The Andersons, Inc 2007 First Quarter Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Preeti Dubey - Thomas Weisel - Analyst : Hi, Gary. Hi, Mike. I have one question regarding ethanol marketing [scale] sales. Could you please tell me what gross margin do you make on ethanol marketing sales? And also, what is the implication of ethanol marketing sales on your working capital? Again, should we expect increase in inventory or accounts payable because of that?

Question: Preeti Dubey - Thomas Weisel - Analyst : Okay. Okay. And regarding Railcar Leasing business -- I was expecting a decline in these rates because of reduced demand. But you have not provided any indication of what kind of decline in these rates you have seen in this quarter. But any color that you can provide there will be very helpful.

Question: Preeti Dubey - Thomas Weisel - Analyst : Okay. All right. Just a few housecleaning questions -- I didn't catch the D&A number that Gary had provided. So if you can just repeat that again? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Preeti Dubey - Thomas Weisel - Analyst : For depreciation.

Question: Preeti Dubey - Thomas Weisel - Analyst : Okay. And on your balance sheet, I did see a minority interest. And if you can just elaborate on that, what is it related to?

Question: Preeti Dubey - Thomas Weisel - Analyst : All right. I'll give you a call on that one. And -- actually, that's all. I'll get back with you. Thank you.

Question: Heather Jones - BB&T Capital Markets - Analyst : Good morning. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Heather Jones - BB&T Capital Markets - Analyst : Someone's going to have to do it, so I guess I figure I'll do it.

Question: Heather Jones - BB&T Capital Markets - Analyst : Yes.

Question: Heather Jones - BB&T Capital Markets - Analyst : I'm very familiar with your conservatism, and I appreciate it. But I want to go through your thinking. If I take the low end of your range -- it implies down earnings from last year, for the next few quarters -- the high end implies basically no growth. And then looking at it another way, if you take out the ethanol development fee from the quarter, it's implying practically no growth from last year. So what I'm trying to figure out, beyond your concerns regarding the planting progress and the impact that could have on Plant Nutrient and Grain -- I'm wondering if there's other issues out there. And clearly, Rail is soft, but it doesn't sound like it's fallen off a cliff. I wonder if there's other issues out there that the street may not be aware of that is causing you such caution, or if it's just your typical conservatism regarding weather, et cetera.

Question: Heather Jones - BB&T Capital Markets - Analyst : I want to go back to the Grain side. Q3 and Q4 combined for last year was better than Q3 and Q4 of '05. But -- and this is where I'm not contesting; I'm more just wanting to know what I'm -- how I'm thinking about this incorrectly. But as far as your Storage business there, there's an enormous bushel differential between corn acreage versus soybean acreage. And in the states that you all are heavily concentrated in, there's anywhere from like a 14 to 16% increase in corn acreage. So thus, you would assume -- again, assume that you make decent progress on planting, et cetera -- that there's going to be enormous increase in bushels. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. And if the USDA, or in stuff that we've read, as far as information on storage capacity is correct, there's been very little build. So I don't understand why you wouldn't have a pretty strong second half.

Question: Heather Jones - BB&T Capital Markets - Analyst : Right.

Question: Heather Jones - BB&T Capital Markets - Analyst : Right. And then my final question is on Rail. If you could give us some color on for Q2 through Q4 '06, do you have a rough estimate of how much of that income was related to car sales? And do you expect a --

Question: Heather Jones - BB&T Capital Markets - Analyst : -- significant --

Question: Heather Jones - BB&T Capital Markets - Analyst : Right. I mean, what does your guidance assume? Does it assume that you only make what you made in Q1?

Question: Heather Jones - BB&T Capital Markets - Analyst : Okay.

Question: Heather Jones - BB&T Capital Markets - Analyst : Okay.

Question: Heather Jones - BB&T Capital Markets - Analyst : All right.

Question: Heather Jones - BB&T Capital Markets - Analyst : Okay. All right, thank you.

Question: Bryan Milberg - Piper Jaffray - Analyst : Morning, guys.

Question: Bryan Milberg - Piper Jaffray - Analyst : Let's stick with Rail for just one second. My understanding of the freight picture in the United States was intermodal traffic was off significantly, but general freight was not. Am I wrong in that assumption?

Question: Bryan Milberg - Piper Jaffray - Analyst : Because my understanding your fleet was it's mostly container cars, not -- do you even have any intermodal cars?

Question: Bryan Milberg - Piper Jaffray - Analyst : I didn't think so.

Question: Bryan Milberg - Piper Jaffray - Analyst : Well, I'll get back to you on that.

Question: Bryan Milberg - Piper Jaffray - Analyst : Yes.

Question: Bryan Milberg - Piper Jaffray - Analyst : Okay.

Question: Bryan Milberg - Piper Jaffray - Analyst : Can we talk a little bit about the development fee -- this semi, ongoing, one-time stream of income? You really haven't spoken much in the past on how this works. Can you give any more color on -- is it a percentage of completion? Is it based on sales? How does it work? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Bryan Milberg - Piper Jaffray - Analyst :

Question: Bryan Milberg - Piper Jaffray - Analyst : Okay.

Question: Bryan Milberg - Piper Jaffray - Analyst : Well, speaking of these outside agreements and partnerships, did you mention -- on the Greenville, I thought the original plan was 50-50.

Question: Bryan Milberg - Piper Jaffray - Analyst : And when did that -- now I hear it's 34%. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Bryan Milberg - Piper Jaffray - Analyst : When did that change? And --

Question: Bryan Milberg - Piper Jaffray - Analyst : Okay.

Question: Bryan Milberg - Piper Jaffray - Analyst : So, if this Greenville plant puts out 100 million gallons, are you going to get 34% of that, or 50%?

Question: Bryan Milberg - Piper Jaffray - Analyst : Yes, I know. I'm just throwing a number out.

Question: Bryan Milberg - Piper Jaffray - Analyst : Okay.

Question: Bryan Milberg - Piper Jaffray - Analyst : Okay.

Question: Bryan Milberg - Piper Jaffray - Analyst : Okay.

Question: Bryan Milberg - Piper Jaffray - Analyst : Okay. I'll turn it over and maybe come back with some more questions.

Question: Bryan Milberg - Piper Jaffray - Analyst : Thank you.

Question: Farha Aslam - Stephens, Inc. - Analyst : Hi, good morning. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Farha Aslam - Stephens, Inc. - Analyst : Couple questions -- could you quantify your one-time items that were in the quarter, kind of the -- as you would say, what would be the fees, and any other income you would think would be one-time in nature?

Question: Farha Aslam - Stephens, Inc. - Analyst : For modeling purposes.

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. And then, when you -- let's just start with your Fertilizer business. That sales number really was surprising to me. Could you just break down kind of volume -- the portion of the sales increase that was volume, and the portion that was price?

Question: Farha Aslam - Stephens, Inc. - Analyst : Yes, exactly. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Farha Aslam - Stephens, Inc. - Analyst : Then maybe just on --

Question: Farha Aslam - Stephens, Inc. - Analyst : Yes -- and kind of what you think pricing is going to be up for the year, roughly.

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay.

Question: Farha Aslam - Stephens, Inc. - Analyst : One hundred eight?

Question: Farha Aslam - Stephens, Inc. - Analyst : So your volume was up basically 50%?

Question: Farha Aslam - Stephens, Inc. - Analyst : And then for the full year, what would you expect your volume to be up?

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. And would you say 2005 was a good year in your Plant Nutrients business as well?

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay.

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay.

Question: Farha Aslam - Stephens, Inc. - Analyst : That's helpful. That helps.

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. That's very helpful. Now, going into Rail -- you had talked about how in the quarter your revenues weren't particularly impacted by the weakness in the rail rates. But kind of going forward, we're hearing that folks that are now leasing railcars are taking advantage of this current weakness in the market demanding kind of two-year rates on ethanol cars, if they're going to take them, and being pretty tough in their negotiations. So kind of looking forward in REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. your Rail business, do you think that the current weakness is going to impact that business longer term, kind of over the next year -- maybe even two years?

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. So the ethanol cars that you've ordered you're using internally. And you're --

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. And kind of when you look at the maintenance cost of your Rail business --

Question: Farha Aslam - Stephens, Inc. - Analyst : -- you've talked about it being high. Do you anticipate that coming down at all going forward?

Question: Farha Aslam - Stephens, Inc. - Analyst : And I can appreciate where you don't have as much kind of forward look in your Rail business as you do in your Plant Nutrients business. But would you point us back down to like the 2004 type kind of profitability levels in Rail? Are we just going back to that 2004 level?

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. And then, we get to your largest business, the Grain Ethanol business. Your comments on corn today are much, much more cautious than your comments on corn your last conference call. What do you think is the difference -- and the fact that you've gone out, and it seems like you've locked in corn prices for all of 2007 in '08 -- really is reflecting that. What changed your view on corn?

Question: Farha Aslam - Stephens, Inc. - Analyst : Last conference call, you had mentioned that you hadn't gone out and hedged your corn needs for 2008, because you felt like there was an opportunity to maybe hedge at a better level. Today it sounds like you've positioned your books, and you've locked in corn prices for '08.

Question: Farha Aslam - Stephens, Inc. - Analyst : When you say high-priced, you're thinking like $4 corn? Or do you think there's a real --

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. And so -- just so I fully understand -- you've completely locked in your corn price for '07 and '08 --

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay.

Question: Farha Aslam - Stephens, Inc. - Analyst : Correct. Right, right, right.

Question: Farha Aslam - Stephens, Inc. - Analyst : Yes. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. And then, when you look at your ethanol -- now, you're completely hedged on ethanol for '07?

Question: Farha Aslam - Stephens, Inc. - Analyst : And how much into '08?

Question: Farha Aslam - Stephens, Inc. - Analyst : Would it be fair to characterize the fact that -- for kind of your hedges into '08 -- that you took advantage of the recent increase in oil and gas prices that we've seen over the last kind of two or three months, and kind of the drop-off in corn prices we saw right after the March plantings report -- would that be kind of a good range for us to think about '08? Or will we start getting our margins way too high for you for next year?

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. And two more questions, and I promise I'll pass it on. When you look at the curve versus gasoline, are you thinking of like that $0.42 historic range, spread between ethanol and gasoline, as a good range?

Question: Farha Aslam - Stephens, Inc. - Analyst : Or you think that's --

Question: Farha Aslam - Stephens, Inc. - Analyst : Premium.

Question: Farha Aslam - Stephens, Inc. - Analyst : Yes.

Question: Farha Aslam - Stephens, Inc. - Analyst : But that's just because of the Brazilian ethanol coming in, right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay.

Question: Farha Aslam - Stephens, Inc. - Analyst : And then my last question is -- you guys seem to be now taking the ethanol in and flowing it through your top line. Does the DDG also flow through your top line? Or is that still at the JV level?

Question: Farha Aslam - Stephens, Inc. - Analyst : Okay. Thank you very much for your answers.

Question: George Askew - Stifel Nicolaus - Analyst : Yes, hi, good morning.

Question: George Askew - Stifel Nicolaus - Analyst : Well, some of my questions have been asked. The -- let's see here -- the development fees -- clearly -- I mean, I assume that you've still got Greenville's development fees ahead of you. I mean, there's no reason to think that the plant that opens a year from now would have -- all those fees would have shown up this quarter. I mean, is that fair to say? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: George Askew - Stifel Nicolaus - Analyst : Okay. So --

Question: George Askew - Stifel Nicolaus - Analyst : Right.

Question: George Askew - Stifel Nicolaus - Analyst : Okay. So if we -- I mean, -- can you kind of articulate, within the guidance range you've provided for 2007 -- how much of that would be development fees? I mean, it sounds like most of it's already --

Question: George Askew - Stifel Nicolaus - Analyst : Right. Okay. That's fair. And --

Question: George Askew - Stifel Nicolaus - Analyst : Okay. The business-interruption insurance -- is that built into your forecast as well?

Question: George Askew - Stifel Nicolaus - Analyst : Okay. So you've made an assumption there.

Question: George Askew - Stifel Nicolaus - Analyst : And I assume you're not going to tell us how much.

Question: George Askew - Stifel Nicolaus - Analyst : The -- your ownership percentage appears to have changed at Albion and Clymers versus my notes --

Question: George Askew - Stifel Nicolaus - Analyst : -- only by a handful of percentage points. But I'm curious -- is there something going on there? I mean, partners leaving, or --

Question: George Askew - Stifel Nicolaus - Analyst : Oh, I see. Okay.

Question: George Askew - Stifel Nicolaus - Analyst : Well, now I'm looking at it -- I wrote down 34% -- that has to be Greenville.

Question: George Askew - Stifel Nicolaus - Analyst : Okay. All right. What is the life span -- if you think of the old -- within Rail -- the old wheel sets -- how long would they last, versus the new wheel sets? I mean, is there -- they had a two-year life.

Question: George Askew - Stifel Nicolaus - Analyst : Right. Okay. Okay. And then I guess last question -- comparing sort of the operating income of Plant Nutrient and Rail, excluding any railcar sales, do you think you could see a situation where the Plant Nutrient business could actually have a bigger year in '07 than Rail?

Question: George Askew - Stifel Nicolaus - Analyst : Basically --

Question: George Askew - Stifel Nicolaus - Analyst : Right.

Question: George Askew - Stifel Nicolaus - Analyst : Okay, fair enough. I'll stop there. Thank you.

Question: Charlie Rentschler - Wall Street Access - Analyst : Yes, good morning, Mike and Gary.

Question: Charlie Rentschler - Wall Street Access - Analyst : Couple questions -- I know we're well out of time here. Mike, you said that Lansing trading did well in the first quarter, but the income was down. And I wondered if you'd just say a few words to try to reconcile that.

Question: Charlie Rentschler - Wall Street Access - Analyst : And Mike, are they doing more and more in ethanol, terms of trading?

Question: Charlie Rentschler - Wall Street Access - Analyst : And then my final question -- there was a report in the local newspaper out in Champagne-Urbana that you guys seem like you were at least delaying any thoughts about constructing another ethanol refinery there. I guess it was an article about some intersection that was going to need $1 million or $2 million upgrade, or something like that. But I don't know if you're in a position to talk about that or not. But I guess my broader question is, are you kind of satiated now with the three plants that you've got built or under construction? And will you kind of rest at that?

Question: Charlie Rentschler - Wall Street Access - Analyst : Yes. Well, that's good. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. And coupled with your earlier comment that you're really focused on hedging all those inputs and outputs, and trying to lock in those relationships -- that to me makes a lot of sense.

Question: Charlie Rentschler - Wall Street Access - Analyst : Okay. Thank you.

Question: Jeffrey Shu - GLG - Analyst : Yes, hi. It's actually Jeffrey Shu from GLG Partners.

Question: Jeffrey Shu - GLG - Analyst : Hi. The first question pertains to Rail. You'd mentioned during your comments that 90% of the year-on-year decline in EBIT was related to lower sales of railcars and Katrina.

Question: Jeffrey Shu - GLG - Analyst : Exactly.

Question: Jeffrey Shu - GLG - Analyst : So what portion was Katrina pop versus railcars? And looking forward --

Question: Jeffrey Shu - GLG - Analyst : Sure.

Question: Jeffrey Shu - GLG - Analyst : [inaudible]

Question: Jeffrey Shu - GLG - Analyst : Just in terms of how much more Katrina activity benefit was there, say, in the second quarter over the third quarter of last year? So in other words, what kind of a difficult -- is there still a persisting difficult comparison?

Question: Jeffrey Shu - GLG - Analyst : Okay. But sequentially -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Jeffrey Shu - GLG - Analyst : But sequentially it eases.

Question: Jeffrey Shu - GLG - Analyst : But sequentially, it eases.

Question: Jeffrey Shu - GLG - Analyst : Got it. My other question just goes back to some of the questions that Heather Jones had asked you about. I mean, when I sort of think of your business, conceptually, when there's more abundance of corn that's coming out of the ground, it needs to theoretically compete to be stored, processed, and so on and so forth. So when that occurs, I sort of conceptualize you having greater sort of pricing power on the farmer, so that you can hopefully pay less for the corn, which you then turn around and sell at whatever the market price is that you can lock in. So conceptually, your spread should be widening in high-volume corn environments.

Question: Jeffrey Shu - GLG - Analyst : And just --

Question: Jeffrey Shu - GLG - Analyst : Okay. And just in terms of -- just help me, in terms of frame of reference, and how guidance was set -- you had mentioned that typically when the plantings are late, either yield or ultimate acreage ends up suffering?

Question: Jeffrey Shu - GLG - Analyst : So if we look what the USDA -- if we just use that as a benchmark -- has said -- 90.9 million acres, and a yield of 153.5, or whatever it may be -- so do you sort of look at that and say, Okay, this is how much planting's been delayed this year. Let's haircut those numbers by x and y, and sort of, Here's what we think corn out of the ground is going to be, here's what we think for the states that we operate in, and hence here's where our guidance comes from?

Question: Jeffrey Shu - GLG - Analyst : But just from a guidance standpoint, though -- so I'm assuming you're using -- so, as you see it today, the worst-case scenario, downgrade from the 90.9 million and the 153.5 million is kind of what your guidance assumes then? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Jeffrey Shu - GLG - Analyst : No, no, I mean, within the spectrum of reasonability. I mean --

Question: Jeffrey Shu - GLG - Analyst : You're taking a haircut --

Question: Jeffrey Shu - GLG - Analyst : So, you're taking a little haircut to the average; i.e. --

Question: Jeffrey Shu - GLG - Analyst : -- the current USDA guidance --

Question: Jeffrey Shu - GLG - Analyst : -- is actually above what you embody in your guidance.

Question: Jeffrey Shu - GLG - Analyst : Got it.

Question: Jeffrey Shu - GLG - Analyst : Right.

Question: Jeffrey Shu - GLG - Analyst : Right. But I mean, the way I understand it is all these farmers have insurance. So they're pretty much incentivized to just pump as much corn out of the ground as possible, which, unless it sits on the road, has to go somewhere, right, regardless of what the end demand really is. So it still needs to get processed, doesn't it?

Question: Jeffrey Shu - GLG - Analyst : But the higher the percentage, the better it is for you, right?

Question: Jeffrey Shu - GLG - Analyst : Got it.

Question: Jeffrey Shu - GLG - Analyst : Got it.

Question: Jeffrey Shu - GLG - Analyst : Okay.

Question: Jeffrey Shu - GLG - Analyst : Okay. Thank you -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Jeffrey Shu - GLG - Analyst : Okay. Well, thank you for the insights. And hopefully we can catch up off-line. I'll give you a call.