Andersons Inc (ANDE) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to second-quarter 2011 Andersons, Inc. earnings conference call. My name is Luisa and I'll be your operator 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 this conference. (Operator Instructions).

I would now like to turn the call over to 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 second-quarter conference call. As you know, certain information that will be discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in the forward-looking statements as a result of many factors, including general economic conditions, weather, and competitive conditions, including conditions in the Company's industries, both in the US and internationally, and additional factors that are described in the Company's publicly filed documents, including its '34 Act filings and the 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 first quarter 2011, the Company reevaluated its reportable segments. As a result, the Grain & Ethanol Group was separated into two reportable segments, specifically the Grain Division and the Ethanol Division. The Company's investment in Lansing Trade Group is included in the Grain Division. Significant 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; Hal Reed, President of our Grain & Ethanol Group; and I will be available for questions at the end of the call. Mike?

Thanks, Nick, and good morning, everyone. What a great day to have an earnings call.

As we announced yesterday in our press release, we generated net income of $45.2 million, or $2.42 per diluted share, on revenues of $1.3 billion. In 2010, we reported net income of $25.2 million, or $1.36 per diluted share, on revenues of $811 million.

Through the first six months, our total net income stands at a record $62.5 million, or $3.34 per diluted share. In 2010, we reported first-half net income of $37.4 million, or $2.02 per diluted share.

Total revenues of $2.3 billion for the first half of the year are $800 million higher than the prior-year revenues. As we are in a number of commodity-based businesses, it is important to remember that our revenues do not serve as a good predictor of income or economic performance.

The Grain & Ethanol Group had a record second quarter, with operating income of $45.3 million, which is more than double its year-earlier result of $19.6 million. The group also had record income through June of $64 million this year, in comparison to first-half 2010 operating income of $40.3 million.

The Grain Division led these results with record operating income of $36.5 million. This compares to $13.4 million earned in the same period last year. The division benefited from higher-than-usual space income, particularly from wheat, primarily due to significant and accelerated basis gains. This is the second quarter in a row that the division has benefited from a significant escalation in the wheat basis.

The division also benefited from good second-quarter earnings from its investment in Lansing Trade Group. Grain Division revenues for the quarter were $797 million, which is more than double the $361 million reported in the prior year. This revenue increase is primarily due to the rise in grain prices, but bushels sold were also up almost 13% during the quarter.

The Grain Division operating income through the first six months of 2011 was a record $51.6 million on revenues of $1.4 billion. Comparatively, the division's first-half operating income in 2010 was $25.6 million on revenues of $763 million. The year-to-date results in the division are influenced by the same factors as the second quarter, which are primarily basis appreciation and good Lansing Trade Group performance.

I also want to mention that, at this time, crop condition reports show that 62% of the corn crop and 60% of the bean crop are good to excellent. The same time last year, the ratings were 71% and 66%, respectively. As long as the weather continues to cooperate, this means we could have a decent harvest season.

The Ethanol Division earned an operating income of $8.8 million this quarter. In comparison, the division earned $6.2 million during the same period last year. The higher income is the result of an increase in the earnings of the three ethanol limited liability companies. The LLCs were positively impacted by higher ethanol margins, partially due to a lower cost of corn used in production that was purchased earlier in the crop year.

Total second-quarter revenues for the division were $165 million. In the prior year, revenues were $113 million. Through June, the Ethanol Division has reported operating income of $12.4 million on revenues of $297 million. In 2010, the division's operating income for the same time period was $14.8 million on revenues of $232 million. During the first half of the year, the ethanol LLCs benefited from favorable corn pricing.

The Plant Nutrient Group achieved operating income of $24.1 million on revenues of $260 million. In the same three-month period of 2010, the group reported a $19 million operating profit on $228 million of revenue.

Margins were up significantly this quarter in comparison to last year. The strong margins were primarily the result of nutrient price appreciation attributable to strong world demand, resulting in tight supply for all basic nutrients.

To a lesser extent, the margins improved due to a favorable product mix that included more value-added products. Volume during the second quarter declined when compared to the prior year. However, when the nutrient year is reviewed in total -- and that's July 2010 through June 2011 -- volume is up in comparison to the prior nutrient year. The group has a good nitrogen-phosphate-potassium ownership position going into the second half of the year and, at the same time, is within their price risk management policy.

This year the Plant Nutrient Group has earned operating income of $29.2 million through the first six months on $383 million of revenues. Last year the group generated operating income of $19.7 million on $332 million of revenue. This revenue growth was due to an increase in the average selling price per ton.

The Rail Group reported an operating income of $2.8 million this quarter on revenues of $30 million. Last year the group reported $100,000 of operating income on revenues of $24 million. This quarter, the group recognized $2.3 million in gains on railcars and related leases -- that's gains on sales of railcars and related leases -- whereas last year $1.7 million was recognized. The average utilization for the quarter was 84.7%, which was up significantly from the 71% experienced last year.

Recent lease rates obtained in the market for the same car categories are at or near the rates obtained during the 2005-2006 timeframe. This is a positive indicator for the group. The benefits of this will be more impactful in future periods, as the shorter-term and lower lease rate deals booked during the industry downturn expire.

The group now has approximately 22,400 cars and locomotives, which is down from its year-earlier total, due primarily to the purposeful scrapping of railcars in 2010. The rail repair business, manufacturing business, and short-line investments were all profitable during the quarter.

Through the first six months, the Rail Group had operating income of $6.3 million and revenues of $58 million. In the same period of 2010, operating income amounted to $1.1 million and revenues were $50 million. These results included gains on scrapping and sales of railcars and related leases of $7.1 million in 2011, in comparison to $4.3 million for the same six-month period of 2010.

The Turf & Specialty Group earned operating income of $1.8 million on $42 million of revenue during the quarter. Last year the group reported $2.5 million of operating income on $41 million of revenue in the second quarter. Turf products tonnage was down slightly from year to year. Gross profit per ton also decreased due to higher input costs.

Through the first half of 2011, the group's operating income was $5.1 million on $89 million of revenue. Comparatively, through the first six months of 2010, the group had operating income of $5.2 million and revenues were $83 million. The group's grant work is proceeding well and continues to be utilized to further develop technologically advanced and proprietary products.

The Retail Group had operating income of $1.9 million in the second quarter, which is just below the $2.1 million reported last year. Total revenues of $45 million for the quarter were approximately 3% above the $44 million in revenue reported in the same period of 2010. The group's year-to-date operating loss is $800,000, which is comparable to the operating loss of $700,000 in 2010.

The Retail business's total revenues of $77 million through the first six months were $3 million higher than last year. The group's customer counts have decreased slightly this year; however, the margins and average sale per customer have increased slightly.

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

Thanks, Mike. Turning to taxes -- for the second quarter 2011, the Company's effective tax rate was 36.1%, unchanged from 2010's second quarter. The Company's effective tax rate for the first six months of 2011 was 36.1%, down 2.3% from the 38.4% rate for the first six months of 2010. The higher effective tax rate for 2010 was due primarily to an increase in tax expense as a result of Patient Protection and Affordable Care Act, which was signed into law in the first quarter of 2010. We are projecting our 2011 full-year effective tax rate to be 36.3%.

Next, as to interest -- interest expense for the Company's second quarter 2011 totaled $7.6 million, up $2.9 million from the same period in 2010. As of June 30, year-to-date interest expense was $14.9 million, up $5.6 million compared to 2010. The increase in interest expense for both the second quarter and 2011 year to date is attributable to increased short-term debt levels, driven primarily by higher prices for grain and fertilizer.

Our average short-term borrowings during the current year's second quarter were $471.2 million. In the second quarter of 2010, the Company had no short-term borrowings. For the first six months of 2011, short-term average borrowings were up $468.8 million compared to the first six months of 2010.

The Company's average short-term borrowing rate for the second quarter was 2.7%. Year to date June 30, average short-term borrowing rates were down 1% for 2010. Commodity derivative liabilities, current, ended the 2011 second quarter at $24.3 million, a decrease of $30.6 million from the same 2010 quarter.

During the second quarter, the Company was also an investor of excess funds, with short-term investments averaging $37.8 million, a decrease of $45.3 million from the 2010 second quarter. As of June 30, our year-to-date average short-term investments were $28 million, compared to $63.6 million in 2010.

Earnings before interest, taxes, depreciation, and amortization -- EBITDA -- for the second quarter 2011 were $88.8 million, versus $53.4 million for the same period of 2010. Year-to-date June 30 EBITDA totaled $133.1 million, an increase of $43.6 million from the same period last year.

The second quarter's pretax earnings include $12.5 million equity in earnings of affiliates, up $5.8 million from the same period last year. Lansing Trade Group income was up $3.1 million. The three ethanol LLC incomes were up $2.7 million. Year-to-date equity in earnings of affiliates was a profit of $19.8 million, up $3.2 million from June 30, 2010. EBITDA has been adjusted for the non-controlling interest.

Turning to the balance sheet -- at June 30, current assets totaled $977 million, an increase of $344.7 million from the year-earlier balance of $632.3 million. This increase was driven by inventories in short-term commodity derivative assets. Inventories ended the second quarter 2011 at $469.6 million. And commodity derivative assets, current, ended the second quarter at $187.4 million.

Compared to the 2010 second quarter, the most significant inventory in commodity derivative assets, current, changes were as follows -- grain inventories were up $170.4 million; commodity derivative assets, current, were up $165.9 million; and plant nutrient inventories were up $54.9 million.

Since 2010's second quarter, the Company's cash and cash equivalents decreased $185.7 million, ending the second quarter at $18.6 million. Restricted cash was up $9 million at the quarter end compared to the same period a year ago. As we discussed during previous conference calls, this restricted cash increase is the result of a Build America Bond issued for capital improvements in 2011 at our Indiana facilities.

Accounts receivable, net, totaled $243 million at quarter end, up $107.6 million from June 30, 2010. The changes in accounts receivable as compared to the 2010 second quarter were primarily driven by grain receivables being up $50.2 million and plant nutrient receivables being up $49.2 million. Net working capital at June 30, 2011, was $352.7 million, an increase of $53.4 million from the second quarter 2010.

Total assets at June 30, 2011, were $1.5 billion, compared to $1.2 billion at June 30, 2010. Along with the change in current assets, other assets ended the quarter at $235.1 million, up $25.4 million from the same period in 2010. This increase was a result of commodity derivative assets, not current, increasing $8.2 million as compared to the same period last year, to end the second quarter 2011 at $8.6 million.

Other assets and notes receivable, net, ended the quarter at $46.6 million, an increase of $5.4 million from 2010's second-quarter balance of $41.2 million, primarily due to the inclusion in the second-quarter 2011 results of goodwill and intangibles reported in December 2010 from our B4 acquisition.

And, finally, equity method investments, formerly investments in and advances to affiliates, were up $11.8 million over last year's second quarter, ending the 2011 second quarter at $179.9 million. Railcar assets leased to others, along with property, plant, and equipment, increased a total of $18.3 million in the 2011 second quarter compared to the 2010 second quarter, due to business acquisitions and an increase in overall rail utilization.

Appreciation and amortization totaled $20 million at the end of the second quarter 2011. Purchases of property, plant, and equipment during the second quarter totaled $12.6 million, versus the $15.2 million for the 2010 second quarter. Railcar purchases of sales were $32 million and $17.8 million, respectively, through June 30. Railcar purchases of sales for the 2010 second quarter were $9 million and $12.6 million, respectively.

Our long-term debt totals $360.6 million, a decrease of $21.1 million from 2010's second-quarter ending level. Our long-term funded debt to equity is 0.48 to 1. The Company's 2011 average interest rate for all long-term debt was 5.41%, versus 5.37% in 2010.

Our June 30 commodity derivative liabilities, not current, were $1.9 million, compared to a 2010 second-quarter ending balance of $2.9 million. The Company's June 30, 2011, total equity was $524.5 million, an increase of $81.9 million from the 2010 second quarter. On July 22, we paid our third-quarter 2011 dividend of $0.11 per share.

Finally, we continue to enjoy good support from our bankers. We currently have short-term lines of credit under our syndicated facility at a total of $992 million. The Company also has a long-term line of credit under the same syndicated facility in the amount of $115 million. The various lines of credit available under the Company's syndicated facilities total $1.1 billion. Back to you, Mike.

Thank you, Nick. Before we take your questions, I'd like to cover a few more points. We're really pleased to be able to report these earnings. The Grain Division and Plant Nutrient Group led our earnings results. I'm particularly proud of the Grain Division for achieving both a second-quarter and six-month earnings records.

The Plant Nutrient Group also had impressive second-quarter results despite a very delayed planting season. This demonstrates that the investments made in the human and physical resources in our agricultural businesses over the last several years, including Lansing Trade Group, are benefiting your company.

Many of you may be wondering, after our record first-half results, what does the second half of 2011 hold? First, we expect our Grain Division to continue to perform well, albeit not nearly at the same pace as the first half. The strong escalation in the wheat basis during the second quarter suggests to us that space income that would typically be received in the second half of the year is shifting into second quarter. That's some space income, I should say.

A significant part of this benefit was realized as the wheat cash and futures prices converged near the end of the quarter, as we have been saying for some years that this would eventually happen.

In regards to the Ethanol Division, we locked in almost half of our third-quarter 2011 production at or near break-even margins, during previous periods when we felt margins would be negative. That logic has been challenged by the recent increase in spot margins, but we stand by our risk management practices.

Additionally, in the third quarter, corn cost is expected to increase. Also, all three ethanol limited liability company locations have brief regularly scheduled maintenance shutdowns during the last six months of 2011. As a result of these items, we feel the last-half results in our Ethanol Division will not be nearly as high as the first half. We believe that our Plant Nutrient Group will have a good second half; however, the group is unlikely to match their 2010 performance for this same time period.

Further, we see our Rail Group continuing to outperform their prior-year results in the last six months of the year, as they continue to benefit from higher utilization rates and their continually increasing lease rates, among other things. As is typical, we do not expect our Turf & Specialty Group to be accretive to earnings in the second half of the year, due to the cyclical nature of the business. I would also remind everyone that, historically, our third-quarter results are generally substantially below our fourth-quarter results, and this year should be no different.

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

(Operator Instructions). And your first question comes from the line of Farha Aslam from Stephens Inc. Please proceed.

Hey, good morning.

Morning, Farha.

Good morning, Farha.

Congratulations on a great quarter.

Thank you much.

Yes, thank you.

And you had pointed out that your Grain Group will not have earnings in the second half that will equal your first half. But do you think you can deliver earnings in Grain that would be equal to second half of last year? So year-over-year, are second-half earnings flat?

Hal?

Hey, Farha, this is Hal. How are you?

Good, thanks.

The current look is that -- the simple answer to your question is that the second half of this year is probably not as good as the second half of last year. From a macro perspective, I think what you would look at is, say, the corn crop and the bean crop are expected to be similar to last year. Corn carry may be a little bit less, maybe bean carry a little bit better.

And from a wheat perspective, as Mike indicated, we've moved up some income from the second half of the year into the second quarter, so that would put the wheat numbers down a bit. So in aggregate, we'll probably be a little bit less than last year just specifically relative to the Grain Division.

Okay. And then in terms of wheat basis, we're looking that wheat basis has continued to rise in the July period.

Correct.

Will you continue to benefit from the basis opportunities in wheat?

Yes. I mean, start with the answer to your question -- the wheat basis has continued to rise. And let me just start -- I'll go back a bit here. We've had some large basis improvement. I'll use Maumee as an example, because the Maumee's little market is a public published bid, so that information is available in the marketplace.

But if you go back early in the year, at the beginning of the year, the Maumee bid at the end of last year was actually about $0.40 under the March futures contract, okay? If you walked into the end of the first quarter, the Maumee bid was about $0.33 under the May futures contract. So we earned a bit of the carry between the March and the May, and improved the basis a bit.

If you get to the end of the second quarter, the Maumee bid was actually $0.20 under the September contract. So in addition to the May-September carry, we also did have basis appreciation. Now, as a matter of fact, the Toledo basis here even recently, just at the start of this week, was actually $0.15 over the September futures market, so we've continued to see basis appreciation in the wheat market.

And that should benefit you in the second half of the year, that continued basis improvement.

That's true. That's true. Now, I gave you Maumee as an example. Maumee -- it may be a bit larger -- a bit better picture than some of the locations, but it is the largest individual share of our wheat ownership. So it was just an example to give you an idea of what the market looked like. And yes, as I said, we're $0.15 over now, and that should continue to benefit us as the wheat market -- if the wheat market stays strong.

And then when you look at your holdings, generally you're more heavily weighted to wheat and corn versus soybeans. This year, are you even more weighted to weight, given that you had a good crop in your area?

Our weighting to wheat is fairly similar this year. We have added a bit of space this year that we've put wheat into, so we may be slightly higher allocated towards wheat than in the past, but it's not dramatically different. And in this year's case, it looks like maybe the bean crop may be a little bit bigger than the corn crop in our territory, so there may be a slight shift there as well. But they're not dramatically different than in years past.

Okay. And then my final question, and then I'll pass it on. In terms of rail, Mike, you had mentioned that rail lease rates are getting back to historical levels. I think you were pointing to '05?

Correct.

Is the D&A per car that's under utilization similar to what you were recording in '05, or is it higher? So can we expect that margin eventually to recover to kind of that $20 million earnings level that you've posted historically, in the future?

Well, I'll get to the first part of that. Our average lease rate right now, kind of average everything in place, is still below the averages of a couple years ago and below the highs. But we're not as far behind as we were in the first half, so we're gaining ground. And the new lease rates that we're putting out here now in the last two, three months are in the vicinity of about 30% -- a third above where they were just several months ago -- or a couple years ago. And that's -- and I should've said -- I think I used the word same, but some cars were actually experiencing leases very similar to the 2005 cycle.

And really, the overall market, kind of broadly -- and it depends on car type, plastic pellets being lower, sand cars higher -- I would say rates are 10% to 15% above the 2005 cycle, the gross lease rate. There is one dynamic that is different in a negative sense from back then. Maintenance costs are higher than they were five years ago, six years ago, and that gives us some bit of concern.

But if we stay in this reasonably good cycle -- I'm not going to predict will we get back to the $20 million or the $21 million. Some of that relates to what the size of our fleet is and what's occurred since then. But we're certainly on a nice and healthy trend, as we, I would say, should relatively quickly raise our -- relatively, over the next couple years if rates stay high -- raise our average lease rate to well above what it was just a couple years ago, and get back in that direction.

One of the benefits of '05 and '06, for a lot of reasons, our average lease rate was extremely high. We had a whole bunch of cars kind of locked in at near tops of the markets. And right now, it's trending in that direction, but we'll see where we go. But it's a really good feeling right at the present time.

Great. Thank you for the additional color.

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

And I want to correct one thing. I think I said the rates were about 10% above the 2005-2006. They're really actually 10%, 15% below the highs back then. So that's the new current rates that we're setting, so I apologize for that.

Good morning.

Good morning.

Hey, Steve.

Excellent quarter.

Thank you.

Thank you.

Thank you.

I wanted to focus a little bit more on ethanol, because I was pleasantly surprised, but surprised nonetheless. I kind of thought the language on the last call was that, for the three -- the second, third, and fourth quarter of 2011, that we'd be near break-even profitability. Maybe I misunderstood exactly what was said, but what happened that you were so profitable? I thought you had hedges in place, and yet you still made good money in ethanol this quarter.

Yes, Steve, this is Hal. I don't think we -- I think we may have suggested that the second half of the year could be closer to break-even. I don't think we suggested all three quarters, but just my memory.

What happened in the second quarter was a couple things. As we always do, we did have a percentage of our grind crunched at certain levels. However, at the end of the second quarter, the markets reacted substantially to some plants shutting down and a lack -- and large exports out of the US, and a number of other things. The ethanol markets reacted pretty substantially to the high side. So the end of second quarter, margins became more profitable. And as I said, we only generally crunch forward a certain percentage of our grind, so the second quarter ended up quite good at the end of that second quarter, given higher margins.

And now when we look into July, ethanol prices have been real strong. I realize you're going to have a higher corn cost in the third quarter, but are you going to be able -- should ethanol prices stay as high as they are right now? Is it possible that you will be able to take advantage of that higher price, obviously not with all of your supply, but maybe 50% of your supply?

Well, yes, as Mike indicated, we have a large -- I think nearly half of our grind crunched for the third quarter. But obviously, that means the rest of it is not. And as you indicated, margins from the end of June, as I indicated, through July were fairly strong, although they have trailed off here in the recent days and weeks. But yes, obviously, the month of July allowed us -- on the part that we were not crunched, allowed us to take care -- take advantage of the current market.

I'll add one color commentary. We mentioned about the lower average cost in the second quarter, and we talked about higher cost in the third. And when we're crunching ahead, typically we're doing it in the futures and derivative markets, because you can't get every piece of cash locked together.

And also, as we run through our actual cost of goods sold, we'll get through our inventory. There's FIFO approaches, LIFO approaches, average cost approaches, and ours is more of an average cost approach. And we had the benefit, as we've used up lower-price inventory accumulated last fall, virtually all of that's run through our system by the end of the second quarter, and we've got some higher-cost stuff now coming in. So we got some benefit just in timing of when that runs through that gave us some benefit in the second quarter; it'll be a little negative in the third quarter.

I see. And then just one more thing from me -- on the Plant Nutrient side, you mentioned that volume declined year over year. Any sense of the cause? I mean, we had a late planting. I know your area in particular had some flooding right around the time the crops were going in. What's your speculation on why you had a little bit of volume decline year over year?

That's a great question. I think there's a few things. The principal, principal cause in our region where we are is -- no ifs, ands, or buts about it -- it was May weather. We were sitting here at the last conference call; it had just started raining for about a week, and, of course, you figure that's going to stop. And we'd had a really good April, but it rained through Memorial Day. And that flat-out reduced the amount of product that went on. It was the single biggest contributor to lower volume.

For the year, the crop year, July 1 last year through June 30, we were up versus the prior year. We would've expected to be up more than we were, and it's mainly weather. In some areas, we were a little negatively impacted by the really good fall application we had. In 2010 we had a very early harvest; and, therefore, we got some additional product down. But principally, principally weather.

The economics of today through the -- as we came into the second quarter fully supported reasonably heavy application of product, given where grain prices were and given the desire to put out good yield. And so there was no reluctance on the part of our customers to buy because of pricing. And frankly, pricing, which is higher today than it was three months ago, even now, as well as then, is well below the dynamics we had a couple years ago as we came out of '08 and went into '09, where the farmers said -- I'm sorry, prices are up so high, grain prices are not high, and we're just going to refuse to put anything down. So the volume I don't look at as anything -- there's nothing really what I'd say macro negative, but just conditions hurt us.

We look through to the next 12 months, given the fact that in general in our area, corn was planted late, beans were planted late, it's hard to imagine that we have a circumstance that was as favorable as it was last year for fall application. So we would expect volume to be down this fall versus a year ago. And, again, it's not because the economics are bad, because they aren't; the economics are good. That should tend to tee up a nice first half next year, from a volume perspective.

I see. I'll pass it along. Thanks a lot.

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

Good morning.

Hey, Heather.

Good morning, Heather.

Excellent quarter.

Thank you.

Thank you.

Thanks.

I have quite a few questions. I guess the real detail-ish one first.

I'm surprised, Heather (laughter).

(Inaudible).

Yes.

What was your rail utilization at the end of the quarter?

Mid-80s. (Inaudible) show me that real quick. Okay, 84.8%.

Oh, okay. All right. And as far as bushels in storage, how did that look at the end of the quarter relative to last year? Was it up, flat, down?

It was very comparable. There's probably, at this point in time, maybe a slight bit more wheat, only slightly, and maybe slightly less [in the] last year. Oh, '10-'11. Yes, it looks like it was up more than I thought. No, total inventory wasn't. I'm sorry. Total inventory was about the same as last year.

Okay. 'Cause my question is -- obviously, everyone's talking about the very tight availability of corn. Basis has continued to appreciate strongly, so I was just wanting to make sure that you had enough inventories in your [fence] to benefit from that appreciation. So is it a fair assumption that you should be able to?

Was that question about corn?

Well, wheat and corn, but honestly, I was really thinking corn. I was looking at basis appreciation for the end of the Q2 yesterday, and it looks like in many of your regions it's continued to appreciate nicely. And so I guess, do you have enough in storage to really benefit?

Just real quickly on that, we had a --

Corn space?

Yes. We had a good second quarter this year in corn spacing, quite good. Not so hot in the first half as basis went down a little bit at that point in time. Typically, at the end of the quarter, as we're going through an inverse, we will not -- as you look at what values are for September and October, where they're substantially lower, it is not a good gamble to come into owning a whole lot of corn, even if basis stuff's tight. The reason it will go up is because very little is owned, and the reason very little is owned is because it's so risky because you know it's going to plummet.

We're going to have a decent third quarter, but we have no reason to want to own corn at this point in time. We want to keep it sold, because we know, when harvest gets here, it will be worth a whole lot less. Wheat -- obviously, we want all wheat carries good. We own it.

Okay. So speaking about -- going to the harvest, and the heat, and the late planning, especially in your core footprint, do you have any concerns about yield and what that's going to mean for volumes through your elevators around the time of the harvest?

Sure, we always do, and it's been a bit of a stressful growing season. As you indicated, there was some late planning. There's been a lot of heat. The yields that are expected out there, both on the corn and bean crop, kind of a regional basis or on a national basis are not dramatically different expectations than what we saw last year for corn and bean yields and production numbers in the region.

In addition, we have added some assets in Nebraska here in the last year. The conditions for the crops out in Nebraska happen to be quite a bit better than here, so we feel good about that. But in total, we don't see it as being dramatically different from last year. Obviously, we've got another month or so to go to make the crop complete, but right now it doesn't feel a lot different.

Okay, so the fretting and the rumors we're hearing of 151, 152 for corn, you don't see that?

Well, that's not a lot different from last year.

Okay. Well, then I guess to interpret it another way then, you do see substantial downtime, then, from the current USDA projection, then.

Now, 158 for the USDA recent projection -- yes, I understand that that's their most current number, but understand that the market gets new numbers every day, and the market has digested that information. The second it was out, it was old. So we don't base it quite a bit directly on the USDA. What we're looking at has been more current, and we've been in this range similar to last year for a while now, I believe.

Okay.

[Market believes that].

Two more questions. Ethanol -- as far as -- you mentioned half locked in for Q3. Do you have any locked in for Q4?

We do have a smaller amount locked in for Q4, yes.

Okay. And then, finally, going to 2012, as far as the ethanol outlook, exports have been very strong. ADM said on their call that roughly 0.5 billion gallons are offline due to issues with access to corn. If those come back online, going into 2012, some concern that ethanol margins could be weaker than 2011. Just wondering what your take is on that.

Right. I would agree that we -- the industry has benefited by the fact that there were some locations shut down because of a lack of corn, and some people have extended shutdowns because of that. So the industry has benefited, but even if you look at the most recent ethanol production figures, including up to last week's numbers, the production has not increased yet, and is likely not going to increase until we get to fall harvest. The availability of corn will keep that down. So we'll probably draw stocks down a bit here, until we get towards new crop, and that'll give us a little bit more room as some of those places come back on to replenish stocks.

Brazil's sugar crop is pretty high priced. Sugar's headed back higher. The world market's kind of in a balanced state. I don't expect our exports to be nearly as big or as huge as they were this past spring and into summer. I understand the comments from ADM, and I do see production increasing a bit, but I don't see anything dramatically changing. The price of gasoline and the driving habits of Americans may matter more than the corn crop to start the fall.

I'd add one thing to that, Heather, and it deals with the limitation of 10% blend, the practical limitation, even with modest approval of E15, and then we've stalled on the broader application of E15. So if we increase production some, and driving's down because of winter, you get back in the situation of -- stocks build, which then impacts margin. If we are able to penetrate the 10% blend wall and have the ability to blend more, which directionally we're going that way -- I just don't know when it's going to happen -- that will help take care of the concern about the stocks build. Don't know exactly at what margin it's at, but that's somewhat important to us.

Okay, thank you. That was very helpful color. Appreciate it.

Your next question comes from the line of Christine Healy with Scotia Capital. Please proceed.

Thanks. Hi, guys. A couple of questions on your ethanol business. Wondering if you can talk about the performance of your ethanol plants over the last couple of months, just given that there have been some shutdowns due to the tight corn supply. Should we assume that your plants are still running at relatively high levels, and could you also speak to some of the reports that we're seeing that you're feeding wheat in your plants?

I'd be happy to. What I can tell you is that the plants are actually running probably at the highest rate of efficiency that they have. Second quarter was quite good. We did two different tests, one of them being the wheat, one of them being running a plant briefly at a lower rate. What we found is, the efficiencies of the plant to run at the highest possible capacity is the most efficient, and we continue to do that. And our plants are basically running at full bore.

We have taken some wheat into one of our plants. We're using it in a 5% to 6% kind of a blend, and we've gotten pretty good results. The wheat that we bought at that one plant was a bit of an off-grade wheat, a bit distressed, and we bought it quite cheap. And we have found that there's only been a slight degradation in the actual output of that plant, so it's been a benefit. It's not something we'd want to do a lot of or full time, but it was a great test and it was positive. And, again, the plants are running great, and we'll do our normal maintenance shutdowns at the end of the season and be ready for a fall corn crop.

And today, we don't have the ability to buy wheat, simply because the wheat price that we were able to acquire that at relative to corn is gone. So it was a spot opportunity to -- I'll commend the Grain & Ethanol team for jumping in and taking advantage of it.

Okay, so that's not a long-term plan, then; that's just an opportunistic thing that you guys could do from time to time.

Right. There are some opportunities occasionally with Milo or other things that may come into the marketplace. And we're merchants of grain, and we're out there looking for that opportunity whenever it arises, so we'll take advantage of them as the plants can and the market allows us.

Okay, and then you guys have adequate corn supply, I guess, for the next quarter until harvest?

Yes, we're all set with our corn supply for the plants, with a little bit of wheat help at the one. So I think we feel pretty good about getting between here and new crop. We could always use a few extra corn acres. That would always be a good thing. So if you get a chance to write your congressman about the Conservation Reserve Program, and letting him know that we don't like paying people not to plant in this kind of economy, we'll be happy to sign that letter with you too.

And are you seeing that some of the smaller players, maybe some of the farmer co-ops that have these ethanol plants, that they're struggling here? Are you seeing some increased opportunities for potential investments down the road?

Possibly so, yes. Money and risk management tools that are expensive are very difficult these days. And so that's why, as was indicated before, there are a number of plants over the course of the last month or so that have shut down for periods of time. So it's usually a money issue, if it's not just a corn supply issue.

[In all fairness], there's been some (inaudible) volatility here both in '08, now again in '11. And I think for a small organization, there's some working capital fatigue. I think, for us, we ended June 30 with, as I said earlier, $352 million in working capital. Ended June 30 with $524 million of equity and our debt ratio of 0.48 to 1 long-term funded debt's worth. So our balance sheet's in very good shape, and we have lots of extra capacity. So, well said.

Okay. That leads into my last question just on your balance sheet, that you guys have been paying down your debt. Good to see. Just want to know what your cash spend priorities are right now. So if you have excess cash, are you more likely just to fund growth, pay down debt? And also, when do you next revisit your dividend?

Yes, those are great questions. I would say that we're not an absolutist kind of company. I think you've kind of picked that up as you've talked to us over the months here. I would say our first interest is -- and has been -- if we find the right growth opportunities, at the right price, in the right markets that we want to grow in. And, again, we're looking -- we view our core businesses, which are Grain, Ethanol, Plant Nutrient, and Rail -- all four sectors we want to grow in. We want to grow in, of course, with a value disposition. So it's finding the right opportunity at the right price that we feel we want to execute on.

We are leaning into continuing to pay down our debt, and that's something that's always there that we look at and review. And we periodically do review our dividend policy, but that's just an ongoing regular event that happens --

Happens quarterly.

Happens every quarter, yes.

Okay, great. Thanks so much, guys.

Thank you.

Your next question comes from the line of Brent Rystrom with F-E-L-T-L and Company. Please proceed.

Don't want to try pronouncing that, huh?

Yes (laughter).

Yes, I was going to say, you had to be kind of scratching your head with some of the fertilizer this year, I know. I would've sensed that, in a lot of your markets, you had a lot of farmers basically mining the potash and potassium -- or the phosphates in their own soil. And so you're going to have a cycle next year for those two nutrients that's probably pretty decent. Would that be reasonable?

Yes.

All right. From a pricing perspective, I'm tracking about 30 [hydronymy] centers in your primary region there. And it looks like, where you can find pricing for next year, it looks like it's going to be up certainly teens to 20s over where it is this spring. Do you have inventory from this year that will be carrying into next spring, or will it all be gone this fall?

We -- I can't remember my exact quote that I had from our conference call, but I'll pull it out.

And I guess what I'm getting at, Mike, is --

Yes, I --

-- that there's a margin opportunity there.

Yes, I made a point of saying that we do have some ownership that is within our risk management guidelines. And with that, there is some additional margin appreciation opportunity. We've also had some benefit -- I think after the first -- the last couple years, we've seen -- in the volatility we've had in grain and fertilizer, we've seen the system on the nutrient side, all the way to the farmer, work a little better -- and I say a little better, not a lot better, but a little better at being able to get some forward stuff locked in, ultimately for the benefit of the producer, while the producer hopefully is also locking in some grain, and we've been participating in that.

But we feel pretty doggone good about the outlook here, from both a volume and margin -- maybe not as much -- we had nice increases in margin this year, with good appreciation. Maybe not as optimistic and that big a percent increase, but should be healthy.

Okay, and then from a corn perspective, I'm just literally finishing up a couple-day tour across Nebraska, Iowa, and Illinois. Seen a lot of corn that looks like it pollinated on V6 or V7, so you're looking at 12- and 14-row corn instead of 16-row kernels. And Iowa supposed to be the hot, sweet spot with Nebraska this year, so their 12- or 14-row corn -- implications are we could be looking at yields even in the 140s. If we're in the 140s for a yield this year, what are the implications for The Andersons?

Well, I'll follow your assumption that we could be. So I think a couple things will happen. If you look at the balance tables, what you'll have to see is you'll have to see the price start to ration the demand again, and that will do a couple different things. We'll start to see margins in users, like feeders -- cattle, chickens, anything else -- narrow substantially, and we'll start to see margins in ethanol narrow a bit. We saw $8 corn in places this summer, and people survived. And we did see some demand destruction when prices got to that high. You also have wheat that got moved into rations, and a number of other things that occurred as the market would normally work.

So, obviously, the bigger the corn crop, the better for The Andersons, because we love handling it and carrying it. But that provides us with a few more merchandising opportunities, so there's maybe a bit of an offset. Obviously, we'd prefer the bigger crop, but we'll manage through that smaller crop, if something like that were to occur, as best as we can.

If it would occur -- if I get back to some of the earlier questions around next-year carry -- especially in corn, for example, you could see less carry in corn. With few bushels coming to the market in the fall, you tend to end up paying a little more for that corn. But that sometimes gets offset by the fact if the futures price is higher, there's a willingness to sell. Hal mentioned the trading opportunities across country as stuff gets out of location, and that's especially good for Lansing as far as opportunity, and also it's something that we capitalize on.

There's been a little bit of offshore wheat come into the Southeast for feeding, and world wheat still, especially off-quality, continues to be less expensive than the US. Hal made the point of impact on feeding. I think you'll see some of that dynamic.

And we still have yet to unfold kind of what happens in the rest of the world. So will we be helped by yields over the next Northern Hemisphere harvest this year and Southern Hemisphere harvest as we get into next year, or will we be hurt? That's somewhat of an unknown. Obviously, if we would go down into the 140s, even if it's the high 140s, it puts more pressure on all the stuff we've talked about.

And I think the point that's been made -- earlier, Hal talked about it. I think Heather -- maybe it was Heather brought it up. The USDA -- their last published deal is 158. There's no one trading that at this time. I think people are -- virtually everyone we've talked to is in the range of somewhere between 150, 151, and 154. And 90-degree-plus days hurt, don't help. It should also mean that there'd be even more encouragement to get stuff planted next year, which would be bullish for fertilizer and bullish for us. I think it's a net negative, with lots of positives wrapped around it.

Two quick questions, then. From a price discovery perspective, I'm hearing that low-grade wheat, primarily -- I'm assuming you're talking about coming out of the Black Sea, kind of at $209, $210 a ton. It's hitting North Africa at about $260 a ton. What are you seeing it in the Southeast at?

We don't -- I tell you, Hal, unless you have a number, I'm not close enough to be able to give you a number. I can just know that if it worked in there, it worked in less expensively than Corn Belt corn and US wheat.

Yes, we would -- I mean, from a comparison perspective, you have the current wheat and corn futures at very similar prices. And wheat's cheaper because the basis is lower than the corn basis. So that wheat that worked into the southeast United States worked in at lower than local corn values or trained corn values. So when you talk about the kind of numbers you're talking about in the Black Sea or North Africa, the off-grade wheat clearly works into the Southeast at lower than the corn numbers that can be railed down there.

So they were probably buying it sub-200, I would guess, to make the --

We're not --

-- (multiple speakers).

Yes, and we're not going to speculate on what they were worth. Just is cheaper than corn.

And then final question -- getting back, Mike, to what you had said about acreage. My bet is, if we get good spring planting conditions next year, you could finally look at that 95-million-acre corn year. Any particular thoughts on what 95 million acres of corn, and particularly hopefully a better weather cycle for you, would mean for spring activity next year on the [turf] side?

Well, given that it's hard to imagine we're going to have near the fall we had last year, just with the later crop that went up, but if we stay hot and dry, who knows? We could surprise ourselves. But for the cycle from July 1, 2011, to June 30, 2012, if the same corn crop, if you have acres, if you have good weather, we'd be bullish, our volume. You add more acres, well, we're more bullish.

And the last 2 million to 3 million acres of corn is a big deal to the whole corn balance sheet and the volume of corn handled.

Thank you, guys.

Okay, great.

Thank you, Brent.

(Operator Instructions).

Okay, I'm going to take that as no additional questions. I want to thank you all for joining us. Next conference call is scheduled for Wednesday, November 9, at 11 a.m. Eastern Time to review third-quarter results. Hope you can join us then, and have a great day. Bye-bye.

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