Andersons Inc (ANDE) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2011 Anderson's Inc. earnings conference call. My name is Francine and I am your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Nick Conrad, Vice President of Finance and Treasurer.

Good morning, everyone and thank you for joining us on The Andersons Inc.'s 2011 third quarter conference call. As you know, certain information that will be discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in the forward-looking statements as a result of many factors, including general economic conditions, weather, and competitive conditions. Conditions in the Company's industries both in the US and internationally and additional factors that are described in the Company's publicly filed documents, including its '34 Act filings and 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 it's forward-looking statements are based are reasonable, it can give no assurance that these assumptions will prove to be. This conference call is being recorded and can be accessed on our website. Mike Anderson, Chairman and Chief Executive Officer, and I will be available for questions at the end of the call. Mike.

Thanks, Nick, and good morning, everyone. As noted in our press release, we generated net income of $10.9 million or $0.59 per diluted share on revenues of $939 million. In 2010, we reported net income of $1.4 million or $0.08 per diluted share on $707 million of revenue. For the first 9 months, our total net income stands at a record $73.4 million or $3.92 per diluted share. In the same period of 2010, we reported net income of $38.8 million or $2.09 per diluted share.

Total revenues of $3.3 billion for the first 9 months of the year, were up $1 billion from last year. The majority of the year-to-year revenue increase relates to rising prices in our agricultural businesses. As we have mentioned before, revenues and commodity-based businesses may not serve as good indicators of income or economic performance. Now, to fully understand the Company results for the quarter, let's take a look at each of our 5 business groups. The Grain and Ethanol Group achieved third quarter operating income of $12.8 million, which is a sizable improvement for its year earlier result of $2.5 million. The Group also had record income through September of $76.8 million, in comparison to operating income of $42.8 million through the first 9 months of 2010. This considerable year-to-date income differential was due to improved results in all areas of the Group, Grain, Ethanol, and Lansing Trade Group.

The Grain Division's third quarter operating income of $8.3 million compares to $3.2 million earned in the same period last year. The Division benefited from good space income, particularly wheat, primarily due to basis gains. This is the third quarter were in a row that the Division has benefited from an escalation in the wheat spaces. The Division also benefited from record third quarter earnings from its investment in Lansing Trade Group. Grain Division revenues for the quarter were $539 million, which is up from $389 million reported in the prior year. This revenue increase is due to the rise in grain prices, as bushels sold actually decreased due to the delay in harvest.

The Grain Division's operating income through the first 9 months was $60 million on revenues of $2 billion. Comparatively, the Division's operating income through September of 2010 was $28.8 million on revenues of $1.2 billion. The year-to-date results in the Division our influenced by the same factors as the third quarter, which are primarily basis appreciation and record Lansing Trade Group performance. As of September 30, the harvest had barely started in the majority of the areas we serve. The exception to this was our recently added areas in Nebraska. As of this week, however, the harvest is ahead of schedule in the US, but is still behind in some of the areas we serve in Ohio and Indiana, and parts of Michigan.

The Ethanol Division earned an operating income of $4.4 million this quarter. In comparison, the Division lost $800,000 during the same period last year. The higher income is the result of an increase in the earnings of the 3 Ethanol Limited Liability Companies. The LLC's were positively impacted by higher ethanol margins, which margins ended up being higher in the third quarter than we had originally anticipated. Total third quarter revenues for the Division were $179 million; in the prior year, revenues were $109 million. Through September, the Ethanol Division has reported operating income of $16.8 million on revenues of $477 million. In 2010, the Division's operating income for the same period was $14 million on revenues of $341 million.

The Plant Nutrient Group earned an operating income of $6.6 million during the third quarter on revenues of $138 million. In the same 3 month period of 2010, the Group reported an income of $1.5 million on $129 million of revenue. This improved performance was the result of higher margins, which were up significantly again this quarter in comparison to last year. The strong margins continued to be the result of nutrient price appreciation, attributable to strong world demand, resulting in tight supply for all basic nutrients. Total volume was down year-over-year, primarily due to a shift in the restocking of the nutrient pipeline.

Some of which occurred in the second quarter, and some of which we are now seeing in the fourth quarter. This year, the Plant Nutrient Group has earned $35.8 million through the first 9 months on $521 million of revenue. Last year, the Group had operating income of $21.2 million on $461 million of revenue. This year-to-year improvement was due to a significant increase in the margin per ton, as volume in comparison to last year has declined. Increased revenues this year are due to higher average selling prices.

The Rail Group reported an operating income of $1.1 million this quarter. Last year, the Group reported an operating income of $100,000, which included a one-time gain of $600,000 for the sale of the SED Hydroflow business. This quarter, the Group recognized $700,000 in gains on sales of railcars and related leases. Whereas, last year, $1.3 million was recognized during the period on these types of sales. The average utilization rate for the quarter was 85.1%, which was up significantly from the 72.9% experienced last year. Lease rates obtained in the market during the third quarter for some car categories were up significantly. This is a very positive indicator for the Group. The benefits of this will be more noticeable in future period, as the shorter-term and lower lease rate deals, booked during the industry downturn, expire.

Group now has approximately 22,300 cars and locomotives. The rail repair business and the short-line investment performed well this quarter. Revenues for the quarter were $24 million, which compares to the $22 million reported for the same period of 2010. Through the first 9 months, the Rail Group reported operating income of $7.4 million on revenues of $82 million. In the same period of 2010, operating income amounted to $1.2 million on revenues of $73 million. These results included gains on sales of railcars and related leases of $7.7 million and $5.6 million, in 2011 and 2010 respectively. The rail repair business, manufacturing business, and short-line investment have all been profitable for the year.

The Turf and Specialty Group had an operating loss of $1.2 million on $23 million of revenue. Last year, the Group reported an operating loss of $300,000 on similar revenues. Both turf product tonnage and gross profit per ton decreased slightly this quarter in comparison to last year. Through the first 9 months of 2011, the Group's operating income was $3.8 million on $112 million of revenue. Comparison through the first 9 months of 2010, the Group's operating income was $4.9 million on revenues of $106 million.

The Retail Group had an operating loss of $1.2 million in the third quarter, which compares to an operating loss of $1.7 million in the prior year. Total revenues of $36 million for the third quarter were approximately 5% above the $34 million in revenues reported in 2010. The sales increase is primarily due to an improvement in specialty food sales. Group's year-to-date operating loss is $2 million on revenues of $112 million. This compares to a loss of $2.4 million through the first 9 months of 2010 on revenues of $108 million. Both the Group's gross margin percent and average sale per customer have increased modestly this year. Conversely, the customer counts have decreased slightly. Now, I will turn the floor over to Nick for his Treasurer's comments.

Thank you, Mike. Turning to taxes for the third quarter 2011, the Company's effective tax rate was 28.5%. The Company's third quarter effective tax rate of 28.5% is relatively low, due primarily to tax benefits related to domestic production activities. For the first 9 months of 2011, the Company's effective tax rate was 35%. Next, as to interest. Interest expensive for the third quarter 2011 totaled $5.7 million, up $1.1 million from the same period in 2010. As of September 30, year-to-date interest expense was $20.6 million, up $6.7 million compared to 2010. The increase in interest expense for both the third quarter in 2011 year-to-date is attributable to increased short-term debt levels, driven primarily by rising prices in our agricultural businesses.

Our average short-term borrowings during the current year's third quarter were $232.7 million versus $40.1 million for the third quarter 2010. For the 9 months ended September 30, 2011, average short-term borrowings were up $376.8 million compared to the same period in 2010. The Company's average short-term borrowing rates for the third quarter were 2.7%, a decrease of approximately 1% for the same 2010 period. Year-to-date September 30, average short-term borrowing rates were down 1% from 2010. Commodity derivative liabilities current ended the 2011 third quarter at $55.4 million, an increase of $7.4 million from the same quarter 2010. During the third quarter, the Company was also an investor of excess funds for short-term investments averaging $36.8 million, a decrease of $17.3 million from the 2010 third quarter. As of September 30, our year-to-date average short-term investments were $30.9 million compared to $60.4 million in 2010.

Earnings before interest, taxes, depreciation, amortization for the third quarter 2011 were at $31.3 million versus $15.6 million for the same period in 2010. Year-to-date September 30, EBITDA totaled $164.4 million, an increase of $59.3 million for the same period last year. The third quarter's pretax earnings include $9.7 million equity in earnings of affiliates, up $10.8 million from the same period last year. Lansing Trade Group income was up $5 million. The 3 Ethanol LLC's income was up $5.9 million. Year-to-date equity in earnings of affiliates was a profit of $29.5 million, up $14 million from September 30, 2010. EBITDA has been adjusted for the non-controlling interests.

Turning to the balance sheet, at September 30, current assets totaled $869.3 million, an increase of $38.9 million from the year earlier balance of $830.4 million. This increase was driven by inventories, accounts receivable net, and cash and cash equivalents, along with restricted cash. Inventories entered the third quarter 2011 at $458.3 million. Accounts receivable net ended the third quarter at $158.8 million. Cash, and cash equivalents, and restricted cash ended the third quarter and $50.4 million. These increases were offset by year-over-year decrease in commodity derivative assets current of $34.1 million.

The increase in inventories third quarter 2011 versus third quarter 2010 was driven by Plant Nutrient due to higher volumes and cost of inventory. Plant Nutrient inventories were up $82.5 million from September 30, 2010. Grain and Ethanol inventories were down $59.7 million in the third quarter as compared to last year's third quarter == accounts receivable changes as compared to last year's third quarter. I'm sorry. Accounts receivable changes compared to last year's third quarter were Plant Nutrient up $9.2 million and Grain and Ethanol up $3.4 million. Thank you.

Now, turning to cash. Since the 2010 third quarter, cash and cash equivalents, along with restricted cash, increased $21.8 million. Restricted cash was up $9 million at the quarter-end compared to the same period a year ago due to a previously disclosed Build America Bond, issued October 2010 for capital improvements at our Indiana facilities. Net working capital at September 30, 2011 was $315.8 million, an increase of $42.7 million from third quarter 2010. Total assets of September 30, 2011 were $1.5 billion compared to $1.4 billion at September 30, 2010.

Along with the change of current assets, other assets ended the quarter at $241 million, up $25.8 million for the same period in 2010. This increase was a result of equity and method investments, formally Investments In and Advances To Affiliates, up $23.7 million over last year's third quarter, ending the 2011 third quarter at $189.1 million. Other assets and notes receivable net ended the quarter at $48 million, an increase of $8.1 million from 2010's third quarter balance of $39.9 million. Primarily due to the inclusion in the third quarter 2011 results of goodwill and intangibles recorded in December 2010 from our [B4] Acquisition. Commodity driven assets not current ended the third quarter at $3.9 million, a decrease of $5.9 million compared to the same period in 2010. Property plant and equipment, along with railcar assets leased to others, increased a total of $31.4 million in the 2011 third quarter compared to 2010 third quarter, due to business acquisitions increasing capacity of existing locations and improved rail activity.

Depreciation amortization totaled $30.1 million at the end of the third quarter 2011. Purchases of property plant equipment during the third quarter totaled $29.6 million versus $23.4 million for third quarter 2010. Railcar purchases and sales were $38.4 million and $19.8 million, respectively, through September 30. Railcar purchases as sales for 2010 third quarter were $13.6 million and $17.5 million, respectively. Our long-term debt totals $235.7 million, a decrease of $28.6 million from 2010's third quarter ending level. Our total long-term funded debt-to-equity is 0.42 to 1. The Company's average 2011 interest rate for all long-term debt was 5.35% versus 5.51% for 2010.

At September 30, our commodity derivative liabilities, not current, were $6.9 million compared to a 2010 third quarter ending balance of $1.9 million. The Company's September 30, 2011 total equity is $532.1 million, an increase of $90.2 million from the 2010 third quarter. On October 24, we paid our third quarter 2011 dividend of $0.11 per share. Finally, we continue to enjoy great support from our bankers. As of the end of the third quarter, we had short-term lines of credit under our syndicated facility that totaled $992 million. The Company also had a long-term line of credit under the same syndicated facility in the amount of [$115] million. The total lines of credit available under the Company's syndicated facility were $1.1 billion. Back to you, Mike.

Thanks, Nick. Before we take your questions, I would like to cover a few points. We are gratified to be able to report these record earnings. The Grain and Ethanol and Plant Nutrient Groups have led our earnings results this year. I'm particularly proud of the Grain and Ethanol Group for achieving a 9 month earnings record of $76.8 million. The Plant Nutrient Group also had a great third quarter despite a decrease in volume. This took the Group's year-to-date results to $35.8 million.

This demonstrates that the investments we have made in human and physical resources in our ag businesses over the last several years including Lansing Trade Group, which also had record results, are continuing to benefit your Company. Many of you may be wondering after we reported 9 month earnings that exceed our prior full year record income, what does the last quarter of 2011 hold? First, we expect our Grain Division to continue to perform well, albeit not nearly at the same pace as the fourth quarter of 2010. The strong escalation in the wheat basis seen year-to-date suggests to us that some of the space income that would typically be received in the last quarter has already been received. In addition, as I mentioned earlier, somewhat like 2009, the harvest has been delayed in many of the areas we serve.

In regards to the Ethanol Division, we locked in a significant portion of our fourth quarter ethanol production at positive margins and expect this year's fourth quarter results to exceed the prior year. We believe that our Plant Nutrient Group will have a good fourth quarter, as some third quarter volume has been moved into this quarter and margins continue to be strong. Further, we see our Rail Group continuing to outperform their prior year results as they continue to benefit from higher utilization and lease rates, among other things. As is typical, due to the cyclical nature of their businesses, we expect our Turf and Specialty Group to have a loss in the last quarter and expect the Retail Group to be profitable.

I would like to end by simply saying how pleased I am with the Company's performance, especially given the volatile economic times we are facing. Our purposeful growth the last 5 years has demonstrated our ability to make good investments, appropriately integrate them into the Company, manage risk, and grow our income as a result. It is our intention to continue down this same path in the future. I, for one, look forward to the journey. We will continue to strive to serve all of our stakeholders well. That concludes my personal prepared remarks. Nick and I will now be happy to answer any questions you may have. So, Francine, we will turn it back to you.

Thank you.

(Operator Instructions)

Michael Cox, Piper Jaffray.

Good morning. Congratulations on a great quarter, guys.

Thanks, Mike.

My first question is on the Plant Nutrients side. Are you seeing any hesitation or reluctance from growers given the rise in fertilizer prices? It sounds like you are seeing some uptick in volume here for fall application, but I'd just be curious as your -- a slightly longer-term outlook. If you were to look forward into the spring, do you expect this to continue to see that volume lift?

Good question. No, we are not seeing reluctance on the part of the growers. That is based on current nutrient prices on this, a general statement, on nutrients and based on current grain prices, primarily corn. I would add that we have come off a -- through almost the end of the third quarter, maybe, or into the third quarter is more accurate of escalating grain prices. And, we saw that similarly escalating nutrient prices, which was the primary driver of our really high or strong margins.

We have seen on the commodity grain side, we have seen fall off, off the highs, and there is, at least in the absence of supply shocks, not appearing to be elements even with reasonably good demand. We've seen elements that would tend to boost that price, so we've seen a similar flattening of nutrient prices around here and there is still a nice positive spread, I would say, on average nutrient prices versus where the grains are. So, I think we will have reasonably good demand, but for the inputs, the pipeline is still -- needs to be recharged. That should help, and the prospects are for, I would say, increased corn acres at this time, which should help. But, our outlook around the whole pricing relationships is a little more caution around nutrient prices at these levels and in relation to grain prices.

Okay, that's helpful. Shifting gears on the ethanol side, you noted that you have locked in a significant portion of your fourth quarter production at positive margins. Could you describe how those margins look relative to what you just reported in the third quarter, in terms of what you've already locked in?

Yes, I would say, on the average, that it is somewhat similar, but unit location by location it's different. So, it is in the vicinity of the same and it is healthy. Now, we have got to work through the quarter and see how we do on our productivity, how many gallons we are producing, and we are producing well at this time. Sometimes things can happen, and we have got to see the ongoing results of where DDG prices itself in relation to corn for the rest of the quarter. We've added some corn oil production in our system here, and so we will get some benefit from that. So -- but, relative to your first question, I would say somewhat comparable.

Okay, and on the rail side, the uptick you are seeing in lease rates, could you maybe bring that up in relation to where we were prior to the market meltdown?

Yes, I will, but we have got a situation of the averages don't tell the whole story. I would say if you look just at our average lease rate on our entire fleet, everything that is in place, right now or at the end of the third quarter, it is really similar to where we were a year ago, which had come down as a result of what was going on. But, what we have got going on for ourselves is the trend line is now about to break through where we have been, and we will see an increase. But, if you want to look at cars that are servicing the housing industry, rates aren't doing that well. If you want to look at cars that are supporting, frankly, the ethanol industry and DDG has been a plus right now. Tanker cars has been a bit of a plus.

Cars supporting, say, the oil sands project is -- there is a shortage. Plastic pellet car is a little [lank]. But, the bulk of the units we have seen sizable increases and if you look at -- we won't have the exact statistic on new car buildings until next year sometime, but I think we are down in that 10,000 to 15,000 range, and I'm going to guess we're going to be in the 45,000, 55,000 range this year. There's no question that some of the accelerated depreciation, bonus depreciation is a factor, but it is also I think reflected that in some segments we have come out of this downturn and are short enough where we need to build new cars and lease rates then tend to move in the direction that approximates new car values, as opposed to being way below for those car types that are being built. So, we are seeing all over the map. If you look at what we released, you will see some car types are (inaudible), some at the $556/month and everywhere in between. But overall, a net plus in lease rates and in utilization.

Okay, that's great, and one last housekeeping question. Where do you expect to end the year in terms of bushels of grain storage given the expansions you have done?

I'm not going to give an exact number other than to say, one, that bushel storage figure is a max capacity number and we tend to -- we always got some air. It is a rare year at that the end of the calendar year that we aren't as full as we could be, and everything that appears right now would suggest the same this year. I think it's important though as where we end the year, at what basis level do we end the year, and where are the spreads relative to corn, wheat, and soybeans. And, as we talked before, we have seen the wheat basis come up considerably. We've still expect good carrying charges and good income from wheat, but the blooms off that rose -- I shouldn't say blooms off that rose -- that has been unbelievably good and the prospect is good.

So, it is lower but still positive. It feels like in the whole corn complex the combination of shorter crop, we just got crop report out today, and yields went down a little more in corn. There is plenty of space to house the corn and the basis levels it takes to originate corn now are higher than normal, so we will be full. But, we won't tend to have, maybe, the opportunity we would have when we are in a lower basis situation, and I would say something similar to beans. We will be full, but maybe not with quite as much earning opportunity compared to what we saw a year ago.

That's perfect. Thank you very much.

Heather Jones, BB&T Capital Markets.

Good morning.

Good morning, Heather.

Hey, great quarter. I wanted to follow-up, it was actually going to be my first question, it's related to the basis. Even after an outstanding Q2, it ended up being an outstanding Q3, and looks like basis trends, at least in corn, Q4-to-date are better than they were in Q4 of '10, which is great for this year. But I was wondering if you could speak to what you are seeing for 2012 because to your point -- how is this impacting your ability? Because normally, basis would have become more depressed during Q4 and you could've picked up corn at more attractive prices to take you into 2012. And so, I guess I'm trying to figure out, how is this affecting your thought on as far as 2012 grain earnings?

Heather, you are right on the money, and I got into that a little bit on the corn. Especially in the eastern part of the grain belt where we have got yield reductions, remember we had the wet spring, interestingly enough the late planted corn, planted early June, much of that is better than some of the early corn. But, we have a lower amount of corn that is being produced, and this rain that we are experiencing through harvest is spreading out the harvest. And in essence, that has the equivalent impact of creating more space because as it spreads out some of the corn is being used and flushes out and then it can be replaced. So, you are absolutely right. The levels that we are originating corn at today are higher than we would have typically experienced. The levels at which we can sell corn today are higher than normal in harvest.

So, we have a nice put through margin situation. We believe that there is carry in the market, but the outlook then as we get -- you are talking about 2012. Almost every year, it is hard to predict now exactly what is going to happen in the last month of 2011 versus the first month of 2012. But, somewhere in there we are moving into a situation where the income opportunity on the corn that we inventory, the basis spread appreciation would tend to be lower than normal. On the plus side, you have a situation where even though certain parts of demand are weaker, just overall feeding, we have a relatively tight carry out and that creates -- generally that creates some better margin opportunities, which we in fact have been experiencing and we would continue to expect to experience. Margin in this sense is the difference between what we buy and sell as opposed to the ability to earn carrying charges.

And I understand your point about weak basis opportunity, but if we take away that big appreciation you had in wheat, if we somehow adjust out that. Looking at corn specifically, do you think these opportunities you are having to create better margin, do think those are enough to offset coming in at a higher basis levels. I'm trying to get a sense -- (multiple speakers).

Our overall space income results through three quarters and say through the end of the year in corn and beans were not -- were okay. But, compared to what we have had before, they were on the low side. I think reflective of a short corn crop and production last year. So, I would say I feel that we should have a reasonably good shot to be similar on the corn and beans next year versus this year. Knowing our ability to predict basis income this far ahead is hard thing to do. But, I wouldn't interpret that as a highly robust number, but for comparability purposes, I think it is reasonable to assume we will be in the ballpark.

Okay, and moving onto Plant Nutrient. You made the point about how prices have essentially flat lined. I guess it is fair to assume that maybe next year you could get some more price appreciation given the likelihood of higher corn acres --.

Go ahead.

I was going to say, it doesn't seem likely that you will get the price appreciation you did this year, but yet your volumes this year were hurt by a wet spring and a late harvest. So, if we look at 2012, what is your thought about -- could higher volumes and the benefit of that offset the likelihood of less price appreciation?

I would say the short answer is no. We absolutely expect higher volume barring some, either macro changes in supply/demand or -- if grain prices should fall through the roof and nutrient prices should stay high, but we are not anywhere near the same situation in '08 in that regard. Or, if we had just terrible planting conditions, but the macro look is that we will have more corn acres, and if we say an average spring, that should mean a first half volume experience that should be positive. The experience we're having this third and fourth quarter on volume, which would also suggest that we would at least be going into next year with more opportunity in volume in the second half. You bore through the margin results this year, and they are so good that it is hard to believe that the relationship, in other words, we would expect that the drop in margin would have more of a negative impact than the benefit from volume.

Now, when we talk about how our outlook was for this year, we were not expecting anything to be near this good. So, I am not feeling negative about the Plant Nutrient Group and its position in a macro and positional and growth and the investments we made relative to year-over-year comparison. I won't repeat what I said. I would say that as you're sitting here, on the plus side, we are going to need the nutrients. The basic asset position we have [leant] is a positive for this. In that, if the pipeline is not totally full, if we -- the farmer has demand for the products, the size of our storage and the quality of our handling facilities is generally a net plus for us. So, we have got some things that certainly are offsetting the likelihood of a lower margin, but it's hard to believe that we could offset all of that, Heather.

Okay. Thank you. And, I've got two more questions. One real quick. When you lock in your margins for ethanol, do you lock in basis or just --.

When we do the crunch -- generally, we don't have the ability on any given day to say we want to lock in this much basis and we can go execute on it. Our buying around the cash basis side of it are always independent of the margins. So when we talk about market locking and margins, that is a good point. We're generally vulnerable on some parts of the basis. We often have some stuff bought ahead. And, in the -- I would say the -- parts of our belt, the Ohio, Indiana parts with a little lower crop and the prospects of these higher basis levels, that can impact the actual margin that we experienced. Now, we also, as we are doing our forecasting and locking in stuff, we are plugging in our estimates of what the basis will likely be. We just know that reality will never be the same as what we estimate. So, I would say from where your modeling is done, I think it is appropriate to plug in a higher basis than maybe you used a year ago.

And then my final question, given how big you all are in wheat, do you anticipate any impact from what is going on with the Canadian Wheat Board? I believe Canadian wheat is largely high protein and you all are more softer, winter but still, was wondering if you are anticipating that having any impact on your business?

If I look at a couple elements of our business, we look at the basic assets we have in Ohio, Indiana, Michigan, we handle wheat in Illinois, but not that much. That is soft wheat, but Ontario is also soft wheat, but I would also say that even with the Wheat Board in place, there has been active movement of wheat across the border for as long as I can remember. So, I don't see if the Wheat Board does decide to move away, I don't see much impact on that. I would say on that element of the business, especially on the Lansing side that involves the physical merchandising of grains and they are really strong in wheat, that holds some positive possibilities for them, and therefore for us.

Okay. Thank you very much. That is very hopeful.

Farha Aslam, Stephens Inc.

Hi, this is Eric Gottlieb for Farha.

Yes, it didn't sound like Farha.

I know, just a little. I have a quick question on ethanol. That corn oil, how much of that is rolled out? At all three plants or what?

Okay, Nick, the question is at what plants do we have the corn oil rolled out, and we are out at two of them.

Yes.

And, the third is not operating yet.

Do have a timetable on when that is coming up?

I wish I could answer that, and I'm not trying to duck you, I just don't know the answer to that.

Okay. Fair enough. Some of your competitors have given an estimate on what they think that could add. Do know what that added this quarter, or what do you think that could potentially add going forward?

I don't know -- I'm not accurate enough to be able to tell you that. I think that is something that we will need to get our arms around. We have that. It is one of those things there is no question that it is additive at the present time. And, we will have that information because it is becoming more desired and more material.

Okay.

Good question.

Maybe that is more of a question I was supposed to answer actually. One question on the LTG. That is another great quarter, another record. What was the split on that, on where they earned their money?

They have got a number of different businesses. The nice thing, this is spread quite broadly among their basic -- they have added a significant amount of investment in traditional grain elevator storage space over the last several years, and that is performing quite well from their historic merchandising the supply chain element, [the own it origin lock in the freight] and sell it to a destination has been really strong for them. Their international performance has increased. They had a good year in their proprietary trading, and it is an important element, especially the first half of their performance. I would say maybe down a little is the traditional ethanol physical trading. It is still positive, but it is just down a little bit. So, we are tickled that it is spread over quite a broad cross section of what they do.

Okay, very encouraging. And lastly, I know you didn't give a response on grains storage capacity, but I am wondering on those areas that -- where the harvest is a little late, how much capacity do you have there? That would be my concern or what percentage of your capacity?

We'll have no problem filling the capacity, and off the top of my head, I don't have a good -- I can't tell you out of [100 and some million], we'll probably be at least 90% full on that. And the areas that are late, this is stringing out the harvest, makes the basis a little more, but it is coming in, and it will come in. And so we'll -- it's not that -- the question for us is not the question filling up, it's the question, and Heather was on it, the question of what price are we filling up.

Right.

Oh, I should add that one positive element to this, in the fourth quarter we should have a reasonably -- some improvement in blending income compared to a year ago. It is not the most material part of our P&L, but we have got water grain to handle and the drying income that comes along with that will be a positive.

Okay. That sounds great. I'll pass it on. Thank you.

Brent Rystrom, Feltl & Company.

Thank you, good morning.

Hey, Brent.

Too bad you couldn't release on a day when the market's not off 200 points, huh?

We've had two in a row like this. (laughter)

Yes, well, a couple of simple questions. Looking at fall applications, talking about the late harvest Indiana, Ohio, I would assume that those wet field conditions maybe make it a little sloppy for fall applications here. How do you feel about the ability to get the plant nutrient crop out there?

It's going to be challenging. We're getting some more rain today. This area isn't as big a fall spot, Illinois is much more so, and there are plenty far along, but it is just going to make it challenging. And then, if we get a rain pattern every four days, it will keep making it challenging.

Out of curiosity, I'm wondering, and this is an odd ball question, I know I have these every once in awhile, but refuge-in-a-bag. I'm wondering if you're looking at how that might change the Plant Nutrients Group next year because in most regions of the country the license-refuge agreement that most farmers have, they tend not to actually plant the refuge as aggressively as they are supposed to. And, I'm wondering if you think that might have an impact, as we shift more to refuge-in-a-bag next year, how that might impact the Plants Nutrient Group?

Brent, I'm just a finance guy. Could you explain that question a little bit more for me?

Yes, next year the refuge to prevent particularly insect problems in corn. Most seed companies have farmers have to plant a refuge, so when you drive by a cornfield, you look at 40 acres you will see 90% of it looks like a certain type of corn and then 10% usually around the edge has a different --.

That's the piece around the edge, got it.

And so, a lot of farmers aren't compliant with that. They don't actually plant the refuge and the reason they want to do this is to prevent the Roundup problem where it loses its efficacy. Next year, most of the manufactures of switching to refuge-in-a-bag, and from what I'm hearing, particularly on the nitrogen side, is they think that is probably going to spike some nitrogen demand because they are going to have to make up for the loss of yield that, that will probably push into the market by fertilizing heavier. I'm just curious if you guys have seen anything in your system that might substantiate that.

Denny isn't in here today, and that is one of those -- those aren't off-the-wall stuff, but they are a level of specificity where I am just not in a position to answer that. Nick is going to find out some stuff around that and loop back to you. I've not heard our team bring that up, but that doesn't -- it's like I'm involved in a number of the tactical conversations around stuff like that.

Brent, I wouldn't characterize that as off the wall. That is a good technical question, but I think rather than us winging it, let us do a little research. I will get back you after I've talked to Denny and give you our view on that. I understand what you're asking.

I have two other questions then that are probably more for you Mike, or Hal if he's around. But basically, I'm curious if you looked at the WASDE today, particularly in the soybeans, as they took the export numbers down. If you looked at [Confab] this morning and what Confab is saying about Brazil, peaking (inaudible) on 140 million, 150 million bushels, it would seem to be a contradiction to take WASDE's soybean exports down. I am wondering if you had thoughts on that.

What I can speak to -- I can only speak to the first report came out today, where yield was taken down slightly and exports were taken down, carry out up a bit. My own perspective on that is the demand that we are seeing so far for soybeans for exports seems to support that logic of lowering the exports. In addition to that, just a carryover projection that we had for soybeans is relatively tight. And, it is one of those things that where you say okay what -- if production numbers and the stocks numbers are accurate, can you really end up with that tight of carry out? And we could, but if not, where do you see the demand destruction? From what we see, tend to support some demand destruction on the export side. The point you are making about apparent contradiction, I'm just not in a position to answer that today.

Confab actually said that they see a Brazil soybean harvest down about 3, 3.5 million metric tonnes from last year.

If the demand is there overall, where is it going to come from with Brazil being -- if we are down, the logic would be Brazil would have to pick up. I am just not prepared to answer that, but I was not surprised by the US report -- that came out this morning and I have not processed the other side of it in there. I don't think we can consume more beans than we are projecting that we are going to consume. If exports go up a little then I think something else has got to give domestically, but the demand that we are seeing from soybeans, in my opinion, supports the reduction in exports.

The final question I have, just thinking out loud about how this cycle might work, and both the benefit this might have, say in the Plant Nutrient Group, and then potentially the margin impact negative on ethanol. Given the likelihood that we are going to need for 94 million, 95 million acres next year of corn, and given the psychology of how bidding for acres typically influences pushing farmers to plant those acres and how that impacts fertilizers, I would assume you are feeling pretty good about the first half fertilizer pricing cycle next year. Because if we're pushing 95 million acres, the capacity to deliver fertilizers for that is going to be really strained, and that has to be good for pricing. On the reverse side, I would assume similar to the pattern we had this year that the bidding for acres by the different end users pushing up the pricing enough to cause people to plant the corn could be a negative for ethanol margins particularly in the second quarter. Any thoughts on that?

On the first one, I would agree with what you're saying, but I would add a caveat to that. And that is, what I would say, the long-term, not perfect correlation but correlations of nutrient -- a basket of nutrient prices relative to a specialty corn price. So, you have got the demand side in the US with more acres corn positive. Let's assume nothing macro worldwide takes place. China's still doing its thing and whatnot. So, all that supports demand, but we have seen commodity prices taper off a bit and you can build a scenario to where corn prices might be under a little pressure. If that would happen then you'd get the squeeze on the margin at the farm level of, what can I get revenue per acre versus what do I got to put in revenue per acre, and that could affect buying.

I am more agree with you than disagree. I'm just getting another side of the equation. On the ethanol, I would tell you that it seems like the ethanol margins that we have, have ultimately been as much or more impacted, now in any given month or two week period, ignore what I'm saying, have been impacted by, what is the demand for ethanol for either export or for blending with others stocks and certainly corn price is a -- price of ethanol is a factor in that,. But, it is also how many gallons are we consuming on US highways along with the price. And then, we are going to get into what is the price of corn versus the price of oil. If we end up with 94 million, 95 million acres and end up building carry out a bit, personally, I tend to look at that as maybe a little more friendly to ethanol margins versus a little negative.

And I would agree. What I'm asking, but that would be an impact post harvest or maybe pre-harvest, but as we are aware that hopefully we are going to get more than 150, I think that the trend line for next year they are saying is going to be 153.

Then you will get into -- of course that would mean with an inverse old crop and new crop, all the farmers should sell all they have, so it makes all this year's corn free corn, and I do think high basis levels are a likely negative impact on margin. I also think if we drop the blenders credit from $0.45 to nothing, you lose that a little demand E85, you lose a little demand on maybe fringe areas. The mandate supports stuff. We don't know where exports will go out, but that's probably, in my opinion, got as much impact on that margin, where that shakes out as corn basis. If the margin is there for ethanol and they can afford to pay what the basis is that we need to pay, then we will grind this stuff and have good margins. Interesting, we saw that the summer with high basis levels. I'm not predicting the same scenario, but we had pretty dog gone high basis levels and really nice margins.

As you say that now, thinking through that a little too, Unica just came out and said Brazil's sugar harvest is going to be down about 20%, so that would work a little counter to what I am suggesting.

There is the corn side and there is the oil-ethanol side, and that there is a demand for ethanol. So, it seems like this whole ethanol thing all the time, there is stuff in the margin that you have to -- that ends up on the one hand and on the other hand.

Fair enough. Thank you, guys.

Eric Larson, Ticonderoga Securities.

Good morning, everyone. Nice quarter.

Thanks, Eric.

Great quarter. I just want to drill down on Lansing a little bit more. The performance in that division is stellar. Of all your equity businesses, we can get a feel for what ethanol may or may not do. It is easily -- it's as much unpredictable as anything else. But, at least we have some metrics in which we can, at least lay a forecast out, whereas Lansing is really difficult for us to know the volumes you are pushing through, et cetera. You've added a lot of elevator capacity to that business, which is going to be, I think, a more stabilizing piece of that earnings flow going forward and you are building more and adding more to it. How should we be looking at a quarterly contribution from Lansing on average going forward? It clearly is in a different place than it was two years ago. Can you give us -- give us a little help on how we should be looking at Lansing and their contribution.

That is an interesting question, so I will take a little stab at it. One, we had a couple year period we disclosed a couple of the big hits that occurred from some -- I don't want to just say one time. We hope they are one time in nature. That were really material and took their income down that I think as you look back at results over time, it is reasonable that as you are looking at results over a 12 month period to add a good segment of that back. And so, you can look at four or five, six year trend of their, not just quarterly earnings, but annual earnings. I think they have developed the capability that would suggest that past performance is in fact a reasonable starting place for the predictor of future performance.

When we have put a growth factor in there, but I am not -- they have got more space and they have got wheat income in it too, but you don't have the ability to say, oh, but they've got exactly how much space like we have space, what the volume of the inventories are. Eric, I understand the point you are making. And, I am not sure exactly what to tell you that we can give you to build up that model. Nick, I don't know if you want to add to that because we are not going to disclose what we shouldn't be disclosing, but we have got a really positive and growing contributor. So, the question is really --

I'd like -- thank you Mike. I would like -- the macro view that you have Eric of a company that's performing very well, especially from 2010 forward, and Mike's talked about our feeling that the issues in '08 and '09 are behind them. They have always been a company that has a number of different streams to it. And, you mentioned that they are deepening some of the streams a little bit recently. And so, I think you have painted a picture of something that is not a one-legged stool, but multiple legs to the stool and I think that -- I just want to reinforce that sense in your gut that there is a good mix of different businesses there are as opposed to any one -- over time a good mix of business as opposed to over reliance on any one stream. Mike is that --.

It is. But, I think we take the input that Eric's given --.

We will see what we can do

With no sense of a promise or anything, Eric. Understand that it is hard to model it without having much granularity behind the number.

Good question.

And, I appreciate your attempt to at least talk through it and think through it a little bit because you can see what us looking from the outside looking in, it makes it -- that is the struggle that we have, obviously. But, if you take Lansing's contribution just in this quarter on a net income basis, it's very meaningful. It is probably the less visible piece for us to really get a good handle on, that's all. I appreciate your sensitivities to it. I realize you're not going to disclose what you don't have to and don't want to disclose. I wouldn't do either. But, at the same time I'm trying to see if there is a way for us to figure out how we try to get a more predictable factor into that number, but thank you for trying to take a stab at that.

Eric, this is Nick. I think you have covered us really the longest of anybody and I think you are giving us a good suggestion here about how we can help everybody who has an interest in us. I'm not sure that we will have an immediate answer, but it is something, I think, the more we can address this issue, we will help you and that in turn help all of our stakeholders and that in turn helps us. So, we will wrestle with it. I can't promise any sort of immediate change in terms of what we are sharing, but over time I think you are pushing on something that is worth our all focusing on.

Coincidentally Eric, this morning I sent an e-mail to Nick that went something like, hey shortly after this conference call I want to get together and talk about, I'm going to paraphrase what I said, what is the stuff that we are disclosing that might not be adding much value to our owners, and what is the stuff we aren't disclosing that a might add value. (laughter) Now, that doesn't mean we end up changing anything, but there's been some suggestions over time and so I'm glad you brought it up.

Timing is everything.

I truly appreciate it and I know that you folks do the best that you possibly can. You've always been very good at that. And I know you will make a stab at it and see what -- it is just become such an important division for you, and again, it's a good investment. You should try to monetize that as much as you can.

The team at Lansing and what they are doing and how they are performing in a positive way is what stimulated your question. That is a good thing.

Yes, absolutely. I appreciate your thoughts and your help on that, and we'll talk more some other time. Thanks, guys.

And now, ladies and gentleman that concludes our Q&A portion of our call. I would like to turn the call back over to Mr. Mike Anderson for closing remarks.

Okay. Thank you for joining us. Our next conference call is scheduled for Thursday, February 9. I hope we have an overall up market that day, that wasn't in the script. At 11 AM Eastern Time to review our 2011 full year results. We hope you're able to join us then, and have a great day. See you.

Ladies and gentleman, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.