Andersons Inc (ANDE) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Andersons, Inc. 2013 third-quarter earnings conference call.

At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Nick Conrad, VP Finance and Treasurer. Please proceed, Sir.

Good morning, everyone, and thank you for joining The Andersons, Inc. 2013 third-quarter conference call. We have included a slide presentation that will enhance our talking points this morning. If you are listening or watching this presentation via our website, the slides and audio are in sync.

For those listening by a telephone and watching the webcast, you should follow directions sent you in order to sync the slides and audio. This webcast is available through the investor section of our website at www.andersonsinc.com. The webcast is being recorded and will be available on our website.

Certain information discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in the forward-looking statements as a result of many factors including general economic conditions, weather, competitive conditions, conditions in the Company's industries both in the US and internationally and additional factors that are described in the Company's publicly filed documents including its 1934 Act filings and the prospectuses compared in connection with the Company's offerings.

Today's call includes financial information for which the Company's these independent auditors have not completed their review. Although the Company believes that the assumptions upon which the financial information and its forward-looking statements are based are reasonable, it can give no assurance that these assumptions will prove to be.

On the call with me today are Mike Anderson, Chairman and Chief Executive Officer; Hal Reed, Chief Operating Officer; and John Granato, Chief Financial Officer. Mike, Hal, John and I will answer questions you have at the end of the prepared remarks.

Now I will turn the floor over to Mike for an opening comment.

Thank you, Nick. We are pleased to announce record third-quarter results.

The Ethanol Group had record results this quarter as they benefited from strong ethanol margins. The Rail Group also had strong results as they continued to optimize the Railcar portfolio and lease rates. The Grain Group's third-quarter performance was good considering it was finishing the 2012 crop year which was significantly impacted by the drought.

During the third quarter, a few initiatives were finalized. At the end of July, the Company and Lansing Trade Group formed a 50/50 joint venture and acquired Thompsons Limited, a grain and food grade bean handler and agronomy input provider, headquartered in Blenheim, Ontario.

Thompsons owns and operates 12 elevators integrated with 11 retail farms centers, two seed processing plants, five bean processing plants and a wheat processing plant. This acquisition provided additional geographic and climate diversification for the Company and also provided an added presence in the edible bean market.

In September, the Rail Group acquired Mile Rail LLC, a rail repair and cleaning provider headquartered in Kansas City, Missouri, with two satellite locations in Nebraska and Indiana, and mobile units in the central Midwest. This acquisition raised the number of railcar repair locations the Company has to 18 plus the mobile units.

I also want to mention that on October 22, the Committee paid a cash dividend of $0.16 per share to shareholders of record on October 1, 2013. This was our 68th consecutive quarterly dividend. I will now turn this over to John, who will provide details of the total Company results.

Thanks, Mike, and good morning, everyone. The Company generated net income of $17.2 million in the third quarter or $0.91 per diluted share on revenues of $1.2 billion. In 2012, similar net income of $16.9 million was reported or $0.90 per diluted share on revenues of $1.1 billion.

The gross profit for the quarter was down year over year by $5.2 million. Gross profit increased in the Grain Group by $5.8 million due to higher grain sales volume. However, this was more than offset by a $9.9 million decrease in rails gross profit due to significantly reduced railcar sales.

Through the first nine months, total net income stands at $59.3 million or $3.15 per diluted share. In 2012, net income through September was $64.5 million or $3.43 per diluted share. Total revenues of $4 billion for the first nine months of the year are $429 million higher than the prior year.

The most significant year-to-year increase in revenue relates to our grain business whose revenues have increased primarily due to greater sales volume. The higher volume has resulted from growth which includes the Anselmo train loading facility that opened in August 2012 and the Green Plains grain acquisition which was completed at the end of last year. Through September, gross profit was $255.6 million which is an $11.2 million decrease from the same period of the prior year.

Now to a non-GAAP measure, EBITDA, earnings before interest, taxes, depreciation and amortization. The Company's 2013 third-quarter EBITDA was $46.3 million, an increase from the $44.3 million reported for the same three-month period of 2012. Through September, the Company's EBITDA totaled $154.4 million, which is comparable to the $152.7 million for the first nine months of 2012.

Equity and earnings affiliates which excludes net income from noncontrolling interest was up $16.2 million and totaled $22.2 million in the third quarter. Positive year-over-year change was driven primarily by an increase in earnings from our Ethanol LLC investment. Equity in earnings of affiliates through September totaled $40 million compared to $15.4 million for the same 2012 period as year-over-year increase was again primarily as a result of improved Ethanol LLC results.

The Company's interest expense totaled $5.3 million in the third quarter, a decrease of $134,000 from last year. Decreased interest expense was driven by lower short-term borrowings.

Through September, the Company's interest expense totaled $16.6 million, up $415,000 from last year. Year-to-date interest expense has risen year over year, primarily to increase long-term debt associated with our growth in capital projects.

Other income increased $4.1 million year over year and totaled $7.6 million this quarter. Through September, other income totaled $11.6 million, which was an increase of $2.2 million when compared to the same 2012 period.

For the third quarter of 2013, the Company's effective tax rate was 36.5%, down 1.1% from the third-quarter 2012 rate of 37.6%. The decrease in the effective rate was due primarily to income attributable to the noncontrolling interest that did not increase taxes.

We are projecting our 2013 tax rate to be 37.2%. The Company's actual 2012 effective tax rate was 37.1%. The slightly higher effective rate for 2013 is due to a correction made in the first quarter with respect to accounting for the Company for the other comprehensive income portion of the Company's retiree healthcare plan liability and the Medicare Part D subsidy which is then offset by income attributable to the noncontrolling interest that does not increase taxes.

The bridge in this next graph demonstrates which group's 2013 third-quarter income is up or down in comparison to the prior year. The specifics behind these differences will be detailed as each group's operating performance is discussed. Therefore, to better understand the total Company results, Hal will walk you through each of the six business groups.

Thanks, John. Let's start with the Grain Group which reported operating income of $14.3 million this quarter versus $10.8 million a year ago. The Group benefited from a strong start to the harvest which resulted in higher gross profit on sales in comparison to the prior year.

Space income was up for the quarter due to basis improvement. The Group also benefited this quarter from strong earnings from its investment in Lansing Trade Group.

Grain Group revenues for the quarter were $766 million, which is up from the $677 million reported in the prior year. This revenue increase is due to an increase in the number of bushels sold as the average price per bushel actually decreased.

The Grain Group's operating income through the first nine months of 2013 was $24.7 million on revenues of $2.5 billion. Comparatively, the Group's operating income through September of 2012 was $45.5 million on revenues of $2.1 billion. The year-to-date results were negatively impacted by the 2012 drought.

Storage capacity of the Grain Group increased to 141 million bushels this quarter from 112.7 million bushels in the same quarter of the prior year, due to growth. The Anselmo train loading facility was opened in August of 2012 and the assets acquired from the former Green Plains Grain Company in Iowa and Tennessee were added at the end of 2012. This growth has also led to an increase in bushels shipped in comparison to the prior year.

The recent acquisition of Thompsons Limited did not increase reported capacity as it is an equity investment. According to the USDA report issued on 4 November, corn harvest is 73% complete.

In comparison, corn harvest was 95% complete last year at the same time. Bushels handled this year are up primarily due to the size of the 2013 crop in comparison to the 2012 crop.

The crop being harvested is a record crop. Yield estimates are currently in the range of 159 bushels to 163 bushels per acre with total production of approximately 14 bushels -- 14 billion bushels estimated.

The report also showed the harvest for soybeans is 86% complete which compares to the prior year of 92% complete.

Now let's discuss the Ethanol Group, which achieved record operating income of $10.9 million this quarter. In comparison the Group had an operating loss of $900,000 during the same period last year.

The higher income is the result of significantly increased earnings in our ethanol limited liability companies. The LLCs were positively impacted by higher ethanol margins. Revenues this quarter were $213 million, up slightly from the $210 million for the same period last year.

Through September, the Ethanol Group had record operating income of $24 million on revenues of $635 million. In 2012, the Group incurred an operating loss of $2.9 million during the same time period on revenues of $528 million. This year the ethanol locations have benefited from favorable margins, which was not the case last year.

The revenue increase was due to both an increase in the average price per gallon of ethanol and added volume. Most of the added volume -- most of the volume increase relates to the Denison plant which was acquired in May 2012. Some of the increase in volume relates to efficiency gains at our existing plants.

The sale of coproducts such as corn oil, E-85, distillers dried grains and CO2 continue to benefit the group. All four ethanol plants sell corn oil, E-85 and distillers dried grains; and two of the four sell CO2.

Some of the previously closed ethanol plants are coming back online. Despite this, ethanol stocks have remained somewhat tight.

The large corn supply does not assure us a strong ethanol margin, but margins currently remain positive. There appears to be a change underway in US energy policy with the EPA indicating they may reduce the 2014 proposed renewable volume obligations. While this is a significant concern, we believe that positive economics for blenders will keep demand balanced with supply well into 2014.

The Rail Group reported operating income of $12.4 million this quarter on revenues of $48 million. Last year the Group reported $19.1 million of operating income on revenues of $60 million.

This quarter the Group recognized $2.2 million in gains on sale of railcars. Last year the Group recognized $13.5 million in gains on sales of railcars and related leases and nonrecourse transactions during the third quarter.

Revenues are lower this quarter than the prior year due primarily to lower railcar sales amounts. Gross profit from the leasing business was significantly higher due primarily to an increase in the average lease rate which has continually risen over the past few years. The Group also recognized income this quarter from the settlement of two nonperforming leases.

Through the first nine months, the Rail Group had record operating income of $36.6 million and revenues of $132 million. In the same period of 2012, operating income amounted to $34.3 million and revenues were $128 million.

The results through September include gains on sales of railcars and related leases and nonrecourse transactions of $15.8 million. This compares to $22.2 million for similar transactions during the same nine-month period last year.

The year-to-date results for the base rail leasing business, not including gains on sales, are more than double the 2012 results. The Group has 22,651 cars and locomotives which is down approximately 700 cars from its year earlier total. The car total is down as the Group has both scrapped some cars and sold some cars outright as part of their railcar optimization strategy.

The average utilization rate for the quarter was 86.2%, which is up from the 84.3% reported last year. The utilization rate as of the end of September was 86.3%, which represents a slight increase from the third-quarter average.

The Plant Nutrient Group had a third-quarter operating loss of $1.6 million on revenues of $96 million. In the same three-month period of 2012, the Group reported an $800,000 operating profit on a $135 million of revenue. Sales volume decreased significantly in the third quarter in comparison to the prior year as customers are only purchasing nutrients as needed due to lower price trends.

Some of this volume shortfall may be regained in the fourth quarter. Margins in the third quarter were solid and comparable to the same period of the prior year.

This year, the Plant Nutrient Group had operating income of $21 million through the first nine months on $538 million of revenue. Last year the Group generated operating income of $34.5 million on $619 million of revenue. Through September, volume is down about 10% as some volume lost earlier in the year was not regained and nutrient purchases are being -- are not being made in advance due to the slow decline in nutrient prices.

Year-to-date margins are somewhat lower than last year as they did not benefit from nutrient price appreciation as they did the prior year. Margins, however, were favorably impacted by a product mix that include more value-added manufactured products.

The Group has appropriately managed its nitrogen, phosphate and potassium ownership position going into the last quarter of the year in order to reduce the risk of a lower cost to market losses. Storage capacity of the Plant Nutrient Group increased to 868,000 tons from 833,000 tons in the same quarter of 2012 due to the acquisition and expansion of both dry and liquid storage facilities.

The Turf & Specialty Group had an operating loss of $100,000 this quarter on revenue of $28 million. Last year the Group reported a loss of $1.6 million on $22 million of revenue. Turf product tonnage was up significantly, but margin per ton decreased slightly due to product mix.

The cob business this quarter had higher expenses than usual as it continued its planned investment in operational and safety improvements at the Mount Pulaski facility which was acquired last year. Through September, the Group's operating income was a record $6.1 million on $118 million of revenue. In the same period of 2012, operating income was $3.4 million and revenues were $110 million.

The Retail Group had an operating loss of $2 million on revenue of $31 million in the third quarter. In 2012 the Group had an operating loss of $1.8 million and revenues of $35 million for the same period.

The Group's year-to-date operating loss was $3.7 million on revenues of $103 million. Through the first nine months of 2012, the operating loss was $3.1 million and revenues were $110 million. Now I will turn the floor back to Nick for the Treasurer's report.

Thanks, Hal. At the end of the third quarter, net working capital was $232.9 million, a decrease of $20.5 million from the 2012 third quarter.

Current assets totaled $895 million on September 30, a decrease of $294.9 million from the same period last year. This change was driven by a $253.3 million decrease in inventories which was primarily a result of lower grain inventories and lower grain prices at the end of the third quarter.

Cash and cash equivalents entered the third quarter at $134.4 million, an increase of $54.1 million year over year. Noncurrent assets increased $185.8 million year over year, driven principally by a $97 million increase in property, plant, and equipment; and a $72.6 million increase in equity method investments, both as measured year over year. As a result, total assets on September 30 were $1.9 billion, a decrease of $109.1 million year over year.

Current liabilities at the end of the third quarter were $662.6 million, a decrease of $274.5 million from the prior year. At the end of the third quarter, the Company had no borrowings under the short-term portion of a line of credit. This is a decrease of $275.5 million from the same quarter 2012.

The average interest rate for the third-quarter 2013 period was 1.9% which is down from the previous year's rate of 1.95%. Long-term debt ended the third quarter at $381 million, an increase of 600 -- I'm sorry, an increase of $68.6 million for the prior year's third quarter. At the end of the third quarter, the Company had no borrowings under the long-term portion of the line of credit.

This is a decrease of $35 million from the same quarter 2012. The average long-term interest rate for the third-quarter 2013 was 4.5% which is down from the previous year's rate of 4.9%.

Total equity at September 30 was $670.3 million, an increase of $67.9 million from the prior year. The launch of debt to equity ratio was .57 to 1 on September 30. Total committed lines of credit under the Company's syndicated facility remained $850 million of which $735 million are short-term and $150 million are long term.

Mike will now make a few comments before we take questions.

Thank you, Nick. Today I would like to provide an outlook for the last quarter of 2013.

First, our Agricultural Group should benefit from the record corn crop that is currently being harvested. We continue to be pleased with the record results being seen in the Ethanol Group and are still seeing good margins. However, we are very aware that the ethanol market is volatile making future margins difficult to predict.

We anticipate our Rail Group having a good quarter, but gains on sales are not expected to be material during the quarter. For the other two groups we expect typical fourth-quarter results.

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

(Operator Instructions). Brett Hundley, BB&T Capital Markets.

Good morning, gentlemen. A quick detailed question. Did you give the gains on nonperforming leases realized in Q3?

We did not disclose that (multiple speakers). Yes, we did not disclose that in the press release and I don't -- I'm not sure if it will be in the Q or not.

On a -- is it relatively small compared to the gains on sales, railcars sold?

I understand the context of your question and I had rather not mischaracterize at this moment. I would -- we can get back to you off-line.

Okay. Moving on. Reports of a wetter crop this year. I've heard of some elevators initially offering free drying so they could get their hands on the crop given better basis trends.

Have you seen this continue at all? I mean, normally, a wet crop would probably mean better earnings for you in Q4, but I just wanted to get your take on what you are seeing.

I would agree that we saw some highly competitive drying rates early on to get bushels accumulated to grain elevators and some of that has continued. So what I would suggest is as empty as the pipeline was, people really want to get their hands on the early bushels and so they have been using drying rates in a lot of cases to do that. So the impact of that is as you suggest, yes.

Okay and that is continued somewhat?

Yes.

And, jumping around, in fertilizer plant nutrient given what's happened from a pricing standpoint, I'm just wondering if you can address whether operators such as yourself would still want to work just in time or if you would switch maybe to more buy and hold, just curious on what that strategy looks like and maybe what are your expectations on pricing moving forward into the planting season?

Yes, I don't think that our approach to the marketplace has changed a whole lot. I think if you go back a few years, obviously everyone in this space looks at risk mitigation for substantial moves and we have made some good improvements in what we have done there. But the rest of our balance between holding inventory in our inventory space and providing product at harvest or at planting time hasn't really changed much.

The declining price -- prices in recent months or so or even across most of the year obviously have an impact on whether or not appreciation is earned on inventories held. But there's not much we can do about that. That's been the way of the market much of this year as far as declining prices. We are still relatively cautious about our positions because of that.

Appreciate that. I do have a question on rail and one other quick one on ethanol.

But as it relates to rail, I read about some design improvements that are being talked about for some tank cars. And I understand a mixed dynamic as you move into 2014, but is there a concern at all for you guys related to the tank car market because of that?

This is Nick, I am going to jump in here real quick, excuse me. Both on the slide deck for this call and on our investor presentations that are out there, you will be able to find a slide that speaks to the composition of the railcar fleet and specifically to the railcar -- to the number of cars that are tank cars. And the number of tank cars we have are scattered across three broad categories. So while I think you are asking a good question, it does not lead to all tank category -- or tank car categories equally and you'll see that our overall number of tank cars is, I believe, under 2,800 cars out of that fleet of 22,000 that Hal referenced earlier.

Yes and go back to your specific question there is -- we don't see anything significant relative to our fleet to the issue you raised. We are doing now, entering into more repair work on railcars within our repair facilities.

So, in essence, to some extent some of those things going on in railcars will be of benefit to our repair facility operating business. So it is actually a bit of a positive to us and not structurally very difficult for us to look forward to.

I appreciate that. Then I have a two-part question on ethanol. It looked closed in late August, but it looked like it may have been possible to lock in a positive margin for October which clearly would have been below spot level.

So I just want to make sure that you guys have continued to stay on the spot market. Is that pretty much correct?

In general this year we have been in a spot market but there's always variances to that month to month.

Hal, I know you will love this question, but you addressed it somewhat related to the potential EPA ruling and how that could affect you and the industry going forward. I mean, are there some other potentially positives out there you have maybe miles ticking up on lower gas prices before talking about an increase in exports? So you talked about maybe positive margin into 2014, but can you address the potential EPA ruling further and what that means for the industry?

Well, I think in a general sense for 2014 we don't see a substantial impact for that change. The supply and demand balance for what needs to be blended in 2014, what we expect to see in imports and exports changed, and what we also as you noted expect to see in just demand from driving miles looks pretty well-balanced for 2014.

So and at the same point in time, we have got relatively cheap ethanol production prices compared to gasoline prices, substantially below gas prices, so the blenders are making good money by blending all they can. I think the current situation has, like you say, there's pluses and minuses and I don't think that the potential EPA change outweighs the positives in the marketplace.

Okay. Thanks for taking my questions.

Brent Rystrom, Feltl.

Good morning. I have got a couple of quick questions for you. From a broad thematic perspective, probably Mike and Hal, do you see grain really as the big driver, the Grain Group as the big driver for 2014?

Grain should be a good driver for business in 2014. So, yes.

From a simplistic perspective, looking at the same spot next year, I am trying to think what could be the greatest disruptor to the margin. Is it potentially not so much margin, but margin in sales?

I would assume cycling against sharply lower potash and phosphate prices in the first half next year will present a sales comparison issue. Is that fair?

You use the word sharply low -- I might not use that, but yes, I would agree they will be lower and that will be a difference that we will need to compare in the first quarter or two of next year.

Yes, you've got -- likely, we'll see. Maybe a little lower corn acre so you get a little volume you have got a little lower price maybe a little lower volume in the first half times a little lower price, so you get a revenue number that could be lower. We will have to see what happens on the margin side, but if we do have dropping prices it certainly reduces the ability to get appreciation. Overall if I had to -- like I say, it should be an okay fertilizer year.

Yes, Nick, and I would agree. Quick question I have as a follow-on to that, then.

How do you manage your expectations for fertilizer margins? Do you try to identify there's so much margin per ton we want to have or do you identify a margin rate and then just attach it to a pricing?

Well, it is a bit of a matrix, I guess, as you would imagine because it is the product mix as well. There's certain manufactured products, certain micronutrient products and there's a whole variety of different things that we do.

But it is on a -- more on a per ton by product basis that we look at and we look at it very specifically to our geographic areas. We have had pretty stable and solid margins as we have noted, even this year. So that is part of the management process we go through on the margins.

And that was going to be my next question, Hal, was I am seeing stronger nitrogen prices in my web scraping of pricing surveys for dealers in the Eastern corn belt and I would assume that you're big, you're strong, your early harvest coming off, are you seeing a pretty good application for fall nitrogen?

I would say it's normal or less than normal. There has been some good weed acres planted, but so we have some expectations, but actual application and purchases for the fall have, I would say, been at best kind of in the middle of the range.

Final credit question, asked earlier about your grain elevators, are all of your grain elevators on natural gas lines or do you have anybody exposed to propane for grain?

Yes we do have a couple of propane places that I am certain of. Most are natural gas.

All right and any issues with the propane supplies at those facilities?

No. We have had none.

Ken Zaslow.

Good morning. This is Andrew Strelzik for Ken.

Taking a step back if I look at your results for some of the guidance you provided on the last call, your underlying grain and rail performance was much better than expected. Could you provide some color about what changed during the quarter since you provided that guidance?

You want to talk about the guidance first? I mean --

Well, we don't give guidance but anyway (technical difficulty).

The grain one was I would say, really, twofold. We were at the end of the drought year of last year with some pretty low expectations as to what could happen in the marketplace and some high risk. We did a nice job, I think, managing certain risks of the inverse to mitigate risk.

We had some good early harvest in some of our new Southern assets in Tennessee and elsewhere that allowed us to take advantage of some early premiums, a little bit better space income than we had thought. A few more sales than we had thought and good results from Lansing.

So that's -- I mean, that is kind of a combination of things from the grain business. Oh, the rail --?

And I think rail, in general, I think the quarter went as expected. We did highlight we had a couple end of lease settlements that impacted results in the Other Income line and I think those were one of the key drivers of the difference.

And bigger picture, when I think about the corn crop. You have a late harvest and slow farmers selling on one hand and you have the big crop and a nice carry-on on the other hand.

Does that change the earnings potential in grains over the next 12 months or is it more of a timing impact? And how should we think about the environment in the context of the $0.25 to $0.50 a bushel range that you provided?

Good question. You know what, the largest piece of that is the basis appreciation piece and the timing of when that begins and how much moves in December versus January or fourth quarter versus first quarter is always just -- it is kind of a crapshoot literally. The current expectations are for the harvest to be virtually done here soon.

The weather has been conducive, so much of it will be undercover here in the next week or so but the basis appreciation piece is just indeterminate as are the sales we make going forward for next year as well. So, it is not likely something that we or anybody else in the market knows very well until you get well into December.

And I would just add a little bit to that. Just confirm what Hal is saying.

There is a timing element that seems to happen almost every year on is it December or January that sales occur and does basis appreciation occur and that can be a flip from year to year. But in a crop year it is of no consequence.

I would add that also encourage you to look at the future spreads versus history and we are again showing inverses in soybeans which suggests no car -- not suggests -- indicate no carry. And there's I will call somewhat average carrying charges in the wheat market and the corn market.

They are not full carry. They are not no carry.

So in addition to basis appreciation within that range we gave you, there -- the spread portion of it from corn and wheat is average like. And well below the huge years we had in wheat that we talked about in the past that we said, especially the one year, is get that out of your comparable -- comp thinking. So it looks okay.

Great. I appreciate the color.

Farha Aslam, Stephens Inc.

I have a question starting with the Grain Group. Your equity income line was significantly higher. Could you tell us what if that was Thompson at all or if that was really Lansing Trade Group, what drove the increase at Lansing and how sustainable that is?

We don't -- we haven't broken out the specifics. Are you -- yes -- your question was asking about Grain which is not the all season and there's a few different pieces in the grain one and I think we commented that the performance year-to-year in Lansing for that period of time was much improved. So that would have a big impact on what is specifically in that line.

And how (multiple speakers) what drove that improvement at Lansing?

Lansing is the opportunistic -- that's the reason why we are there and what they do well. There's a chance for the opportunistic inverse merchandising of grain when it is out of market regions and needs to be brought together that is what they do well. Transportation and arbitrage opportunities.

So there were some big inverses that were taken care of in that quarter. Plus actually some of their other businesses did quite well also. They executed well on a number of fronts.

And so would you say that we could expect that going forward? For next quarter as well? Is that -- are those conditions conducive to that?

We -- you have got the benefit of -- Lansing has done well. There's been variability in the quarter-to-quarter results.

We would expect them to do well. We would expect them to continue to be variable.

Then going into the Ethanol division, clearly on the pretax lines your Ethanol division did really well because (technical difficulty) noticed some variability on the gross profit line where sequentially store gross profit in ethanol was down versus the second quarter where we would expect that to be up, given your pretax. So I was wondering the disconnect between your gross profit line and your pretax line, is that the Denison plant? Is that plant running well?

Actually I think it's -- the combination is what you are looking at because the Denison plant is not included in the normal gross profit line because it is a consolidated piece. So there is a little bit of difference back and forth there.

I think we probably need to spend a little time, we could spend a little time with you to explain not right here -- we have to go back for those details, but some of that does have to do with the fact that the Denison plant is consolidated and not part of that LLC equity line. So we could probably talk with you about some of the specifics a little bit off-line.

Right, it is consolidated, that's why I am wondering why the drop sequentially from the June quarter to the September quarter in the Ethanol [from profit]? Usually that should have been a positive because of that (multiple speakers).

There is -- it was one adjustment in our corn pricing that is -- I guess account for what you are seeing there. That is a quarter-to-quarter adjustment on how the corn pricing flowed through the Denison plant. Yes there was that (multiple speakers).

There was a neg -- it was a negative adjustment (multiple speakers).

So when we look at the fourth quarter and end of year, how should we think about Denison impacting gross profit and just overall your gross profit on -- and how variable we should think about that Ethanol gross profit line? Because historically it has been very consistent because (technical difficulty) pretty much a fee income line.

No, it is not just fee income from Denison.

No, it's the income from ethanol facility (multiple speakers)

Before Denison, yes.

So now it is fee income plus the Denison operating profit. And so that adjustment that was made in the third quarter, negative adjustment to third quarter, is over and done with so that gross profit from the Denison plant for Q4 will be more aligned with just what the margins are in the marketplace for Q4. On top of our fee income as a company that we would receive.

And color on Thompson going forward. When is there any seasonality to Thompson as we think about that business contributing to earnings that we should think about?

The seasonality in Thompson's isn't a lot of different than our other businesses. We have -- a good segment of the Company is a grain business which obviously will handle volume in the fall and at time for wheat, and there will be space earnings just like our grain business. There is a plant nutrient business that will have a spring planting season just like our Plant Nutrient business here.

The one thing that is a lot less vol -- or is not as volatile. There's a good segment of that company that is the edible food bean business and that is more of a balanced set of numbers across the time frame of the year. But the majority of the business is a lot like our Grain and Fertilizer business and does have the seasonality.

Thank you very much.

Christine Healy, Scotiabank.

I want to first add on to what Farha ask regarding Thompsons. So the acquisition closed in late July so you would have had two months of results in the third quarter. So can you give us some sense of how the business is performing in its early days with the Company and also if I can just confirm that any contribution from Thompsons is being recorded in that earnings from equities affiliates in the Grain Group.

Yes. You are correct. That is where it is being recorded. We do have -- we did have about two months' worth of performance in there.

We also had all of the expenses of closing the deal and those -- the transitions, all those transitions going forward in that same period of time as well. So --

So we were just below breakeven on our portion of that in the two months of the second quarter. We would expect to be accretive for the year on the fourth quarter.

And how is the integration going? Is everything going as planned there?

Actually it is going quite well. We have got some really good work going on to integrate all kinds of things from both of the companies -- the Andersons and the Lansing Trade Group -- with the team up at Thompsons. We are all quite happy with how that is going.

Okay, great. Turning to free cash flow, I want to get a sense for your free cash flow.

I know for the last two quarters your inventory has been $200 million below the prior year. But if we look to Q4, Q1, grain prices are low, but you should have much higher volumes. Can you give us a sense for how we should expect your working capital to trend here over the next couple of quarters?

Are you asking on a net basis between current assets for liabilities or you just talking about current (multiple speakers)

Yes, I am trying to get a sense for your free cash flow that is going to be coming through. Should we expect that same trend to continue or your inventory will be lower or will that be that the lower grain prices, will that be offset by the higher volume?

Yes, we do have the seasonal phenomenon which you see again on September balance sheet of having a substantial grain payables at this time of year and that will continue to build between now and the end of the year. Of course, those payables will need to be funded in the first quarter and that is the normal kind of pattern.

I would say that the levels that we are at today should be the levels that we are in, roughly, in the range you see in the first quarter and second quarter from a GAAP reported working capital perspective. Again I am speaking range, not target.

Okay, that's helpful. Thank you.

Then, last question. I'm sorry if I missed this from your opening comments, I wanted to get an idea, there's $6.3 million in cost in the Other segment. Is that related to the Thompsons acquisition, some fees there. Can you give us a sense for that?

It is in that Other Corporate segment. It's (multiple speakers)

Yes, it is. John will handle that one.

There was -- some of that is really just timing. We have some benefits charges that we held at corporate that haven't been distributed yet. There were some adjustments really about a good portion of that, really, is just timing I think in there.

In addition because of the year and some of the incentive comp accruals are up a little bit and also our IT refresh project, our ERP project is starting to flow through that line as well. And those are the big ones.

Okay, that's helpful. Thanks.

Eric Larson, CL King.

Good morning, everyone. Congrats on a great quarter. I want to pursue the basis issue just a little bit more. Given that you got some early harvest in some of your new Southern assets, were you able to pull -- did you pull some fourth-quarter basis income on your mark-to-market calculations into the third quarter from Q4?

I would say that that is not likely or not significant.

It is just hard to tell from the timing of how it all works. And you got into a little bit of a discussion or Mike certainly did that right now your corn carry is only about average. It is.

It is good to have positive carries, it is better than the inverse, but if we truly do have a 14 billion bushel crop and when we were in that kind of that 50% to 60% harvest completion period, I'm really surprised that we didn't get a better carry opportunity. What might be going on? Were people's inventories so depleted from the drought that some of this stuff just isn't coming to market or what is maybe an explanation of the carry issue?

I think you hit it and that is the largest piece of it. The pipeline was so empty from all the way from the farm bins through the barge fleet on the river system to the export elevator into the processors. It was so empty that the first part of harvest in virtually all locations disappeared into that pipeline at a rate that was pretty alarming, I think, to everybody.

It was -- that's just the phenomenon that occurred. It was badly needed and it filled the pipeline and filled the space and disappeared quickly at the beginning. So that kept it from getting to the point that you suggested could have been a very large basis move down.

I would add to that. You know you have the bean dynamic which is beans just are coming in and going out. Nobody is watching those in space so it is not taking up space because the market needs the beans.

Now and we are seeing the impact which we will feel for some time of the expansion of grain storage space in the last four years. We have seen this episodic thing occur where you get a bunch of space and it takes a while for supply demand and production to catch up with it.

But we also -- what we don't know yet, it's early November and just the last several days we have been pleased, continue to be pleased with the flow of grain, corn in particular, that continues to come and the basis levels that are still relatively low, but there is a lot of space out there and so at least we are able to still be accumulating corn at decent levels. We'll see where she goes from here.

That [point] helped me. I don't know what the numbers but let's just use a number. 1 billion bushels of corn and beans that got consumed by the supply-chain really kind of hit the front end of harvest, even encouraged -- somebody mentioned cheaper drying, no drying rates early.

It just came and went and was gone, it didn't lodge anywhere. So that pressure disappeared on the system.

So I would say it is okay. We think we are recharging the system. That is a good thing for us as we point to the future, but as you said, Eric, it will probably be somewhat average in the carry we earn this year.

Yes, it clearly has surprised me a little bit. You mentioned, Mike, I don't want to beat this point to death, but there has been a lot of building of storage, but it isn't only just commercial.

It isn't the ADMs and stuff of the world. It is also the farmers have built a lot of storage in the last (multiple speakers) any guesstimate as to what the incremental storage -- you probably know the commercial number, you have to make a guess on, on farm storage numbers, but you have any sort of rough guesstimate of what storage increase has taken place in the industry in the last year and a half, two years?

No. We wouldn't hazard a guess at the number. It's obviously been substantial. You can tell that from a lot of different anecdotal evidence, but we wouldn't hazard a guess at the number.

Yes, well you can tell it in the basis. You can tell it -- is that coupled with the impact from the drought.

So it is hard to get a feel for it. But (multiple speakers)

But what we do know, the way it is setting up is we are going to have roughly between what's happening in corn, we are going to have roughly call it 1.5 billion bushels in storage going into next year's harvest.

Yes, that makes sense. I quite frankly was expecting with this harvest it would see cash prices dip below you know that they have a three handle on it (multiple speakers) and we haven't really seen that.

But the final question then is the one area, well, there's a couple of small areas where the harvest was suspect and, obviously, Iowa was -- parts of Iowa was one of them. What --? Around your Denison plant, what are you guys -- what are your farmers saying about what their yields are? Are supplies good? So what are you seeing in Iowa specifically with Denison?

Well, whether it is Denison or all of our Iowa facilities, I think what we found during the harvest is that the harvest yields have been better than we thought they were going to be when we were sitting here at Labor Day worried about the dry weather. Surprisingly so.

Yes, I would agree with that. Okay, well thanks for that confirmation. Thank you, everyone.

I would now like to turn the call over to Mike Anderson, CEO and Chairman.

Thank you much. I want to thank you for joining us this morning. I also want to mention for those that are interested, there are seven appendix slides to this presentation available on the Andersons Inc.com website at the investors tab under the third-quarter earnings call replay.

Our next conference call is scheduled for Wednesday, February 12, at 11 AM Eastern time to review our full year 2013 results. We hope you are able to join us again at that time. Until then, have a great day. Thanks.

Thank you for joining in today's conference. This concludes the presentation. You may now disconnect and have a good day.