Andersons Inc (ANDE) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2012 The Andersons Incorporated earnings conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to Nick Conrad, Vice President of Finance and Treasury. You may proceed.

Good morning, everyone, and thank you for joining us for the Andersons Inc's, 2012 second quarter conference call. We have included a slide presentation that will enhance our talking points this morning. If you are listening or watching this presentation via our website, the slides and audio are in sync. For those listening via telephone and watching the webcast, you will need to follow directions sent to you to sync the slides and the audio. This webcast is available through the investor section of our website www.AndersonsInc.com. The webcast is being recorded and will be available on our website.

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 of the Company's industries both in the US and internationally and additional factors described in the Company's publicly filed documents including it's 34 [act] filings and the prospectus 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 is forward-looking statements are based are reasonable, it can give no assurance that these assumptions will prove to be.

On the call with me today are Mike Anderson, Chairman and Chief Executive Officer; Hal Reed, Chief Operating Officer; and John Granato, Chief Financial Officer. Mike, Hal, John and myself will answer questions at the end of the prepared remarks. I'll now turn the floor over to Mike Anderson, CEO, for opening comment.

Thank you, Nick. The Company had a strong quarter and I'm proud of that. The rail group had record quarterly earnings for the second quarter in a row and is gratifying to see this group produce these results now that the rail industry is improved. Plant Nutrient Group had a very strong quarter due to increased volume and margins that were higher than anticipated. Grain Group also did well, including record earnings from our investment in Lansing Trade Group. The Company paid its 63rd consecutive quarterly dividend on July 23 of $0.15 per share.

During the first quarter conference call I indicated a very promising outlook for the year due to the early and record corn plantings that had taken place. However, the drought the country is experiencing will have a significant impact on the grain and ethanol business. I will provide an updated outlook in my concluding remarks.

The Company has continued to expand its capacity of its core assets over the last five years. The geographic diversification into Florida, Wisconsin, Nebraska and Iowa provides us with many benefits. One of these benefits is that our territory is more diverse so the possibility that a localized drought will severely impact all the crops in the areas in which we do business is greatly reduced. The macro sense the growth of the world's population coupled with in improvement in diet continues to create good long-term demand for the grains we handle and, in turn, nutrients and other inputs we sell and the transportation we provide. Our diversified locations and growing capacities position us well to meet the future demand.

I'd like to specifically highlight some accomplishments in 2012 that demonstrate the Company's continued commitment to growth. In January the Plant Nutrient Group acquired new easy grow, an Ohio-based especially agricultural and industrial company. This group also completed a major capital build this year at its Maumee, Ohio, location and improved both its formulation capability and efficiency. The Grain Group is in the final stages of constructing a three-point million bushel elevator unit train capable facility in Nebraska that is expected to open in September.

In May, the new ethanol investment affiliate, The Andersons Denison Ethanol LLC acquired an existing 55 million gallon ethanol plant in Iowa and it also included a 2.7 million bushel grain elevator. The Rail Group expanded its fleet in its rail repair business by adding two satellite locations in Ohio and North Carolina. Additional expansion and acquisition opportunities for 2012 are being explored. I will now turn this over to John, our CFO, who will provide details of the total Company results.

Thanks, Mike, and good morning, everyone. The Company generated net income of $29.2 million in the second quarter or $1.56 per diluted share on revenues of $1.3 billion. In 2011, record net income of $45.2 million was reported or $2.42 per diluted share on similar revenues. Through the first six months total net income stands at $47.6 million or $2.54 for diluted share. In 2011, first half net income was $62.5 million or $3.34 per diluted share. Total revenues of $2.5 billion for the first half of the year are $113 million higher than the prior year.

Earnings before interest, taxes, depreciation and amortization EBITDA for this quarter were $63.9 million after adjustments for non-controlling interest which was down $24.9 million from the same period in 2011. The second quarter's pretax earnings included $5.1 million in equity in earnings of affiliates, a decrease of $7.4 million from the same period last year. This was a result of a $9.5 million decrease in income from the Company's investment in its Ethanol LLC's which was offset by an increase in the investment income from Lansing Trade Group of $1.9 million.

Through June the Company's EBITDA totaled $108.4 million, a decrease of approximately $24.7 million from the same period of 2011. Equity in earnings of affiliates through June totaled $9.4 million as compared to $19.8 million for the first six months of 2011. Interest expense for the second quarter 2012 totaled $5.4 million, down $2.2 million from the same period of 2011. Through June, the Company's interest expense totaled $10.7 million down $4.2 million from last year. Interest expense has declined due to lower borrowing levels and interest rates. Average short-term borrowings for the quarter were $344.4 million, down $126.8 million and average short-term borrowing rates were 2%, a decrease of approximately 1%. Average short-term borrowings for the first six months were $323.6 million compared to $469 million for this first six months of 2011.

During the second quarter, the Company was also an investor of excess funds with short-term investments averaging $21 million. The Company's effective tax rate for the second quarter was 37.9%, up 1.8% from the prior year rate of 36.1%. The Company is projecting a 36.5% tax rate for 2012. The Company's actual 2011 effective tax rate was 34.5%.

The bridge in this next graph demonstrates which groups income is up or down this quarter in comparison to the prior year. The specifics behind these differences will be detailed as each group's operating performance is discussed. Therefore, to better understand the total Company's results Hal, our COO, will walk you through each of the six business groups. Hal.

Thanks, John. Let's start with the Grain Group which reported operating income of $15.3 million this quarter versus a record $36.5 million a year ago. This income differential was driven primarily by a return to a more normal level of space income. As we mentioned before, the space income recognized in the second quarter of 2011 due to strong basis gains in wheat was extraordinary and not likely repeatable. The group benefited this quarter from record earnings from its investment in Lansing Trade Group. Grain Group revenues for the quarter were $719 million which is down from the $797 million reported in the prior year. This revenue decrease is due to a decrease in the average price per bushel as there was actually a slight increase in the number of bushels sold.

The Grain Group's operating income through the first six months of 2012 was $34.7 million on revenues of $1.4 billion. Comparatively, the groups first half operating income in 2011 was $51.6 million on revenues of $1.4 billion. The year-to-date results are influenced by the same factors as noted before in the second quarter which are primarily a return to more normal basis gains on wheat and the strong performance from Lansing Trade Group.

Last quarter we mentioned that corn planting progress in our region and in the US was well ahead of both the prior year and the five-year average. We also noted that we are hopeful the weather would continue to cooperate through the growing season. Well, it hasn't. As I'm sure you're aware, many parts of the country are experiencing drought conditions. This has lead yield estimates to decrease from early projections of 160 or more bushels per acre for corn now to estimates of 130 bushels per acre or lower. For comparative purposes, last year's yield was 147 bushels per acre. As of Monday, crop condition reports show the 21% of the corn crop and 26% of the bean crop are good to excellent. At the same time last year the ratings were 46% for both crops.

Next, let's discuss the Ethanol Group which had an operating loss of $2.1 million this quarter. In comparison, the group had $8.8 million of income during the same period last year. The lower income is a result of decreased earnings in our ethanol limited liability companies. The LLC's were negatively impacted by lower ethanol margins resulting from increased corn costs and lower demand for ethanol in both the US and export markets. Revenue this quarter was $168 million, up slightly from the $165 million for the same period last year. Through June the Ethanol Group had reported an operating loss of $2 million on revenues of $318 million. In 2011, the group's operating income for the same time period was $12.4 million on revenues of $297 million. During the first six months last year our Ethanol LLC's benefited from favorable margins which has not been the case this year.

Our investments in E-85, corn-oil and CO2, however, have produced profitable co-products that provide income even when ethanol margins are not positive. This business structure has helped the Ethanol Group to perform better than the industry in this down market. With approximately 10% to 15% of ethanol capacity currently shut down, the ethanol stocks are declining. Ethanol stocks are now down about 150 million gallons of the spring peak as plants struggle with reduced corn supply and a weak margin structure. We expect production to be near a 12 billion gallon per year rate for the next six to eight weeks which could drive down stocks further.

The Plant Nutrient Group achieved operating income of $28 million on revenues of $309 million this quarter. In the same three-month period of 2011 the group reported a $24.1 million operating profit on $260 million of revenue. The improved results were due to increased volume which resulted from strong demand due to very early start to fieldwork, low retail stocks coming into the quarter, and record corn planting. Margins were down slightly this quarter in comparison to last year, but when compared to historical margins, they were strong. The strong margins were primarily the result of nutrient price appreciation and, to a lesser extent, a favorable product mix that included more value-added manufactured products. The group has appropriately managed its nitrogen, phosphate, and potassium ownership position going into the second half of the year in order to reduce the risk of lower of cost-to-market losses. This year, the Plant Nutrient Group has earned operating income of $33.8 million for the first six months on $484 million of revenues. Last year the group generated operating income of $29.2 million on $383 million of revenue. This revenue growth was due to both higher volume and an increase in the average selling price.

The Rail Group reported record operating income of $7.2 million this quarter on revenues of $32 million. Last year, the group reported $2.8 million of operating income on revenues of $30 million. This quarter the group recognized $2.4 million in gains on sales of railcars and related leases and nonrecourse transactions which is comparable to the $2.3 million of recognized last year. Gross profit from the leasing business was significantly higher due primarily to an increase in the average lease rate which is risen in each of the last three quarters. The average utilization rate for the quarter was 84.7% which was consistent with last year. Through the first six months the Rail Group had record operating income of $15.2 million and revenues of $68 million. In the same period of 2011, operating income amounted to $6.3 million and revenues were $58 million. These results include gains and sales of railcars and related leases and nonrecourse transactions of $8.7 million and in 2012 which compares to $7.1 million for similar transactions in the same six-month period of 2011.

The year-to-date results for rail -- for the rail repair business were more than three times what was recorded in 2011. In addition, the Rail Group executed several transactions in the second quarter which will result in the recognition of $4.3 million in operating income in the third quarter. The group has approximately 23,100 cars and locomotives which is up approximately 700 cars from its year-earlier total. Utilization rate at the end of June increased to 85.2%.

The Turf & Specialty Group earned operating income of $2.8 million this quarter on revenue of $44 million. Last year the group reported $1.8 million of income on $42 million of revenue. Turf products tons was essentially flat, margin per ton increased slightly due to product mix. The cob business this quarter more than doubled its income in comparison to the prior year as a result of increased sales of patented products. Through the first half of 2012 the group's operating income was $5 million on $89 million of revenue. This is comparable to the same prior period year-to-date results.

The Retail Group's operating income was $1.4 million in the second quarter compared to $1.9 million reported last year. Total revenues of $44 million for the quarter, approximately 2% lower than the $45 million in revenue reported for the same period of 2011. The group's year-to-date operating loss is $1.3 million on revenues of $75 million. Through the first six months of 2011 the operating loss was $800,000 and revenues were $77 million. The group's customer counts decreased slightly; however, average sale per customer increased slightly. Now, I'll turn the floor back to Nick for the treasurer's report

Thanks, Hal. Turning to the balance sheet, networking capital at June 30 was $256.3 million, a decrease of $96.4 million from last year's second quarter. At June 30 current assets totaled $1 billion, an increase of $34 million from the 2011 second quarter ending balance. This change was driven primarily by an increase in Grain Group inventories and offset by decreases in commodity derivative assets current accounts receivable unrestricted cash of $65.4 million, $35.2 million, and $6.9 million respectively. Inventories at June 30 totaled $597.1 million, a net increase of $127.5 million as compared to last year. The decrease in the restricted cash was due to draws for reimbursement of capital expenditures related to the Anselmo, Nebraska grain elevator project.

Under current liabilities, borrowing on the short-term line of credit at June 30 was $309.6 million compared to $194.2 million at the same time last year. Commodity derivative liabilities current ended the second quarter of 2012 at $29.8 million versus $24.3 million at the end of the second quarter 2011. The Company's June 30 total equity was $589.2 million, an increase of $64.7 million from last year second quarter.

Total assets at June 30 were $1.8 billion, an increase of $250.9 million from the 2011 second quarter ending balance. This increase is a result of equity method investments and other assets net showing increases of $9.7 million and $23.4 million respectively. Also, property plant equipment along with rail car assets leased to others increased a total of $187.4 million compared to last year due to business acquisitions, expansion at existing locations, and rail car investments. (inaudible) derivative assets non-current ended the second quarter at $4.8 million, a decrease of $3.7 million compared to the same period last year. Long-term debt totaled $317.6 million at the end of the second quarter, an increase of $57 million from 2011 second quarter ending level. Our total long-term funded debt to equity was 0.55 to 1.

The Company's second quarter 2012 average interest rates for all long-term debt was 4.89% versus 5.41% for the second quarter 2011. Year-to-date June 30, the average long-term interest rate was 5.02% which is down from last year's rate of 5.37% for the same period. At the end of the second quarter our commodity-driven liabilities not current were $454,000 compared to a 2011 commodity -- 2011 second quarter ending balance of $1.9 million. Purchases of property, plant, and equipment through the second quarter 2012 totaled $38.2 million versus $12.6 million through the second quarter 2011. Railcar purchases and sales were $77 million versus $16.1 million respectively through June 30. Railcar purchase and sales for the same 2011 period were $32.2 million and $17.8 million respectively.

Finally, we are fortunate to enjoy good support from our banks. As of June 30 we had short-term lines of credit under our syndicated facilities that total $735 million. The Company also had a long-term line of credit under the same syndicated facility in the amount of $115 million. Total of these lines of credit available under the Company's syndicated facility were $850 million. We continually monitor our current and future borrowing needs and at this time feel the existing lines of credit are adequate. Our banks continue to indicate they are willing to support our accessing of $350 million uncommitted accordion line if needed in the future. Each of the borrowings -- I'm sorry, each of the periods of grain price escalation have played out differently in terms of influencing our borrowing needs. We are pleased that our existing line has been and continues to be more than adequate. Mike will now cover a few more points before we take questions.

Thank you, Nick. As I noted in the press release, we had a strong quarter, but our expectations for the remainder of the year are being tempered by the drought conditions which will certainly impact the results of both our grain and ethanol groups. I would like to expand on our expectations for the year.

First, we currently expect our grain group to have a loss in the third quarter due to an anticipated decline in space income. As we move into the fourth quarter we expect earnings for the Grain Group to be reasonably close to the prior year quarter. Further, we expect Lansing Trade Group's results to remain strong in the second half. Due to the low margins currently being experienced in the ethanol market, we expect the ethanol group's full-year results to be considerably lower than the prior year. Last quarter, I told you that we can't predict exactly what ethanol margins will do in the future. That is still true. However, I also told you that our outlook for margins later the year was positive. Given the drought conditions, that's no longer true.

That being said, the group continues to provide services for a fee and to sell co-products such as DDGS, corn-oil, E-85 and CO2 which will help temper the impact of the current ethanol market. I continue to expect our Plant Nutrient Group to have a very good year as the demand for nutrients remains high. However, we anticipate the second half of this year to be lower than the prior year. As the Rail Groups year-to-date results are more than double the prior year's results, I foresee our Rail Group more than tripling their prior-year income as they benefit from increases in lease rates and from highly effective management of their fleet portfolio. As we said previously, a typical year for us is where the second and fourth quarters are stronger and the first and third quarters our softer. We expect that trend to be seen in the second half of 2012.

I think it's also appropriate to provide an outlook for the first half of 2013 given the significant impact of the drought is having on the production of corn and soybeans in the US. As you all know, space income is a significant part of the Grain Group's income and has been quite good to us for several years. The crop production shortage and resulting higher price is already causing a rationing of consumption and it will encourage the movement of grain from the farm through our storage and almost immediately to market. At the present time there is no carry in the new crop corn or bean markets with wheat showing some carry through next March. Obviously, that suggests little space income outside of wheat at this time. I would add, however, that even though we have a significant crop shortage the market likely cannot handle all the volume of these two crops coming to market in the first five months of the crop year. So it is possible that the future price relationships might change and reflect greater carry. The fact that there is some wheat carry is reflective of different supply demand characteristics for US soft red wheat. And as such, the current market conditions suggests that there could be decent space income into next year. In addition to the outlook for reduced space income, it's reasonable to assume that the crop shortage will result in fewer bushels for us to handle.

I would think the significant dislocation and disparity of supply and demand will also prevent a situation that has the potential to be favorable for both our arbitrage capabilities along with our farm-to-market program and for Lansing Trade Group's domestic and international arbitrage and merchandising expertise. Probably and perhaps most importantly is that this situation should encourage higher planning of soft wheat this fall and strong corn and bean planting next spring. The fundamentals of this business have not change. The world needs our production capacity as well as our logistical capability and reliability. As we look to the ethanol market we also have to deal with the impact of high futures prices and the regional shortages of grain in some areas that will likely result in higher than normal basis levels where the shortages exist. We do believe the gasoline market will want and need ethanol even at higher prices. We feel that next year the industry could be dealing with periodic shutdowns of plants that are poorly positioned and local corn supply shortages or have other operating and margin challenges.

We're feeling bullish on the plant nutrient volume and margin as we look to next year. It's possible we might see another record planting year for corn. That would be quite positive for us. We believe world demand for nutrients will be strong as a result of this year's short crop year and elsewhere keeping basic nutrient prices firm. In addition, the outlook for our rail business in the first part of the year also looks bullish. Before I conclude, it's important to note that what I just stated is our informed opinions and you can bet the conditions and outcomes will change. All in all, we are pleased to be positioned in good fundamental industries. We, like others, are wishing that we would have had better near-term outlook, but it is with the situation is and we will work through this and look forward to next year's planting and harvest seasons.

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

Thank you.

(Operator Instructions)

Our first question is from the line of Farha Aslam from Stephens Inc. You may proceed.

Hi. Good morning. Thanks for all the additional color regarding the outlook. That's very, very helpful.

You're welcome.

And going into that a little bit more detail, particularly as it relates to ethanol. You had mentioned of course that ethanol earnings will likely be down year-over-year, but going forward do you expect earnings in the second half of the year to be at roughly similar levels that we experienced in the second quarter of this year or materially better or worse?

This is Hal. Thanks for the question. I think -- I don't -- today's crystal ball would suggest that margins for the second half of the year are relatively similar to the first half. We don't see anything that's obvious to make them dramatically different. But we've got a lot of questions around the crop and a lot of other things going on, so it's a pretty foggy picture right now.

And then when you look at RFS, there is some questions whether Washington will change the requirements for either this year or next year. What is your view regarding that?

Again a crystal ball picture, but it's hard to say what the federal government will do. We don't anticipate them making a change to the RFS this year. The two things I would note are this. One, it is a very complicated equation. It's not just a simple statement that some people may have you believe of a simple change. And, two, the oil and gas industry and the gasoline production capacity here in the United States is set up to use ethanol and is deeply committed to it at this point in time, so any change in the RFS would not have a dramatic immediate impact on the ethanol demand or corn prices likely, so it's a very intricate equation and so if anything should happen like that, there's a lot of pieces -- moving pieces. So, again, we will have to wait and see but I don't see a dramatic change near-term from that.

And do you anticipate -- have you heard of anyone changing from their gasoline blends to -- so that they have to use less ethanol as octane or do you think the octane value of ethanol is really going to drive the demand for ethanol rather than the RFS?

The octane demand is truly what's driving it and we don't see anybody changing that.

Okay. And then my final question would be regarding your Grain Group and in the September quarter you're looking for the Andersons Grain Group to be negative excluding Lansing. Is that correct in how I'm understanding that?

That's correct, yes.

And then when you said that you expect profitability to be in line with the year-ago period in the December quarter, what do you expect will drive that better profitability in that quarter?

Well --

Of course we have the harvest, but I'm trying to understand if there is no forward basis available in corn and beans, what do you anticipate driving profitability there?

Well, again, I think clearly at that period of time it is the volume of harvest that drives a large portion of the profitability. As Mike indicated, when that crop comes to market there is a likelihood that it cannot all be taken to market without the need for storage which could put some carry back in the market and the wheat market does have carry in it today. So, the other indication that Mike made was that there are a number of different dislocations and local shortages in supply and demand situations that offer opportunity for arbitrage and for merchandising and trading, both from Anderson's perspective as well as Lansing's. So, it's the opportunity of the fall harvest with a lot of different things added. I agree that the spreads carrying corn and bean market are not there today, but there is a variety of things for us to work on in the fourth quarter that are positive.

Perfect. And maybe one last housekeeping question. In terms of interest expense, what do you expect interest expense to be for this year?

Are you referring to interest expense in total or --?

Yes, just interest expense that goes through your income statement.

We've not normally given projections in that regard. I think you've got a sense from the end of the quarter short-term borrowings and end of the term -- end of the quarter long-term numbers about what we're after the first half and I think that's about as far as we normally would go.

Okay. Great.

I give you credit for asking the question, though.

Okay. Thank you very much.

And you next question is from the line of Heather Jones from BB&T Capital Markets. You may proceed.

Good morning.

Good morning, Heather.

Really quick on the fertilizer business. Given the dryness in the Midwest, do you think that may affect wheat plantings?

Yes. There is a possibility it will. Obviously on one side, the crop will come up earlier because it is drier it won't be in the field as long. That should allow more time for planting, but if conditions are overly dry at that point in time that again could have a negative impact on planting. So, the weather from this point forward does matter for the wheat plantings, yes.

Okay. And you know the crop insurance you guys do is a service underwriting. Do you do any exposure there or is it more just a service you offer?

No exposure. We do not do any underwriting, so no exposure from that perspective.

Okay. And then there's been some concerns about aflatoxin levels. Do you have any insight at this time as to whether that is going to be a real risk or is it just -- is it too early to tell?

My -- I would tell you it's a little too early to tell, although there are a lot of tests going on. And at this point in time we don't see anything that is very dramatic or very informative. There is good and bad tests, but nothing outside of the norm at this point, so we're hopeful still it won't be a substantial issue.

Okay. And I know it's incredibly difficult to say exactly what's going to happen in 2013, but looking at the projections out there for the size of the crop, call it anywhere from 10.5 billion to 11.5 billion bushel crop. The last time we saw a crop of that size was the '06, '07 crop year, and so then I go and look at what you earned in your grain business ex-Lansing that year. But now you have, call it, a third more capacity but there are more ethanol plants on the ground that have their own storage, there has been more grain storage built in the industry and in addition some of the worst hit areas are in your footprint, especially Indiana. So, wondering, do you believe your business has changed enough since the '06, '07 crop that would cause you to believe your grain business should be able to generate earnings well in excess of that year? Or if you could help us to put some parameters around what this could look like.

Yes, let me -- there more than one or two questions in there, Heather, but I will do my best. First of all, I did want to let you know that Informa just came out with its update on production and it put the crop -- corn crop at 10.338 at just under 121 bushel yield. So, it put the beans at just under 2.8 billion. So, those are pretty small numbers and so your question is a good one. I think that if you look at our business today versus that year you identified it pretty well. We're about a third larger in space and there's more competition on the ground. We also have a lot more human resource assets dedicated to our services business and our risk management business, so we've done our, in addition to growing our grain volume and grain space we've added some other service income and service opportunities as well. You asked about Lansing's business at the same time. Lansing's business is notably different from what it was back then and I will say although they do have a few more assets than back then, they happen to have assets this year in areas where they've had tremendous crops, so they've been blessed with that from the Lansing side, and their business is much more involved in merchandising and arbitrage opportunities, so this location is good for them. It's hard for me to compare to '06 and '07 from an absolute numerical perspective. It's -- they're two different -- notably different businesses and this drought makes it -- it's not just the size of the crop, it's a vastly different perspective than having the same crop size because it's a much different demand market.

Okay. So I understand it's difficult to put hard numbers on it, but the way I'm looking at it, I'm not out in left field somewhere, or am I in left field somewhere?

I think it's hard -- I hate to duck it, but we gave a first half. The second half, there is so much to occur yet and you brought up wheat plantings. Well, how much wheat gets planted? You got next year. I think the second half of the year is going to greatly depend on what we get planted, how much we get planted, and what the growing conditions are and at this stage with the cupboards bare we need to recharge, so we have a big crop, and we're going to be able to fill back up. We have a challenging crop next year and we are into another situation but Hal did describe some of the fundamental differences that we have today in how we generate income.

Okay. And then my final question is on ethanol and the challenges there, pretty straightforward. You guys have always been very adept at mitigating your risk and just -- is there -- at some point if the situation gets much worse, is it fair for us to assume that you will reduce your throughput, et cetera, to limit losses. Is that a fair assumption for us to make?

We analyze our throughput and our margins and our contributions on a very regular and intricate basis and, of course, we're going to make the best financial decisions that we can make. There's no question about that. As you suggested, we like to mitigate it ahead of that piece by what we do in the marketplace and how we generate our income in the ethanol businesses from our services and our merchandising, et cetera. So, we like to mitigate it ahead, but we are analyzing everything on a constant basis. So, we're very aware of the details of the marketplace and we have to react to them as dictated by the market.

Okay. Thank you very much.

Your next question is from the line of Ken Zaslow from BMO Capital Markets. You may proceed.

Hi, everybody. How you doing?

Hi, Ken.

So, a couple questions. Most of the questions have been asked, but in terms of capital spending, can you talk about if there is any change to how you're thinking about it. I know you have an efficiency program, you have the SAP implementation. Is there anything that needs to change because of the drought or in response to it?

Thanks, Ken. No, I think we continue to move forward with our normal maintenance programs looking at all our facilities, and we're continuing to look at opportunities out there, particularly in the rail space, which we've been fairly active this year. And we believe, candidly, that the current situation could provide some opportunities for us looking forward.

So, that was my next question is, in terms of opportunities, would you think about -- given the ethanol shutdowns, is there potential for you to continue to actually build and take this opportunity to go the other way and can you talk about your ability to do that? How much more debt would you take on? How available do you have to be to do anything like that, to consolidate the ethanol industry and all?

Well, great question. I think our approach to investment has always been pretty disciplined, Ken, and we have a portfolio allocation model that we like to look at. So, to get into specifics around ethanol I'm not really comfortable doing that here. But, as I said, we're out there looking for opportunities and, as Nick pointed out, we believe we have good access to capital. So, I wouldn't say we're out there looking, but we are constantly looking for opportunities.

Okay. So, to make a clear distinction between you and some other agribusiness companies out there. You don't need to change any of your behaviors because of the drought in any way and the rise in working capital. That's not going to impede any of your ability to CapEx pending acquisitions, anything like that?

Ken, I think we're constantly looking at the situation and looking for opportunities so when you say we don't need to, I think what I'm trying to say is we're out there looking. We're going to be prudent and conservative as we always have been, and we'll react accordingly as and when needed.

Great. And in terms of utilization rates, at the end of the quarter -- end of year you said the end of quarter railcar utilization rates were and I think it ticked down from 85.7 to 85, a small tick down, but is there anything to read into that or is that just noise?

I think we reported 85.2 at the end of June. So, it's fairly close like you said, is that a small down tick.

So, there's nothing to read into that? (multiple speakers)

Up slightly from the previous quarter, nominal amounts.

Okay. And then my last question is if the soybean crop actually [is green] and low and behold you could get a better crop out of the soybeans, would that change materially how you laid out the (inaudible) for the next one to three quarters?

It certainly does change it, and the beans are the one crop that could still react to some good rains here and do much better. So, that is a possible upside for us. There is no question. Obviously, we don't handle nearly as much soybeans as we do corn, so it wouldn't be the same as making a dramatic improvement in the corn crop, but it would be a plus for us.

Do you want to offer any sort of magnitude?

No.

Okay. Just thought I'd give it a shot. Great. Thanks. Take care guys.

Thanks, Ken.

Your next question is from the line of Christine Healy from Scotia. You may proceed.

Thanks. Hi, guys.

Hi, Christine.

Hi. A few questions for you. I guess first on the ethanol. You mentioned that 10% to 15% industry capacity has been shuttered. Can you tell us what your ethanol plants are currently running at?

We're at full production as efficient as we've been running at any point in time, so.

Okay. And I guess is there anything that you're doing or looking to do to mitigate the impact of the negative industry margins? Are you looking to reduce your capacity run rates? Are you looking to switch the feed stock to wheat? Anything you're thinking of doing there?

Well, I think as I indicated, we're monitoring it constantly. We don't have any plans to switch to wheat. Wheat is $1 higher priced than corn these days, so that's not likely an option any time soon. And we are in a continuous improvement mode at the plant and looking to cut some expenses and costs, but we're fine tuning as best we can and that is our normal mode. So, nothing right now and other than more of the same and we had decent first half of the year given where the industry is and we want to keep turning the dials a little bit better.

Okay. And then on Lansing it sounds like the outlook for Lansing is pretty good for the next year or so. Curious about this JV that you guys recently formed with Olam. Western Canada is probably one of the only regions in the world that looks like it's going to have a great crop this year. Can you talk about that? Lansing, Olam, JV? Maybe provide us a little bit more detail on that and what your expectations are in the next year or so?

Yes. Again, that's a Lansing venture with Olam and it's not really something that we can comment on.

Okay. And I guess, lastly on the Rail Group. Gross margins were really impressive, 36%, I think that's the highest I've seen, ever. Do you view that rate as sustainable. Is there anything that was one-time in this quarter on the margin side?

Yes, reasonably sustainable. I think we mentioned the segments of that business and what comes from the ongoing operations versus the sales and transactions and reasonably sustainable.

Okay. And on the utilization rates of the 85%, how do you see that trending for the remainder of the year and into next year. Has is stabilized?

I think at this point in time we see it potentially improving slightly. There's been a handful of things that have occurred that maybe are negative, obviously the smaller grain harvest is a bit of a negative. So, there is a variety of pluses and minuses across the board. The US economy maybe not coming up as strongly as we had hoped in the second half of the year but, in general, I think we will see it creep a little higher. And if we don't have big grain harvest until next fall, then we'll get that improvement next year on that case.

Okay. That's really helpful. Thanks so much, guys.

And your next question is from the line of Michael Cox from Piper Jaffray. You may proceed.

Hi guys. Good morning.

Hi, Michael.

My first question is a followup I guess to a previous question on looking at ethanol acquisition opportunities, and I guess it poses a similar question on grain elevator storage with high price of grain and the working capital required to finance those operations and relatively challenging outlook by comparison to what we've had the past few years. Does that perhaps shake loose some opportunities for you in securing additional elevator space over the next six to 12 months?

Well, we are clearly out looking at those opportunities. As Nick and John alluded to earlier, we're in good shape from a balance sheet and access to capital perspective, and these are the kind of times that for people who are smaller or less well capitalized are difficult and we are clearly keeping our eyes open for anything in opportunity in that mode. We like the grain business.

And then on the fertilizer side. I was hoping you could talk a little bit about your expectations for fall applications levels, given some of the uncertainty around absorption rates of PNK and the drought and but yet farmers will have all the time in the world to prep fields so (inaudible) early harvest. So, your thoughts on that and balancing that against the general uncertainty.

That's a great question and, again, there's multiple sides to the story. The producers will say, well, we didn't use all the PNK in the soil so we don't have to but quite as much on. Some of that may delay them from putting things down in this fall timeframe. On the other hand, they're looking at next year's prices saying, boy, that's a great corn price and I don't want to miss the chance to grow my best crop ever. So, they have some incentive to do the best agronomic work they can. I think in general over the course of the last few years they have probably under applied on the PNK side, so if they look at it from a long-term perspective, they probably don't want to come in short this year with it, especially if they're looking at next year's prices. So, it's possible they could delay a little bit this fall, maybe more next spring in application, but there's different arguments from different people on both sides of that equation. So, it will be interesting. If you get a chance to put in 95 million to 96 million acres or more next year they're going to want to grow a really good crop at the prices they're able to see.

Sure. Very good. Thanks a lot, guys.

And your next question is from the line of Brent Rystrom from Feltl. You may proceed.

Thanks guys for keeping it in Minneapolis. The comments you were just making about the PNK. I would assume here what you're saying is that farmers are going to realize how big this crop is, so even if they push a little off this winter, they'll test it in the spring and see where it's at and odds are they'll circle back and do a fairly normal application rate. Is that what you were trying to say there?

Yes, I would agree with that statement.

All right. Hal, what level of yield do you go absolutely queasy on 4Q being a flat year, rather than -- going to a down year rather than a flat year. Is it 120 bushels, is it 110 bushels? It's crazy to talk about but --.

No. I understand. I think we've pretty well priced in numbers like Informa just came out with just over 120 and we got a lot of people with a lot of feet on the ground and those are the kinds of numbers we're seeing. So, that is baked into the commentary that Mike just gave you about first half of next year and that's what we're looking at.

Let me add just one thing to that. Hal mentioned today when he talked about potential to use wheat for ethanol is $1 above corn. If things would change such that the market says we need to consume or take down the surplus of wheat because we need it for let's say, for feeding just for usage, that could change the outlook around -- that we have around wheat carry. Today, the way things are looking, the market doesn't want wheat to go in that direction, and on the corn side real rationing and the trauma around that is already occurring. So, what I don't know is if you take the yield down another five bushels is it still mostly a corn issue where the rationing occurs or does it dip into this wheat situation. Certainly every 5% lower I think takes a chunk out of income potential and it creates pain in the system.

Great, thank you. From little bit different twist. I just spent a lot of time down in Iowa looking at a lot of fields and spending some time with some agronomists, and they have a significant problem there with unabsorbed herbicides, and so there is going to be residual herbicides, unless we get a lot of rain fall and winter that will carry over into fields next year and it sets, particularly you guys in the Eastern corn belt, up for a lot of corn-on-corn planting because you're not going to be able to rotate the beans because the herbicides would kill the beans. Do you think you -- not necessarily a risk, but do you run that as a factor in your Eastern part of the corn belt next year? Is that a possible influence on the business?

We have not -- it's nice insight, but we have not put that into our thinking and so with that input we will get it into our thinking and assess the impact.

Out of curiosity, when we were there last summer for your Summer Field Day we talked a little bit about frack sand railcar leasing. I'm curious if you have any updates, if you've done anything to move more into that area?

We do have more demand showing up and have supplied some of that demand here in the past quarter and expect there to be ongoing demand there. But it's just another new market here in the last 12 months for us to keep our eyes on and it's been a positive market.

Great. Thanks, guys. Good job in a tough environment.

Thanks.

Your next question is from the line of Eric Larson from CL King.

Hi, everyone. How are you?

Hi, Eric.

Quick question. Going back to one of Mike's comments. Talking about the basis potential for this fall. Obviously really in the fourth quarter of last year we've been trading at a premium basis for a long time. Fourth quarter was unusual because I think of the ethanol blend credit disappearing, and you just had a lot of ethanol being built up and stored ahead of that credit. That absent this year, one would normally assume that you would get -- you would have at least some relief on the basis. Is there anything more to it than that to read into it than that relative to your comment, Mike?

No. That's basically it. And we'll see what actually develops, but the structure of the futures market around, especially for corn and beans, is such that it would tend to encourage the flow of a lot of this crop to harvest in the fall and that probably gives some potential to accumulate corn and beans at reasonable basis levels which then gets some pop. Futures isn't showing any carry. We'll see how it plays out. If for any reason this harvest -- if we would get into a rainy situation, everything just stretches right out, then we have a different scenario. On the other hand, we will recharge the soil. So, I don't know if I will be happy or sad at that. I think I'll be net happy.

Yes, I would tend to agree with that comment as well. It's a really interesting situation in the futures market today and in particular with what we see -- what the demand factor is going to come into the fall on top of that to see what the basis is. Obviously, we're still going to harvest a lot of corn, it's just going to be less than what we had expected, and so you would assume that basis to give you some opportunities and that's really what I was trying to focus on. That obviously will be a driver of your income in the second half.

That's correct. And frankly it's reasonably easy. Our Toledo bids in particular are very easy to obtain and if you watch the movement of that during the harvest, it will be an indicator as to whether we are able to accumulate at decent levels or whether it's hard to accumulate it.

Right. The follow-up question here to that is obviously the drought has hit the Eastern corn belt particularly hard, harder than the Western corn belt, although I would say arguably there are some areas in the Western corn belt that probably don't look much different than Indiana. Does that -- does that mean that you're going to have to try to secure corn from a wider geographic area this year? Are there going to be areas of corn deficiencies and soybean deficiencies that -- does it create some different logistic issues with you this year that might cost you some more money to get the -- to put some grain in your bins?

Good question. There will be a whole variety of dislocation of supply and demand because of spotty crops, some good, some bad in similar geographic areas. So, it will create those kind of issues. It also creates the opportunity to find those different supply and demand imbalances and move the crop around even those that aren't in our own inventory. So, yes, it creates some issues but it also creates some opportunities.

Okay. Thank you, everyone.

Thank you, Eric.

Your next question is from the line of Ian Horowitz from Topeka. You may proceed.

Good morning, everyone.

Hi, Ian.

Hal or maybe Mike, do you guys -- can you just walk me through what's going on in ethanol from a macro level? We were looking like we were heading in the right direction relative to margins in that we continued to lower production volumes and chew through inventory and then suddenly now we're seeing an increase in production and we did have a reduction in inventory but nothing significant. Can you just walk me through this? I guess the concern is, is that capacity is so able to turn back on at a moment's notice to take advantage of any margin opportunity that margins could be basically depressed until I think through a significant period of time until demand -- finished gasoline demand gets to the point where we can absorb a higher rate.

In general, your commentary is right on. We did have a slight uptick here in this last week's reporting. The week-to-week numbers tend to be not 100% accurate, so the general trend is we have taken stocks down quite substantially in the last few weeks, but you're right, the demand is relatively low, gasoline usage is not apparently going much higher in the near-term and corn price is. From a macro perspective, that's been the -- those are the two driving forces. We freshen the industry down quite a bit to about a 12 billion gallon annualized level that we are producing at now. And even at that level there is no substantial margin to be made, so the weaker players will continue to be on the negative side of that and that's why we do what we do as far as try to generate income as every place we can from our plants, to be one of the better producing and better performing plants, but it's going to be a tough environment.

So, a bit of an abstract question, Hal. How much capacity would you think you would need to see out of the system before we got back into a tight margin environment or a good margin environment?

I think we're right about where we are right now based upon what the demand we see. And it's pluses and minuses from here will be just dependent on gasoline demand and a few other things. But obviously it has to get lower than where we're at today if we want to see good margins, but we are nearing that equilibrium point, we just have to watch the stocks and the demand from here.

I'd echo what Hal is saying. The last four to six weeks of production have resulted in a draw down of stocks. So, to the extent that that trend would continue, it would be helpful. Then you make a point that plants can come back online and, as Hal said, the huge escalation in corn price has caused ethanol to get trading in the wholesale market at approximately the same price as unleaded versus being $0.80 below it early in the year is a reasonably big factor in this equation. So, --.

The US gasoline refining industry is set up to use the ethanol for octane, and so gasoline demand is a big deal.

Right. Okay. And, Mike, your business has changed fairly significantly and as well as -- both from a footprint as well as from a product standpoint, but can you just give us a little bit of a history lesson on how the Andersons went through the last -- the '88 timeframe and what you saw in your local markets in terms of farmer behavior and --?

Yes, and I'll try to be somewhat brief on this. In '88 we came into the year -- into the harvest of '88 with almost -- with the largest carryover ever of corn. Almost half a crop which, as a result of that, the market in the end was able to sustain a 30% plus reduction in the harvest with some pain and dislocation, but we didn't have to -- in the end we didn't have to ration demand as much. At the farm level, a lot of those stocks carried over were owned by the government, CCC, some in loan stocks. The farmer at that point in time had been coming off a rough decade, starting around 1980, a really rough decade, and was just starting to come out of it. Rough in the sense of prices that were low, a lot less -- weak balance sheets aggravated by a crash in land prices because what we had then different than now. We still have a demand market. Back then we had a supply market and land prices had really plummeted. Folks increased substantially produces their investment land in high interest rates. We also didn't have as robust a crop insurance program as we have now.

So, at the farm level, this is a generalization. Because there is real trauma with individual producers, farmers depending on their specific circumstances, both in production side of corn, wheat, and beans or in dairy or in any of the feeding areas. But, in general, 80%, 85% of the acres -- of corn, wheat, and been acres have healthy crop insurance. So, the farm side of the economy I think is -- as tough as it is to look out the back door at the withering crop, is really in a much different position today.

For us as a company we're in a position -- much different position today too. We have a much, much stronger balance sheet. I can't recall exactly, but I know we had a significantly higher leverage situation, we were much more concentrated. We did not have a rail business which is producing, all our plant nutrient business was substantially smaller. Grain was -- and it was grain Indiana, Ohio, Michigan was the guts of our business. So, you had something like this happen and it had a significantly more material impact on us. I think big difference this year is the low carry-in stocks and having to fight with the demand destruction that we have. Of course, we're in ethanol now and we weren't in ethanol at that point in time. So, there are similarities, but there is differences.

Got it. Great. That was very helpful. Thank you.

And at this time we have no further questions. I'd like to turn the call over to Mr. Mike Anderson, Chairman and Chief Executive Officer, for your closing remarks.

Thank you. I want to thank you for joining us this morning. Also want to mention for those that are interested that there are 5 appendix slides to this presentation available on the AndersonInc.com website at the investor tab under the second quarter earnings call replay. Our next conference call is scheduled for Tuesday, November 6 at 11 AM Eastern Time to review our third quarter 2012 results. We hope you're able to join us again at that time. Until then, have a great day.

Ladies and gentlemen, this concludes your presentation. You may now disconnect.