Andersons Inc (ANDE) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Andersons, Inc. 2017 Fourth Quarter Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. John Kraus, Director of Investor Relations. Sir, you may begin.

Thank you, Amanda, and good morning, everyone. Thank you for joining us for The Andersons' fourth quarter earnings call. We have provided a slide presentation that will enhance today's discussion. If you're viewing the presentation via our webcast, the slides and commentary will be in sync. This webcast is being recorded and it and the supporting slides will be made available on the Investors page of our website at andersonsinc.com shortly. 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 connection with the company's offerings. Today's call includes financial information which the company's independent auditors have not completely reviewed. 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 accurate.

This presentation and today's prepared remarks include non-GAAP financial measures. Reconciliations of the GAAP measure to non-GAAP measures may be found within the financial tables of our earnings release. Adjusted pretax income, EBITDA or earnings before interest, taxes, depreciation and amortization and adjusted EBITDA are our primary measures of period-over-period comparisons, and we believe they are meaningful measures for investors to compare our results from period to period. We have excluded the impairment charges we took related to our wholesale fertilizer business and our grain business as well as the onetime benefits of recent U.S. federal income tax reform, both from adjusted measures -- from both adjusted measures as we believe those charges and benefits are not representative of our ongoing core operations when calculating adjusted pretax income, adjusted net income, adjusted earnings per diluted share and adjusted EBITDA.

On the call with me today are Pat Bowe, President and Chief Executive Officer; and John Granato, Chief Financial Officer. Pat, John and I will answer your questions after our prepared remarks.

Now, I'll turn the floor over to Pat for his opening comments.

Thank you, John, and good morning, everyone. Thank you for joining our call this morning to review our fourth quarter 2017 results. I'll start by providing some viewpoints on each of our 4 business groups and the progress we're making on our strategic initiatives. After John Granato provides a business review, I'll conclude our prepared remarks with some comments about our current outlook for 2018.

Our adjusted fourth quarter 2017 results were considerably better than our fourth quarter 2016 results on an adjusted basis. Grain results continued to improve but some of our other groups' markets remain challenging, and we incurred a number of unusual expenses during the period. We're happy to see that Grain Group continued to make progress toward a more typical earnings range. Weaker margins drove the Ethanol Group's results lower year-over-year. The Plant Nutrient Group continued to struggle with persistent oversupply in most fertilizer markets that continue to compress margins. The Rail Group's results were hampered by a lower lease rates and some higher expenses for interest and depreciation year-over-year.

Our grain business results are improving and underlying grain fundamentals are stable with good grain ownership income opportunities. As we expected, however, large global 2017 corn and soybean harvests have kept world supply and carryouts into 2018 for corn, soybeans and wheat quite large, which have kept both prices and market volatility low. That low volatility limits trading opportunities, and continued low prices keep the farmer less interested in selling.

During the fourth quarter, our risk management services business was bolstered by farmers enrolling a record number of bushels in our Freedom pricing programs. Our grain affiliates results were significantly better year-over-year as Lansing Trade Group rebounded from a very difficult 2016.

We also announced late yesterday that we've agreed to sell 3 of our 6 Tennessee grain elevators to Tyson Farms. The pending sale caused the revaluation of the carrying values of those 6 facilities, which led to $10.9 million of asset impairment charges.

The ethanol business delivered improved results for the third consecutive quarter despite lower year-over-year margins, which were again, driven by higher industry production and stocks. Better international demand for DDGs and the absence of any meaningful vomitoxin issues both helped improve our DDG values.

Our Plant Nutrient business worked through another difficult quarter. Wholesale nutrients results improved year-over-year on an adjusted basis, and while volume was up 12%, margin per ton was down 26%. While our expenses for the quarter were otherwise much lower due to productivity and efficiency improvements, the full effect of these cost reductions was muted by lower margins.

The railcar market continues to be oversupplied keeping pressure on lease rates. As we expected a quarter ago, our utilization rate rose again sequentially and it exceeded the fourth quarter 2016 rate. The lease rates were lower year-over-year. We continued to buy cars in the secondary market, purchasing more than 1,200 cars in the fourth quarter and almost 2,800 cars during all of 2017. We also scrapped more mostly older, underutilized cars and sold some others outright but income from these activities was lower than in 2016. Repair revenue was down for a second consecutive quarter, and margins tightened.

I'd like to update you on the progress we made on our ongoing strategic initiatives during the quarter. We named 2 new business group presidents, kept advancing our productivity and cost savings efforts, made good progress on our system's refresh, took more steps towards achieving a 0-harm safety culture and sold 1 of the 2 remaining retail stores properties.

In December, we announced 2 changes to the senior management team. Jeff Blair succeeded Bill Wolf as President of the Plant Nutrient Group in December. In Rail, Joe McNeely has succeeded Rash Shah as President. Jeff and Joe each bring a wealth of talent and industry knowledge to their new roles. I want to again thank Bill, who has retired for his more than 20 years of service to The Andersons. I also want to thank Rash, who will retire in July, for his 40-plus years of service to the company and more than 2 decades of leadership of the Rail Group.

We are continuing our efforts to create a productivity culture. We're still making good progress on our second $10 million run rate cost savings goal. We are confident that we'll reach our overall goal of $20 million by the end of 2018.

Our new companywide indirect procurement system implementation has gone well so far. The project team met all of its first 90-day success metrics, has standardized the company indirect purchasing processes, and has already greatly improved supplier information and data quality and visibility. We expect to begin to reap the benefits of this system in real cost savings once we have amassed a few more months of data.

Our broader IT system refresh also continues to go well. As we planned, we went live with the first wave of our Plant Nutrient Group locations in early January with relatively few issues. We expect the next wave to go live in March, and that substantially all of the wholesale fertilizer locations will be on the same new platform by year-end.

We also continued to vigorously promote our 0-harm safety culture. Those efforts are paying dividends, and our recordable injury rate and lost time metrics continue to improve.

We also closed on the sale of the third of our 4 retail store properties during the quarter, netting a gain of about $3 million, and we're working to sell the last store property in 2018. I'll speak later in the call about our early thoughts about 2018. John Granato will now walk you through a more detailed review of our fourth quarter financial results.

Thanks, Pat. Good morning, everyone. In the fourth quarter of 2017, the company reported net income attributable to The Andersons of $68.4 million or income of $2.42 per diluted share, and adjusted net income of $17.6 million or $0.62 per diluted share on revenues of $1 billion. The adjusted results exclude 3 items: $74.2 million or $2.62 of benefits from the recent U.S. federal income tax reform legislation, primarily related to deferred income taxes; a pretax $17.1 million goodwill impairment charge in the Plant Nutrient Group; and $10.9 million of pretax impairment charges associated with the Grain Group's Tennessee facilities. These last 2 adjustments together equate to $0.82 per diluted share. Earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA for the fourth quarter of 2017 were $25 million and $53 million, respectively. These amounts compared to fourth quarter 2016 EBITDA of $40.7 million, and represent a 30% year-over-year increase. These results were considerably better than those of the fourth quarter of 2016 when our $1.1 billion of revenues generated net income of $10.1 million or $0.36 per diluted share.

For the full year of 2017, revenue was $3.7 billion, about 6% lower than the $3.9 billion in revenue last year, and was driven primarily by the shipment of fewer bushels of grain in 2017 than in 2016 and the closure of our retail business.

Net income attributable to The Andersons was $41.2 million in 2017 or $1.46 per diluted share. Adjusted net income attributable to The Andersons was $32.3 million or $1.15 per diluted share. This compares to reported net income of $11.6 million incurred in the same period of the prior year or $0.41 per diluted share.

Full year EBITDA and adjusted EBITDA were $87.4 million and $157.4 million. The latter number was a 27% increase over full year 2016 EBITDA of $123.9 million.

Our long-term debt is slightly higher than at this time last year, but our debt-to-equity ratio is basically unchanged at 0.51:1. Our target ratio is 0.80:1 so we have debt capacity for growth.

We next present bridge graphs that compare 2016 reported pretax income to 2017 adjusted pretax income year-over-year for the fourth quarter and for the full year.

In the fourth quarter, the Grain Group's fifth consecutive year-over-year improvement was driven by continued strong grain storage capacity utilization and much better results from Lansing Trade Group. The Ethanol Group's results were down primarily due to softer margins but did benefit from better DDG values and strong E85 sales. Plant Nutrients' comparative fourth quarter results should take into account the $5 million of fourth quarter 2016 expense we incurred to consolidate the group's cob operations. The group's 2017 results were negatively impacted by lower margins per ton. As a result of our annual review in the fourth quarter of the carrying value of goodwill, Plant Nutrient recorded a charge for the remaining $17.1 million of goodwill related to its wholesale business. With this action, total company goodwill was $6 million at the end of 2017.

Rail results were off in each of its key operating areas, but mostly from lower base leasing and car sale income. Base leasing income was down due to lower average lease rates and higher depreciation in interest expense on a larger fleet. The group's income from car sales was down primarily due to having sold fewer cars outright from its portfolio.

Retail's improvement was driven by the gain on the sale of a former store property and the fact that the group incurred a $6.5 million asset impairment charge in the fourth quarter of 2016 after announcing that we would close the business. We expect to sell the last remaining property later this year.

Unallocated costs were lower by $2.5 million, primarily due to lower professional and contract service expenses.

For the year ending December 31, 2017, grain results after adjusting for the $10.9 million in Tennessee-related impairment charges improved by more than $39 million from 2016, again, primarily due to strong income from grain ownership. Interim from affiliates also improved dramatically.

Each of the other 3 core businesses were down year-to-date compared to the same period in 2017. The Ethanol Group's results were down by about 25%, again due to lower margins. In total, the Plant Nutrient Group recorded $59.1 million in impairment charges related to its wholesale fertilizer business. 2017 results include a $4.7 million gain on the sale of the southern region farm centers. And 2016 results included a $5 million charge associated with the consolidation of the cob business.

Overall, 2017's full year results were almost $10 million lower than the comparable 2016 results after considering those unusual items.

The lawn business results were down from 2016. That division still returned pretax income of $7.1 million. Considering the adjustments I just noted, full year farm center and cob results were negligible.

Rail results were about 25% lower than in 2016, primarily due to lower utilization and declining lease rates and lower sales volume and margins in the repair business in the second half of the year. The sale of 3 former retail store properties helped to offset about 75% of the costs we incurred this year to close the business.

Unallocated costs were lower by $3.6 million, again primarily due to lower professional and contract services expenses. Next, let's talk about a current popular subject, income taxes.

As we are all aware, Congress enacted a tax reform law in December. The primary impact of that legislation for corporations such as ours was to reduce the federal income tax rate from 35% to 21%. As a result, we were able to record a $74.2 million income tax benefit in the fourth quarter or $2.62 per diluted share. A revaluation of our net deferred income tax liabilities resulted in a $75.6 million benefit. Other changes in the law resulted in an additional $1.41 million onetime mandatory tax on previously-deferred earnings of certain of our foreign subsidiaries, owned either wholly or partially by one of our U.S. subsidiaries. We also expect to receive benefits from the new law beginning in 2018. While we are still studying all the ramifications of the new law, we believe that our all-in effective tax rate for 2018 will be in the range of 23% to 25%. We also expect to be able to take ample advantage of the ability to immediately deduct much of our capital spending for the next few years.

Now we'll move on to a review of each of our 4 business units. Our Grain Group continued to improve year-over-year in the fourth quarter. The group recorded pretax income of $8.3 million and adjusted pretax income of $19.2 million before considering the $10.9 million of asset impairment expenses related to our Tennessee assets. This represents a nearly 50% increase over the pretax income of $12.9 million in the same period of 2016. Stronger income from grain ownership continued to drive the group's performance.

Base Grain earned adjusted pretax income of $15.7 million in the fourth quarter compared to pretax income of $15.9 million for the fourth quarter of 2016. There was again little market volatility during quarter, and low prices and wider carries incented the owners of grain to hold rather than sell.

Lansing Trade Group fared much better in the current quarter than it did in the fourth quarter of 2016, deriving $3.5 million of pretax income from our grain affiliates, a $6.5 million improvement over the pretax loss of $3 million for the same period of 2016. Grain Group EBITDA and adjusted EBITDA for the quarter were $14.3 million and $25.2 million, respectively. The latter amount was 40% higher than fourth quarter 2016 EBITDA of $18 million.

As we anticipated during our last call, the Ethanol Group's performance fell well short of its fourth quarter 2016 results, primarily due to lower average margins. The group earned fourth quarter pretax income attributable to the company of $6.4 million, which was $5.3 million lower than the $11.7 million in pretax income attributable to the company for the same period last year.

Margins continued to be stressed by higher ethanol production and inventories in spite of strong exports. On a positive note, DDG values improved to well above year-ago levels towards the end of the quarter due to strengthening export demand and the end of the group's Eastern Corn Belt vomitoxin issues.

The Plant Nutrient Group recorded a pretax loss of $18 million and an adjusted pretax loss of $900,000 in the fourth quarter compared to a pretax loss of $3.8 million in 2016's fourth quarter. The 2017 reported loss included a $17.1 million charge for goodwill impairment that I mentioned earlier.

Continued margin compression due to nutrient oversupply drove wholesale fertilizer performance lower in spite of better volumes. The farm center and lawn businesses were both profitable, but less so than in the fourth quarter of 2016. The cob business recorded a small loss.

Base nutrient tons were up 10% year-over-year but margins per ton were down by 32%. Value-added volume was up by 18%, but margins were down by 24% per ton. The full year base nutrient tons were up slightly. But margin per ton was down by 16%. Value-added volume was down slightly, but margins were down by 19% per ton. Margins in both product groups were negatively impacted by a persistent oversupply of product.

Group EBITDA and adjusted EBITDA for the quarter were negative $10.2 million and $6.9 million, respectively compared to 2016 EBITDA of $4.5 million. We continue to believe we will need a return of supply-demand equilibrium and an increase in farm incomes before this business can begin to improve appreciably.

The Rail Group generated $6.7 million of pretax income in the fourth quarter compared to $9.7 million last year. Our utilization rate averaged 86.2% for the quarter, which was up slightly compared to 85.8% last quarter to 1.4% above the 84.8% in the fourth quarter of 2016. Average lease rates were down 4% year-over-year. Those lower lease rates and the higher expenses produced base leasing pretax income of $1.9 million, which was down by $1 million from last year's results.

The group recorded income from car sales of $3.3 million, down from $4.7 million of pretax income in the fourth quarter of 2016 and the $2.7 million earned last quarter. The group sold fewer cars outright in the fourth quarter of 2017 than in the same 2016 period.

From a fleet management perspective, 2017 was a very active and productive year. The group spent $107.5 million to buy almost 2,800 cars, the highest such annual figures since 2004 and 2005, respectively, and scraped about 1,800 cars or about 100 more than its previous high set in 2010. More importantly, the group grew the fleet slightly, and increased its average remaining life in accordance with its fleet portfolio management objective.

The group's repair business continued to face difficult conditions. Sales were down about 4%, and margins were squeezed year-over-year. The group's EBITDA for the quarter was $14.3 million or about 8% lower than the fourth quarter 2016 EBITDA of $15.6 million.

I want to remind our listeners that the rail group will face a couple of significant headwinds in 2018. The first is that the group expects to incur a disproportionately large amount of expense to recertify some tank cars in 2018. Rail expects its 2018 tank car recertification expense to be approximately $3 million higher than in 2017. There are currently no other years in the 10-year cycle in which even half as many tank cars will need to be recertified.

The second comes as a result of changes in the accounting rules governing revenue recognition. The new standard which became effective on January 1 of this year will change the accounting for certain transactions the group has engaged in over time. These transactions will not qualify for sale treatment in 2018. The group has recognized pretax income from car sales of an average of $6 million per year on these transactions over the last 5 years, or almost half of our sale -- car sales pretax income. Also, as a result of the transition rule, only the balance sheet was impacted on January 1, 2018.

Beginning in 2018, rather than recording lease expense for payments made to financial institutions, the group will record interest expense and reductions in the financing liability as well as depreciation of railcars impacted by the transition rule. It is also important to remember that this accounting change will not impact the value of the fleet or its capacity to earn lease revenue over time, nor the total earnings generated from these arrangements, and has no implications on the cash flow for these transactions.

Another impact of the new revenue recognition standard will result in changes in how we record the results of some of our transactions with customers. The only material impact of the changes will occur on certain sales contracts entered into by the Grain Group. Realized gains and losses from origination agreements are currently recorded in gross revenues upon physical settlement of the contracts. This treatment is based on our conclusion that we are principal in the contract on the basis of risks and rewards. However, the new revenue recognition standard requires us to evaluate whether we are principal or agent on the basis of control, rather than risks and rewards. We have determined that the Grain Group is the agent in certain origination arrangements. Therefore, realized gains or losses will be presented on net basis beginning in January 2018. However, as this change relates only to presentation of revenues and cost of sales within our income statement, there will be no impact on gross profit. While the impact of this change is dependent on commodity price levels, we expect consolidated revenues and cost of sales to each decrease by approximately 10% to 20% for the company, and 20% to 30% for the Grain Group.

I'll now turn the call back over to Pat for a few comments on our outlook for 2018.

Thanks, John. As we look farther into 2018, we expect our overall company results to improve significantly over those of 2017. More specifically, we will continue to focus on the strategic objectives we discussed at our Investor Day in December in New York City, focusing on both growth and greater productivity and efficiency.

The Grain Group has now achieved year-over-year improvements in 5 consecutive quarters on an adjusted basis, and while low grain prices and low volatility continue to influence farmer selling behavior and trading opportunities, we like our ownership positions and anticipate that we will continue to earn solid storage income.

We also expect our affiliates, and particularly, Lansing Trade Group, to be set up for a much improved 2018. The group estimates that growers will plant 87 million to 90 million acres of corn in 2018, perhaps slightly below the 90 million acres planted in 2017. Soybean planted acres are expected to be 90 million to 92 million, compared to 90 million acres planted last year. Total wheat acres that were planted have been reported to be approximately 46 million acres in 2017 compared to 50 million acres in 2016. While there are concerns out west with dryness in the hard-red wheat belt, for our backyard, soft red wheat conditions are favorable.

Normal weather conditions during corn and soy planting and growing seasons should create a solid storage and merchandising opportunity in the coming new crop year. The group will continue to work on originating more bushels and increasing the income earned from its risk management services and specialty food business.

The Ethanol Group continues to work to improve production efficiently. All 4 of our plants are running well. In the fourth quarter and through January, the industry continued to outproduce demand. Despite high export shipments, historically high production levels and typically lower winter driving miles, have stressed margins in the first quarter. Specifically, we expect our first quarter results to be lower than last year's results, and near breakeven. Our longer-term outlook for 2018 is positive.

Our Plant Nutrient Group continues to be impacted by an unfavorable combination of oversupply and low margins. The fertilizer industry needs to move toward a supply and demand balance to stabilize prices which could lead to more normal buying patterns. We continue to believe in the long-term strategic value of the overall Plant Nutrient business, especially in the value-added and lawn products we manufacture.

Going forward, we'll keep looking for growth opportunities in the value-added nutrient sector, drive sales by standardizing our go-to market approach, and develop new products to help farmers sustainably maximize yield and meet environmental challenges.

Rail continued to be impacted by an oversupplied market. While there are some signs that a slow recovery will continue, the improvement of our utilization rate continues to look like it will be very gradual. We think our average lease rates will remain under pressure for at least the first half of the year. As John noted earlier, the combination of changes in accounting rules and the 2018 spike in tank car recertification expenses will make this year a challenging one for rail. We continue to estimate that our 2018 results will be 15% to 20% lower than in 2017 due to those 2 changes.

I will not keep the group from actively pursuing its primary objectives to profitably increase the size and lower the age of its railcar fleet and to continue to expand its railcar repair network. The group will also evaluate opportunities in adjacent businesses as they arise.

We'll continue to work on our $20 million productivity and efficiency initiatives. We feel confident in achieving that goal by year-end as planned.

In closing, our 2017 company results were better than those of 2016 and became more encouraging as the year progressed, in spite of the fact that we had to recognize some unusual expenses in the Plant Nutrient and Grain Groups. I'm optimistic that we will see continued and significant improvement in 2018, helped in part by the new income tax regime. While our grain business has experienced a good recovery and continues to get stronger, we'll remain guarded in the near term about the prospects for each of the other 3 groups.

I'll turn it back over to John, where we can entertain your questions.

(Operator Instructions) And our first question comes from the line of Heather Jones of Vertical Group.

So I think I missed -- just a quick clarification. Did you say that you think Q1 '18 results will be below Q1 '17 for grain -- or was that ethanol, I just...

That was for ethanol. Yes, good clarification. Those were my last comments about ethanol. For the quarter, we think we'll be below where they were a year ago -- that's close to breakeven.

And then why is -- because I mean, did you all have good hedges coming into Q1 of '18?

Yes, we had some -- good point, we had some coming in. We've had a nice appreciation of DDGs of late, which is really helping us. That's more on a go-forward. As we go into the second quarter, that's going to help us a lot. As we mentioned, all the vomitoxin issues we had a year ago are behind us. We've seen good fundamentals in the market. So looking out, exports look solid, DDGs, as I said, as a percentage of local corn values, have improved. We still have a pretty balanced SND, but we're pretty optimistic about the latter parts of the year.

Okay. And I just wanted to revisit something you all talked about at your Analyst Day, the $300 million-plus goal for EBITDA in 2020 and -- that's a very ambitious good goal. And I was just wondering, like if you could help us think about the cadence because we're obviously in 2018 so it's not that far from now, and that would be very nice growth between now and then. And so I just wonder if you could help us think about how you're stacking that up in your mind as far as the cadence.

Sure, Heather. I think that's a good clarification. The last couple of years, we've done a lot of what I call, cleanup. As you know we closed the retail stores, we sold some assets in our portfolio that weren't performing as well as we liked. We just announced last night the sale of some assets in Tennessee. So a lot of them are about fixing areas in the business we thought needed improvement. Of course, to reach a lofty goal like that, we have to have growth, and growth has to come in bigger volumes of our business, and we need to do some M&A and build out to get there. Obviously, that would be probably more backend-loaded. Some of it will depend a little bit on what the vagaries can be in the agricultural market at the time. As you know, we faced a lot of headwinds the last couple of years. We feel confident in the 4 businesses we have. Each of them can have significant investment. And we have dry powder on our balance sheet, so it will be a little bit more backend-loaded but we are optimistic about growth as we look ahead.

Okay. And then on Lansing, that was great to see for the quarter. Can you give us a better sense of like what drove that and just -- did they reach an inflection point? Or just, I mean how should we be thinking about Lansing?

Yes. I think that -- we've seen a nice improvement at Lansing. They had a really poor previous years, so year-over-year, it's quite an improvement. They -- it will be interesting to watch this wheat story that's starting to happen. They've been very active hard wheat traders, historically, so that could play well to them. As you know, they've had a frack sand business as part of their portfolio that has really turned around nicely for them. And probably, more importantly, a year ago, they just had some losers and some deals that didn't work out quite well for them, that they didn't have this year. And John, I don't know if you want to add any color on that? Or...

I think you've covered most of it, yes.

Our next question is from the line of Farha Aslam of Stephens.

A question on your Tennessee elevators. I thought that was an area you were interested in growing in because there was expanding corn production in Tennessee. So I was really surprised to see that you decided to divest it and write it down.

Yes, thanks for the clarification there. So we acquired these elevators in 2012, that was kind of the peak of the ag cycle. We felt good, like you said, about growing acres that would happen in Tennessee, especially going to corn and beans, away from cotton and other crops. One of the things we're probably looking back now, that was underestimated at the time, was the impact of cheap barge freight on the river, and the fight for those bushels that go to the river to get pulled for export. So in those elevators, those 6 elevators, we've struggled to meet our expectations level of performance. And then, the most important thing here is that recently Tyson just announced the building of a new $300 million chicken production complex in Humboldt, and that will require a significant amount of corn to produce for feed. And we felt that this was the right time and situation to sell those assets to Tyson. So correctly, we reevaluated our position in Tennessee and thought this was a proper decision to make.

That's helpful. And then when you look at your Rail Group, you guys highlighted all the changes in accounting for the railcar sales. Will that bump up the level of lease income that you'll recognize, if you kind of post the adjustments in the current year?

It won't have a material impact on the lease income we recognize.

Farha, this is John. That the -- you may see -- you will see a revenue bump, but not a gross profit bump.

Okay. So you used to recognize that as income. So now that income stream just goes away with the new accounting rules, or does it kind of factor in into a different part of your business?

Yes. We still make the spread that we did, but you don't get -- the gain essentially moves from the front-end to the back-end, so that when you -- you don't really realize the full gain until you actually divest the car wholly. And so that's essentially what happens. It's a shifting in timing.

And so the timing is now pushed back all the way until you get rid of the car, which might be 30 years? Because I don't know how long you hold your cars.

Farha, it's a little of both. This is John, again. It's a little of both. The trade-off, if you will, between the lease expense that -- or actually, the cost of sales that we record for payments to the bank, are being replaced by interest and depreciation, which more often than not, are lower than the payment to the bank. So the payment to the bank now is going to be considered an interest payment and a principal payment. The interest goes to the P&L, the other to the balance sheet. And so we're going to recognize some of that spread over time as well.

Okay. So some of it is recognized in kind of -- over time.

Yes.

Yes.

Awesome. And then my final question is on Plant Nutrients. Your outlook for next year remains subdued. Could you give a sort of a longer-term picture of how do you expect that business to progress and what we should expect from that business?

Yes, sure. I'm going to start, and John can chime in. I think there are some pros and cons as we look forward, Farha. So on the pros side, we're seeing some stability in some of the fertilizer ingredients, with some of the miners and producers kind of creating maybe a -- I hate to call it a floor, but starting to stabilize prices in the market. So it's not been as freefalling as it was maybe in the last couple years. So it feels like there's some bottoming and some uptick occurring in some key ingredients. That's the stability we talked about. Farmers have been engaging with us. We've had good discussions with farmers and getting product on the books. As we talked last year, our volumes are pretty good. The concern side is really on margins, on the wholesale side with low corn prices continue. It just so happens, our February crop insurance numbers -- the number for corn price was almost exactly the same as last year's price, so we haven't seen any appreciation on corn price. And acres, thus, could slide a little bit. We mentioned, it could be lower than the 90 million acres planted last year. Lower corn acres would hurt that on the numbers side. There's also some credit risk out there in farm communities. So those are some of the negative things. Having said that, we feel good, especially about our specialty business and the productivity they give farmers and some of the solutions they provide. We're out aggressively marketing those products that we produce ourselves. And so in the long term, we're optimistic about this business. We like the Plant Nutrient business. We see growth potential in it. We need a robust farm economy to kind of help that out, though.

Farha, this is John. The only thing I would add is we did see a pick up, albeit not on the margin side but on the volume side of value-add this year and that's a good sign. Because we think as farmers start to adopt the value-add for all the reasons we've talked about, efficacy, environmental impact, we believe and hope that, that will continue to stick as margins improve. And as we've talked about, we do get much better margins on the specialty side than in the base NPK space.

Okay. Can we expect the value-added side to continue to outpace the growth in the base as you execute your marketing program, and that will drive growth in the business?

I think that is a good assumption, yes.

That's our goal and that's our focus, and we're really working with our salespeople on farmer engagement.

Our next question comes from the line of Eric Larson of Buckingham Research Group.

I'd like to go back actually to the grain business a little bit. Pat and John, obviously in the fourth quarter, you did get some pretty decent basis appreciation. You had good ownership, that was a nice positive in the quarter. We're seeing a little bit of life in the grain markets right now. So can you talk about -- are you starting to see buyers starting to build a little more book on your end? Is it becoming a better merchandising environment for you right now? I think we're seeing it from other places -- I'm assuming that it is. Could you talk a little bit about that, Pat?

Yes. I think you've really got to look by commodity. So let's start first in weather in Argentina, which has been the story of late. We've had this growing dryness in the Pampas growing region in Argentina. And we're seeing estimates of soybean crop to drop as much as 5 million bushels -- I'm sorry, million tons, 5 million tons -- from 55 million metric tons down to 50 million. There's even some analysts saying it could be on the 40s. And you're seeing soybean meal markets really take off here in the last couple of weeks. Now U.S. has plenty of stocks, 530 million bushels of carry -- in carryout to take care of any demand for that, but at least it's getting some action in the marketplace, as you said a little bit of volatility coming back in. At the same time, we're just getting some action in the bean market, corn tends to be quieter with our big U.S. stocks and kind of a more quiet corn story. But the wheat market is starting to get a little interesting with this dryness in the western hard red wheat belt and that could be -- create an interesting protein market trading opportunity this year. So it's something we're watching very closely. We like our storage positions we have in each of our products, and I think having a little bit of volatility come back in the market would be really good for the industry.

Yes. And then back onto to wheat, thank you, I think that's a good overview. When you look at the wheat market, I think you're still kind of running just a little bit over that 50% carry. I think we still have 2 ticks in the market, maybe it's down to 1 now. Are you getting much...

I'm sorry -- we do have 2 ticks in South -- in Chicago and the South red wheat market, 1 tick in hard. We think we will continue that, but that could be a little bit under the bubble, depending what happens here with carrying charges later in the year. But we'll likely carry 1 tick going forward.

Okay, good. And then the final question, it's more a strategic, Pat. When you look -- you had mentioned -- this goes back a little bit to Heather's question, the $300 million EBITDA goal. And I think you answered it very well that you need to get some growth, you need to get some -- you need to redeploy some capital and do some M&A, et cetera. So when you look at the market today, we're sort of at the bottom of the cycle. There's places, I think in the grain market for you to go more to the specialty grains, which I think you'd do very well at, and we've talked -- you've talked about that in the past. With a very depressed Plant Nutrient cycle, is there a way to maybe at really attractive prices today, consolidate some more of the fertilizer end on the specialty end? Where would you look to put -- what's the most attractive use of that capital right now, and in which areas that you would look at?

Right. As I mentioned to Heather, at a high level, we see investment opportunities in all 4 businesses, in Ethanol, in Plant Nutrient, in Grain and Rail. As we've talked about in Rail, we've been making our fleet younger and more diversified and we'll continue to grow our rail fleet. In PN, specifically, we've said at the Investor Day and more recently, too, we like the specialty space. We like that we're a manufacturer part of that. We will look at wholesale nutrient facilities if they fit with us. But we really like that specialty space and are constantly looking for opportunities to grow there, both green fielding at our own sites or bolt-ons as well as new products, or even looking at M&A in that space.

Okay. And then the final question is for John. John, the tax bill, obviously, lower tax rates. How much cash does the lower tax rate give to you folks to deploy elsewhere your business, i.e. what is the impact on your cash tax rate?

Eric, we're still evaluating. We did talk about the effective rate being between 23% and 25%. But we haven't completed our full analysis as we look -- we've got to project that across our plan over the next several years and we're still in the process of evaluating that. And we'll be happy to give you an idea on the next call.

(Operator Instructions) Our next question comes from the line of Dan Bellow (sic) [Ken Zaslow] of Montréal ( sic ) [BMO].

I think that's me. A couple of questions, one is -- with the new management in Plant Nutrient, how will that business be managed differently?

I think that's a very good point. So we brought in somebody that has really a sales background and we think we have much more focus on the value-added side and how we train our sales force and push it more aggressively. As we've moved with our Nutra-Flo acquisition a couple of years ago and our own buildout of New Eezy Gro and other products, our lawn business doing very well, we need to really retool our sales effort with precision ag tools, our better online, working with farmers -- so it's kind of making our sales efforts more sophisticated, Ken. And I think that's what Jeff Blair is bringing and is out in the field right now working with our teams and that's the key thing.

And I that I think we're going to work -- and we talked a little bit about this at Investor Day, on sales and operations planning, particularly in that specialty space. And I think we can drive some costs out of that process.

We're getting our SAP implementations done in PN this year, and that will help us a lot with data. We're going to be more data-driven in sales and planning, as John mentioned.

Will that change -- does that change your ability the generate through that $300 million as this division changes at all? Does that help? Is that -- is there any material effect on it financially, if I think about it over the next couple of years? Or is it -- how do I think about that?

It should. I mean, when you look back and we've had -- when you have very nice periods of growth like we did in the ag super cycle, that's a main economic driver and that's a key part of it. But we can do a better job managing our sales and operating planning and maximizing the production rates at our assets that -- we can do a better job despite of what the market conditions are, so we are focused on that right now. That's a lot of our productivity initiatives we're underway now. But really push the theme -- as the market is going to need more specialty ingredients going forward and environmentally friendly ingredients, we think that's a good position for us to really blow up that specialty business more.

And my next question, just on the ethanol side. How do you think about the production levels, because over the last year, I think what caught most people, including at least us, by surprise, was the debottlenecking and the production creep. How do we ascertain how much there is left of that to go? And how are you thinking about that in terms of your production levels for 2018 and '19?

Yes. The good news is, we're from a relatively balanced domestic market, the good side is the exports. Our traders are predicting 1.7 billion to 1.8 billion gallons for 2018, so another uptick in exports can really absorb a lot of that creep, the term you called. I think a lot of the major investments have been made by a lot of companies as far as debottlenecking, ourselves included. I think you're always going to have innovation. A lot of our innovation efforts are focused on the coproduct side where we're working on DDGs, corn oil, as well as just how we can run our plants more efficiently. So I think there will be some creep, but the good news is exports has been really solid.

And then just to follow up on the exports. Can you frame how much you think the EU will be, how much you think Japan will be, how much you think China would be and how much even Ontario could be? I mean, how is this all developing? And where does this kind of lead us for '18 and, more importantly probably in '19?

Yes. I don't know if I have a specific number country by country but last year we, I think, finished at [104 or 105] and specifically, without China, right. So Brazil was our biggest export destination at [4.45], we think there's still upside potential there. Canada has been very solid, India has been increasing as well as the Philippines -- South Korea, other Asian countries. But China is the trump card that's really adding this year. Also with some improvements even in Mexico. So it's pretty well rounded from a demand standpoint and our corn price and absolute ethanol price still helps that, so we're still the location of choice when it comes to ethanol. So we could see a broad destination increase in oil on all fronts.

Can you earn your cost of capital in this business this year? And then I'll leave it at that.

Sure, sure.

At this time, I am showing no further questions, so I'd like to turn the conference back over to John Kraus for closing remarks.

Thanks, Amanda. We want to thank you, all, for joining us this morning. I also want to mention again that this presentation and slides with additional supporting information will be made available later today on the investors page of our website at andersonsinc.com. Our next earnings conference call is scheduled for Tuesday, May 8, 2018, at 11:00 a.m. Eastern Time, when we'll review our first quarter 2018 results. We hope you are able to join us again at that time and until then, be well.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.