talking about, but just the technical ability of the farmers is pretty much kept up with those kind of compressing seasons.

It is unbelievable how fast it can get in now and how fast it can be harvested and we've had -- if you go back over 20 years, we have had a number of years at this point in time where we're tight in our stomach. And there hasn't been a time broadly that we haven't got the crop in although it could be several million acres less somewhere. But that's an historical perspective.

So in general, we get breaks and we get the stuff in and vendors, the risk to yield, and there's -- Denny talked about depending on the circumstances were they able to put PNK down or work that. So there is some other potential consequences, some of which are negative. Relative to the farmer, it tends to suggest a later rather than an earlier crop already and that is what it is.

And then are any of your markets being impacted right now by the Mississippi flooding and the levee breaks?

Not directly The Andersons. Lansing has one facility, it's not being directly impacted by this, but it's down in the Louisiana area, so it's got farm customers and folks that deal with it are being impacted down there and it's not a nice situation for those who are having fields drowned out along the Mississippi.

But your markets are relatively untouched by this?

Correct.

Okay. And then lastly, Mike, I tried to get Nick to answer this recently, but he's been reluctant, I think he defers to you. With the high-priced commodities and the difficulties, the need for a significant balance sheet to kind of operate in this environment. Can you talk a little bit about The Andersons, the target hit lists or opportunities to acquire some of these more challenged competitors or people in different segments? I know you talked a little bit about looking for rail opportunities, but beyond rail we're seeing ethanol margins that are extremely difficult right now, like I said the inventory costs are very high as well.

I think you raise some good points. I would say that one targeted growth in the regions that we're in, especially the things as we focus on what we're good at and put those capabilities to bear. It is that we in fact are looking to and expecting to be able to have some M&A opportunities along the lines of what you're talking about, but it wouldn't be appropriate. I won't talk about specifics, nor would it be appropriate to talk about any specifics.

No, of course not. But I mean are you looking across your business segments?

Yes. Our primary growth focus is ag broadly and within that we've got grain and the segments of grain and we have ethanol. We like our strategy in ethanol. We believe we're quite good operators.

I think we have a good sense of what it takes to do well there and your observations on the industry are appropriate. And certainly Plant Nutrient, we've had a number of acquisitions. And so primarily ag and rail is where our focus is.

Would it be safe to say that you're kind of actively involved in the M&A situation right now or?

Would it be safe to say? We've had M&A as part of our strategy and still do and the channel's active. We've had something that we thought was at the order and it falls apart and that was not only reactive, we're about to get married and disappear. Then we have nothing -- nothing really [hot]. The next day something shows up and we're closed in three months. So I'm going to just duck that question and say, M&A is part of our strategy.

I tried.

You did. You tried well.

All right, guys. Thanks a lot.

Thank you, Ian.

Eric Larson, Soleil Securities.

Hi, guys. Let me try now.

Hi, Eric.

Hi, guys.

We gave you the wrong phone number. I heard just to keep you from trying, so --

I know you didn't give me a phone number. I had to coerce Sandra to get it, and then she didn't give me the access code. So I had to really finagle to get on this call today.

We apologize.

Sorry about that. Anyway go ahead.

I don't take it personally.

Okay.

Mike, I am going to kind of focus a little bit on M&A and I need some help. The AIG railcar business was recently sold to a private equity holder for $600 million, they had 11,000 cars. You've got 22,000 cars. $600 million is almost 60% of your total market cap. Now, I don't know what the difference is. The difference is in the AIG portfolio, I mean I'm sure that there is a lot of -- I'm just looking at it very simplistically.

How should we look at valuing and now of course GE has put their big rail business up for sale. So there is -- what's going on in the railcar business right now is pretty dynamic and the one that I just have a needle on is the recent sale of the AIG business, again $600 million for 11,000 cars. I'm kind of saying, whoa, what am I missing, how do we look at valuation on these things and what would be a parameter for us to shoot for?

I'm going to let Nick answer that and part of that is, he is -- since we started the rail business, he's been an active participant, really active participant in it. And so, Nick, why don't you go ahead?

Yes. I probably don't want to start with any sort of crystal-clear statement around the AIG transaction. I would kind of maybe guide us in a little bit slightly different way, little bit more of an indirect way, that portfolio was built here relatively recently and the age of various fleets is really a factor in valuation.

And so you can look at some companies just in general and I'm just going to move away from AIG. You can look at some companies who've had a conscious strategy of having relatively newer age fleets. So let's just say an average age of 10 years. You've got some companies who have a strategy of having relatively older fleets and so that's a little bit of the granularity I want to get before you.

The other is that you can get a little bit of a picture of our average cost per car if you look at our -- the numbers that we gave you at the end of last year in terms of our fleet size and then look at our reported (inaudible) end of last year and then look at our lease carry-forwards footnote in the 10-K and you can kind of extrapolate from there, I think there's enough that you could kind of estimate in that footnote how much of those forward lease payments are for rail obligations that are financing rail assets off balance sheet.

And generally, S&P gives a guidance of -- I shouldn't say specifically S&P, but generally the agencies give a guidance of capitalizing those things of a factor of three to five. Those pieces would allow you to put together the data points necessary to get through kind of the average costs or assets. I think you'll find that our assets are -- while it's an older fleet relative to perhaps those people who focused on a new fleet, our cost per car is relatively modest. And so I think those are the parameters I'd want to give you and just kind of stop there. Does that kind of help you?

Yes. Well, that -- I mean that's a starting point. It's just a very simplistic -- saying that I just looked at and of course it was -- this is so simplistic, it's almost embarrassing to put on the call, but go pay $1.2 billion for your 22,000 cars and get the rest of the company for nothing.

Yes, it helps.

Yes. As I said, that is so simplistic, but that was the first thing that went through my mind is what are -- what should we -- how should we be looking at your business on an asset basis, and you -- highlight that.

Eric, real quick on that -- yes, real quick on that, Nick went in and we've said we're a used car, we're older and that -- and you can also get into certain car types.

Sure.

And whatnot, but that's the type of stuff understanding, it can help you drive through it, but one -- I'll say just this, we've had a couple rough years from a net income perspective in rail, but one thing that's occurred is there is the ability to write assets down relatively quickly in their book life and tax life compared to their likely economic life. And so we like the asset position we have, but the things I mentioned about car types and age of cars and amount of usual life can create big, big disparities in value of a car.

Yes, yes, yes. I mean that makes perfect sense and that explanation that Nick gave does help. So that's what I needed to really hear. Another question we'll move off of rail, obviously you still have cash, corn prices that are above -- the near futures, cash prices that are above basically everything. I'm assuming that you still have a relatively favorable carry in your inventories, hence it's giving you the ability to continue to profitably merchandise your corn?

Let's see, Nick, exactly how should I answer that?

That's right.

I'm not going to tell you what our position is. I can't say that if we describe what we have in inventory, at the end of the first quarter, we in fact owned corn, wheat and beans.

And we of course manage that to try and optimize -- not necessarily maximize, but optimize the benefits of earning carry and space income of what we have and weigh that against the risks of you mentioned corn, fine, there's been some carry, but there's a big inverse between old crop and new crop.

But we've owned grain and we'll liquidate it when we think it's right and carry it as long as we think it's right. Once your beans got carried out for a long period, corns got an inverse coming up in a couple months, so beans has an inverse, so it will work itself out like it does every year.

Eric, you've known us for a long time, and you know what you get with our management team is active management.

Yes, yes, yes. No, I agree. And then finally, Mike, I mean I'm sure you're concerned on this window of corn planting, it is getting tight. And the problem that we have here in the Midwest, upper Midwest at least particularly, it's our soil temperature is still -- it's been cold. Our soil temperature is still 5 to 6 degrees below where we need to have them before you really put the crop in. I mean we haven't even warmed up the diesels yet, I mean that's really delayed.

It's got some nervousness going.

Yes. It's got us pretty nervous too, so -- but anyway thanks for your comments, appreciate it and I'll follow up with Nick on anything else.

Okay.

Thank you, Eric.

Brent Rystrom, Feltl.

Hi, good morning guys.

Hey, Brent.

How are you?

Good. How are you?

Good. Just a couple of quick questions. Thinking about and we're talking about here as far as the late planting went out, what are the official cut-off states or your key states as far as the ability to get the full into crop insurance. For North Dakota, say, it's May 25, I'm just curious what it would be in Ohio or Indiana?

It's June 5 on the corn.

All right. And so from a decision to go which direction basically around the end of May or June 1 then technically would be the time that people will be shifting acres that they're going to do it. And they would have planned for it prior to that, but that would be the real goal date to try to get it out of the way then.

Yes, yes.

The fertilizer pricing tax, when you look at some of the other people have been reporting, you look what Agrium and what Agrium said they did in North America here. Your fertilizer sales look like they're delayed, what some of the broader industry was doing and I'm wondering if there is something specific in the region or is it just --

Brent, we're having a hard time hearing you. Could you repeat your questions and be a little bit louder?

Sure. I'm -- I got a problem in my phone evidently. I'm wondering about your fertilizer sales. When we look at like what Agrium reported yesterday, their North American sales of fertilizers were up much faster growth rate than yours were.

I'm wondering if there is a regional issue or if it's just an issue of how dealers take inventory from you or is that just a way -- I assume your business is going to be as robust as what some of the other players are seeing right now.

This is Denny Addis, and I didn't read their report closely. So I can't compare. But this is not unusual what we're seeing in here. Our volume, as I said earlier in the second half of 2010 was up tremendously over the same period a year ago. So we pulled ahead a lot from the first quarter into the fourth quarter 2010.

So proportionally we should see a bigger growth rate in the second quarter because as we get into that side-dress application and some of the other stuff you do a little bit later into the plant -- or right after the planting season, that should really kick in more here. What you're talking about is the preparation application shifted 4Q and as we get into side-dressing and whatnot, in June we should see the normal seasonality kick in a little bit better.

Yes, I would agree with that statement. I don't know that that's going to suggest that our volume in Q2 is going to be --

Yes, when I said volume and really I'm talking pricing, because when you look at anhydrous or you look at DAP and MAP, I mean really only potash is up modestly. When you look at everything else it's up 30%, 40%, 50%, 60%. I would imagine that should correlate into a higher growth rate than your 20-ish% growth rate or so during the first quarter?

Okay. You said there are higher growth rate in margin.

In revenue, In revenue.

Revenue.

On flat tons with pricing up. Anhydrous is up 50%, DAP and MAP are up 55% ,60% from where they were a year ago. If volume is flat, your revenue should to some degree track that kind of a pricing increase.

Yes. I'm with you now. Yes, I agree with that. All right. Generally speaking, yes. Product mix is going to --

Generally a thinking, yes.

Product mix is going to be different than Agrium's are.

Yes, I understand it. Just a philosophical question, when you look at the 4 million acre increase the USDA is predicting for 2011 and you look at 850,000 acres, that's going to be in South Dakota, 450,000 acres coming from North Dakota. And what Eric was talking about earlier, my farm's up in North Dakota, it was snowing in 36 on Monday.

Lot of the supply that's expected to come this year in corn is coming from some of those fringe states. If we have the difficulty that it feels like we're starting to have as far as corn getting planted and possibly corn yield, what are the implications for your business in 2012, I would imagine for the ethanol business it could be fairly negative?

I like the fact that you've asked that about 2012 rather than 2011, because usually it's the post harvesting where you get the full impact of that. A couple of things. One, clearly I think, if we were to go macro -- globe -- I would say that the area of wheat, wheat's got a lot of other places, there's more wheat around and can work and sow itself a little better.

I'd say similar to soybeans, corn is an area where there is -- I think what the US does has more impact proportionately than the other two. And you'll get into -- if we have price actions like we have had this year and it finds its way into next year, you get in with what's projected to be used next year, you start getting into, well, what's going to be rationed and what's interesting to me is ethanol has not been rationed this year.

And in fact despite the high corn prices, obviously oil price doing what it did is a major factor on this. But I would say what you're talking about if we have a shortage, you get into the rationing and the impact emerging on lots of industries, ethanol being one of them. Now working against that on ethanol, does an E15 come into where it actually see some increasing gallons or don't, because we have -- we've got this huge blending margin that exists there, because ethanol is being sold so far below unleaded gasoline today.

So that kind of works against a short corn, but there is no question it can have an impact and then those plants that are, to the extent has a negative impact, those plants that are -- the most challenge from that price they have to pay for corn. Where they're positioned relative to markets for ethanol and DDG and how well the operator don't operate and the incremental revenue streams that they get in addition to just base ethanol, i.e. corn oil, CO2 and some other things, all those things will go into the mix and create some angst.

If we have a shortage of corn that would be severe and you have a price impact, obviously you've got the cost of financing that for inventories and hedges in the impact on the balance sheet. The likely impact, negative impact on carry in grain, you could go into an extreme and say, oh, did you get to a point where you actually feed substantial volumes of wheat. We'd have a ways to go to get there, I'm not going to say it couldn't happen.

So yes, you end up with shortages and then there is impacts. Now, I'd say on the plus side for us, our increasing -- Andersons' increased investment in what we call our point-to-point or we'll call them farm to market, to find a best market for the grain is a plus. Lansing Trade Group in particular does this long-distance and cross-country and I would say that would net be a positive for us, granted there's the risk in management, but they are a supply chain merchandising company that finds origins and destinations and matches them and when there is dislocations that is typically very much to their advantage. So I'm not -- I don't want to try and make this a rosy picture if we have a significant corn shortage.

But that was giving my next question. I'm glad you raise that point, and this is my final question then. I would imagine the volatility environment that we're looking at would be very good for Lansing for the next year, year-and-a-half, if some of these issues develop?

Very much so.

All right. Thanks guys.

And it's not just all three, because -- I mean you think of trading and trading the futures market, it's the volatility in the physicals, in the supply chain disruptions that will they exist that creates the opportunity for them, as well as the pricing volatility.

That forms actually a question and I apologize for running on here. If we indeed -- everything -- obviously it's getting planted real late here and after May 15 you start to have potential yield problems with corn at least we do up here if you plant too late.

Just thinking about the physical aspects of an 18-day carryout in a year in which yields could be impacted negatively, in a year in which the actual, physical harvested grain could come in a little bit late as well. I would imagine that July, August, September time frame talking about physically securing grain could be a good opportunity for them.

It could be one of those memorable years. And I don't mean that lightly, it's just --

No, it just makes a lot of sense.

May go back in time that transition from an old crop to a new crop generally causes grains to flow in what would be the non-traditional directions and more stress to balance sheet to more of that happens and with that comes all the risk and opportunities that goes along with it and very unusual moves of grain to satisfy the demand that's there.

Well, thank you.

Yes. Okay, we got no -- one more?

Charlie Rentschler, Boenning & Scattergood.

Boenning & Scattergood. Hi, Mike and Nick and Denny.

Hi, Charlie.

Hi, Charlie.

Hey, I know we're running over and I just got a couple questions. But on the basis that the ethanol industry in the United States is in fair amount of trouble right now with corn in the area of what $7.25, $7.30. What would corn have to get to, Mike, to have this industry really in deep trouble? I mean is it $7.75, $8 that kind of a thing, what's your sense, what are you hearing about your competitors?

That's an interesting question. I'm realizing it's not simple to answer and it's not a ducking it, but if you would have said a few years ago, can we get to $7 corn and still profitably make ethanol or supply it, we would have said no. And yet despite where corn is today, I've said this before, the issue today isn't that we can't afford to buy corn at this pricing.

We're grinding the corn and we're selling ethanol unsubsidized, $0.60 below unleaded wholesale gas. The price of ethanol before VEETC or blender's credit can go up $0.60 a gallon. And economically it'll still be blended for E10. Then you add the VEETC that does in fact exist. I don't know how much it changes, but -- so and that -- now, at the same time corn goes up $2, oil wants to drop $20, $30 a barrel.

So it's a relationship to what is going to and right now today unless you couldn't get the corn or had ungodly price or even for it in some physical location where there is nothing and had temporary shutdowns, I think there's more risk of maybe temporary shutdowns in some areas with this location than not grinding corn. If we have a really severe shortage that we have to take 20% out of our demand and I'm being extremist here. And you're going to have to look at a whole bunch of industries that use corn in ration. The ethanol industry will be one of them.

Well, just as a follow-up question and I'll let you go, but if I understood what you said earlier, you would have an open mind, you would have a certain amount of appetite to make additional investments in the ethanol industry. I mean if things got worse, if you've found something that really fit well with your business you might be interested. I mean you're not ruling that out.

The answer is yes.

Okay. All right. Thank you.

Okay. Thank you. Thank you all for joining us. Next conference call is scheduled for Thursday, August 4 at 11 a.m. to review second quarter results, we will know what was planted and not planted. We hope you're able to join us again at that time and have a great day. Thank you.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.