Andersons Inc (ANDE) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Andersons Inc. 2013 second-quarter earnings conference call. My name is Erica and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Nick Conrad, Vice President Finance and Treasurer. Please proceed.

Good morning everyone, and thank you for joining the Andersons Inc. 2013 second quarter conference call. We have included a slide presentation that will enhance our talking points this morning. If you are listening and watching this presentation via out website, the slides and audio are in sync. For those listening via telephone or watching the webcast, you should follow directions sent to you in order to sync the slides and audio. This webcast is available through the investor section of our website at www.AndersonsInc.com. Webcast is being recorded and will be available on our website.

Certain information discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in the forward-looking statements as the result of many factors, including general economic conditions, weather, 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 the prospectuses prepared in connection with the Company's offerings. Today's call includes financial information for which the Company's independent auditors have not completed their review. Although the Company believes that the assumptions upon which the financial information and its forward looking statements are based are reasonable, it can give no assurance that these assumptions will prove to be.

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 I will answer any questions you have at the end of the prepared remarks. Now I will turn the floor over to Mike for an opening comment.

Thank you, Nick. The Rail and Ethanol Groups both had record second-quarter results. And the plant nutrient group had strong results. The Rail Group continues to optimize its railcar portfolio and is benefiting from increasing lease rates. Margins in the ethanol market improved significantly in the second quarter and the Ethanol Group is continuing to see the beneficial results from its co-products. The Plant Nutrient Group's second-quarter performance was solid, as volume increased due to the recapture of the majority of the volume lost during the first quarter.

During the second quarter, a number of growth initiatives were pursued by the Rail Group. First there were two rail car repair facilities opened in Romulus, New York and Henderson, Nevada. Additionally, Maumee, Ohio paint facility opened during the quarter. The new facility includes a state-of-the-art blast booth, a paint booth, a drying booth and a cleaning area. This is expected to increase the put through capabilities of the location more than 3 times, which will allow the team to meet customer demand for existing and additional value added service.

Finally, two days ago the group announced it has entered into an agreement to acquire Mile Rail LLC, a rail repair and cleaning provider headquartered in Kansas City, Missouri. With three satellite locations in Nebraska, Kansas and Indiana, and mobile units in the central Midwest. This acquisition will raise the number of rail car repair locations the Company has 20 plus the mobile units. Last week, the Company and Lansing Trade Group finalized the acquisition of Thompsons Limited, a grain and food grade bean handler and agronomy input provider, headquartered in Blenheim, Ontario. Thompsons owns and operates 12 elevators, 11 retail farm centers, two seed processing plants, five bean processing location plants, and a wheat processing plant. This acquisition provides additional geographic and climate diversification for the Company, and also provides an added presence in the edible bean market. The business will continue to operate as Thompsons Limited. I will now turn this over to John, who provide details of the total Company results.

Thanks Mike, and good morning everyone. The Company generated net income of $29.5 million in the second quarter, or $1.57 per diluted share on revenues of $1.6 billion. In 2012, similar net income of $29.2 million was reported, or $1.56 per diluted share on revenues of $1.3 billion. The gross profit for the quarter was comparable year-over-year at $103.2 million and $102.7 million for 2013 and 2012, respectively. Gross profit by group, however, was not similar, as gross profit increased primarily in the ethanol and Rail Groups, and decreased most notably in the grain and plant nutrient groups. Through the first six months, total net income stands at $42.1 million, or $2.24 per diluted share. In 2012, first half net income was $47.6 million, or $2.54 per diluted share. Total revenues of $2.8 billion for the first half of the year are $386 million higher than the prior year.

The most significant year-to-year increase in revenues relates to our grain business, whose revenues have increased primarily due to higher grain prices and greater sales volume. The higher volume is a result has resulted from growth, which includes the Anselmo train loading facility that opened in August of 2012 and the Green Plains Grain acquisition competed at the end of last year. Through June, gross profit was $182.5 million, which is a $6 million decrease from the same period of the prior year. The same factors that influence the quarter's gross profit results also influenced the year-to-date results.

Now to a non-GAAP measure, EBITDA, earnings before interest, taxes, depreciation and amortization. The Company's 2013 second-quarter EBITDA was $65.3 million, an increase from the $63.9 million reported for the same three-month period of 2012. Through June, the Company's EBITDA totaled $108.1 million, which is comparable to the $108.4 million from the same period of 2012. Equity and earnings of affiliates, which excludes net income from non-controlling interest, was up $4.9 million, and totaled $10 million in the second quarter. The positive year-over-year change was driven by a favorable increase in earnings from our ethanol LLC investments that was partially offset by decreased investment income from Lansing Trade Group. Equity and earnings of affiliates through June totaled $17.8 million, compared to $9.4 million for the first six months of 2012. This year-to-year change was again primarily impacted by improved ethanol LLC results.

The Company's interest expense totaled $4.9 million in the second quarter, a decrease of $525,000 from last year. Decreased interest expense was primarily a result of lower short-term borrowings. Through June, the Company's interest expense totaled $11.3 million, up $549,000 from last year. Year-to-date interest expense has risen year-over-year due primarily to increased long-term debt associated with our growth.

For the second quarter of 2013, the Company's effective tax rate was 36.3%, down 1.6% from the second quarter 2012 tax rate of 37.9%. The decrease in the effective tax rate was due primarily to income attributable to the non-controlling interests. The bridge in this next graph demonstrates which groups' 2013 second-quarter income is up or down in comparison to the prior year. The specifics behind these differences will be detailed in each group's operating performance as discussed. Therefore, to better understand the total Company results, Hal will walk you through each of the six business groups.

Thanks, John. Let's start with the Plant Nutrient Group, which had an operating income of $23.2 million on revenues of $330 million this quarter. In the same three-month period of 2012, the group reported a $28 million operating profit on $309 million of revenue. Volume increased in the second quarter as we regained most of the first quarter's volume shortage caused by the late start of field work. Margins were down this quarter in comparison to the prior year, but when compared to historical margins were still solid. This year, the Plant Nutrient Group had operating income of $22.7 million through the first six months on $442 million of revenue. Last year, the group generated operating income of $33.8 million on $484 million of revenue.

Through June, volume is down slightly, as not all volume lost in the first quarter was regained. The volume decline was seen primarily in the Wisconsin and Minnesota areas, as those areas received heavy rains in May and June that did not allow field work to be completed. Year-to-date margins did not benefit from nutrient price appreciation as they did in the prior year, but margins were impacted by a favorable product mix that included more value added manufactured products. The group has continued to proactively manage its nitrogen, phosphate and potassium ownership positions as pricing has begun to reset. Storage capacity at the Plant Nutrient Group increased to 867,000 tons from 833,000 tons in the same quarter of 2012, due to the acquisition and expansion of both dry and liquids storage facilities.

Now let's discuss the Ethanol Group, which achieved record operating income of $10.6 million this quarter. In comparison, the group had an operating loss of $2.1 million during the same period last year. The higher income is the result of significantly increased earnings in the ethanol limited liability companies, and the group having a full quarter of income from its Denison, Iowa production facility, as that acquisition occurred in May 2012. The LLCs and Denison were positively impacted by higher ethanol margins, which have improved steadily as supplies of ethanol have declined. Revenue this quarter was $222 million, up from the $168 million for the same period last year.

Through June, the Ethanol Group has reported operating income of $13.1 million on revenues of $422 million. In 2012, the group incurred a operating loss of $2 million during the same period on revenues of $318 million. This year, the ethanol locations have benefited from favorable margins, which was not the case last year. The revenue increase was due to added volume from the Denison plant and an increase in the average price per gallon of ethanol. The sale of co-products, such as corn oil, E85, distillers dried grains, and CO2, remains a focus of the group. All four ethanol plants sell corn oil, E85, and distillers dried grains, and two of the four sell CO2. The investments made in the production of co-products continue to positively impact the margins seen by the Company. Additionally, all four of the ethanol plants are operating very efficiently, as they continue to set new production records for both ethanol and corn oil.

Approximately 10% of the industry's ethanol capacity remains shut down, contributing to the supply/demand situation that has allowed ethanol stocks to decline. With improved margins, and a large new crop corn supply, we see most of those plants returning to production in the future. A large corn supply does not assure strong ethanol margins. In fact, there could be margin pressure later in 2013 if ethanol production ramps up. E85 demand is growing, and our plants are positioned well to capitalize on this. However, it is not growing at a pace necessary to outpace ethanol production capacity. Therefore, the group considers to focus on operational efficiency, co-product production, cost control, and improvements in marketing, risk and technology to maintain their competitive position.

The Rail Group reported record operating income of $9.7 million this quarter on revenues of $39 million. Last year, the group reported $7.2 million of income on revenues of $32 million. Gross profit from the leasing business was significantly higher, due primarily to an increase in the average lease rate, which has risen in each of the last nine quarters. This quarter, the group recognized $4.4 million in pretax gains on sales of rail cars and related leases and nonrecourse transactions, whereas last year $2.4 million was recognized.

Through the first six months, the Rail Group had record operating income of $24.3 million and revenues of $85 million. In the same period of 2012, operating income amounted to $15.2 million and revenues were $68 million. These results included gains on sales of rail cars and related leases and nonrecourse transactions of $13.7 million in 2013, which compares to $8.7 million for similar transactions for the same six-month period in 2012. The average utilization rate for the quarter was 85.7%, which was up from the 84.7% experienced a year ago. The utilization rate as of the end of June increased to 86.1%. As of the end of the quarter, the group has 23,245 rail cars and locomotives, which is up from the year-earlier total.

The Grain Group earned operating income of $2.1 million this quarter versus $15.3 million a year ago. The group had considerably lower space income this quarter, as market carry and ownership was lower as a result of the 2012 drought. The Grain Group, however, benefited from good second quarter earnings from its investment in Lansing Trade Group. Grain Group revenues for the quarter were $891 million, which is up from the $719 million reported in the prior year. This revenue increase is due primarily to greater sales volume as the increase in the average price per bushel was very modest. The Grain Group's operating income through the first six months of 2013 was $10.4 million on revenues of $1.7 billion. Comparatively, the group's first half operating income in 2012 was $34.7 million on revenues of $1.4 billion. The year-to-date results are influenced by the same factors as the second quarter.

Storage capacity of the Grain Group increased to 141 million bushels this quarter from 109 million bushels in the same quarter of the prior year, due to growth. The Anselmo train loading facility was opened in August of 2012, and the Green Plains Grain Company was added at the end of 2012.

Last quarter, we mentioned that corn planting progress in our region and the US was well behind both the prior-year and the five-year average, but that there was still ample time to get the crop in. The crop got in in record numbers. And the weather has cooperated so far, with a few minor exceptions, and it now appears likely we will have a record corn crop. Corn yield estimates are currently in the range of 158 to 162 bushels per acre, and it is estimated that 95 million to 97 million acres have been planted. As of Monday, crop condition reports show that 64% of the corn crop as good to excellent. At the same time last year, that rating was only 23%.

Soybean acreage comparable to 2012 was planted this year, but yield expectations are notably better than 2012 due to the improved weather. As of Monday, crop condition reports show that 64% of the soybean crop is good or excellent. At the same time last year, that rating was 29%.

The Turf & Specialty Group earned operating income of $2.2 million this quarter on revenue of $43 million. Last year, the group reported $2.8 million of income on $44 million of revenue. Turf products tonnage down was quarter. Margin per ton increased slightly due to product mix. The cob business this quarter had higher expenses than usual as it continues to invest in operational and safety improvements at the Mt. Pulaski facility, which was acquired last year. Through the first half of 2013, the group's operating income was $6.2 million on $90 million of revenue. This compares to operating income of $5 million and revenue of $89 million last year.

The Retail Group's operating income was $1.5 million in the second quarter compared to $1.4 million reported last year. Total revenues of $41 million for the quarter were approximately 7% lower than the $44 million reported for the same period of 2012. The revenue decline is due to the closing of the Woodville, Ohio store, as same-store sales have actually increased approximately 1.5%. The group's year-to-date operating loss is $1.6 million on revenues of $72 million. Through the first six months of 2012, the operating loss was $1.3 million and revenues were $75 million. Now I will turn the floor back to Nick for the Treasurer's report.

Thanks, Hal. At the end of the second quarter, net working capital was $308.9 million, an increase of $52.6 million from the 2012 second quarter. Current assets totaled $907.3 million on June 30, a decrease of $103.8 million from the same period last year. This change was driven by $152.6 million decrease in inventories, which was primarily a result of the lower grade inventories at the end of the second quarter. Cash and cash equivalents ended the second quarter at $75.9 million, an increase of $52 million year-over-year. Total assets at June 30 were $1.8 billion, an increase of $26.2 million year-over-year. Other assets added $34.6 million, and property, plant and equipment increased $105.4 million compared to the second quarter last year. These positive changes were the result of business growth through acquisitions and expansions, along with favorable changes in the investment in the ethanol LLCs.

Net cash used for investing activities totaled $25.9 million through the end of June, a decrease of $146.5 million versus the 2012 second quarter. The major components of this change were cash used for acquisitions decreasing by $89.8 million, and net cash from purchase and sale of rail cars decreasing by $57.3 million. Current liabilities at the end of the second quarter were $598.3 million, a decrease of $156.3 million from the prior year. Borrowings under the Company's short-term line of credit decreased $259.6 million from the same period last year, ending the second quarter at $50 million. The average long-term rate for the 2013 second quarter was 4.4%, which is down from last year's rate of 4.9%. Long-term debt ended the second quarter at $409 million, an increase of $91.4 million from the prior year's sector quarter. Long-term debt to equity ratio was 0.63 to 1 on June 30.

Total equity at June 30 was $653.9 million, an increase of $64.7 million from June of 2012. On July 22, the Company paid a cash dividend of $0.16 per share to shareholders of record on July 1, 2013. Total committed lines of credit under the Company's syndicated facility remain $850 million. $750 million -- I'm sorry, $735 million of which are short-term and $115 million of which are long-term. Current and future capital needs are continually monitored, and at this time existing lines of credit are felt to be adequate. Mike will now make a few comments before we take questions.

Thanks, Nick. Today we would like to provide an outlook for the second half of 2013. First, we continue to feel that space income in the Grain Group will be down this year due to the 2012 drought, with the majority of this impact being seen in the third quarter. Adversely, we expect the Grain Group to have a strong fourth quarter, as we are currently anticipating a record corn crop. Further, we expect Lansing Trade Group results to remain strong in the second half. We are pleased with the significant improvement in the Ethanol Group, and are feeling good about the margins being seen so far in the third quarter. However, the ethanol market continues to be very volatile, making future margins difficult to predict.

We expect the last six months for the Plant Nutrient Group to be comparable to the prior year. You are likely aware of recent events in the potash markets, and we are pleased to report that the Plant Nutrient Group has close to a zero position in potash and therefore faces no exposure to any lower of cost or market issues as the potash market resets.

We anticipate our Rail Group having a very good second half, albeit not as strong as the first half. As we have said previously, a typical year for us is where the second and fourth quarters are stronger for the Company, and the first and third quarters are softer. We expect that trend to continue in 2013. That concludes our prepared remarks. Hal, John, Nick and I will now be happy to answer any questions you may have. Erica, we will turn it back to you.

(Operator Instructions)

Brett Hundley, BB&T Capital Markets.

Mike, I will admit, you are getting better and better at your forward commentary. That was good commentary regarding the second half, so thank you for that. Hal, I want to try on this, will you give us what percentage of Plant Nutrient volumes did not get recaptured during the quarter?

Yes. I can give you a range. It is a single-digits. It is probably close to the 5% range, it is not a big number. I don't -- I think -- okay, maybe it is closer to 4%, but that is the range.

Okay. And would you care to give an estimate of acres that didn't complete the field work?

Nationwide, are you asking? We still look at 95 million to 97 million acres of corn planted, 77 million acres of beans planted, which is -- that is a pretty narrow range, which everybody is pretty much agreement with right now, I think.

Okay. No, that's fair. So staying on your Grain business, carry has been improving weekly as we look out through 2014. You have grown your asset base in recent years, which you've talked about. That should help earnings in a more normalized environment. I am wondering if you give some commentary on the type of situation or situations that would present ideal earnings conditions for grain in 2014 versus what might just be average?

Sure, I will do my best to give you a picture of that. Obviously with our assets, one of the best things that can happen to us is that the harvest comes off in a -- at a very heavy pace and very consistent up front. And the larger the crop, the bigger the push for harvest. That will tend to suit us quite well. We like that. And that also tends to force basis a little bit lower at harvest time. And so the wider the spreads go, the more pressure on basis right at the immediacy of harvest. That's-- those are both great opportunities for us.

Okay. And staying with a look more further out than just the back half. When you look into rail, and trying to think about how rail evolves into next year, you had 10-car demand and some portfolio rotation by The Andersons that has helped rail earnings this year. Rail car sales have also helped him, but visibility is somewhat limited into this going forward. And so, given the expectation of demand improving for hopper cars in 2014, with a possible roll off of tankers, how do you think investors should think about rail earnings into next year versus what is occurring this year?

Yes. I think your characterization of some rates going up versus some rates going down is quite accurate. As we mentioned, we have seen nine quarters of increasing average rates. If the economy continues to grow, I think we will continue to see good demand across the broad portfolio, especially in the grain side, with the harvest, as you mentioned. And the rail car sales and purchases, and that whole marketplace is, as you say, it is tough to see much visibility into that.

So, it is hard for us to project forward exactly what we will see in that regard. But you characterize the rate piece and the lease income well. And we have got the addition of the shops and we have got the addition of Mile Rail. So we are looking for a variety of things to perform well. But again, the hard piece to depict this early is clearly the portfolio purchases and sales.

I will add just a little more on that last point. The gains on sales we have come from a couple of sources. The primary one is where we actually would sell, in a nonrecourse situation, certain accounting treatment to gain the sale as a current period income. And that is the majority of what we do. At times, we will actually sell and liquidate some of the fleet, and that is a little more what I will call optimistic. Keep in mind, on the first one I talked about, that although that may create a nice, positive pop in a given quarter, it also means that we are extracting a gain the could have been amortized as a positive over a number of future quarters.

So there is an elements of, although it's not easy to see. Because we are going to be opportunistic. We are going to look at the circumstances. The fact that we would not necessarily have a gain on a sale should not necessarily draw a conclusion about income being down over time any more than if we have a sale. Typically on the ones where we have had the gains, that means we are -- won't have the benefit of the amortization income over the life of the lease. So it is still very hard for you, I think, to predict in that regard, but this business is real healthy right now.

Okay. I have two quick other ones. Hal, given some of your comments, do you think it is possible for the Grain business to see a loss again in Q3 excluding Lansing?

In Q3 specifically? Yes.

Okay. And then just lastly, regarding Thompsons, how will that be accounted for in the P&L? Is that a equity line?

Yes, it's an equity line.

Christine Healy, Scotiabank.

Just a couple of questions for you. First on ethanol, have you guys been able to lock in margins for any second-half volumes, as you did for Q2?

The ethanol market has all been done in a spot sense, so deferred margins have not been profitable enough for us to lock in.

Okay. And can you give us your view on the EPA potentially changing the mandate for next year, and what impact that could have on you guys?

Yes, if you're talking about their recent minor modifications, those do not have much impact to us next year. The major thing they did recently was to reduce the cellulosic, which could not have been met anyway. There is just not enough cellulosic to go around. So that is what they did do. And they basically reinforced all along what is in place, with minor tweaks. So we do not see them making any other major changes for 14. So I think it is much more a of a supply and demand-driven market than it is anything that will come out of the EPA.

Okay. And then on Thompsons, just wondering, is there much integration involved with that acquisition? Or is it pretty much business to usual? And did you retain all the employees, including senior management?

The -- we are continuing to operate them as Thompsons, and we are continuing to operate that business as we took it on. There is not a substantial amount of integration, other than at the senior levels of our involvement with the Lansing Trade Group ourselves and the leadership at Thompsons. So, we do think that from a market integration perspective, there is quite a bit of opportunity, both in the Grain and Fertilizer business, as well as the new Bean business. It crosses all three companies in many places. So, we look for a lot of opportunity there, but there is not direct integration at this time.

Okay. So it sounds like all the employees retained except the leadership team?

Most of the leadership -- virtually all of the leadership team was in fact retained, and it was an important part of the acquisition. There is significant talent there.

Yes, we are very pleased with that.

Yes, they are really well known here in Canada. Yes. And then just last question for you. On the Rail Group, can you give us a sense for the sales mix before Mile Rail? What weighting rail car repair has to your overall sales? Is that a big component of your sales right now, before that acquisition?

No. We don't -- haven't divulged the percentage of the rail car, but clearly the rail car facilities are the minority of the business. The majority of the business -- we described what piece was the sales piece and we described the lease rate. So you can tell from those numbers that the repair is the minority piece that remains. But we have been growing it steadily for the last few years, and really like that business based upon our fleet and the way we see the US rail car fleet, so it has been increasing fairly steadily.

Okay, great.

Ken Zaslow, Bank of Montreal.

Can you help us out -- how much do you suspect that your Grain business or the inverse of the corn actually cost you in 2013?

It is hard to tell, because you lose the carry of that, but -- so you earn no carry for probably the last four to five months, and normally you could have earned $0.03 or $0.04 in one carry on inventory if you would have had it. It's a hard thing to suggest, but you market it completely different. That is the thing. So you push sales up a little further before the inverse. It is probably pretty difficult. The smaller crop, obviously, which created the lack of carry, obviously you can look at the year-to-year results over the last couple of years and see it was pretty expensive to us.

I guess what I'm trying to get at is, you did not talk about 2014. I know it is early, but it seems like 2014 could be -- the range is up to $0.50 per bushel, but it seems like it should be at least at the higher end of that. Is that not a fair way of thinking about it?

Yes. Excluding the big wheat years, we would expect the -- this coming crop year to be at the higher end of that range, yes.

Okay. In terms of the late harvest, is that really a meaningful impact? Or is it just a month timing type of difference? Does that change any of the carries in the market? Or anything material on basis that we should be thinking about?

There are and will be some minor impacts. Much of the impact on the inverse has already been taking into account. People have figured out what they're going to do with their August and September supply demand needs, and that is mostly figured out. The late harvest is actually not as late as it began. We have clearly caught up in some places, so we do not expect it to be quite as late as we may have when we saw the crop planted in May. But it has minor impacts. More of the timing of when the crop comes off will impact both the end-users and ourselves as to what the opportunities are in the market.

But by the time to get the crop in, 2014 would be unaffected? Is that fair?

Yes. In general, yes. If the crop all comes off in a normal fashion, it won't dramatically impact the '14 crop year piece.

I will add one element of that, and -- as we're -- our fiscal year end is of course is December 31. In general, if you look at the results of the grain business on -- it would be the calendar -- the fiscal year more that follows the grain cycle for us and where we are. Would be the fourth quarter of a year and the first three quarters of the following year. What we really struggle with predicting is how much the basis moves, say, in the last month of December versus the first month of January. That is year in, year out, really difficult.

For example, with all the space we have, let's just say versus some average, it moves -- increases $0.10 more than normal in December, by December 31. It is what it is. We mark our inventories to market every single day. We benefit by that in this calendar year, but in the same crop year.

Take the opposite. It doesn't quite bounce back as much by the end of December. This calendar year is not as good. It rolls over into the next calendar year. So there can often be a material swing, calendar year to calendar year, but the general perspective for this crop year is a very healthy crop year carrying charge situation. Exactly what calendar year it falls into the end of this year or the first nine months of this year, still undetermined how much it's this year versus next year.

That is fair. And again, I agree with you. I think, over a period of time, it becomes irrelevant. It's just a mark in time.

That is exactly right. That was a much shorter and succinct way for saying what I should have said. Thank you.

(laughter) And then my last question is, assuming that the EPA does a waiver on the advanced biofuel side for 2014, it seems like that is where they are moving towards. Does that -- how do you think of your ethanol margin structure from that? How do you think about that implications for you guys? Is that basically exactly what you would want to hear? And how does that change how you think about the ethanol margins?

(multiple speakers ) Yes, their decision on the advanced biofuel piece, I do not think will have a dramatic impact on the overall ethanol marketplace. Not nearly as much as the supply and demand conditions and the absolute cost of corn versus the cost of gasoline. So we have been pretty clear throughout. We like the ability to be as free market-oriented as we can on the use of ethanol and its value to the gasoline and the motor fuels marketplaces. So we are going to be in for a little bit of a bigger supply to start this year off, and we'll see how that goes. But we are looking forward to some pretty good pricing on ethanol, relative to gasoline, which should really help demand and help the consumer quite a bit. And if the pricing mechanism works the way it should.

Great. I appreciate it.

Brent Rystrom, Feltl & Company.

Just a couple of quick questions. Could you guys give a sense of how you are thinking about 2014? Maybe by the major groups?

Can you speak up?

(multiple speakers ) Sure. So I am wondering if you're -- viewing 2014, I'm thinking by group that it should be a favorable year for grain. It should be a flat to favorable year for rail. The plant nutrient group could possibly be negative, given all the pricing pressure that is coming there. And then ethanol will be mixed from the sense of good operations, but maybe headwinds from the regulatory perspective. Any thoughts on that?

I think most of the characterizations are close. I don't -- I think -- maybe your characterization on the plant nutrients side may be a little bit softer than what I would have said.

More flat?

But I think in general, you have the arrows pointed -- I just think that there is still plenty of opportunity. We've got some prices resetting on the lower side on the plant nutrients side, which, although corn prices are lower, with lower nutrient prices, there should be an offset to keep that demand relatively good. We have made some expansions, and we have got some other specialty products at better margins. So I think I would be a little bit more positive on the nutrients side. But in general, comments were fairly close.

And then from a simplistic perspective, I know in the past you guys have had some opportunistic margin when the corn comes in with a high moisture content. It is looking more likely, I think, that we are going to have an early frost in the Western corn belt. And I am wondering, if that were to occur, do you have similar capabilities in the Western corn belt to dry like you did in the East a couple of years ago and capture that margin?

Yes, it is a good question. I won't predict the weather. But I can tell you that both corn and soybean moistures for the early crops have some positive impact potential for us, and we have done this many years in the past. So we do, as you say, look for those opportunities to take advantage of those pieces of it. And now with more locations in the Western corn belt, and our Southern locations in Tennessee, which get a little bit earlier crop, I think we feel like those opportunities could be there this year. And we're looking for those in both corn and in soybeans.

All right.

Farha Aslam, Stephens Inc.

Two first housekeeping questions. The first one is, in the quarter, your other income had a significant swing. Could you share with us what caused the swing in other?

Farha, this is John. That is related primarily to Lansing and ethanol -- primarily Denison, excuse me. If the reporting -- it is the reporting of the LLCs and our -- the way we own the ethanol plants and such. So, it is primarily related to the Ethanol business and the higher income from our LLCs, et cetera, in ethanol.

Okay. Your tax rate has been quite different quarter-to-quarter. If you had to think of the year, where should that tax rate be?

The full year tax rate is, I think, going to be slightly up from last year. I do not know that we have given the specific number. But I think, probably, it is going to be up a little.

Okay. And then on to the Business, and particularly as it relates to grain. The wheat harvest came out -- and you usually have significant income in wheat. Wouldn't that help your September results? And so, I would have thought that your June quarter could've been your trough quarter for grain. But it sounds like September is going to be the trough quarter. Could you share with us some color regarding corn, wheat, soy, grain handling opportunities?

Let me take a quick -- both the second quarter and the third quarter are tough. Both of those -- the numbers for our grain operation for both of the quarters are not what we would like to see in difficult times. The one thing about the second quarter is, as you move into the inverse, you do sell -- tend to sell more grain before that inverse occurs. So there are margins that occur when you sell them. And then there is very little left to carry. So the second quarter may have had a few more sales in it than normal, and the inventory that we carry in the third quarter is less.

You are right. The wheat crop was good. We have regained a little bit of carry in the wheat crop. But again, that's -- most of the wheat does not get into our facility into late in July. So July itself did not really provide much in the way of carrying the wheat market. Compared to the size of the corn harvest, the wheat harvest is a fraction of it. So both quarters are tough. A lot has to do with carry. And hopefully, like you said, we start to see us come out of that at the end of the quarter as we start to bring the southern harvest of corn in.

Okay. And then if we go on to the rail, what portion of your fleet is tank cars? And tank car lease rates have clearly declined. Do you anticipate your rail earnings in the second half of 2013 to be comparable to your fiscal second half '12?

I do not think we have specified the exact percentage on the railcar fleet. We could probably take a look at that and give you the tank car piece. I think in a total perspective, the second half of '13 versus '12, is that what you asked, Farha?

Yes.

From a lease side of the Business, we expect it to be comparable to slightly better. And we would say the same thing from the repair facilities piece of the business. The question as we posed it was, what is the variability of the transactional side, the recourse transactions that we delineate each period? And we have been notably higher in the first half of the year, and it is just hard to predict whether we will see -- what kind of volume we will see the second half of the year. So, that is the variable piece. But I think we mentioned that we see fairly comparable at this point in time, in a total sense to the prior year.

Okay. And then if you look at ethanol, back to potential EPA changes, do you anticipate for 2014 the blend requirement to stay at this 14.4 step-up? Or do you anticipate them to possibly moderate that to go to a 10% blend, which is what we were hearing yesterday?

Yes. At this point in time, it is hard to tell. They have not -- they have shown that they did not make very many changes. So for us to sit here and suggest that they are going to make any substantial changes is probably not supported by their past history. But -- so I don't look for a whole lot of changes.

Okay. And then if you commented on the spread between corn and oil and particularly that makes ethanol very attractive. Would you anticipate E15 coming into the market next year? And any color you can provide in terms of the significance and the scale of E15 and timing?

Yes. E15 will continue to come into the market in small increments, but it is clearly not enough at this point in time, nor is E85 enough to take up the capacity that we have available. So it is all good when E85 gets in, and when E15 gets in, but it is just not enough to dramatically impact the market in the next year or two.

This is Mike. Farha, I am going to just reinforce something Hal said in rail to make sure that there's clarity, because he was talking at times about first half, second-half, full-year. And we obviously had a really strong first half. As we look to the second half, if you remember last year, we have fairly sizable on gains on sales. And a comment was made about comparable, and that was a perspective around the year, not the second half. And it is hard to have really great visibility so far, but I would say at this stage, if something would happen tomorrow, we would expect probably on that piece of the second half not to be as strong as next year. At this stage, we are feeling somewhat comparable year-over-year in total, but still moving parts.

Mike, thanks for that added color. That is helpful. And then my final question is. So going forward, if you are thinking E85 and E15 are going to be slow to be adopted by the market. Do you anticipate ethanol plants having discipline and cutting production? How do you expect the supply/demand balance to get -- to play out in the market for ethanol?

Yes. There is obviously a lot of factors in your -- the answer to the question on the supply and demand. I think the market has proven over the past few years to adjust production fairly quickly when the market tells it to do that. There have been times in the past few years, we've gotten probably up to 20%, 25% of the production shut down at specific times when margins were very poor or corn supply was unavailable. So I do think the market reacts quite well.

And as we said, we are focused very highly on the plant efficiency and the co-product viability and profitability to help keep us -- help sustain us in those periods of time. And we are generally located in pretty good crop areas. So, I think the market will continue to react well.

And the other side of that is supply and demand and the rest of the world. At times, there is a export program out of South America. At times there is imports from a variety of countries. So that whole piece will have to fit into your supply and demand equation, but I think the US market works pretty efficiently.

Great. Thank you for the added color

We have no further questions at this time. I will now turn the call back over to Mike Anderson, CEO, for any closing remarks.

Okay. Thank you all for joining us this morning. I would also want to mention for those who are interested, there are seven appendix slides to the presentation, available on the AndersonsInc.com website at the investors tab under the second quarter earnings call replay. Our next conference call is scheduled for Thursday, November 7, at 11 AM Eastern Time to review our third-quarter 2013 results. We hope you are able to join us again at that time. Until then, have a wonderful day.

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