Andersons Inc (ANDE) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Andersons Inc. third-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today, Mr. Jim Burmeister, Vice President Finance, and Treasurer. Sir, you may begin.

Thank you, Ben. Good morning, everyone, and thank you for joining us for The Andersons' 2015 third-quarter conference call. For the purposes of today's discussion, we have provided a slide presentation that will enhance our talking points. If you are viewing this presentation via our webcast, the slides and audio will be in sync. This webcast and supporting slides are being recorded and will be made available on our investor relations section of our website at Andersonsinc.com.

Certain information discussed today constitutes forward-looking statements, and 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 United States 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 conjunction 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 of the Board; Pat Bowe, our Chief Executive Officer; Hal Reed, our Chief Operating Officer; and John Granato, Chief Financial Officer. Mike, Pat, Hal, John and I will answer questions that you may have at the end of the prepared remarks.

Now I will turn the call over to Mike for his opening comments. Mike?

Thank you, Jim, and good morning, everyone. First, I would like to officially welcome Pat Bowe, who joined The Andersons this week as our new Chief Executive Officer. Pat comes to us with a strong background including over 35 years of progressive experience in the agriculture sector. Pat most recently served in a role as the Corporate Vice President of Cargill's Food Ingredient and Systems platform, where he was responsible for strategy, capital allocation decisions, customer relationship management, as well as key leading sources -- as a key -- as a leading key sourcing in business excellence initiatives.

We are pleased to have someone of Pat's caliber as our CEO. He's an accomplished executive with a proven track record of delivering results, and he brings extensive global experience in the agriculture sector. Welcome aboard, Pat.

Good morning, and thanks, Mike, for the introduction. It's truly an honor for me to join the Company. I have long admired The Andersons, and I really look forward to capitalizing on opportunities that lie ahead of us for the Company. I'm excited to have an opportunity to lead such an outstanding organization, and I look forward to working closely with all of you.

But having said that, I have just joined the Company on Monday, and thus, just after three days, I won't be contributing too much to today's call. But I do look forward to working closely with all of and meeting you in the future.

Pat, we're happy to have you. As Pat only joined us this week, Hal, John, and I will be covering the third-quarter results with you today. We will set up opportunities for everyone to get to know Pat more in early 2016.

Overall, this was a disappointing quarter, where a few of our businesses and an equity investment encountered challenges in both the market and in execution. Our grain group performed poorly this quarter primarily due to our non-consolidated affiliate, Lansing Trade Group, significantly underperforming. Further, our core grain business experienced a trading loss which turned what would have been a modest profit into about a $1 million loss in that business for the quarter.

While the third quarter is typically a lower earnings quarter for the plant nutrient group due to seasonality, the business had a larger loss that it experienced in the same period last year, due primarily to a $4.5 million loss related to recent acquisitions and a $2 million impairment in the cob business. Hal will describe both in more detail in the call.

The ethanol group's earnings decreased from its second-quarter results primarily due to a lower-margin environment. They earned $5.9 million of pre-tax income, compared to the $9.7 million delivered in the second quarter of this year and $21 million in the third quarter of 2014.

Our rail group continued to perform very well in the third quarter. Lease income remains strong, utilization rate increased year over year, and our service and repair business had one of its best quarters. John and Hal will take you through the detailed results of the quarter, and I'll finish up with our outlook for the remainder of 2015 and early 2016.

Thanks, Mike, and good morning, everyone. In the third quarter of 2015, the Company generated a net loss of attributable to The Andersons of $1.2 million, or $0.04 per diluted share, on revenues of $936 million. This compares to the third quarter of 2014, when our revenue of $953 million generated net income of $16.8 million, or $0.59 per diluted share. Third-quarter earnings before interest, taxes, depreciation and amortization, EBITDA, totaled $24.2 million, compared to EBITDA of $47.2 million for the same period in 2014. Operating, administrative and general expenses for the Company were $88.7 million for the quarter, up $12 million from the prior year. More than all of this increase in expense is attributable to the acquisitions completed in the last year and is primarily related to depreciation, maintenance and labor. Operating, administrative and general expenses for the rest of the Company were actually down about $3 million.

The Company anticipates that its full-year 2015 effective tax rate will be 33%, down from previous estimates primarily due to factoring in the pension plan termination and lower-than-anticipated results for the first nine months of this year.

Turning to our IT infrastructure renewal project, we are pleased to highlight that our grain SAP solution has passed an important test, with successful operation during the recent peak harvest season at the locations where it has been deployed. To date, the grain solution is deployed at locations that have historically handled about a third of our annual bushels. We will continue to roll out the solution at other grain locations and start to focus on blueprinting for our plant, nutrient and ethanol groups.

About a year ago, the Company disclosed that it started down a path to terminate its defined-benefit pension plan. We are pleased to announce that the process is expected to be completed in the fourth quarter of this year. As part of the wind-down, participants had an option to take a lump-sum distribution or continue a monthly annuity benefit. Based on employee response, we expect planned termination to result in a one-time non-cash charge of approximately $54 million based on unamortized losses and accumulated other comprehensive income, and require a cash contribution of approximately $7 million to fully fund the plan. This last cash contribution is consistent with the average annual cash contributions seen in recent years to fund the plan when taking into account that no funding occurred in 2014.

Once the process is complete, Andy will have no further obligation with respect to this terminated plan. In addition to removing uncertainty around future obligations, the Company expects to save about $0.5 million a year in expense.

The bridge graph shows the increase or decrease in each group's pre-tax income for the third quarter in comparison to the pre-tax income for the same period of the prior year. While we are disappointed in the grain and plant nutrient group results, ethanol did well in a much lower-margin environment compared to last year, and rail continued to deliver strong results. Hal will now discuss the key drivers of the performance of each business group.

Thanks, John, and good morning, everyone. As Mike mentioned in his opening remarks, our grain group had a disappointing quarter. The group's pre-tax income for the third quarter was $131,000, compared to $12.4 million in the same period last year. This was driven primarily by a significant drop in earnings from our affiliate, Lansing Trade Group, which fell $8.8 million from the same period last year, and a 3.4 million drop in our core grain business.

Lansing's performance was primarily impacted by a difficult merchandising environment due to falling China DEG demand and the ongoing decline in the US oil and related fracking markets. Our corn and grain business experienced approximately $4 million in trading losses coming from option and flat-price positions which are within our trading limits, along with trades associated with our risk management programs. Without these losses, we would have seen a $3 million profit in our core grain business.

This year's corn harvest has been highly variable, particularly within the markets which we operate. According to the USDA crop report issued Monday, corn harvest is 85% complete. In comparison, corn harvest was 62% complete last year at this time. The five-year average would be 79% complete on November 1. Nationally, the bushel break or yield estimates are currently in the mid to upper 160s, off of last year's record of 171 bushels per acre, with total production estimated to be down a little over 0.5 billion bushels.

Regionally, the yield story is highly variable. As you can see in the included PRX slide, yields are strong in the West. When you get into the core of the Eastern corn belt, where approximately 70% of our assets are located, yields are challenged compared to last year due to the effects of excessive rains and limited nutrient applications in May and June. Opportunities for income from drying and blending have also been limited this year due to an unusually dry September and October.

Farmers continued to be reluctant to bring their grain to market. They have healthy balance sheets due to recent profitable years, and they've added on-farm storage space faster than the total production has grown. As such, they are more able to keep their grain off the market at harvest. This is a cyclical change that has occurred before in the grain industry, and we expect to see our space income opportunities return as we build carryout stocks over the longer term. In the meantime, we are addressing costs in our grain business and will consider using our own healthy balance sheet to look for opportunities.

The November 1 USDA report also showed the harvest for beans is 81% complete, which compares to 92% last year and a five-year average of 88%. You can see in the provided yield estimates from PRX, the total soybean crop is expected to be similar to last year, with significant variances from state to state.

The plant nutrient group had a reported pre-tax loss of $11.1 million in the quarter, which is an $8.1 million drop from the $3 million loss reported in the same period last year. Legacy businesses were down about $1.6 million versus the prior year. In addition, there was a negative impact of $4.5 million related to recent acquisitions and a $2 million goodwill impairment with our cob business. The driver of the drop of $1.6 million in the legacy business was primarily lower volumes in the quarter as many customers were hesitant to buy nutrients when fertilizer prices were trending lower.

As I mentioned, the largest driver of the reduction in the group's reported earnings was an approximate $4.5 million impact from ongoing and one-time costs associated with the businesses we acquired over the last year. The plant nutrient business is highly seasonal, and the acquired assets have similar seasonal volatile characteristics. More specifically, products acquired in the Nutra-Flo acquisition are concentrated in the liquid starter fertilizers, which can skew results to a spring planting season as well.

Additionally, Nutra-Flo margins have been dampened as we are selling through inventory that was purchased as part of the acquisition. US generally accepted accounting principles requires inventory on hand at the time of an acquisition to be written up to fair market value, so little if any margin is generated from this inventory. The vast majority of this inventory is expected to be gone by the end of the fourth quarter.

So far, the fourth quarter is off to a good start. Fertilizer application has increased as farmers are getting back into the fields post-harvest. Margins are holding; however, there could be modest margin compression in the future as some market participants work to lower their inventory positions.

In ethanol, we continue to operate in the market where the margins are positive for The Andersons but well below the record levels seen in 2014. Within this environment, the ethanol group performed well, delivering record third-quarter production volumes and generating pre-tax income of $5.9 million, compared to $21.3 million in the same period last year. Ethanol revenues were down this quarter by over 20% from $179 million last year to $139 million this year, due entirely to the lower average price per gallon of ethanol, as gallons sold actually increased slightly.

As you can see in the chart on the bottom left, the spread between ethanol prices and corn costs improved slightly as we started the quarter but held below the nine-year averages as we moved through the quarter. Many industry participants took some down time for maintenance, but total production remained at fairly high levels.

Despite the strong dollar, industry exports remained strong, and domestic demand continues to be running near multi-year highs. Given the production and inventory levels in the market and the foreseeable pressure from lower oil prices, ethanol margins continued to move within a moderate range in the fourth quarter, and we would feel they are likely to remain modest in the near term.

Our rail group continues to deliver good results, generating $11.9 million of pre-tax income in the quarter and $43.9 million year to date. This compares to last year when the group earned $4.2 million in the quarter and $25.9 million in the first nine months. Rail's results were impacted by higher lease income driven by an average railcar utilization rate of 91.6%, compared to 89.9% in the third quarter last year as well as higher lease rates.

There was an expected small dip in utilization rates for us during the quarter as we worked through the return of approximately 750 cars related to an early lease termination in the second quarter. All of those cars have now either been deployed or are in the process of being redeployed, which resulted in a utilization rate of 92.3% at the end of Q3.

The rail service repair and other businesses had one of its best quarters, generating $2.3 million in pre-tax income, compared to $1 million in the same period last year. The retail group produced a pre-tax loss of $800,000 on revenues of $32 million during the third quarter, which is $200,000 better than the same period last year when the group experienced a loss of $1 million on revenues of $33 million.

Now I will turn it back to Jim for the treasury report.

Thank you, Hal. The Company's net working capital as of September 30 was $183 million, versus the $257 million a year ago. Primary changes in the assets were from lower cash and cash equivalents, partially offset by higher inventories and higher receivables driven by earlier harvest activity and acquired businesses. Liabilities were up, driven by an increase in long-term debt and higher trade payables partially offset by lower commodity derivative liabilities.

Short-term borrowings under our line of credit as of September 30 were $83 million, compared to $500,000 at the same time last year. Long-term debt totaled $414 million at the end of the third quarter versus $289 million a year ago, with the primary increase stemming from the funding of our Nutra-Flo acquisition last quarter.

We believe long-term debt to capital is the most appropriate metric of our leverage. Our long-term debt-to-capital ratio at the end of this quarter was 0.36 to 1 versus 0.31 to 1 at the end of the same period last year. Our effective interest rate for the third quarter was 3.73%, which decreased from last year's 4.49%.

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

Thanks. Though this was a difficult quarter, we continue to feel good about our outlook for the years ahead. The remainder of this year, we see good elements amongst a few challenges including the recording of approximately $54 million non-cash charge related to the termination of the pension plan. Utilization rates in our rail group remain high, which should carry them through to finish what has been a great year. Renewal rates seem to be holding for most equipment types, but we are mindful of the longer-term economic cycle that could put pressure on some of our customers' industries.

Ethanol is also on track to close out a good year with many quarters of excellent operational performance. Margins seem steady, as high production levels in the industry continue to be balanced with strong domestic demand and an export market that has held up despite the strong dollar.

The plant nutrient group is off to a good start in the fourth quarter, as the early harvest has made way for some much-needed nutrients to be applied. We expect them to see a better fourth quarter than last year, as legacy locations are seeing higher volume with modest pressure on margins quarter to date.

As we further deepen our integration of the Nutra-Flo product line into our national marketing and distribution strategy, the group will be poised for significantly improved results in 2016 and forward. Great results will continue to be muted as we navigate the rest of 2015 and early 2016, as the weaker yields and lower basis opportunities in the Eastern corn belt have hampered our ability to build inventories and carry is trending lower. Pockets in other areas of the country, however, have been very -- have had very favorable yields in locations such as the West and upper Michigan.

As we begin to look forward to 2016, we remain confident in our business' long-term capabilities to generate the levels of earnings that we have come to expect. Further, we continue to invest in our growth. We are pleased to share that the EPA has approved the Efficient Producer pathway for the Albion, Michigan, ethanol facility. It clears the way for a potential doubling of the capacity of our most profitable ethanol location.

We are also pleased to share that earlier in the third quarter, we broke ground on a new grain elevator in Humboldt, Tennessee. Once completed, this asset will augment our current footprint in a strong and growing region of the country where the land has been shifting from cotton and tobacco crops into grains. While we are not happy with the results of the most recent quarter, we see good promise in 2016 and years beyond as we see -- begin to see the benefits of our acquisition of Nutra-Flo and the earnings power of our organic investments will deliver into the future.

As we are confident in our future earning potential, we have again raised our dividend. For the payment to be made early in the first quarter, the rate has been increased from $0.14 per share to $0.155 per share, which is an increase of 11%. This will be paid on January 25, 2016 to holders of record as of January 4, 2016.

Before we open it up for questions -- I'm going to ad lib a little, get off to script. I told the team here I was going to do that. People said that, well, you often do that anyway, so what else is new. This is my 68th and final quarterly conference call, and I wanted to just give a little bit of reflection. First, a lot of thanks and appreciation to you all who have been following us, analyzing us, supporting us and, within that support, putting forth challenges to us around what we do, how we do it, how we communicate. You've been helpful in the past, and I know you will be helpful in the future.

One of our commitments has been to be forthright and transparent, to be as candid around the bad as well as the good. I hope we've done and believe we've done a good job on that and expect that to continue. Overall in this period of time, feel very good about the value-add that we've had. Of course, feel disappointment on the things that don't add value, some of the mistakes we have made. Really proud of my team and all of our employees and their ongoing daily commitment to put our mission of service to optimize results for all stakeholders in the practice.

I'm reflective a little bit about the business yesterday, today and tomorrow. Feel good about the overall good growth we've had. I think back to about a year ago, the same conference call where, if I could have maybe changed my tone a little, I would have. But part of the message was the communication that we had a situation where the optimism around especially the ethanol part of our business and a bit, our base grain business just seemed too high and it felt appropriate to put a damper on that.

Five years ago, we did the same when we had what we call earnings as good as we can get in space, income and wheat. In the sense that in these cyclical and volatile businesses, sometimes those things are returning at levels that are a significant return on the assets we have in play, the odds are it won't continue.

But I would say the opposite is true. If I go back into 2008 where we had a loss in our plant nutrient businesses, things were pretty scary with high grain prices, we are able to communicate high confidence in the fact that we were solid and we had a solid future.

As I look to today and reflected on the fact -- and John touched on this little, the fact that we have in fact turned the quarter on the platform -- the IT platform that we're putting in place. This successful deployment that's occurred and be able to get to a harvest is really, really important because this is a system on which we're going to build our growth for the future.

Feel really, really solid about the general expansion things that we have in place right now. We have mentioned the Nutra-Flo. Feel really good about the long-term outlook for ethanol. Right now and for the foreseeable future, I think we have a supply situation in ethanol that creates a margin pressure, but this is a low-price octane additive. It's an important fuel in the mix, and we've got a good position that. Look at where we sit with our rail business and feel so solid about that. So if I look beyond the quarterly ups and downs, we have been on a good trajectory and we will continue to be in a good trajectory.

The very last thing before we open to comments, I would say I couldn't be more excited than to have Pat on board as our new CEO. I reflect on just the reality as the clock ticks by. I'm 64 now, and things are going to change eventually. But I will tell you, I am cognizant of my own strengths and my own limitations, and I look at this guy's enthusiasm and excitement to be with this Company, I look at the cultural mix, I look at the focus on customer -- the farm customer -- all customers, and the background he has in areas of operational excellence. And I will tell you he's just what the doctor ordered.

So, thank you again very much for your ongoing support of us. And with that, I will turn it back to Ben, and we will open it up for questions.

(Operator Instructions) Heather Jones, BB&T Capital Markets.

Mike, we're going to miss you on these calls. And let me extend a welcome to you Pat. I look forward to working with you.

Thank you.

I will try to limit it to two questions. I guess on the grain business, Hal, on the Q2 call, you had said that despite the issues in the Eastern corn belt, you thought that the grain business -- the core grain business could come in within that $0.15 to $0.25 range. Toward the low end, maybe a little bit below that. Year to date, we are at about a loss of $0.04 a bushel, and it sounds like you have a pretty muted outlook for Q4. So I guess I was wondering if you could give us an update on where you think that business will ultimately shake out this quarter -- I mean, this year.

Good question, Heather. Right now, because of the high variability, Q4 looks a lot like last year for us. And that would take us -- that would take us a lot like -- that would take us a little bit below the bottom end of that range that we had shared with you before.

Okay. And on the Lansing business, could you give us more detail on how the decline in oil production and -- did they get caught on the wrong side of some positions? I guess my point being until crude oil production accelerates again and/or China starts importing greater volumes of DDGs, are we going to see this kind of pressure or was there some kind of wrong side of the trade in Q3? How should we be thinking about that business for the next few quarters?

The largest piece of that oil and fracking piece is truly in the fracking and the sand side and our distribution business. And so that's a decline in volume, that's building of stocks, and just lower opportunities for them to do what they normally do to arbitrage across marketplaces with freight and different opportunities.

So it was a -- it's just a complete backup of the product into the system and a lot less opportunity. I think we see that that has leveled off at this point in time. So we see a little bit more of a normal perspective of that going forward, but it was almost a complete halt in that business at that period of time. So I think we feel better about it looking forward, and it was a point in time that created that bigger issue for them on the fracking and the sand side.

So we should see going forward -- and when I'm -- let's just think about the next couple of quarters. We shouldn't see that kind of deterioration year on year with these guys.

No, that's correct, that's correct.

Okay. All right. I'll get back in the queue. Thank you.

Farha Aslam, Stephens.

Mike, just wanted to also extend my thanks that over the years we have really appreciated your insight.

Thank you.

And Pat, we're looking forward to hearing a lot more from you going forward.

And you will.

But -- and perhaps Hal, we can continue on Heather's questions regarding the grain group and the fact that we are going to go through this period of depressed earnings from that storage business. Could you give us some color in terms of how long that carry-out stock it will take for you to build those back up so that you can get back to your historical earnings?

All right. Well, obviously the grain business works on kind of a crop-year basis. And so, carry in the marketplace is basically laid out for our crop-year period. So with the fall harvest that we have had, we don't see much change in the first two quarters of next year from it being at the lower end of the range just because there isn't quantities of carry available in the markets.

That being said, we have opportunities in some of the fringe markets in our Western areas and in Michigan where there is a bit better carry. So what we're going to have to do is we're going to have to make the most of our opportunities for arbitrage and look at our cost side of our business in the next couple of quarters. We have some -- we do have opportunity, but there's definitely not as much carry in the market in general. So in a long-term sense, as we start to build stocks again with the next wheat harvest, the next corn harvest, and build stocks across the belt, that's what will take us into the old levels of earnings that we've seen in recent years. So it's not something that we will see dramatically change in the first two quarters.

That's helpful. And then do you see anything happening in ethanol in terms of supply that can jolt us out of the current breakeven to plus or minus a little bit in terms of margins and ethanol to get us back to healthy profitability in that segment?

I don't see anything that would change it dramatically right now. We have a pretty balanced supply-and-demand table, and we see that continuing going forward with modest margins. Exports remains good, and they will adjust based upon a strong or weak dial but not very much. Cheap gasoline does provide an opportunity for us to have good driving demand in the US, and that's a good thing. So it is -- there are some minor opportunities here and there, but, as you asked for something major, no, that's not case.

Okay. And my final question is on the rail segment. You are enjoying some really nice lease rates and (technical difficulty) notable that your (technical difficulty) cycle. Is there -- how many quarters can we continue to expect those lease rates to be a really nice positive for you?

Well, we've seen a good trend, as you said. It's been fairly long term. We do realize that that business ties to the GDP in the US economy pretty well. Things seem fairly solid going forward for the next few quarters. We don't see any major changes, so we're looking forward to continued good performance. Don't see any sizable changes in interest rates or US GDP or anything that would dramatically change that. As you know, the portfolio is pretty well-balanced over the number of years that we have our portfolio, and it's pretty well-balanced across a variety of industries. So we feel good about managing that and doing our analytics and trying to stay on top of all those different factors to maximize that portfolio.

Great. That's very helpful. Thank you.

Sandy Klugman, Vertical Research.

So in ethanol, you discussed your near- to medium-term expectations. But over the longer term, how do you think about the opportunity for higher blend seeking traction, and how meaningful do you expect the export market to become for US producers?

It's a great question. We have a lot of positive perspective relative to the long-term use of ethanol for higher-octane blends. There's some great work being done for those possibilities, and we look for the US export demand to continue to pick up. It's the cheapest source of octane that we can put into the motor vehicle fuel. And that's why we see -- even with the change in the strong US dollar, we didn't see a change nearly at all in exports.

We see China picking up a little bit of imports in that marketplace. Boy, that would be a great market to open up to US high-octane foreign ethanol. So we see a lot of positives going forward in the ethanol marketplace. How far out is it? We see them building slowly. But it's -- the horizon of things that could happen to improve next year's exports and beyond are clearly available to us. There's lots of good work being done in the things that you mentioned, so we're excited about the ethanol business moving forward.

Thank you. That's helpful. And just a shift to Kay Flo -- demand for fertilizers is clearly being hit by compressed grower margins. Farmers are taking a closer look at what they're going to apply. So in an environment where growers have to be increasingly selective about applications, how do you see demand for liquid starter fertilizers holding up?

Well, that's a great question. We've talked for probably the last few quarters or more about our move into those -- that whole specialty micronutrient liquid starter fertilizers because of the efficiencies it produces for the farmer both in the planning as well as in the growing of the crops.

So we've been moving into that marketplace for a number of quarters now with a couple of acquisitions, and that's exactly why we have been excited about this Kay Flo -- Nutra-Flo acquisition. They have a fantastic name, fantastic products in the marketplace and we're excited to mesh them together with what we've got. That is exactly where farmers need to go to get the bang for the buck to put the nutrient in furrow with the seed, and we're excited about the future of that liquid starter fertilizer business going forward.

Great. Thank you very much.

Kenneth Zaslow, BMO Capital Markets.

Mike, we will definitely miss you, particularly your candor. So thank you for all your help. And Pat, we obviously extend that welcome to you as well.

Mike, I will at least see if I can squeeze in one question to you. When you were looking for a CEO, what were you looking for? And do you expect there to be a change in strategic direction? Say, maybe expand into the West? Is there a real play for a regional? Just kind of thoughts on conceptually on that outlook.

When we were first looking and evaluating were we going to just go internal or also look external, one thing -- there were about two things that were pretty clear. We wanted to have a cultural, value-based fit, which is not to suggest that there shouldn't be change. We found that in Pat, and it's evident so far.

The other thing -- the Board was -- this was a Board decision, not a Mike decision. The Board was pretty clear -- not pretty -- was clear that this is not being done because of the desire to have a strategic direction change -- a large course correction.

Having said that, when I came into the CEO's chair, one of the things we did was to -- after a few years, to decide to rapidly grow our rail business and to provide Hal and his team the opportunity to look at the potential to get into the corn processing business, ethanol, which we did.

So we're not -- although a big course change, we've got a lot of capability and attributes. And Pat is going to bring his own background, his own insight, his perspective and work with a team that has an appetite to grow. So I have no doubt that we are going to look back a few years from now and we will see things that are changes in direction, not -- maybe enough on that.

I would say also as we are looking at this -- the ability to get someone with the -- as we're looking to expand on capabilities and to bring someone in who has a background -- an agricultural background that is as broad as Pat's was one of the things that was of real interest to us. And his -- the fact that he has lived in many parts of the world but also has roots in the grain and grain business with his family and himself and in mainland United States, it's just a nice combination.

My second question would be how long would it take Andersons to restore its earnings power? Over the course of years, we all come up with our earnings power, but we generally come up probably in the same range as everybody else. How long will it take? And if it doesn't get accomplished, is there a case to be made that a regional player may be more difficult to find its path with this global market? And then I will leave it at that.

I will go ahead and start this -- start the answer. I think there's a couple things, and I will let John add to them as well. First of all, it's to the last part of your question, I think our growth, especially in our businesses like our rail business and our nutrient business, is completely national. We are the leading liquid fertilizer manufacturer in the country at this point in time with the acquisition of Nutra-Flo.

So I don't think it's at all about regional. Our growth in recent years from Tennessee to Nebraska and expanding our current footprint has truly made us much more than a regional. So I will leave that aside to begin with.

From a timing perspective, I think we have talked about the opportunities in our nutrient business starting even as much as this fourth quarter and clearly in the spring. So we're looking for that to start right away. We're looking for continued very solid performance in our rail business. We talked about the GDP and the lease rates and all that.

And so it really gets down to a question of what we see in the ethanol and grain markets. And I think the grain markets for the next couple of quarters are soft until we start to get to the next wheat crop and the next corn crop. And so the timing of that one is maybe a little bit slower than the other two, but it looks like we are off to a start even in fourth quarter.

And ethanol -- ethanol, like I say, we are -- we think we produce ethanol quite well on a Company level, and we do our good work on risk management and marketing. So we are excited about the business, and we're excited about the long-term potential. We are pleased with that business as well. So there may be -- it may not jumpstart as quickly as the nutrient business and continue as strong in the immediate sense of the rail business, but we are positive about it going forward. John, did you want to add, or Pat?

Yes, I would like to make a couple of comments. This is Pat Bowe. And maybe it kind of leads to, so why am I here? What makes me excited about The Andersons? We don't know each other yet, but, as Mike mentioned, I have 35 years experience in the ag industry, cash grain trading, futures trading, sales, plant, administration, working overseas in Brazil. Been involved in the ethanol industry for 25 years. I (inaudible) a corn mowing business.

So for me, The Andersons is right in the sweet spot of my experience in the ag sector. And the reputation of The Andersons and their brand as a farmer and the reputation in the marketplace is second to none -- the culture or the values, how they conduct themselves -- and that's why they are partner of choice for many of their farmer customers.

Having said that, I'm really excited about the opportunities that we have on performance improvement. So what do you do when times get tough? We have productivity gains that we can make and big strides that we can make in becoming more efficient. Mike talked about this SAP deployment that is going well. We have lots of opportunities and could comment on other processes that we can get better, and that's what will help us.

The other thing that's exciting that was mentioned, I think by John, that we have a strong balance sheet, and we're well-positioned in the downturn of the cycle for organic growth and bolt-ons in the regions that make sense for us in our segments. As well as expanding into some white space that might be good for us to grow. So I'm excited about looking at that as we go forward.

And probably more importantly, as Hal just mentioned, is the breadth of the portfolio. This is not just a grain storage Company and it's not just a rail Company, it's not just a fertilizer Company. But managing up and down the ag supply chain as Andersons does puts us in a good position to have a more balanced portfolio.

And lastly, I really want to thank Mike and the Board for selecting me and their support. But more importantly, to Mike, who is just a class act and is making this a very smooth transition with the whole management team here, and it is going to be great to have Mike in the seat as Chair of the Board, as a mentor and to help me guide the Company going forward. So really look forward to our next call when we have a chance to get my hands around the strategy for next year and we could be more specific. But those are just some high-level thoughts I have after three days.

Thank you very much.

Brent Rystrom, Feltl.

Mike, my best wishes as well. And Pat, welcome. Just from a philosophical perspective, just thinking as we're talking about the things going on with the Company right now and some of the issues facing us, has there been or do you think there is an opportunity to address the portfolio approach of the Company? Historically, there's been a lot of good discussion and a lot of good data to suggest that the portfolio approach of the Company as structured has worked well over time, and I don't think that's hard to argue.

My thought is more a little bit different. You are particularly at risk for when the farmer is starting to face maybe a little bit better environment. And you do better when the farmer underperforms. So when there's excess supply in ethanol and in grain, you tend to do well. And when there's tight supply, your primary exposure is to the plant nutrient group. Is there a thought process, or do you think there should be, to maybe look to balance that and change the risk profile of the farm side of the business?

Brent, I will try. It's a broad question; I will try to take a few pieces of it. As you said, the portfolio approach has worked quite well in a number of different instances. Your perspective about where we are at risk relative to the farmer -- the farmer side of the business we're in -- contrast to the farmer side of the business is interesting. And right now, given the circumstances, it is a bit of a negative.

However, it isn't always that. And there is -- we have also had an addition in recent decade of Lansing to help us take advantage of the periods of time when the arbitrage opportunities represent more income than the facility opportunities. So we've done a number of things there. We've also done a number of things to improve our connectivity so that it isn't just simply a storage space gain for The Andersons but it is about providing risk management opportunities for farmers that draws that farm customer base into us.

So there's always a strategic discussion and assessment about how a business should best operate. And with a new CEO, obviously those discussions are going to get a little bit of a different insight and a different light shone on them. So we should always be looking to make sure we understand where we operate well and how we could operate better. I don't know that we can provide you with an answer to your specific question today other than to say that the history has been good, and we always do our best to look at how we should operate going forward.

Yes, I will add some perspective; it may not be so much in the specific. But I think questions like that are really wonderful and challenging, and they are especially relevant, I think, when we go through a change like this. And I harken back to the change with me. It does allow one to take a little bit of a clean-blackboard look at what you do and how you do it.

My own perspective -- the prospective we've had is just one of the things -- maybe I'm entrenched in the portfolio approach makes sense. And within the portfolio, you look within our plant nutrient portfolio, it's a portfolio within there, too. So my quick reaction is -- to that is, no, the portfolio make sense. And we've got seasonality, we have got variability. We've got to run a good operation on the cost side. And if we're going to get -- our objective is to get a return on capital over time.

But the longer answer -- I'm glad Hal went first -- is that it's a perfect question, with Pat coming in along with other perfect strategic questions, to put up on the board to evaluate. Which is, in a way, ducking your answer, but not. It's a fair question.

I appreciate that. My final question has to do then with thinking about fourth quarter, first quarter, second from both the grain and the ethanol perspective. Obviously with grain, it kind of pushes off to a next-year's-crop sort of event as far as when that turns.

Been reading a lot recently, when we have a reduction in the corn carryout of this size, more than just a percent or two, when you translate that into corn prices -- realized corn prices in the spring, 15 out of the last 15 times we've had a reduction in the carryout (inaudible). We've had a fairly substantial increase in the price of corn by spring. If that happens, and if gasoline doesn't work higher or ethanol can't work higher, how do you view the ethanol business? Is it likely that that business will stay profitable, or do you think the business is at risk of maybe losing some money?

Well maybe just a -- the carryout estimates -- we don't look at the carryout estimates as changing all that dramatically, to be honest with you. We're down a little bit from some of the earlier USDA numbers, but we're not down to a number where we're impacting it. We're still a little over $1.5 billion carryout, I believe. Right? And our estimate of the carryout is a little bit above some of the recent $1.5 billion.

So we don't see it dramatically changing that much, and we don't really see it dramatically changing the price of corn. What will happen to change the price of corn likely more than that is planting conditions and crop progress in the Southern Hemisphere and then planting conditions in the spring. So we will look to those two things. And at this point time, the Southern Hemisphere looks like it's in pretty good shape. The rain has been good. And so right now we don't see a lot of pressure on flat-price corn.

I would agree with you that it's likely that lower oil prices at some level are likely to be with us for a while. But, again, we've had some great increases in demand from driving, et cetera. So I don't see anything changing dramatically in either direction in the oil price market, but that market is such a volatile market that it's hard to say. But I don't look at high-price corn creating an issue for the ethanol business going forward.

And you also -- this is Pat. I was just going to add we're talking about our eastern belt, western belt grain supplies. When you look at the macro issue there on ethanol, you've got to look at global feed grains. And the ample crops we have had in South America, the biggest (inaudible) record in Brazil, it looks like crop conditions are then good with a cheaper real. So we think that conditions are for the globe to continue to be amply supplied with grain, and that's part of the broader picture that is more important than exports.

All right. Thank you.

Eric Larson, Buckingham Research.

Mike, congratulations, and Pat congratulations as well. Mike, I have to say I do feel a little abandoned this morning because I think the one thing I could probably safely say is that you and I are probably the two oldest salty dogs that have been on this call for many, many, many years. So you are leaving me high and dry, but congrats. I think it's great that (multiple speakers).

Thanks, Eric. We do go back a ways.

Yes, quite a ways. I can't say that we actually have pictures of each other, but we are not far from that either, I'm sure. (laughter)

Guys, just a couple questions. And I don't know this is for Hal or for who. But could you give us -- and they're more specific to the quarter. Can you give us a little more breakdown of the $4.5 million dilution from the acquisitions in the quarter as to the part that might be interest, the part that might be -- you mentioned the one-time piece of that, and you talk about what that was. But you didn't really give us the magnitude. Is there a way to walk us through some of that to give us a sense of what happened there?

Yes, I will lump it into two buckets. The largest portion of the $4.5 million is truly the ongoing costs from the added Nutra-Flo and ABG assets that we didn't have in the previous quarter. That comes in a quarter when the fertilizer business generally makes about no money. A lot of breakeven kind of numbers in the quarter. So we've got added depreciation and labor costs and all the ongoing stuff for those new businesses without a lot of gross profit. And a slightly smaller portion of the total is a combination of one-time acquisition costs and that inventory that we talked about that we are selling through without any margin because GAAP requires us to write it up at the time of acquisition.

So those two pieces that are this one time in the inventory piece are a lesser portion of the total. The larger portion of the total is the ongoing expenses of those businesses in a quarter where gross profit generation is generally low.

Okay. All right, that helps. At least we can kind of do some penciling around that.

And then to the grain business, I think we have probably had pretty good crop production in Nebraska this year. And I know that you are greenfield facility there has been underutilized. Is that improving? Are you making money yet in that Western asset, or is it still kind of a gradual build?

We had a pretty good year in Nebraska. The crops were good. We have much more highly utilized that asset from a rail perspective. The rail markets were much more competitive. So we have seen an improvement -- notable improvement in the performance in the Nebraska assets for this year.

Okay. And then the final question; it gets back to your storage facility. You are building a new greenfield asset in Humboldt, Tennessee. Frankly, I'm not all that familiar with Tennessee, but I don't think there's as much storage capacity down there as you will find in more of the heart of the rural crop farm belt. But I get nervous every time I see a greenfield facility get built with -- in the storage industry because there's just so much capacity. Are the competitive dynamics down there better than what you might get in some other regions of the country for storage?

The simple answer is yes. We take great pains to analyze crop production versus storage capacity, and that area has the best ratio of any place that we have our assets. Plus, the amount of ground that has been moving from things like tobacco and cotton in the last five years into row crops has been substantial. And in addition, there's been an additional investment in irrigation in the area that also supports that. So there's three pretty core factors that have led us to be very excited about the Tennessee marketplace.

All right. Thank you, everyone.

Ben, we have probably time for one last question, then we need to wrap it up.

Heather Jones, BB&T Capital Markets.

I just have two more follow-up questions. Wondering on the -- I think it was a $4 million hit in your core grain business. From what I understand, as long as I follow this Company, you guys are essentially basis traders. And I don't remember you guys ever having a loss on a position or positions that large. So I was wondering if you could help me understand that more. And has there been any change in your strategic direction there?

Thanks, Heather. There has not been any change in the strategic direction, there has not been any impact in our position limit, so it is nothing different. You haven't heard about them in the past because generally any trading losses that we've had in the past tend to be on the positive side and they tend to be small.

So what happened is that we had a highly volatile period of time at the very beginning of the third quarter. If you go look at a corn chart for the last couple of days of June, the first week or so of July, you will see that it was an extremely volatile time frame. And in addition to normal positions that our merchants would hold relative to options and futures, we also have risk management positions that we have on for ourselves and for our customers. And managing those options positions and futures positions wasn't done at the level that we would have liked it to have been done at that time. And that plus, simply, merchants without -- merchants with the wrong position on, accumulated to those numbers. So it's not a change. It's kind of a perfect storm. It's an accumulation of a number of things. And it's not something you've heard about and hopefully not something you'll hear about again. There's nothing different; it just happened that way at this point in time.

And then my final question is just on your grain business on an ongoing basis. We are hearing more and more about essentially disintermediation between the end user and the farmer. And I was wondering if you could talk about what you're seeing in your core geographies there. And if that is a trend that's going to continue, does this incent you guys to move more into the processing side where it's less of a middleman type role?

A good question. And obviously our move into ethanol the past decade has been quite a bit about that. We also talk quite often about our direct connection to that farm customer for reasons of our ability to provide risk management solutions and services. And so we may be part of that disintermediation that you're talking about, and we would feel pretty good about it.

I'm not sure exactly where it will take us in the processing business, but our direct connection to our farmer customers is a big deal to us. It's crucial to who we are and what we do, and we think we do it quite well. So, how that leads us to grow our businesses more in the future, whether it's processing or geography or whatever that is, it's important to us and we believe that there is real value to it as well.

If I can build on to Hal's point, a lot of my recent experience has been in the ag processing side for food ingredients. And the trend you're talking about for customers, about transparency in the supply chain, is real, and I think that's nothing but opportunity for The Andersons.

So, the link to the farmer, when you are talking about non-GM, organics, specialty grains, different new wheat varieties, there's going to be a way to someone who can handle it and work with a farmer and manage that supply chain and get it to the right processes in the right fashion with the right documentation. There's going to be a real need for that as we go forward, and nobody is positioned as well as The Andersons to do that, and I think that's an exciting opportunity for us.

Perfect. Thank you so much.

Well, with that, I want to thank you all for joining us. Also mentioned for those that are interested, there are appendix slides to the presentation available on the Andersonsinc.com website at the shareholder relations tab under the third-quarter earnings call replay.

Our next conference call is scheduled for Thursday, February 11, 2016, at 11 AM Eastern time to review our fourth-quarter and full-year 2015 results. We hope you're able to join us again at that time. And I want to again thank you for all the support you've provided us. And have a great day and a great rest of the year. See you later.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Have a great rest of your day.