Andersons Inc (ANDE) 2016 Q1 法說會逐字稿

[Good morning, ladies and] gentlemen and welcome to the first-quarter 2016 The Andersons Bank earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I'd now like to turn the call over to our host for today, Mr. Jim Burmeister, Vice President, Finance and Treasurer.

Thank you, Ben. Good morning, everyone and thank you for joining us for The Andersons first-quarter 2016 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. The webcast and supporting slides are being recorded and will be made available under the 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 34X filings in the prospectuses prepared in conjunction with the Company's offerings.

This presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of the non-GAAP to GAAP measures may be found in our statements. Adjusted pretax income attributable to The Andersons is our primary measure of period-over-period comparisons, and we believe it is a meaningful measure for the investors to compare our results from period to period.

We have excluded nonrecurring items and items that we believe are not representative of our ongoing operations when calculating adjusted pretax income.

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 reasonable, it can give no assurance that these assumptions will prove to be accurate.

On the call with me today are Pat Bowe, Chief Executive Officer; and John Granato, Chief Financial Officer. Pat, 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 Pat for his opening comments. Pat?

Thanks, Jim. And good morning, everyone. Thanks for joining our call today to discuss our first-quarter results. The Company reported a difficult quarter with a net loss attributable to The Andersons of $14.7 million or $0.52 per diluted share on revenues of $887.9 million for the first quarter of 2016 compared to a net income of $4.1 million or $0.14 per diluted share on revenues of $918.2 million in the first quarter of 2015.

While we expected a difficult first half of the year in our Grain and Ethanol Groups, market conditions put further stress on our performance. The Grain Group's results largely reflect the combination of weak demand for exports and lack of farmers selling causing basis levels to trade sideways for much of the quarter, significantly limiting opportunities to generate margins.

Grain affiliates also underperformed as DDG's shipments to China dramatically fell off and the cost and other margin impacts of redirecting and unwinding those flows significantly impacted the Lansing Trade Group. These factors combined for a pretax loss of $17.4 million compared to the $700,000 of income in the same period last year.

In the first quarter we accelerated actions to improve the performance of the group going forward. In March we signed an agreement to sell our grain and (technical difficulty) [agronomy] assets in western Iowa. This transaction successfully closed earlier this week and resulted in a small gain, which we recorded in the second quarter.

The Ethanol Group performed well despite many challenges in the industry in general. Low oil prices in combination with seasonal supply and demand dynamics pressured ethanol margins. When compared to the broader industry, our business had the added impact of higher corn basis levels in the three facilities in the Eastern Corn Belt.

Our production capacity skewed to the East compared to the overall industry, which is more centered in the West. We expect the effect of higher corn bases in the East to continue until new crop.

The Plant Nutrient Group delivered improved earnings compared to last year, led by strong sales of our lawn products, resulting in a pretax income of $1.7 million compared to $400,000 in the first quarter last year. Overall nutrient volumes were up in the first quarter, primarily due to the added sales of basic and specialty nutrients from Nutra-Flo. Basic nutrient sales in our region started off slowly and add margin pressure, due to a high supply in the channel and hesitant demand from farmers who held off purchases.

In the Rail Group, it benefited from its diverse portfolio of customers and the solid asset utilization level built up in 2015. In the quarter, earnings lost slightly due to lower car sales versus the prior year, which were proportionately offset by strong results in our repair business. We resolved to aggressively manage the business to deliver the best possible performance throughout any market cycle or condition.

In addition to exiting underperforming grain assets in Iowa, we have launched a Companywide initiative to reduce annual costs by more than $10 million over the next two years. During the quarter we reduced executive positions in corporate as well as selected roles in the business units to ensure we are running as lean as possible. We have an active pipeline of productivity, sourcing, continuous improvement projects and our Grain Group is starting to realize the benefits of the information technology refresh project.

I will speak later in the call about our out for the remainder of 2016 and additional actions we are taking to improve our performance levels this year and in the longer term. John will now walk you through a more detailed review of our first-quarter financial results.

Thank you, Pat, and good morning, everyone.

In the first quarter of 2016, the Company generated a net loss attributable to The Andersons of $14.7 million or $0.52 per diluted share on revenues of $887.9 million. This compares to the first quarter of 2015, when our revenue of $918.2 million generated net income of $4.1 million or $0.14 per diluted share. Depreciation and amortization in the quarter was $20.9 million compared to $17.5 million in the first quarter of 2015.

The increase is primarily due to the assets acquired in the Nutra-Flo transaction.

Earnings before interest, tax, depreciation and amortization was positive at $6 million for the quarter, down from $28.8 million a year ago. Unallocated corporate expenses were $10.9 million, up $1.5 million from the same period last year. More than all of the increase came from approximately $2.5 million of severance costs taken in the quarter.

The effective tax rate for the quarter was 31.8%. We expect the full-year rate will be about 33%.

Long-term debt at the end of the quarter was $402 million, up $79.1 million from a year ago. The increase is largely due to the acquisition of Nutra-Flo in the second quarter of 2015. Leverage remains modest with long-term debt to equity at the end of the quarter at 0.52 to 1 compared to 0.41 to 1 year ago.

Next we show a walk to first-quarter pretax income from the same period last year. Significant deterioration in both base grain and grain affiliates resulted in an $18.1 million drop in pretax income for the group, relative to last year. Our Ethanol Group also experienced a large decrease in pretax earnings due to challenging market conditions. Improvements in plant nutrient retail were more than offset by a modest drop in rail and a higher unallocated cost in corporate.

Moving to the segment level details, we will start with grain. Although we highlighted on the last call that the first half of the year would be difficult for grain, market conditions were worse than anticipated, preventing our base grain operation from realizing any meaningful space income. We saw little to no basis appreciation. This drop in space income accounts for almost $10 million of the lower pretax income in our base grain business compared to last year.

Lower volumes and margins negatively impacted base grain profits and were only partially offset by expense control.

On last quarter's call, we noted that we had seen some improvement in the performance of our grain and agronomy assets in Iowa. And while we said that the assets had value, we also indicated we were evaluating if someone else might be a better owner.

In March we announced an agreement with NaxYield Cooperative to sell these assets. Earlier this week we closed this transaction. Consideration for the assets in working capital was approximately $54 million and will result in a small gain in the second quarter. The sale produces Grain Group storage capacity by approximately 18 million bushels and Plant Nutrient's distribution space by 11,000 dry tons and 22,000 wet tons.

Now turning to ethanol, market conditions were challenging in the first quarter, with relatively low oil prices and seasonally high supply levels coupled with moderate demand. Despite these conditions, the Ethanol Group performed well and maintained cash-positive margins. The group delivered a pretax loss of $2.7 million compared to $5.3 million of pretax income last year.

Contribution from coproducts were pressure, particularly distillers dried grains or DDGs, which have been trading at approximately 90% of corn value. In the year-ago quarter, DDGs were trading at 110% of corn value. Demand for DDGs has slowed, in part due to the drop-off in exports to China noted earlier in the grain remarks.

Margin for ethanol improved as we entered the second quarter with driving demand increasing and many in the industry taking spring maintenance downtime.

Our Plant and Nutrient Group delivered year-over-year improvement with pretax income of $1.7 million on revenues of $167 million. This was up from the $400,000 of pretax income last year on sales of $154 million. Income in the quarter was supported by increased sales and income from our lawn products, which sold well, given the mild winter weather and early spring.

Overall nutrient volumes were up in the first quarter, primarily due to the added sales from Nutra-Flo. Nitrogen, phosphorus and potassium or NPK sales in our region started off slowly and had margin pressure due to a high supply in the channel and hesitant demand from farmers, who held off purchases. Despite the slow start, NPK volumes were up 18% compared to the same period in the prior year. Half of this increase can be attributed to the acquired Nutra-Flo locations.

One of our core strategies is to continue to grow higher-margin specialty product sales at a rate faster than basic commodity nutrients. Tons of specialty products, which include low-salt liquid starter fertilizer, micronutrients and other value-added products, were up over 35% in the first quarter, relative to the same period last year with most of the gain attributed to the acquisition of Nutra-Flo. Following a good start to sales in the first quarter we expect momentum to continue through the rest of the selling season.

Now turning to the Rail Group, the group started this year well with average utilization rates holding above 91%, though slightly lower than a year ago. Pretax income for the Group was $9.4 million or $39.6 million of revenue compared to the $10.3 million of pretax income generated on $44.2 million of revenue in the same period last year. Base lease income was down moderately due to higher depreciation compared to the prior year. Average lease rates were comparable to the first quarter of last year as the Group continues to benefit from its diverse lease portfolio.

Income generated from the sale and financing of railcars was approximately $2 million lower in the quarter compared to last year. We have noted previously that car sales for the full year are expected to be similar to last year.

Rail services and other pretax income was $2.6 million in the first quarter, up from $789,000 in the same quarter of 2015, but primarily by improved performance in the repair business. In early March, the Company redeemed its stake in Iowa Northern Railroad after nearly six years of investment in the short line. In 2015 the Iowa Northern investment contributed approximately $2 million to the full-year group result and was reported as part of the services and other portion of the business.

The Andersons continues to have an ongoing relationship with Iowa Northern, providing repair services and through the leasing of railcars and locomotives.

The Retail Group had a pretax loss of $2.1 million for the first quarter compared to a $2.2 million pretax loss in the same period last year. The seasonality of the Retail Group is such that the first quarter normally generates losses.

This year's improvement was primarily due to an early Easter. It was partially offset by the mild winter weather in our markets, which limited cold-weather clothing and snow removal-related sales.

I will now turn it back over to Pat, who will provide an outlook for the remainder of the year.

Thanks, John. Looking at the remainder of 2016, we continue to see challenges as well as opportunities. The challenges encountered in the Grain Group during the first quarter were more severe than we anticipated entering the year. As noted previously, the negative impacts from the regionally high basis levels seen through the last harvest provided little to no opportunity for space income in the first quarter.

For April we have not seen these conditions improve. We are expecting some of these challenges to continue through the second quarter. Based on planting progress and anticipated increased corn acreage, conditions should provide a more normal opportunity to earn space income after fall harvest.

Wheat conditions are good in our markets and may offer upside opportunities this summer. Estimates for the US grain inventory carryout levels have been steadily increasing. Our internal estimates and those by the USDA are calling for large acreage dedicated to corn production this year. Given normal weather and growing season, these factors can combine to create strong space income opportunities for the Grain Group and a return to acceptable levels of profitability late this year and into 2017.

Despite this tough period we continue to take actions to position the group for sustained long-term profitability. We exited markets in Iowa where we do not see opportunities for adequate returns. In addition, we are investing in Tennessee to take advantage of changes in that region.

Within our Rail Group, we remain dedicated to mitigating risks through portfolio diversification, shrewd asset acquisition and operational excellence. We are on a different cycle compared to our anchor culture groups. This is a business that manages long-lived assets through market cycles.

In the year ahead we see weaker car demand as some commodity sectors, like oil, sand and coal, continue to decline. We may have lower weighted -- we do have lower weighted exposure to these industries, however. But higher speeds due to lower traffic volume provide more efficient equipment terms and lower demand for leased cars.

We expect to see modest reductions in utilization and lease rates through the remainder of the year. We have positioned our portfolio well for this cycle.

In our ethanol business, it's a top performer relative to its peers. Our advantages come from new assets, a highly confident operating team and strong partners. Margins are improving as we enter the higher driving demand months of this year and periods where the industry goes through its normal maintenance shutdowns. The industry is seeing good demand with exports tracking at levels similar to recent years, and we would expect to see 800 million gallons to 1 billion of exports for the year.

The higher basis corn versus regional norms in our Eastern plants will shake out as we approach the next harvest. The team continues to get more productivity from our facilities by improving yields and lowering costs.

Expansion of our Alvin, Michigan facilities is well underway, on-time, on budget and with a good safety performance. We look forward to starting operations in the second quarter next year, seeing the added production as summer driving demand begins to build in 2017. We expect the Group to recover the loss from the first order and end the first half net positive.

The Plant Nutrient Group is delivering on our strategic investments. Their growth is focused on leveraging our distribution position in basic nutrients to more rapidly expand the volume of the specialty products. This provides our customers with value-added solutions to generate improved yields, resulting in better financial performance while at the same time giving us more profitable margin mix.

Nutra-Flo has been integrated into The Andersons team, our product offerings and our manufacturing networks. Volumes of specialty products were up 35% in the first quarter with 75% of the increase coming from sales of Nutra-Flo products. April volumes were solid and in line with our expectations. We are happy with the performance of the business and continue to build on the opportunities to realize synergies, expand distribution and further improve profitability.

Lastly, we have renewed our focus on operational excellence. The Company is evolving to take advantage of our investments in technology, our growing scale and the capabilities within our businesses to deliver exceptional solutions for our customers. The cost reduction initiative announced this quarter is a first step along that path to establish a leaner and more scalable infrastructure that can provide further operating leverage as we continue to grow.

We're committed to delivering on the $10 million cost reduction goal and working to increase it.

We will now hand it back to our operator so we can take your questions.

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

So I have a few questions. I guess, first, is the housekeeping item. The unwinding of the DDG -- the impact to Lansing from the China DDG dispute -- could you give us a sense of how large that was for the quarter and whether that is going to continue into Q2?

As you know, generally, the DDG -- when these conditions occur, what happens is the shipments get either changed or pushed out, typically. And so the impact at this time is probably close to being fully realized, but we don't know for certain at this point.

Okay. And was that like several million dollars? How should we think about it in terms of magnitude for Q1?

We typically haven't given Lansing-specific numbers. And at this point I think we're going to continue with that, at least for now.

Okay. Moving on to your grain operations, so looking at the Basis quotes and your footprint, it looks like you benefited, as some of the others have noted, from increased farmer selling the last few weeks. And Basis while still at a premium, it has come down some.

So, how should we be thinking about Q2? I guess I know you can't say definitively, but based upon where you sit now, do you think we are looking at a loss in grain comparable to what we saw in Q1?

You really have to look across the Corn Belt. There's really kind of dramatic differences East to West this year. Really, when -- we didn't see much farmer selling tributary to a lot of our regions. There was a little run-up in futures because of some farmers selling, but we haven't seen a big spring flush or farmers getting ready to clean out bins going into next year yet. So it has been relatively quiet. So those conditions look like they are probably going to continue.

Planting progress is going well. I was traveling here the last two weeks, have been in Illinois, Indiana, Ohio. And really good progress in Illinois, and we are just kicking it into gear here and Indiana and Ohio. So the farmers are going to be busy here this next month.

But your real question about profitability -- it's hard to see a big turnaround unless we saw some market volatility or something that really gives a good opportunity during the period. So if it continued to be like we are right now, we are going to continue to have to financial period in the second quarter in grain.

So, it could be as bad as -- setting aside Lansing because they had the DDG's issues, but in your core grain it could be as bad as Q1, even though from what I understand sometimes you start to get wheat in before the end of the quarter.

But it is still, you think -- do you think it's going to be comparable to the Q1 loss?

It will continue to be challenging, again like parking the affiliates separately. One good move as we get into the summer -- as I said, just out in the country, wheat conditions look really good. As you know, we are a significant player in wheat here in the East, and that will come a little later as we get into the summer wheat harvest. But that's starting to shape up to be a good situation for us. But that will come later.

Okay. And then my final question is on plant nutrients. So if we look at going back to call it [11], your Q2 for your legacy business pre-Nutra-Flo has averaged about $25 million. Last year was obviously affected by weather conditions. So when I'm thinking about Q2 this year, Nutra-Flo was a drag last year just from a cost perspective. You didn't get it until the end of -- I think it was June. So should we be thinking that you should be able to do in that mid-$20 million range for your legacy business, and a pretty healthy chunk on top of that for Nutra-Flo?

While we don't give specific guidance, I can -- as we usually allude to the first quarter, volumes are tracking at or above, in our base business, plus the increase we've seen from Nutra-Flo. Margins got a little compressed based on pricing. But we do feel very good. (technical difficulty) [April] numbers thus far have been good, up both in our basic nutrients and our specialty products. So we're looking positive at the quarter.

But my thought process doesn't strike you as strange?

No.

Okay, all right. Thank you.

Just to echo what Jim said, we really fully integrated Nutra-Flo. We've had a good selling season. We like the spread on our specialty products and our sales of specialty. We are feeling quite good about where PN is positioned.

Okay, thanks a lot.

Farha Aslam, Stephens Inc.

Starting with grain, looking beyond the second quarter you highlighted that into the back half of the year you could have some superior earnings opportunities, particularly in the fourth quarter. Could you highlight the conditions and what could cause your earnings to outperform and what you would consider strong earnings in your business, given the start of the year?

I don't think I'll use the term superior. That's a big word. But we'd like to see a return to if you want to call it normal because we had such a tough crop year last year. It looks -- corn acres are up. We are estimating 92.6 million, quite a size of [93.6] put out by the USDA a month ago. But it's going to be very solid crop reduction.

So our handle and then drying and other margins we can earn at harvest time could be attractive. So -- and outperformance is really based on volume at the time of harvest. So we just want to see a return to good normal crop conditions in the East.

Okay. And that would be kind of what kind of earnings per bushel, because historically you have discussed you are going to be below normal for this year?

We could see that returning back into our normal historical range of space income we've talked about before.

Okay. And then wheat -- wheat could come in the third quarter? Or is that really going to be a more fourth-quarter event? Because one of the issues we've heard from others is that, while volumes are coming in, in terms of exports and farmers' selling, they are coming into a system that has so much capacity that it's really not doing much for profitability.

Is that what you are seeing as well?

That's somewhat true. I think across the whole ag sector that's true. I think in our case, again in the East, we do a lot of wheat blending, and that's one of our core capabilities. We are also located right here in the delivery market for week. So it's good opportunities for us in the Great Lakes, in our position in Canada as well as in Ohio and Michigan. We are more positioned to do enter market trades during the summer.

So we are encouraged with we see so far in wheat, and probably it will be towards the end of the third quarter as the crop comes off, but more of it will be tilted to the fourth quarter.

That's helpful. And did you highlight any successes you had in terms of your focus on selling more services to the farmer and the redirection long-term that you are focusing the Anderson's today versus in the past?

Specific successes -- we had a really good volume of price [when at] risk management tools when we were out with farmers this year. Obviously, growers coming off the high-price and high-income years, years ago, and now having more tougher economics with lower commodity prices are looking for help and looking for ways they can better manage their crops, manage crop insurance programs along with risk management tools.

So, we had a good selling season of our risk tools that will go into next year. So we are excited about the position that we are at from a service standpoint. We would like to do more. And we look to 2017, and that's also going to link up with our technology and how we improve our access to the farmers through our technology portal, etc. So that's a long-term investment of partnering with farmers.

Thank you. And my last question is on ethanol. Beyond the second quarter, any leads you have for what you look for profitability into the second half of the year and into 2017?

Yes. I'd love to have a crystal ball on that.

But I'll tell you the short-term margins have improved a little here in April, so we are off to a little better start just this month. Plant shutdowns -- a lot of that is behind us. We mentioned exports are trending on a good pace as we go into the summer driving season with reasonably priced gasoline. We expect to see good mobile gas demand for the summer.

And then the question is what is [going] going to be doing as we get later in the year? So will big crops come off in the fall? And how will that lead to corn pricing? I think that's a big question.

John mentioned the DDG impact related to Chinese starting to look into antidumping process got the market a little bit tilted over on DDGs. But that can come back to a more normal range. So we're optimistic about second half of the year. And to be similar maybe to last year when we get to the second part of the year or Q3, Q4.

Ken Zaslow of Bank of Montreal.

I just have about two topics to cover. One is, when you look at your business model, and I know there has been another company out there a little bit larger than you, who has evaluated the business model and say, hey, look, ethanol may not be the core business for them. There seems to be a little bit more talk about export challenges in terms of margins. As you now look at the business, can you talk about, is there structural changes within your business that maybe your margin structure late of history may not be the right margin? Or do you think that it's just the cyclical nature of the industry and you just got to wait this out? How do you see those two issues going against each other?

I'll start off and then see if anybody else wants to finish up. But I think in relation to some of the other players, and I can't speak for them, we are very fond of our ethanol business. We believe that we are well-positioned both with the assets we have, their locations, both in the Corn Belt and also for the majority of the locations close to demand centers, the technology run and the great people we have running it and the partners that we have in those businesses.

So as we go through these cycles, even in the tough conditions we just came through, we saw the business deliver positive cash flow, positive margins at the cash level. And that's what you what you see is the ability to go through a tough season and still throw out cash and then be there to earn money when the season comes back.

So we like those assets. We like how we participate with our JV structure, with services we provide into the JV and the assets we run with our partners. So, we are fairly positive on the business long term and the industry.

I'll just add I think we are, as you know, adding capacity at our Albion facility. So I think that says a lot about our views of the long-term prospects for our ethanol business.

It's also -- you really can't -- it's hard to compare different players in the industry. But you have to understand where our grain assets are in the Eastern Grain Belt. And ethanol has had a huge impact in the Eastern Grain Belt. So we like participating in that because it's a big portion of the grain flow in our region.

As John mentioned, we think Michigan is a particularly good truck market for fuel and it works well for us. And that's why we are expanding our facility in Albion. So there is cyclicality, no doubt about that. You brought that up.

So we still feel good about our business model and stick to our knitting and keep our plants highly efficient and be really smart about how we merchandise our grain and coproducts.

Business is still also with the grain business is all you know, again, historical margins, there is talk that the capacity out there has changed a little bit of the opportunity longer-term. Would you still say that your historical margin range is the right range to actually think about on your grain business as well?

Yes. I think in the long term we would come back up to within that range we have talked about in the past. As we talked about on the road, and there are some good materials in our road book investor presentation around, we have gone through a cycle here in the last few years where utilization rates in storage capacity in the United States have dipped a bit below their higher level norms, down below that 95% utilization rate, especially in some of our markets. That impacts your ability sometimes to buy well and get good space income.

As we pointed to some of the impacts we see coming this year, in this coming crop year, increasing carryout, a good level of corn being planted, we see good opportunities to return to some of those levels of storage. As space additions have slowed down quite a bit this year actually we feel we will get back into our normal zone.

Okay. And my final question is -- the indication of the cost savings program, the $10 million, is that something that's starting [up], or is that -- is there more to come on that? Or have you finally think that's the finite cost savings program that you expect? Again, I would argue, Pat, you are walking into the business. You probably are seeing a lot of opportunities throughout the organization. Is it fair to say this is the first of a series of steps?

Yes, appreciate the question and the thoughts. And that's exactly the thought process we are taking. And I formed a leadership group with John Granato, the CFO, as well as our business Presidents and myself as oversight. And everyone is fully accountable. Jim Burmeister here has got a GE Black belt background. We have some of us who have experience from other companies of looking at process improvements and where we can drive productivity across the Company, whether it's in supply chain procurement, staffing and just working on all aspects of our business to make it cleaner and more efficient.

So that's a process we have kicked off. We think we're off to a good start and we will keep you guys updated after we finish the year on how we are returning. But it's more a state of mind and how we are moving forward for the Company to be competitive. It's also have we're beginning to see the benefits of the investment we made in our IT system. We are now pretty much fully integrated in our Grain business and starting to see those benefits as we begin to take that across the rest of the Company.

So it's -- like you said, it's a journey. And you've got to keep working on it, keep pushing it. So it's not a one-time dollar amount. It's about how we can continue to improve the Company for the long term.

Great, thank you.

Eric Larson, Buckingham Research.

A couple just easy questions here, I think -- your severance costs in the first quarter of $2.5 million, did that include the full tally for what that action was? Is there any drag into second quarter on that?

There is a slight drag related to some ongoing salaries, but it should be flushed through in the second quarter. So it's not much.

Okay. And while I have you, John, answering that question, can you give us another quick update on your earnings drag for IT integration? You have been at $0.30 with your SAP system last year. I think it even started a little bit the year before. Is there less incremental drag on earnings from implementing SAP this year?

It's going to be a drag, but is it -- would it less from last year, or how should we be looking at that?

I think it's relatively similar, maybe a slightly lower drag this year. We have talked, Eric, about we are now starting to implementation relative to our Plant Nutrient Group. So some of that effort will be capitalized rather than expensed.

And once we go into production, obviously then you start to depreciate the asset. So I would say in general it will be relatively consistent.

Okay.

Maybe just to build on that, I'd love to use the term investment rather than drag. And feel good about where we are at in our Grain business now with the assets and want to get that all fully operating prior to going into the key harvest seasons. So we feel good about where we are at and now we are just starting the planning and blueprinting for the fertilizer business. And that's going to help us a lot in fertilizer as we go forward.

So we understand the investment and the timing and resources it takes. We feel it's being managed well.

Okay. Well, and -- and I would agree with investment. So that what's the return on it? What's the payback period for it?

So as we have talked about it before, it really is about renewing our IT infrastructure and the need to get systems that allow us to be competitive. So let me at least give you one specific example.

We recently rolled out some automated ticket processing functionality. And I won't go into a lot of details, but we estimate that that functionality cuts time between 60% and 80%, relative to ticket processing, which is a pretty big deal for us. So just one very specific example where we are really realizing benefits today. And as we roll out to more locations, we will continue to see those benefits.

Okay. And that makes sense. Certainly, we do understand that. The sale of your grain facilities and your agronomy centers in Iowa -- you mentioned that you are going to have a slight gain that will be recorded in the second quarter.

But what is the EPS impact? Was the business losing money? Was it making money? Was it breakeven? Do we have (multiple speakers) --

So over the last three years, we've averaged a loss relative to those assets of approximately $4 million of pretax income.

Per year?

Average over the three years, yes, per year. It has varied between $2 million and $7 million.

Okay. And obviously, those losses will no longer be ongoing as of May 1, just to make sure that I'm clear on all of that?

That is correct. And when we say small gain, we mean small gain. We just wanted to make sure that people understood that we are able to exit at a reasonable outcome for us.

Right, okay. Yes, that's very helpful. And then my final -- I could ask a whole day of questions. But my final question is for Pat.

Pat, you've got a long, long history and very distinguished background in the grain merchandising business. And we are hearing that there's new capacity coming in, in the Central Gulf area, for storage, etc. And it appears in markets that are already well serviced.

So, given the highly fragmented nature of storage and maybe the ability to buy the assets as opposed to putting them in greenfield, why would anybody be building greenfield storage capacity today?

And when you said long, long, you made me feel pretty old. But I appreciate the butter-up comments. But you hit the head on the nail in terms of the highly fragmented. Right?

So you can never speak to what other companies are doing. Long term, the US is continuing to be the bread basket for the world and is going to be an exporter of record, of note, for many years to come. There's many assets that need to be upgraded and improved. And there has been a lot of investments in the key export ports here in the last 10 years. Right? And in the years where it was quite good, then obviously a year like this past year, which weren't particularly that attractive.

You also mentioned or someone mentioned earlier about space that farmers have put in. The whole ag supply chain continues to get more and more efficient. And so, companies like ourselves and others are always looking at what best way you can add value and create advantage or make the supply chain better. We are always looking at our assets, as we did in this case, and trimmed our portfolio with the Iowa assets.

But at other times we have one in construction in Tennessee, as we talked about, that's an attractive location for us.

So I was just at Champaign, Illinois in the last few days. And those tanks were built in the late 1960s. Right? This was -- these are long-lived assets, as we talked about. And some will have to be upgraded and improved, and everyone is looking at doing that in a smart way that impacts their markets.

We are very much focused on regional plays for us where we supply the Southeast from the Eastern Grain Belt or even -- we are still exporting beans up to the Lakes and other opportunities we have in our wheat market.

So I'll make it a long answer, it's -- bottom line, it's fragmented. And people will make the right decisions for their companies that give them the best returns.

Okay, and then just a follow-up on that and I will pass it over. But I've been in the camp for a long time, that the increase in on-farm storage really, at the margin, probably doesn't impact the ag processor or the big grain merchandisers that much. But I'm feeling like I need to change my opinion on that.

Has the on-farm storage started to shift a little bit of the balance away from the grain merchandisers? It just seems that farmers have that much more discretion on when they sell. They might not make the right decisions; that's not what the question is. The question is it's more in their hands today than it was in the past.

Is that something that resonates toward what you are thinking or not?

I'd say not, from the standpoint as when the farm economy is quite strong in farmers are very smart is and they make astute decisions, whether it's an equipment -- again, just been out in the country the last couple weeks [looking at] brand-new planters, people laying tile in a new precision ag implement, tools. So they have invested in technology to help improve their earnings, which makes sense.

Some of them added commodity bins. And it's a cycle, right? As their wealth builds, which is now declining, there's going to be some pressure from new farmers who recently got into the business at a high and have more debt.

I visited some old farmer customers -- I shouldn't say old but long-careered farmers that we work with that are still making smart investments in technology. Maybe they put in some smaller bins to grow specialty crops and they are looking at that as a way to improve income.

So I think this idea that there's a space build on the farm and that takes it right out of the merchandisers and exporters, I think, is really overblown.

Okay. Well, that's what I was curious about. And obviously, this is -- it's always very cyclical. And we've gone through a period of pretty high farm income on average over the last five years. Of course, that has changed last year and it's even worse this year.

So it does change, but I just thought I'd ask your perspective. Thank you, everyone.

Sandy Klugman, Vertical Research Partners.

Pat, you discussed in the past an emerging opportunity to source specialty crops for food manufacturers that are increasingly focusing on GMO-free and other types of organic growth opportunities. I was wondering if you could provide an update on that trend and how meaningful you think it could be for the Company over the long-term.

Yes, appreciate your memory on that, Sandy. Again, these are long-term trends. So you haven't had massive shift in ag production and what was a small niche a few years ago is becoming a little more mainstream. I would say the market is still pretty fragmented on non-GMO, organic and even other specialty crops.

We've had a long history of doing some origination of specialty crops, especially beans, which are (inaudible); we have been involved in other food companies, getting contract acreage grown of specialty crops. We think they can get bigger.

Will it be huge? No, but we think it could be a meaningful segment that would have higher margins. So it's going to come. It's going to take a little time, say, because it's crop year to crop year. Right? So we will see it, we would like to position ourselves for the long term as a player in that space. You won't see a move-the-needle, major P&L swing item next year because of that. But we want to continue to build our position there.

Okay, great. And a follow-up on plant nutrients. What kind of traction at this point do you see for precision ag technologies on the farm? Is there further to go in a meaningful way on that trend? And if so, what are the implications for Nutra-Flo associated with that trend?

I think we continue to see advances in that space, not just precision ag but I'll call it specialty ag. You see lots of people playing in the biological and specialty nutrient businesses today. Those have lower volumetric impacts on the fields and generally more targeted results.

So, I think your specific question is also about delivery, and we continue to see advances in delivery techniques where people are actually mapping spaces on their fields to make sure that specific nutrients go down in very small grids. So we believe that we are positioning ourselves well for that trend and we think there's room to continue to grow there.

Also just to build on that, too, that I was out, again, in our farm centers with our agronomist, who was meeting with farmers. And they have the satellite imagery maps of their fields and where they are planting at what population rates and then, specifically, what inputs they are putting down in what parts of the field, which I think you guys are aware of that. The interesting part is people think, well, gee, when the commodity price is lower, maybe it will go away from that.

In fact, the farmers are looking to even utilize that more because they want to be really smart with their -- to demonstrate the return for those inputs. So they really focus a lot on that.

What pressure that may have on prices in general is a different topic. But the technology is, of course, not going away and only going to get more advanced.

That's very helpful, thank you.

Brent Rystrom, Feltl.

Just a couple of quick questions -- the Iowa assets that were sold: will that all be cash proceeds?

Yes.

All right. Out of curiosity, you are at 1 million acres less than USDA. Where do you see that million acres coming out of?

We talked the last crops, the last meeting we had in New York. I didn't see a lot of switching to beans. There's a little bit of switching to beans, just so the price actions happened late. Still, we're talking about a 92.6 million acres is still a huge crop for corn. And that's a solid number.

Other people, I'd say industry is probably in the similar kind of areas for the crop, 82.5 million for beans, those kind of numbers. So it's not a dramatic shift. And weather conditions are great. We've had scattered rains across the entire growing areas in the country. So, so far, so good. And I think a lot of the decisions have been made.

That leads to my next question. As you think about contingency planning for the Company, one of the things that I think in the past has been difficult to manage forward has been the large weather events.

So as we are seeing more and more data suggesting we are entering into a La Nina, particularly if you look at crop data and the moisture data coming out of Brazil, if we were to enter into a La Nina in the corn belt this year, how would that change your thinking for what you're going to try to do with the business in the back half of the year?

Well, I guess it always remains to be seen. We had this discussion before about La Nina events. And so far, all crop conditions are outstanding. There's always the potential to have heat come into the Grain Belt later in the summer. That exists every year, maybe more so in a, quote, La Nina period.

The good news is crop was in early, especially in the West. So if you look at the crop planting numbers are in ahead of schedule, especially in Illinois and even in Nebraska. We are right on our five-year average here, but we are behind where the other parts of the Belt are. But we are right on our average. So as long as we get the crop in, in timely fashion, that's the key numbers to watch, this planting progress here the next few weeks.

And then, that's a big thing to be in solid beforehand. Also, as we mentioned before, the technology of the kind of corn that's been planted and the new varieties of beans -- we have been a little bit more heat-tolerant.

So we ourselves can't do anything about the weather. But our contingency planning for the latter half of the year just be to make sure we buy the right kind of crops that are tributary to our areas and position ourselves accordingly to foresee the price risk action of a drought-like condition.

I have two quick questions left and then one larger thought. With Brazil seeing the safrina crop collapse, to anywhere from a couple million tons to some people saying as much as 10 million tons smaller, does that present export opportunities that you were not expecting before?

Well, we are not an exporter. So it's probably wrong for us to comment. As I told you before, I lived in Brazil in the early 1990s. The safrina production that has come into the interior of Brazil is quite amazing. And as talking to people there and -- but it's going to be you said, a collapse. I think that's a big word. It could be easily done 2 million to 4 million tons, the numbers I've heard. 10 million would be a big number.

Brazil exports were big the last couple years, so if their exports come off the grid a little bit, that will price the US into some markets. So that could be encouraging for exports.

It remains to be seen. Probably more interesting to see what happens politically with the President and whether she gets taken out of office or not here, prior to the Olympics. So it's going to be a busy time in Brazil this summer.

All right. And then a quick question on nitrogen -- we've seen a lot of nitrogen price appreciation since, say, March. So, where pricing had gotten down to mid-300s in some of the Plains states and high 300s in some of the Corn Belt states, prices have really run back up again.

Does the price appreciation imply a margin opportunity for PNG in the second quarter?

I think the price action has been -- some other ingredients have actually been soft during the season here. So the supply chain has been hard to time. Overall there hasn't been a steady appreciation of all inputs this season. Nitrogen is a little bit up and down, moving with the energy markets. We don't see a big runaway pricing increase happening.

What we need is a stable pricing period across our sales season right now, which looks to be the case.

All right, and final question -- thinking about on farm storage, taking that a different direction. So from the perspective I have looking at the farm community, it seems like the next big push is going to be on farm fertilizer storage and with bigger farmers increasingly bypassing distributors and retailers and going direct to manufacturers to get a lot of their inputs. Is that something that you guys think about and how you can work to serve that? Or is that something that you think about and you worry about? Or is that something you just don't think about?

I think, obviously, we've heard the same things you have. I don't know that we've seen a lot of that. And we really do try and keep an eye on all market trends and anticipate where they are going. We talked a lot about and we have actually executed to position ourselves on the higher-margin side of the nutrient space.

I think it's -- so I think we think about it. I don't know that we are losing sleep over it this point, to be honest with you.

It's not a major macro trend at all. If anything, it would position us well to work with farmers on maximizing how they manage their crop in that business.

Thank you.

Heather Jones, BB&T Capital Markets.

I just had a quick housekeeping question. Did you say the tax rate is going to be 33%, for the year?

We did say was going to be about 33% for the year is what we are estimating now.

And then a follow-up to Brent's question, on that fertilizer question. How much of your earnings in fertilizer is derived from your mixing, blending, selling as opposed to storage?

It's a combination of everything. Right? So it's kind of hard to say this is the case. The big thing is, especially as we move to Nutra-Flo, that acquisition, it's really having specialized products that bring value add to the farmer. That's more of a, if you want to call it, IP-protected kind of specialty solution for growers.

So that's, if you want to call that blending science, it's really a special product. Some years there's good price appreciation in the markets allow for, if you want to call it fertilizer carry. We don't comment that, but it's enhanced elevations. In other years it's more moderate price action.

I would say this year is probably more moderate price action. But the volumes are good. So we like the second quarter in fertilizer and feel real strong about our start and like how Nutra-Flo is fitting into our portfolio.

Right. Okay, thank you so much.

Thank you. And that does conclude our question and answer period. I'd like to turn the conference back over to Mr. Jim Burmeister for any closing remarks.

Well, we want to thank you again for joining us this morning. I also wanted to mention that, for those of you that are interested, this presentation with the appendix slide of additional supporting information will be made available on the Investor Relations section of our website at Andersons Inc.com. Our next earnings call will be scheduled for Thursday, August 4, at 11 AM. We look forward to talking with you then. Have a good day.

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