Andersons Inc (ANDE) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Andersons, Inc. 2014 third-quarter earnings conference call. My name is Sheila, and I will be your operator for today. (Operator Instructions)

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

Good morning, everyone, and thank you for joining us for The Andersons, Inc.'s 2014 third-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 our website, the slides and audio are in sync.

For those listening via telephone and watching the webcast, you should follow the directions sent to you in order to sync the slides and the audio. This webcast is available through the Investors section of our website at www.andersonsinc.com. The 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 a 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 1934 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 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 I will answer 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 ethanol group had a record third quarter, with operating income of $21.3 million. Margins in the ethanol market were strong, although not as strong as the record margins seen in the prior quarter. The outstanding year-to-date performance of the ethanol group has led the Company to a nine-month earnings record of $2.95 per diluted share. The Company also paid its 72nd consecutive dividend in October.

As part of its growth strategy, the Company completed three acquisitions since the end of the third quarter. First, the purchase of Auburn Bean and Grain added six grain and four agronomy locations throughout North Central Michigan. This is an area of strategic significance to the Company, as it bridges the gap between its existing grain and plant nutrient group assets and the Thompson joint venture in Ontario.

This acquisition added grain storage capacity of about 18.1 million bushels, which is a 13% increase; and 16,000 tons of dry and 3.7 million gallons of liquid nutrient capacity, which represents a 4% increase. Further, the majority of the assets of both United Grain, LLC and Keller Grain, Inc., were purchased in October in order to expand the grain group's food-grade corn business into the Texas market.

I will now turn this over to John, who will provide details of the total Company results.

Thanks, Mike, and good morning, everyone. The Company reported net income of $16.8 million in the third quarter or $0.59 per diluted share on revenues of $1 billion. In the same three months of 2013, net income of $17.2 million was reported, or $0.61 per diluted share, on revenues of $1.2 billion.

Through the first nine months, total net income stands at a record $83.8 million for $2.95 per diluted share. In 2013, net income through September was $59.3 million or $2.10 per diluted share. Total revenues of $3.3 billion for the first nine months of the year are $752 million lower than the prior year. The majority of the year-to-year decrease in revenue relates to the grain business, whose revenues decreased due entirely to lower grain prices, which declined by more than 30% in comparison to the same period of the prior year.

Gross profit increased from $73.1 million in the third quarter of 2013 to $84.9 million this year. The year-to-year increase in gross profit this quarter was due primarily to an increase in ethanol margins and space income.

Now to a non-GAAP measure, EBITDA -- earnings before interest, taxes, depreciation, and amortization. The Company's third-quarter EBITDA was $47.2 million, which was slightly ahead of the 2013 quarterly results of $46.3 million. Year-to-date EBITDA totaled $194.4 million, which is an increase of $39.9 million compared to the prior-year's nine-month total.

Equity and earnings of affiliates was up $1.7 million and totaled $23.9 million in the third quarter. Through September, equity and earnings of affiliates totaled $76.6 million compared to $40 million in 2013.

The positive year-over-year change for the first nine months was driven primarily by a significant increase in earnings from the Ethanol LLC investments. It was also impacted by the inclusion of income from Thompsons Limited, which was added to the Company's portfolio in the third quarter last year.

There were no short-term borrowings on the short-term line of credit during the third quarter, which represents a decrease of $12.2 million from the prior year. Other income was $1.7 million compared to $7.6 million in the third quarter last year. The prior year, the rail group recognized income of $4.3 million related to the settlement of two nonperforming leases.

For the first nine months, other income increased $13.5 million year over year, primarily due to the $17.1 million pretax gain recorded on the partial redemption of the equity investment in Lansing Trade Group. For the third quarter of 2014, the Company's effective tax rate was 34.7%, down 1.8% from the third-quarter 2013 rate of 36.5%. The lower 2014 effective tax rate is due primarily to increased deductions related to domestic production activities and to the benefit of income attributable to noncontrolling interest, which does not increase the Company's tax expense.

We are projecting the 2014 tax rate to be 34.2%. The Company's 2013 effective tax rate was 36%. The lower effective rate for 2014 is due to the items mentioned in relation to the quarter and to the correction made in 2013 with respect to accounting for the OCI portion of the Company's retiree health care plan liability and the Medicare part D subsidy.

The bridge in this next graph demonstrates which group's 2014 third-quarter income is up or down 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 results, Hal will walk you through each of the six group businesses.

Thanks, John. Let's start with the ethanol group, which achieved operating income of $21.3 million this quarter. In comparison, the group reported operating income of $10.9 million during the same three-month period last year. The increased income is a result of significantly improved ethanol margins, strong ethanol production, ongoing service fees, and increased coproduct revenue. Ethanol margins were supported primarily by strong export demand, lower corn prices, historically strong DDG prices relative to corn, and excellent operating metrics at all four plants.

Revenue was $179 million in the third quarter in comparison to $213 million in the prior year. Revenue declined primarily due to a reduction in the average price per gallon of ethanol sold.

Through September, the ethanol group has reported record operating income of $75 million on revenues of $595 million. In 2013 the group had operating income of $24 million during the same nine-month period on revenues of $635 million.

At this time the group has approximately 85% of the fourth-quarter and almost half of January's ethanol margin risk hedged. The hedges for the fourth quarter were made throughout 2014, consistent with the group's strategy to lock in reasonable forward returns when available in the market. The January hedges were added during or since the third quarter.

As is standard, the ethanol group shut down each of the four plants during the third quarter for scheduled maintenance. The shutdowns were successful, and new daily production records have been set since the maintenance was complete.

Due to the plant shutdowns, volume for ethanol, distillers dried grains, and corn oil decreased slightly this quarter. The group, however, still had record E-85 sales, as they continue to focus on this product line.

The grain group earned operating income of $12.4 million this quarter versus $14.3 million a year ago, in spite of a delayed harvest caused by wet weather. The group had improved space income this quarter, due primarily to higher wheat basis appreciation as well as good execution on new crop bean sales.

The grain group also benefited from its equity investments this quarter. Income from Lansing Trade Group was down slightly, primarily due to the Company's ownership percentage being reduced by approximately 20% this year.

Thompsons' income improved, as only deal closing expenses were recorded during the same period of 2013. The grain group was negatively impacted this quarter by the recording of a $3.3 million reserve for potential default on the sale of distillers dried grains destined for China.

Revenues for the quarter were $575 million, which is down from the $766 million reported in the prior year. This revenue decrease is due entirely to a lower average price per bushel, which decreased by almost 36%. The grain group's operating income through the first nine months of 2014 was $34.1 million on revenues of $1.8 billion. Comparatively, the group's operating income through September of 2013 was $24.7 million on revenues of $2.5 billion. The year-to-date results have been positively influenced by the pretax gain of $17.1 million from the partial redemption of the group's Lansing Trade Group holdings.

Bushels shipped in the third quarter of this year increased by over 11% as the group worked to open up storage space for the record 2014 crop. Storage capacity increased slightly since the prior year, from 141 million bushels to 142.3 million bushels. This capacity was as of the end of September, and therefore does not include the 18.1 million bushels recently added by the Auburn Bean and Grain acquisition.

According to the USDA Crop Report issued recently, the harvest for corn is 65% complete. In comparison, the corn harvest was 71% complete last year at this time. Yield estimates are currently in the range of 174 bushels to 180 bushels per acre, with total production approximately 14.5 billion to 14.8 billion bushels. These are record results.

The report also showed the harvest for beans is 83% complete, which compares to the prior year of 85% complete as of the same time period. The soybean crop being harvested is also a record.

The plant nutrient group had a third-quarter operating loss of $100,000 on revenues of $111 million. In the same three-month period of 2013, the group reported a $1.6 million operating loss on $96 million of revenue.

Sales volume increased by almost 25% in the third quarter in comparison to the prior year. However, this was partially offset by a lower gross profit per ton. Third-quarter margins were solid but did not benefit as much from nutrient price appreciation as was seen in the prior year.

This year the plant nutrient group had operating income of $23.5 million through the first nine months on $530 million of revenue. Last year the group generated operating income of $21 million on $538 million of revenue.

Through September volume increased approximately 9%, and margin remained relatively flat in comparison to the prior year. The group has appropriately managed its nitrogen, phosphate, and potassium ownership position going into the fourth quarter in order to reduce the risk of lower costs or market losses. Storage capacity from the plant nutrient group increased to 935,000 tons from 889,000 tons due to the acquisition and expansion of both dry and liquid storage facilities. The reported storage capacity is as of the end of the third quarter; therefore, it does not include the capacity added from the Auburn Bean and Grain acquisition.

The rail group reported operating income of $4.2 million this quarter on revenues of $32 million. Last year the group reported $12.4 million of operating income on revenues of $48 million. The prior-year third-quarter results include a one-time gain of $4.3 million for the settlement of two nonperforming leases.

Gross profit from the leasing business was down slightly, even though both the average lease and utilization rates were higher this quarter, as the fleet decreased by approximately 500 cars. Further, that leasing business was impacted by $1.6 million in freight costs to return idle cars to service, which is $1 million more than was recorded in the prior year.

This quarter the group recognized $1.4 million in pretax gains on sales of cars and related leases and nonrecourse transactions, whereas last year $2.8 million was recognized on similar transactions. Revenues are lower this quarter in comparison to the prior year due primarily to lower railcar sales.

Through the first nine months, the rail group had operating income of $25.9 million and revenues of $11.8 million. In the same period of 2013, operating income was $36.6 million and revenues were $132 million. The results through September include gains on sales of railcars and related leases and nonrecourse transactions of $14.7 million. This compares to $17.4 million last year for similar transactions.

The group has 22,139 cars and locomotives. The car total is down slightly, as the group has scrapped some cars and sold some cars outright as part of their railcar optimization strategy. The average utilization rate for the quarter was 89.9%, which is up from the 86.2% reported last year. The utilization rate at the end of September was 90.1%, which represents a slight increase from the third-quarter average.

The turf and specialty group had an operating loss of $2.9 million this quarter on revenues of $23 million. Last year the group reported a loss of $100,000 on $28 million of revenue. Turf products tonnage was down significantly this quarter, due to both a decline in the contract manufacturing business and to the reduced need for fungicide and insecticide products based on the weather.

The cob business also had significantly lower sales volume, due to reduced demand for certain products and lost production due to downtime at the Mt. Pulaski facility so as to make major operational and electrical upgrades. Through September the group's operating income was $500,000 on $109 million of revenue. In the same period of 2013, operating income was $6.1 million and revenues were $118 million.

The retail group had an operating loss of $1 million on revenues of $33 million in the third quarter. In 2013 the group had an operating loss of $2 million and revenues of $31 million for the same period. The group's year-to-date operating loss is $1.7 million on revenues of $102 million. Through the first nine months of 2013, the operating loss was $3.7 million and revenues were $103 million.

Now I will turn the floor back to Nick for the Treasurer's report.

Thanks, Hal. At the end of third quarter, net working capital was $257.3 million, an increase of $24.4 million from the 2013 third quarter. Long-term debt ended the third quarter at $289.4 million, a decrease of $91.6 million from the prior year.

Year-to-date, September 30, the average long-term interest rate was 4.54% compared to 4.49% last year. The long-term funded debt to equity ratio was 0.36 to 1 on September 30 compared to 0.57 to 1 over the same period last year.

Current assets totaled $1 billion at September 30, an increase of $153.4 million from the same period last year. The increase is primarily due to an increase in cash, which increased $192.5 million from the previous year's third quarter. As has been recently the case, the purchases of grain under delayed price of hold pay contracts again generated cash balances in related grain payables, which we expect to continue into the fourth quarter.

In addition to declining grain prices' reduced margin requirements, also during the third quarter the Company received a distribution from its investments in some of the Ethanol LLCs. Total assets at September 30 were $2.1 billion, an increase of $200.7 million year over year.

Current liabilities were $791.6 million at the end of the third quarter, an increase of $129 million from the prior year. As a result of lower grain prices, the commodity-driven liabilities current account increased $541 million.

Accounts payable for grain ended the third-quarter at $222.2 million, a decrease of $19.4 million year over year and a decrease of $370 million compared to the 2013 year-end. Total equity was $801.6 million at the end of the third quarter, an increase of $131.3 million year over year.

Mike will now cover a few points before we take questions.

Thanks, Nick. I just want to first mention that yesterday we announced our Board has authorized the repurchase of up to an aggregate $50 million of the Company's common stock. Primary objective of the limited share repurchase program is to offset dilution related to the Company's recent share issuance in connection with its acquisition of Auburn Bean and Grain.

The program will also enable the Company to acquire shares used for its employee long-term incentive plans in order to offset dilution. Shares will be repurchased from time to time in open-market transactions. When and if shares are repurchased will depend on stock price, market conditions, and other factors. The authorization for this plan will be in effect for two years.

As we mentioned last quarter, we rolled out the new SAP financial system Companywide and implemented the new grain system at two locations in May. As our focus shifts from development to implementation in 2015, project team size and work effort will remain relatively stable.

However, the amount of team effort that is capitalized will be greatly reduced, resulting in higher expense. Project team expense, along with the amortization of previously capitalized costs and system support costs is expected to reduce earnings per share by $0.25 to $0.35 in 2015 relative to 2014.

In the future the SAP system will be expanded to include other groups. And we are excited about the system's ability to help us connect employees, customers, and information in order to support the Company's relationships, growth, and performance for years to come.

In closing, I would like to provide a future outlook. Let's begin with the fourth quarter. The grains group should benefit from the record corn and soybean crops being received, which should have a positive impact on its fourth-quarter results.

The record yields being seen should further benefit the plant nutrient group, as farmers will need to replace the nutrients consumed by the crop. It is likely we will see less acres planted in 2015. We have 85% of the fourth-quarter ethanol margin risk hedged at good margins. However, it will not be at the record margins received earlier this year.

We anticipate our rail group having a good quarter, but gains on car sales are not expected to be that material. It should be noted that poor railroad service could impact the Company in the fourth quarter. Both grain and ethanol groups rely on outbound rail service to turn their inventory, which enables them to effectively serve the customers. Further, the plant nutrient group relies on inbound rail to ensure nutrients are available to meet customer needs. When all this is considered, we continue to expect record earnings in 2014.

Next, I would like to provide an outlook on 2015. I have already mentioned our increased information technology costs that will especially impact the 2015 and 2016 results as the grain system implementation is completed. In 2015, the grain group should continue to benefit from record 2014 crops, including strong performance from its equity investments.

With the need to replace nutrients in the soil, we further believe the plant nutrient group will have a good year. As always, however, the performance of our agricultural businesses is dependent on numerous external factors, such as favorable weather.

We anticipate our rail group having a strong year in 2015, as they will benefit from continued increases in utilization and lease rates. At this time the group believes the utilization rates will continue to increase during 2015 and could reach levels in the mid-90s. We expect earnings improvement in both turf and specialty and retail groups next year.

I would like to conclude the 2015 outlook by focusing on the ethanol group. In 2014 we have seen the ethanol group exceed just about every earnings and production record possible. Although we can envision setting additional production records next year based on plant improvements, and although we remain positive about the industry -- the corn-based ethanol industry, we do not expect to continue to set earnings records in 2015.

We are acutely aware that the ethanol business is volatile, making future margins difficult to predict. We do, however, want to offer up some indicators that are influencing our current thinking in regards to the ethanol business. First, at this time, forward margins are not providing as attractive opportunities to hedge into 2015. As noted earlier, we have pre-hedged about half of the January production. That has been done at margins which are closer to historical norms.

Second, and quite significantly, we have seen a recent decline in the value of distillers dried grains relative to corn price, due in large part to Chinese import restrictions. During 2014 we have seen distillers dried grain prices in the range of 110% of corn price and often higher. However, with the uncertainty of export demand from China, we have seen distillers dried grains prices more in the range of 80% of corn price looking into 2015.

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

(Operator Instructions) Kenneth Zaslow, BMO Capital Markets.

Couple cleanup questions and then a big-picture question. When is -- how much was the incremental expenses on the rail car -- you know, the freight costs this quarter? And do you think they are recurring?

This quarter was $1 million higher than the same quarter last year.

Okay. And then, how much do you expect to be impacted with the rail issues in the fourth quarter? You kind of said it, but you didn't give any sort of parameters to build on that.

Yes. The rail issue impact for the fourth quarter is primarily related to grain and ethanol. That would be the logistical piece of moving the products. We have seen slowdowns at this point in time. We are doing our best to work around all those. We know it has impacted the entire grain industry to some extent.

It is just really hard to tell right now exactly how difficult it will --

It's going to be a good quarter.

Yes, it will be a good quarter. Like you said, it just still will make it much more difficult than we like it to be, but it will be a good quarter.

Okay. And on ethanol -- the sequential decline, again, Hal, I asked you the question last time on the quarter: do you think the margin is sustainable? You kind of said yes, and we blocked in 75% out on our margins. And then sequentially the profitability in ethanol fell far sharper than stable would indicate. Can you talk about that? And then I have my final question.

Well, I can't -- I don't have the exact quotes in front of me. We did mention the 75% that was booked. I don't think we believed at any point that the higher margins from the summer were sustainable. And so the actual margins in the third quarter were lower than they actually were in the summer. So that obviously impacted the part that we hadn't booked.

I think we also noted this time around that the margins that we have booked in January are more along the lines of historical margins, meaning nothing related to the 2014 margins, but margins that we would normally have experienced previous to the big run-up in 2014.

I think the other key point on that is Mike's commentary about the DDG valuation, which isn't always taken into consideration as people model. But a move in DDG prices from 110% on a sell-side value relative to corn price to something in the neighborhood of 80% of corn value makes a notable change in the revenues for the DDG segment of the business.

Okay. And my final question: Mike, you kind of stopped short of saying that 2015 would be a record year. Is there any reason we would not expect 2015 earnings to be a record year? And how do you think the --

We would not -- let me answer that. We would not expect 2015 to be a record year.

Couple of things. One, remember Lansing Trade Group. That was an unusual gain that we would not expect to be repeated. Of course, you never know when you are going to do something out in the future.

Two, let's be real clear: ethanol had a record year. Record year so far. Wonderful year. We are friendly the industry. If you recall several years ago, when we were talking about wheat space income, and we said it is as good as it gets; we said it's going lower -- we were not at all negative on the industry. We are positive about grain. We are positive about ethanol.

But the relationship that occurred as a result of starting two years ago in the drought, shutting down 15% of the industry or more, greatly reducing or impairing available stocks of ethanol drove up ethanol price relative to oil; drove up ethanol price relative to corn, even with high corn prices. DDG's shortages appeared as a result of, first, the drought -- again 15% plus supply goes. There were places who increase their inclusion rates for DDG because of lack of availability of corn coming out of the drought year. And, you know, some of that has continued, which is positive.

But as we replenished the supply of corn, we turned on the supply of ethanol because of the plants that came back online. China does its thing on DDG. We have seen recently a compression between the price of ethanol and the price of corn. In other words, ethanol price coming down more than corn price recently. We see that continuing into next year.

Be real clear: what we experienced in the ability to sell DDG was fantastic. It is kind of the as good as it gets. Before the ethanol industry took off like crazy, DDG regularly traded 100%, 110% of corn. It was very small supply.

Ethanol industry took off like crazy, and then for a while it got into 70%, even 60% range. Before the drought it had stabilized in the 80%/90% range. I do believe that its economic value is over 100% of corn. I do believe over time you will see a move in that direction.

But the increase in supply by bringing plants on, China out, to us says we are going to have a substantially lower price of DDG relative to corn starting now and into next year. And I don't think that has been plugged into your models.

So I don't think we will have a record year. We are going to have good year in grain. We are going to have an okay year in PNG. We are going to have a good year in rail. I expect some improvement in turf and specialty, but the other thing we know in ethanol -- it is really hard to predict the margin.

We didn't see it getting as weak. We didn't see it getting this hugely strong. So can't sit here and have absolute confidence. But -- okay, so I answered the first part of your question.

Okay. So even with the capital investments.

Hey, the capital investments are going to be great. They are going to return. I just think that if you look, go through your models, and you look at what we have returned in ethanol so far -- which is fantastic, as good as it gets; we expect a good fourth quarter -- we expect a sizable drop-off next year that won't be made up by the capital investments that we have in place so far, and a Lansing one-time gain, and SAP costs that we have just articulated. So we are not sitting here just negative negative, but we are expecting that we would have a down year compared to this year's results.

Three key things. LTG cents per share, SAP cents per share -- and I understand everybody has got different models. We don't give a specific guidance on the model on ethanol, but lower cents per share in ethanol.

Okay. I appreciate it.

Farha Aslam, Stephens Inc.

We are coming into a record grain harvest, and you are coming into this grain harvest with a significantly larger footprint because of your acquisitions. Could you help us frame the opportunity for The Andersons in terms of earning for this fourth quarter and into next year with the grain that is coming in and that footprint that you have?

This is Hal. Based upon the slight increases throughout the year and the 18 million-bushel increase in capacity at Auburn, we are up in our total storage space. So, yes, we have more space available.

And the crop has been -- obviously is a record crop, especially notable on the corn side, because we handle more corn than we handle soybeans. Also, spreads on the Chicago Board of Trade are wider. They are close to where we have expected them to be. So that spread relationship is -- you know, if you check the changes in the spreads or comparison year to year, the spreads across the corn crop, usually from the December futures to the July futures, you notice that increase in that spread relationship. And that generally is something we will capture as we carry corn throughout the year.

So those spread relationships are good. Actually, in some cases, depending on how the weather impacted us, we had slightly lower basis levels in some locations. That will help us, as well.

But this wet weather and some of the issues with the railroad shipments have both been a little bit of negative impact to the big harvest. But, again, spreads are better; base is a little bit lower to start the harvest. Both of those are good.

A slightly delayed harvest because of the weather, and some logistical issues with the rail concerns -- those are the negatives. But in total it should be a good fourth quarter and a good start to next year with the space income.

So we should think good things out of the grain group for the next two quarters with this large harvest?

Yes.

And then, just expanding on Ken's question regarding ethanol: could you give us some color? Because on the fourth-quarter margin levels compared to third-quarter margin levels, where you have blocked them in versus what you are going to realize -- because that has been a source of significant volatility in your earnings throughout the year.

Yes, okay. Well, a couple of thoughts. I am looking at third-quarter versus -- this year versus last year. Obviously, we had -- we gave you that comparison in the call. And we were about $21 million versus about $11 million the previous year. Okay? So that is the historical perspective.

We also talked in the call about locking in margins, primarily in January, but also during this year, more in line with historical margins. Okay? So at this point in time, it would be not correct to assume that the kind of margins we have already locked in for the fourth quarter represent the high margins that we saw in Q2 and Q3.

They are more along the lines of historical margins. And obviously, since we don't have it all locked in, and current margins are less, that also would have a bit of an impact. So we expect a very good fourth quarter in ethanol, especially compared to all historical measures, but probably not as good as what we have seen from margin perspective and what we have locked in so far.

You said probably?

I said probably. But, okay, so not as good. I said probably -- so not as good as we have seen in Q2 and Q3.

So you would expect your ethanol earnings in the fourth quarter to be down relative to the third quarter?

Yes.

Okay. And then, just looking at ethanol in a broader sense, you are clearly very cautious on that industry and are locking in margins that are in normal levels. But when we see just crush margins -- we have seen them bounce in the last month by about $0.30 in just the last month, because you have seen this huge rally in ethanol. And that is with -- and that factors in the lower DDG price, largely because recently the inventories have come in really very tight. Could it be possible that you are locking in very cautious margins and leaving a lot of money on the table if you were more in spot? Because it seems very cautious for you.

Okay. Well, first, you mentioned that we were cautious about the industry; and I will restate what Mike said. We are not negative towards the ethanol industry in the long-term sense. We believe in that industry. So I don't want to give you the sense that we are negative in any long-term perspective relative to the ethanol business.

Second, I am going to question the $0.30 bounce that you show in the ethanol margins. I can tell you that I have not seen that. So maybe we could talk about some of the details behind that, because one of the biggest components of that is this DDG price relationship that we also discuss.

But we look long-term at the ethanol business very positively. We certainly like that business. We just see that the forward curve currently has very small margins in it for 2015. I realize that the spot market has improved generally from quarter to quarter, but we are not seeing the kind of spread between the spot margins and next year's margins that we would see that would lead us to believe that the next year's margins are going to continue to bounce up to these higher levels that we saw in Q2 and Q3.

Okay. And then when you look out into your M&A outlook, where do see the greatest opportunities for The Andersons? And where are you focusing your efforts?

Yes. Well, as we've discussed in the past, because of our portfolio, we broadly look across all of our business constantly to get the right mix and to look at the right opportunities. We have done some work here this year, as you've noticed, in the grain and the plant nutrient side.

And at this point in time, we have talked about the fact that with the returns, ethanol plant values are high. We know railcar values have increased because of higher rates and demand. So opportunistically it might seem that still on the nutrient side or maybe on the grain side, there may be opportunities more in the marketplace. But we look at the portfolio completely and constantly, in the whole sense of balancing it and looking for the best place of opportunity.

Thanks for the added color.

Eric Larson, Janney Capital Markets.

Can we just talk a little bit also about the plant nutrient business in a little more detail? Typically, when you have grain prices as weak as they are -- have come down relative -- you know, because of obviously big supplies. Historically it has been very hard to hold the nutrient pricing. There tends to be a pretty high correlation with corn prices.

And I have felt that you have a natural offset to maybe stronger grain profits next year with the nutrient business. And I guess I am not getting that same color from how you are describing nutrients for next year.

And Hal can add to this. I think your observation is right. We -- if you look at that kind of composite fertilizer chart against corn, both have come down -- corn more, which could suggest, if you -- if with the correlation maybe there is a little more downside.

So we are cautious on the ability to get price appreciation. But what is interesting -- and we would expect corn acres to be down a little next year, which would both suggest maybe some caution. So we are not just wildly bullish margin.

At the same time in the industry, to some extent we -- and I think it is beyond just The Andersons -- were a little lucky that this harvest got delayed. Because there's a challenge getting inventory in position from a worldwide and from a production standpoint, which is creating a little bit of an underpinning to price.

And there's no question that inputs of all sorts will come under pressure with lower corn price. At the same time, there's -- we have seen this bounce in yield, which -- then you get to, okay, what is the cash flow that comes from revenue per acre, not just price per bushel?

And so if you look at that this year, that's been -- with the big yield increases, despite the lower price, the revenue breaker has been -- although it is down, has been there. And it will put pressure. So we will also continue our focus on the specialties and the industrial tie to supps that have got different margin piece to it.

So we expect maybe a little -- and we have taken a lot of nutrients out of the soil with these yields, which will suggest the need to replace. So I am not disputing a thing you are saying, Eric, because I think you are on the money. And it maybe suggests some caution.

We are going to be cautious on inventory build for risk of lower cost to market. I am proud of the way the folks are managing it. We're a little, I would say, not bullish on ability to get appreciation, but we see a decent year coming at us.

Okay. All right. Then just a follow-up question on -- you know, again, kind of Thompsons, and we don't know yet really what you paid for Auburn Bean, et cetera. Obviously, you paid some -- some of the consideration was in shares, and you are going to repurchase those in the market, et cetera. But would you expect, net-net, these acquisitions to be additive to earnings next year in some way, shape, or fashion?

Yes, we would expect those two to be additive. We would. And there will be details in the queue on the acquisition of Auburn.

On purchase price, and how you paid for it, and that sort of thing?

Yes.

Okay. Thank you.

Brett Hundley, BB&T Capital Markets.

Mike, I want to go back to this conversation on ethanol. And I appreciate what you are saying about DDGs. I would assume you are going to have help from lower corn next year. And right now you guys are basing your commentary on the forward strip, which I think is just tough to do, because none of us really have a great idea of where ethanol is going to go next year.

We can talk to supply and demand dynamics, but we are looking at a strip right now that has come in from a level that we saw six months ago. And my question is: I add $0.20 to the forward strip, I am right back at margins that are looking pretty darn good.

So can you speak to that and just go through, again, your view today? You are looking at the forward ethanol strip, but if those prices come up, all else equal, does the drop in corn offset this DDG that you are talking about? And you are able to earn a pretty sizable margin again next year as an industry?

Again, I think it should be an okay year for ethanol. So it is relative to what I will call unusually good this year as a starting point. In ethanol, if I look at the relationship on the margin to the corn price versus ethanol price, corn price has come down significantly. And it dropped further faster than ethanol price, and ethanol came down. Yes, you get a little bounce here. But that relationship has been negative. And I agree, on the forward strip, that has been a very hard thing to predict.

But I would say since this ethanol industry took off, not any of your projections would have projected what we experienced in the prior 12 months. And it was so good. So it is the common of more toward historical norms or the good side of historical norms -- not as good as it gets.

So my negativism is in relation to what we have experienced as being so good -- not negative in the sense of the industry, or return on assets, or anything like that. The other issue is -- and I don't know how this is going to play out -- but the drop in oil price. That's not so much an impact in the US; we have got, besides a mandate, ethanol is cheaper than oil in the US, but -- in US dollar. But it can have an impact on the ability to export. We'll see how that goes. But I don't think it is a friendly item relative to our ability to export. And we have had some benefit on that.

And the DDG thing is -- I -- we'll wait and see with it, but this is one where it that component of the margin going out -- I think we got a really nice gift pop of a confluence of a lot of factors that I mentioned: decrease in supply, because plants shut down; a lack of availability of corn and meal; Chinese -- huge demand which is now shut down, and they went to import licenses for DDG.

So we are back to what I will call a supply situation that is greater than what I will call, maybe, economic demand, which is going to, in my opinion, likely keep a lid on DDG relative to corn, probably under the 90% level as we look out to the next year. And that is occurring in the spot market, too. That is not just a forward strip situation. And it has happened in just a couple of months here, frankly.

We did have the benefit of forward sales in DDG that we're working through, that we're at nice margins relative to corn. But in the spot, that relationship has changed materially. So I just don't see that piece getting the pop.

As far as your corn to ethanol margin, I agree with that. We are not banking our expectation of next year on that forward strip. If we felt that way, we would lock in margins more than we have. Well, we are not. Because we expect --

We expect that.

Yes, we expect the bounce you are talking about.

Okay. You would expect the (multiple speakers) to get better, you are saying?

Yes. So we are talking about a relative situation here, not an absolute. Yes, I would expect the forward strip, for the same reasons you said, to get a bounce. In general, that has occurred.

Working against that is supply situation has increased, but fact is ethanol is cheap. It is a cheap molecule. It's cheap fuel.

We are limited with the blend wall. That's real. We will wait and see what the impact of exports are with dropping oil prices, but I would expect the ethanol/corn relationship to continue to be positive for this industry.

Okay. And then, Hal, can we talk a little bit about your rail business? I'm just trying to put it all together inside my head. And you have a little bit of noise over the short-term here as you pull cars back into production and some increased cost related to timing in Q4.

But one other view that we had, rightly or wrongly, on next year was that some congestion, primarily towards the West, could actually benefit you guys as it relates to your rail business and your grain business -- potentially a shifting of demand out of the Northern plains into your area of the US.

And then also, just given that you are going to be pulling some cars out of idle and into production, and there should be better lease rates associated with that, overall congestion could also help as far as railcar leasing, just given that more railcars would potentially be needed. So I was under the impression that rail could have, actually, a pretty strong year in 2015. Does any of that not make sense to you? What would be your overall thoughts on that?

Yes. Your comments almost all make sense to me. And I think Mike stated earlier that he would expect next year to be a good year for the rail business.

So we have constantly seen utilization rates go higher. We expect that to continue. We have seen average lease rates go higher. We expect that to continue. And so we do expect that base leasing part of the business next year to absolutely have a good year. Yes.

Okay. And switching gears real quickly back to fertilizer: is there -- I know you guys are going to be mindful of the inventory, but is there potential for fertilizer volumes to be up next year?

I don't see a really -- no, I don't see a good possibility that that will happen. I mean, we expect corn acres to be down someplace in the neighborhood of 5% or so across the country.

Now, maybe less in the Eastern corn belt. But, still, we wouldn't expect the acres to be up. I know that there are people talking about making sure that we get all the nutrients replenished in the soil. But I don't see that as allowing us to have a chance to have a higher volume. We continue to work on our specialty business. We have added some growth in a couple of different locations. Those are all positives, but I don't see in total the nutrient volume across the country being up next year.

Okay. Then just last question from me. On turf and specialty, was there business loss there? Or was that mainly just due to weather?

No, it was a business loss there. We have some noted volume decreases on our turf fertilizer business, and we noted a lengthy shutdown and renovation in our cob business that decreased actually our operating time.

We renovated substantially a cob plant that had us down quite a bit of the middle part of the year. So both businesses were a loss because of volume and, in some cases, margin on the turf side.

You know, on that weather thing, this was one of too good of weather. We had ideal summer weather for golf course maintenance, et cetera, et cetera. And those products that we have that help deal with bad weather -- pesticides, fungicides, et cetera, are high-margin products. So that's definitely a piece of it, too. We'd expect in the next year to see some improvement in our turf and specialty business.

Okay. Thank you.

I would now like to turn the call over to Mike Anderson for closing remarks.

Okay. Thank you. I want to thank all of you for joining us this morning. I also want to mention, for those that are interested, there are appendix slides to this presentation available on the andersoninc.com website at the Investors tab under the third-quarter earnings call replay.

As John and Nick shared with all of the analysts on the call, Nick Conrad will be retiring at the end of the year. And so he has participated in his last earnings call for the Company. I would like to thank Nick for his years of service to the Company broadly, and more specifically to all of you, our owners. Thank you, Nick; and I wish you best in the next phase of your life.

Our next conference call is scheduled for Wednesday, February 11, at 11 AM Eastern Time to review our full-year 2014 results. We hope you are able to join us again at this time. Until then, have a wonderful day.

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