Andersons Inc. Q3 2008 Earnings Call Transcript

Nov.20.08 | About: The Andersons, (ANDE)

Andersons Inc. (NASDAQ:ANDE)

Q3 2008 Earnings Call

November 5, 2008 at 11:00 am ET

Executives

Michael J. Anderson - President and Chief Executive Officer

Gary L. Smith –Vice-President, Finance and Treasurer

Analysts

Analyst for Heather Jones - BB & T Capital Markets

Farha Aslam - Stephens Inc.

Michael Cox - Piper Jaffray

Joseph A. Gomes, Jr - Oppenheimer & Company

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2008 Anderson Inc. earnings conference call. My name is Marcia and I will be your coordinator for today’s call. At this time, all participants and analysts are in a listen-only mode. We will conduct a question-and-answer session toward the end of today’s conference. (Operator instructions). As a reminder this conference call is being recorded for replay purposes. I would now like to turn the call over to Mr. Gary Smith, Vice-President of Finance and Treasury. Please proceed, Sir.

Gary L. Smith

Thank you Marcia and good morning everyone and thanks for joining us in the 2008 third quarter conference call. As you know certain information that I will be discussing today constitutes forward-looking statements. The actual results may differ materially from those presented in the forward-looking statements as a result of many factors, including general economic conditions whether in competitive conditions, conditions in the Company’s industry both in the United States and internationally. And the additional factor that is described in the Company’s publicly filed documents including correct filings and the prospectuses prepared in connection with the conference file. Mike Anderson and I will be available for questions after the call. Let me turn it over to him.

Michael J. Anderson

Thanks Gary, good morning everyone. As noted in our press release, we generated a record third quarter net income of $12.8 million or $0.70 per diluted shares on revenues of $906 million. In 2007, we recorded net income of $10.6 million or $0.58 per diluted share on $554 million of revenue. Despite the record results we had additional upside opportunities we could have achieved but did not. For the first nine months, our total net income stands at $66.3 million or $3.60 per diluted share. In 2007, we reported net income of $45.3 million or $2.48 per diluted share. Total revenues of $2.7 billion dollars for the first nine months of the year are up $1.1 billion dollars from last year. This revenue growth has come from several sources including higher grain and plant nutrient prices and ethanol sales made on behalf of our joint ventures.

Let us start with the grain and ethanol group. It had an operating income of $9.4 million in the third quarter versus $13.7 million a year ago. Income from the grain business increased over the prior year but this was not the case with our equity investments. Grain business continued to benefit from its significantly improved margins on grain sales and from an increase in basis income. Early in the year we had significant basis deterioration but year-to-date basis income is now just below last year. Grain business, however, continues to be impacted by higher cost, interest cost, which increased $2.8 million in comparison to the prior period due to higher grain prices. Income from ethanol business declined $8.8 million during the most recent quarter to a loss of $2 million. This was primarily due to the combined performance of the Company’s investment in the three ethanol limited liability companies. Also, the distillers dried grain market (NYSEARCA:DDG) did not keep pace with the rising corn market and this accounted for approximately $1.2 million of reduced performance within the ethanol business. I am able to report, however, that the DDG market returned the prior levels in the fourth quarter as the price of corn decreased. The ethanol facility explosion that occurred at the end of the second quarter also impacted this quarter’s ethanol business results. Our share of the impact was estimated to be about $1 million. Business interruption claim related to this event will likely not settle until 2009.

The total of the third quarter operating loss from our ethanol equity investments was $3.2 million. However, when the minority investor share of TAEI is included, this becomes an operating loss of only $1.5 million dollars. The third quarter income from the group’s investment in Lansing Trade Group was $2.6 million, which is $1 million dollars lower than last year. Total third quarter revenues for the group was $651 million dollars. These includes $245 million of grain and ethanol sales made by the group in accordance with its origination and marketing agreements between the Company and its ethanol joint ventures for which it receives a fee. The third quarter of 2007, the group’s total revenue was $283 million and included $167 million in ethanol joint venture sales.

Though revenues for the group are higher, such amounts do not serve as a good predictor of income or economic performance for the group as it is a commodity-based business.

Before I move on to the year-to-date results for the grain and ethanol group, I have to point out the impact of our commodity markets had in our income. I previously pointed out; rising grain prices lead to much higher cost in the way of increased interest expense, the debt expense contract per value adjustments within our grain division. Rising corn prices can also have a significant impact on the ethanol business as it is the primary input for ethanol. These considerations let us and our equity partners to take purposeful positions to limit our risks on the rising price of corn.

During the third quarter the price of corn declined significantly in these hedge position led to an operating loss of approximately $8 million within the Company and an additional $1.6 million for our share on Lansing Trade Group for a total impact of $9.6 million. Year-to-date, however, the impact of these [inaudible] hedges has been a gain of $1.3 million, mostly attributable for Lansing Trade Group.

Overall, I am satisfied with full year impact in the unbelievable volatility that has been seen in the market place this year. Even though I am disappointed that in the third quarter, we gave back virtually all we earned in the first half of the year.

The grain and ethanol group’s operating income through the first nine months was $31.7 million in 2008 which compares to $35.9 million in 2007. We consider, however, that there was $6.9 million dollars more in one-time development fees, insurance claims paid last year, operating income from continuing operation has actually increased $2.7 million. The year-to-date results are largely driven by the performance of Lansing Trade Group and the ethanol business. Grain business’ performance was lagging for the year due to the higher expenses related to the high prices of grain experienced during the year, more significant of which is interest costs that were $11.5 million higher than last year.

Total revenues through September were $1.8 million in comparison to $950 million in 2007. The first nine month’s results include $657 million of grain and ethanol sales made in accordance with the origination and marketing agreement, which is $339 million more than what was reported last year. Sales of grain other than to ethanol entities also resulted from higher revenue due to increases in bushels sold and significant increases in the average price of grain sold.

During the third quarter, our company completed the purchase of the grain storage facility in Reading, Michigan. We also finalized leasing agreements for two additional grain storage facilities in Champaign, Illinois and Jonesville, Michigan. In total, these transactions added 7.6 million more bushels storage capacity within the group.

The rail group had an operating income of $5.2 million this quarter and revenues of $28 million. Last year, the group reported $5.8 million of income and revenues of $34 million. The group recognized $700,000 in gross margin from the sale of rail cars and related leases during the quarter. Over the last year, similar gains of $2.8 million were recognized. Absolute gains from sales, gross profit from leasing was higher in spite of the fact that some lease renewals were made at lower rates. This was partially due to the fact that the current value of our asset base yields wider [Inaudible] spreads. Gross profit from leasing business was also higher due to a higher utilization rate in both the size of the fleet.

The group now has 24,007 cars and locomotives, which is 6% more than its year earlier total. Also the average utilization rate which is a percentage of the fleet in service for the quarter was 93.2% in comparison to 92.5% last year. Maintenance cost for car actually decreased during the quarter after rising in the second quarter. Gross profit of the rail car business grew during the third quarter as the sixth rail car shop was opened in April in Anaconda, Montana and the seventh shop was added in September in Ogden, Utah.

Through the first nine months, the rail group has generated revenues of $106 million and operating income of $16.5 million. The same period of 2007, total revenues were $102 million and operating income amounted to $15.7 million. This year-to-year increase in the first nine months operating income was due mainly to increased gross margin in the leasing business for the same reasons I previously mentioned.

The results of the manufacturing business have also improved year to year. I am pleased with the rail group’s results year-to-date as they are $800,000 ahead of the prior year in spite of gains from car sales being down $3.8 million compared to last year. This demonstrates that our strategy of buying cars in our target market segment is working well. That being said, with the current slow down and the general economy, resulting in the decrease in the car loans and improved velocity of the rail roads, we could see utilization rates drop. Downturns in the leasing market, however, also tend to provide us with car acquisition opportunities that could pay dividends in the future.

The plant nutrient group had an operating income of $7.2 million on revenues of $162 million. Typically, the third quarter is a loss or a near break-even quarter for the group. The same 3 month-period for 2007, the group reported $800,000 operating profit on $77 million of revenue. The current quarter earnings were impacted both positively and negatively by fluctuating fertilizer prices. During the quarter significant margin increases were recognized on sales made due to the inventory appreciation. Certain inventory values, however, declined sharply late in the third quarter and into the fourth quarter, resulting in $13.1 million in adjustments for purchase commitments and inventory that was valued above the current market. Sales value during this quarter was slightly above the prior year.

Although experiencing some real time price volatility as a result of slowing demand and increasing supply, the plant nutrient group has earned a record of $62 million through the first nine month on $541 million dollars of revenues. Last year, the group generated an operating income of $18.4 million on $326 million of revenues. Through September, the group’s revenues are up 66% and operating income was up $43.8 million. For the remainder of the year we anticipate some continued price decreases in the world fertilizer markets that will lead to margin decreases and additional inventory adjustments in the fourth quarter. The market is in the process of getting grain input cost and output prices recalibrated. Managing the volatility is challenging, however, agricultural fundamentals remained strong as world demand for protein continues to grow. The inoperation of the recently acquired 6 Douglas fertilizer locations and the 3 pelleted line facilities has been going very well.

The Turf and Specialty group incurred an operating loss of $500,000 for this quarter on $23 million in revenue. Last year, the group reported the $1.6 million loss on $18 million on revenue. Turf products sales was up slightly from the prior year. Gross profit for turf was up considerably in spite of record high raw material prices due to a larger percentage of sales coming from proprietary products such as Contec DG.

The dispersible granular product line is continuing to perform well and the group continues to see products such as these as growth area. Through the first nine months of 2008, the group’s operating income was $3.4 million and $99 million in revenue versus last year’s operating income was up $2.5 million and revenues were up $14 million. I should mention that the price decreases especially on nitrogen being seen in our plant nutrient group will not have a noticeable impact on the Turf and Specialty group as the group primarily purchases its nitrogen as it is needed, which mitigates the risk of inventory devaluation.

The Retail Group did a good job of controlling cost in the third quarter, which historically is not a profitable quarter. The group kept the operating loss to $200,000 which compares to a loss of $600,000 in the same period last year. Total revenues of $41 million for the third quarter were approximately 3% of $42 million in revenue reported in June 2007. The sales decline is primarily due to the weak economic conditions that have led to an overall decline in consumer spending. Margins for the quarter however were up 1.2% in comparison to the prior year. The group’s total revenues of $127 million in the first nine months were down $3.6 million from last year. Year-to-date operating loss of $200,000 is $900,000 less than the results for the first nine months of the 2007, due to the difficult first quarter which the retail business experienced. As a result of the margin improvement seen in this quarter the year-to-date margins for the group are now comparable to the prior year. Now I will turn the phone over to Gary for the treasurer’s comment.

Gary L. Smith

Thank you, Mike. The Company’s third quarter year-to-date effective tax rate within 2008 was 36%, unchanged from 2007. We are projecting that will be our four-year tax rate for all of 2008. Interest expense for 2008 third quarter totaled $7.5 million, up more than $3 million for the same period last year. Year-to-date interest expense was $25 million; an increase of approximately $12 million was compared to 2007, $7 million in short-term debt and $5 million dollars in long-term debt was really the factor. Our short-term average interest rates for both the third quarter and the September 30th year-to-date were down approximately 2% compared to 2007. Average short-term borrowings as compared to 2007 were up for both third quarter and year-to-date by $112 million and $247 million dollars, respectively. Short-term borrowings at the end of the third quarter were down in $44 million versus $163 million in 2007. This is significantly different than what you saw in June of 2008 which was a balance of $432 million. The Company’s short-term lines of credit were totally paid off early in October and for the balance of the month, we were investing. Yesterday, we still had excess cash investments of $8 million. When you review our 10Q and the statements of cash flow from operating activities, you will notice some substantial improvements between the second and third quarters 2008. Earnings before interests and taxes for the third quarter of 2008 were $35 million versus $28 million in 2007. The year-to-date EBITDA totaled $151 million, an increase of $48 million for the same period last year. The 2008 third quarter pre-tax earnings include the loss of approximately $600,000 in the equity earnings of affiliates. Year-to-date equity earnings and affiliates totaled $16 million, down more than $1 million dollars from 2007. According to the balance sheet, our current assets ended 2008 third quarter at $842 million, a $201 million increase with the year earlier balance of $642 million. The majority of this increase was in tree line items, accounts and notes receivable, net margin deposits and inventories that were up $57 million, $29 million and $75 million, respectively. Commodities derivative assets current were up $5 million from the same period last year and it ended the quarter at $113 million; however, mild driven assets current was down $381 million from the second quarter of 2008, a pretty substantial difference.

Since the 2007 third quarter, trade receivables had increased of $57 million. Grain and ethanol receivables were up $15 million and plant nutrient receivables were up $39 million, all of these as a result of increasing selling prices. Margin deposits, net, ended the quarter up almost $29 million over the same period last year. Inventories were $382 million at the end of the third quarter up $75 million from last year third quarter ending balance compared to the 2007 third quarter levels, the largest increases came from plant nutrient with inventories up about $129 million and this, of course, was due to higher raw material prices. Grain and ethanol inventories were down $55 million that less compared to 2007 and changes in the commodity prices were affecting them.

At the end of September 2008, the Company’s total grain inventories were 40 million bushels, down 6 million bushels for the year earlier position. Networking capital ended September 2008 at $347 million, an increase of $191 million from the third quarter last year. The total assets at the end of third quarter went $1.3 billion, an increase of $294 million over the third quarter of 2007, but a decrease from June 2008 peak of $1.75 billion. Along with the increase in working capital, investments and advances to our affiliates, added $54 million. Property plant and equipment, along with rail car assets leased to others, added $50 million as well.

At the end of 2007, third quarter depreciation totaled $22 million. Total capital spending including investment in affiliates at the end of September was $69 million versus $53 million with the same period in 2007, and this excludes rail cars, which I will give you separate, rail cars purchases and sales worth $82 million and $54 million, respectively, for the first nine months of 2008. Rail car purchases and sales for the same period last year were $45 million and $16 million, respectively.

Our long-term debt totals $339 million, an increase of $184 million. From last year’s third quarter balance, our long-term funded debt to equity is 0.8 to 1. And the average third quarter of 2008 interest rate for all long-term debt was about 5.9%.

As of September 30th, our total equity was $419 million, up $91 million from last year. As in the case with most companies with the applied benefits with pension plan, our portfolio has large ground like everyone else invested in the capital market. As a result, we are taking steps to increase our contributions during these difficult economic times. On October 22nd, we paid our fourth quarter 2008 dividend of $0.085. Fortunately, we continue to receive good support from our banks, considering economic conditions in mid-October when we renewed our temporary flex line at a $161 million and that will remain in place until April of 2009. We currently have syndicated lines of credit of $860 million. Mike?

Michael J. Anderson

Thanks, Gary. Before we take questions, a few more points, despite the turn of events in fertilizer market, I am pleased with the earnings growth we have achieved so far, especially if we consider that the prior year results included non-recurring gains that were $10.6 million more in pre-tax income than what has been recorded this year. The current guidance of $3.50 to $4 per diluted share was significantly influenced by the recent, sharp decline in global fertilizer prices and the impact it has had on inventory valuation, and will have on margins on the plant nutrient group. In both the first and second quarters, I mentioned that in some point in future there is a risk that the inventory price depreciation we have seen could reverse on one or more of our products. Admittedly, we did not expect for the change in the inventory pricing to occur so quickly, otherwise, we would not have owned so much inventory.

Current guidance was also partially attributable for the economics in the ethanol industry which have continued to worsen. It is also important to remember that with the diversity of our business units, there are numerous factors that could impact the full year results. Examples of which are further changes in plant nutrient prices and grain prices, the timing of the sales of rail cars and the performance of our equity investments, which includes the ethanol production plants in Lansing Trade Group. If the year progresses, we will continue to revisit our earnings forecast before we will update our guidance at the time.

We would however like to put our guidance into perspective. Last year we had record earnings of $3.75 for diluted share, which was a 71% increase over the previous record established in 2006 of $2.19 per diluted share, which was also a 30% increase over the prior year record. At the current range we still intend to have a great year and possibly another record. I would like to reiterate to prove by reiterating that the Company is committed to positive sustainable growth. We have been deliberately growing various business units over several years we will continue to do so. Just since the beginning of the year, we have increased our investment in Lansing Trade Group twice, increased our grain storage capacity by 7.6 million bushels, increased our rail fleet by 6%, added two more rail car shops and purchased 6 Douglass fertilizer sites and three pelleted lime facility. That concludes my prepared remarks. Gary and I will now be happy to answer any questions you may have. So Marsha, we will turn it back to you.

Question-and-Answer Session

Operator

Ladies and gentlemen (Operator’s instruction) and your first question comes from the line of Heather Jones from market. Please proceed.

Analyst for Heather Jones - BB & T Capital Markets

Hey guys, this is Brad speaking in behalf of Heather. How are you doing?

Michael J. Anderson

I did not sound like Heather, Brad.

Analyst for Heather Jones - BB & T Capital Markets

I wanted to delve back into rail, real quick. Mike, you talked about the down turn in the economy affecting the business and possible acquisitions arising there. I just wanted to go through some of the trends you are seeing in your own operations, thus far in the quarter, and your expectations for the business going forward there.

Michael J. Anderson

I just to want to make sure I understand. That was a broader company comment, not a rail question. Is that correct?

Analyst for Heather Jones - BB & T Capital Markets

Right. That is right. That is about rail.

Michael J. Anderson

Ok, well, we do see, for some period of time, car loads of all types, for some period of time over a year, almost every month, not every month but almost every month, the total car loads get recorded and been hold on rail lines and they have continued to go down I think clearly reflecting economic slowdown. And as you take cars off the rail lines, generally, the rail lines get more efficient so the cars turn a little faster. We been blessed up till this time, and I reported our utilization rate, is actually increased in the third quarter versus a quarter a year ago. But we would suspect with the fact that we still are dealing with, what I call, the final phase of new car buildings coming into the market and leases unwinding and general slowdown that there will be a little more challenged to keep the utilization rate above the level we have it so that is the kind as we look forward on the base business. But typically, it is at that point in time that we are given, historically, there has been opportunity to step in and acquire cars, and our place is in the used car space so we would expect this to create some opportunities when we can acquire some more cars and grow the fleet, to take advantage of a cycle that goes up. And we have most of our rail cars are in long term leases, three, five, seven-year leases. So, at any given year, I am just going to saying, on the average, usually no more than 20% of our fleet is coming off lease, and a good chunk of those will be re-let right away but also we expect to have cars returned to us. And just in this environment, maybe, it will be little harder to place in. Gary, you want to add further commentary to that?

Gary L. Smith

Well, the re-let rates have been coming down, but remember the bases in our cars are older so as a result, our spreads are pretty much maintained or improving.

Analyst for Heather Jones - BB & T Capital Markets

That is all for you, guys. I appreciate the color. There is something I want to talk about, we have looked at your ethanol production investments and looking at it for Q3 here. What we are assuming that Albion & Climbers made money. So, is there anything unusual during this quarter or is Greenville losing more on a cash basis. Can you take us through the performance there?

Michael J. Anderson

Actually, Climbers did not make money, it is actually Albion was just below break-even. And one of his reasons was that we had a relatively minor exposure right at the end of the second quarter, and we ran out of production for 3 to 4 weeks, and so almost one-third of the quarter, and we paid a little price for that and ended up slightly below break-even. So, the bulk of the loss was in Greenville and if you look on the financial statements, that was the earnings of the affiliates. Gary, why don’t you take them through a breakdown of that? You can get back into the team number.

Gary L. Smith

You will get the granularity in this number, in the 10Q. But there is the three ethanol plants and the Lansing Trade Group in there, as well as another small entity that invested in there. But when you look at the Greenville number, it is showing gross, with the 50% of the loss will be recorded in that line. However, we have a separate entity that was consolidated with our income and balance sheet and financial statements showing a minority interest for another outside investor. So, you have to consider that two-thirds of that shows up in the Anderson statements, on the net income basis, on the pre-tax income basis, and one-third flows into the minority interest. And you will see a decline quarter over quarter for their share of that loss.

Analyst for Heather Jones - BB & T Capital Markets

Gary, what else is in that minority interest line?

Gary L. Smith

It is virtually all that investments that we …

Michael J. Anderson

TEAI that owns 50% of gain and that TAEI has 2/3 of us and one-third Mitsui and, in essence at this point in time you can assume virtually all of that line related to that investment. I do want to add you did just start up Greenville. I talked before about the fact that we did not have the ability to get forward contracts on a crunch and it has the crunch on at profitable levels and we bid more on the spot market which has been negative margins. I would say through the start-up, and we are now multiple months into it, we are getting about a 5% less yield of ethanol per bushel corn in that facility that are under two, and we are working on to try to get that up to get to the other two, but in essence that yield is for the same amount of corn that we put through, if we can get up with a same yield we get 5% more gallons at current market price in the vicinity of $8 million dollars, then you have got a net offset if you have less distiller’s dry grain. But we would say that would be a $6 million dollar item for the entity five to six million. We are working on a number of other things in that particular facility. But we are not operating as efficiently as the other two and we have got higher cost. It was built later and was built with some higher costs than the other two. But we have got to continue to focus on getting this more productive and more efficient.

Analyst for Heather Jones - BB & T Capital Markets

And what is the main hamper on that yield.

Michael J. Anderson

Well, if we knew exactly what it was, we probably would have it. And that is what we are focusing on.

Analyst for Heather Jones - BB & T Capital Markets

Ok. I just have a real quick last question and I will jump in the queue. I appreciate you guys answering my questions. When we look at the core-grain handling business, year-to-date we are estimating it has lost around on $3 million dollars when you adjust for the ethanol production and Lansing. And then we are comparing that to roughly $1 million in earnings for the first three quarters of 2007 and $8 million in earnings for the first three quarters of 2006. I think you pretty much answered my questions in your prepared remarks but have you pretty much gotten back that hit that you saw earlier on basis this year? And what do you anticipate as far as next year’s performance for core-grain?

Michael J. Anderson

We have gotten back most of that hit. I am not going to get in to breaking up the numbers that we do not break out. But your numbers are … Thank you, we have done better that you suggested in the base frame business. But we have gotten the bulk of it back and we have seen improved basis depreciation especially when we even end of the third quarter. So, we had to bear this year, I am talking about the call a little bit ago. Substantial amount of additional interest cost, I say, higher than normal interest costs. And we have had some fair value adjustments on grain with the risk of contract defaults. So, in a highly volatile market, I can look back and say here, we have made good decisions, here we made bad. But, generally, I am reasonably pleased with what has occurred now. We have got through those problems, through the third quarter and what has come back in income and feel good about that position and our recent acquisition of additional space.

Analyst for Heather Jones - BB & T Capital Markets

Thank you much, guys.

Michael J. Anderson

Thank you.

Operator

Your next question comes from the line of Farha Aslam from Stephens Inc. Please proceed.

Farha Aslam - Stephens Inc.

Good morning. I am just starting off with the plant nutrients. Could you share with us how your purchase contracts are structured for plant nutrient?

Michael J. Anderson

Well, I will talk about two things; one is inventory and the other is forward contracts. In inventory, we generally own our own inventory. We will have inventory here held for someone else in the market and on forward contracts, there are times when we make forward projections and have a sense of the volume that we are going to be supplied by huge suppliers. This is not always price and then we have the ability to make price commitment. In this situation that we just gone through, we are projecting our anticipated fall and early winter usage and given where the prices were and our concerns about availability of the inventory and the fact that at that time, we had inventory and forward purchases priced below the market, the apparent market or real market, that existed in, say, early August. Well, we owned a fair amount of that. Well. It has turned out that obviously its prices have plummeted and when that has occurred, demand is really shut down. So, in essence we own inventory and we often have fixed-priced forward contracts.

Farha Aslam - Stephens Inc.

Are you required to buy a certain amount every month and prices every month? Or do you have flexibility now?

Michael J. Anderson

We have flexibility, other than the fact that the reality that fertilizer is not a just in time product. So, at any point in time, we do not have to take product if we have not committed to it. So we could say we do not want it and we could take the risk that later on when we will need it, we will be able to get it. But our experience has shown that we better be in the position to take advantage of the space we have and more often than not, we have had inventory escalation. But we are not forcing as far as when someone is saying, here it is you got to take it at this price. It is our decision. We pull the trigger and now we have some hindsight that says do not pull the trigger out too much, too early.

Farha Aslam - Stephens Inc.

And that $13 million, that is the marked down as of September 30th and then, the pricing declines again in October and we will take additional hits in the fourth quarter? How much is that factoring in?

Michael J. Anderson

The $13 million that is… I mean you are right. It is as of September 30th, except that the fertilizer market is not near as transparent and it is called a futures market, it does not trade as much. So, in determining what the total amount of that revaluation should be on forward purchases and inventory, we have the reality of knowing what prices were doing through the month of October. And so, that was factored into our decision. And obviously, we still had a good quarter compared to history and if you look up where we are at year-to-date as a company, and you look at what we are projecting within our guidance range for the fourth quarter, obviously suggests a poor fourth quarter and a substantial amount of that is the fact that we expect additional inventory devaluation and margin compression in that particular business. Now that we are in early November, we think we have a pretty good handle on that. On the other hand, let us see what goes between now and then.

Farha Aslam - Stephens Inc.

If you had to take a look at your holdings generally, are you a third, a third and a third, for that nitrogen and potash?

Michael J. Anderson

I honestly do not know the answer to that at this point in time.

Gary L. Smith

That is approximately what we sell, however, but that may not necessarily be what we are holding.

Michael J. Anderson

Of the three, right now, we have had nitrogen and phosphates are the commodities that is wobbly, that was in nitrogen, urea has gone down more than ammonia has, for example. But nitrogen and phosphate should be the ones that have shown the most depreciation and potash has not shown much in the way of appreciation.

Farha Aslam - Stephens Inc.

Any thoughts on potash prices and do you think that once the strike in Canada is resolved, you are going to see potash prices decline? Is that factored in at all into your thought?

Michael J. Anderson

We have taken a look at each of the commodities and what is in the commodities all of our products and dissected it and used all our best estimates at this time as we factored in our guidance for the year. And I am going to avoid your question on specific price notification on potash. Although, I would say is that its fundamentals are a little different in the sense that it is little less in supply. There is more supply constraints. There are still the existing strikes in a few mines. So, probably our view is that there a little less risk there for substantial price depreciation. It appears to be holding up and one of the things that happened, I mentioned it in the conference call, there is a truth. Demand for protein base will continue to be strong. We have now switched the fertilizer front from being the real supply concerns, almost a concern that I cannot get the product, but at least, in nitrogen and phosphate, there is reasonable supply today and a reasonable pipeline. The same is not necessarily the case in potash. As farmers delay their decision on utilization now, that just puts a higher likelihood that when we get to the spring that they are going to need more.

Farha Aslam - Stephens Inc.

And then when you look at your ethanol business, your plants currently, you were saying Albion aside from the production issues and Greenville are profitable, if you had to go and run those plants without the hedges you have, do you think they would be profitable today?

Michael J. Anderson

No.

Farha Aslam - Stephens Inc.

No, and as you look out, are you still completely largely unhedged on your ethanol production for the next year?

Michael J. Anderson

Correct. We are virtually, I mean, if you get out the next year we have very, very little odds. So, the stock market, I say no. The stock market is rightly, really interesting with oil prices plummeting as much as they have. Ethanol which was trading $0.60 to $0.80 below wholesale unleaded, now trading $0.30 above wholesale unleaded. So ethanol is obviously is not fallen all as much as grain but we have had all this capacity in general. This is a generalization, just in the spot market, without taking of position in either being long or short on ethanol, spot market margins tended to be in the break-even to loss situation for some extended period of time. And that is where we are right now. And I think we have to work through this capacity build-up that we have had before. And there has been, as you have seen fallout in the ethanol industry here. Fallout in the sense of some Chapter 11’s which had production still going out but also some holding on some projects and some closedowns. So the capacity volume-side has got to be reconciled and back in line with what the demand is, I think, before we get back in to the profitable side, which we believe will happen. And I said a quick no. We are doing some significant things to figure to work out, figure out how to get more productive, more efficient, take cost out of the energy side of the equation. So, I gave you abrupt answer but that really then creates a challenge for us to operate better than we have been.

Farha Aslam - Stephens Inc.

So, if you have to guess on when capacity will catch up with demand? Would you put those six months out? Twelve months out?

Michael J. Anderson

You know, I am thinking in terms of 6 and 12 and 18 months, not 2 and 3 years. But the thing that I do not really have a good handle on is how fragile or not fragile a number of these entities that are out there today are with the balance sheet is, what the credit situation is now. What hedges they have or they do not have. How they handle risk management. So, I do not have a good handle on potential fallout for that could be a factor that could actually shorten the time frame before stuff gets imbalanced.

Farha Aslam - Stephens Inc.

Okay.

Michael J. Anderson

And I guess you do not really have a good handle on what happens with the demand for gasoline now at $2 per gallon versus $4 per gallon.

Farha Aslam - Stephens Inc.

Okay, and my final questions is, is there difficulties in the ethanol industry creating opportunities for you to look in plants by grain source facilities or plants?

Michael J. Anderson

Could you repeat that again, I just want to make sure…?

Farha Aslam - Stephens Inc.

You have the opportunities to pick up some ethanol plants at very, very good prices or have you been looking at the grain storage capacity at ethanol plans?

Michael J. Anderson

The least we did in Illinois is elevate our cash to an ethanol plant but I will say from the most part on grain storage side, our opportunities I believe will generally be independent of the ethanol plants, but I would not say that completely. So the shakeup will create some opportunities on the ethanol side. I would say right now our focus, although we are trying to stay aware and abreast of the next potential buyout capacity, especially with our concept to provide service and risk management. Our major focus is operating the plants that we have right now, operating them better.

Farha Aslam - Stephens Inc.

Ok, thank you for your answers.

Operator

Our next question comes from the line of Michael Cox from Piper Jaffray. Please proceed.

Michael Cox – Piper Jaffray

Hi, good morning. Thanks for taking my questions.

Michael J. Anderson

Hi Mike.

Michael Cox – Piper Jaffray

My first question is on the plant nutrient side. I was hoping you could comment on how long it will take to burn through the inventory position you have in fertilizer as it gets replaced with lower cost fertilizer?

Michael J. Anderson

Great question. We know that the product that we have in here will easily be used into this fertilizer season. What we do not know is, now the price has come down some and the weather is still good, will demand pick up again this fall? We are moving a little bit but it is still slow. And what the early winter spring season is. But we will use it up certainly in the season. We know we will use the inventory, what we do not have a good handle on is where will prices ultimately end up and if they hit the floor, will they bounce back, for example, in urea which has dropped, depending on the market you are in, as much as 50% from its peaks. It appears to have bounced back off the wall. So, I would say knowing that, what I am about to say is a forward statement and therefore subject to changes in the market, that we feel we have embedded in our guidance for this year, the vast majority hopefully all of the potential shift relative to the inventory contracts we have. Now having said that I cannot be certain of that, and then, it is possible to stop, it is possible that we do not take as much this fourth quarter, stuff can move over into the first quarter. But I think that we certainly, as we get into the next year, into the planting season for sure, we are back to what I would call, from our perspective, into a more normal margin situation and I would not. I think I would stupid of me to suggest that we won’t have price appreciation opportunities as we get that time frame next year.

Michael Cox – Piper Jaffray

As we look at the volumes here in the fourth quarter, given the extended harvest season, did you anticipate volumes to decline into the fourth quarter?

Michael J. Anderson

I think overall volumes were decline. They have been down so far, and we already have wonderful weather, but this has been with grain prices seemed to have hit the floor or the shelf but they bounced up a little bit. Farmers have, this is a generalization or on a very good casual situation like the generalization because we know there is always a situation that is not the case. But with input prices where they are, and the sense that they might go lower, that creates an incentive by a little as you can and that can backfire on somebody too because we still have really good fundamentals in agriculture. We just have to work through what I call as supply and demand equilibrium, a strong demand and not enough supply, to enough supply, not enough demand. But you will get back in balance as you have seen some recent shutdowns in phosphate capacity, both in US and overseas.

Michael Cox – Piper Jaffray

Okay, just from a theoretical standpoint, could you remind us what type of impact, if any, you would feel from a shift in plantings from corn to soya, something like that, given the volatility that we have seen in corn prices?

Michael J. Anderson

Right at this point, we have produced in the range of 85 to 86 million acres this year. And I have seen projections up for next year. I think the highest site I have seen is 90 and I have seen as low as 83 to 84. We are feeling flattish year over year. We look at the supply to demand table in corn. We are going to reduce… Just a second. Here we go. We are projecting we carried in this year about 1.6 billion bushels of corn. And we are projecting that we are going to carry out between 1 billion to 1.2 billion next year. We had production of 12 billion, usage of 12 ½ billion. I do not maybe, usage drops a little maybe a little high maybe drop ethanol a little bit. But the bottom line is we got to keep producing corn. It is very hard for me to develop a scenario much downside from the acres we had this year. I grant it, when it is all said and done, the prices that farmers will get this spring will have a major impact on that. So, obviously, if we go lower, in corn, then we use less nitrogen. And corn is king for our fertilizer business. I am not seeing much downside from this past year’s acreage.

Michael Cox – Piper Jaffray

For my last question, on the storage capacity on the grain side, are you seeing additional opportunities to add capacity there given some of the financial constraints that some of these smaller players may be facing right now?

Michael J. Anderson

You know, about July 1, I was kind of sitting here saying, oh boy, we are going to get quite a few opportunities but with prices now having plummeted, anybody that might have been challenged with working capital in the first half of the year, was put back into a reasonably good situation. Right now, wheat prices are $3 below what they were a year ago, over $3 below. Beans are slightly lower. Corn is pretty flat. So, in general, I think, those in the grain business, although we have to suffer with the high interest cost, most of us with storage has some reasonably good time once you put that behind you. So, we are going to be on the lookout. And there are always companies or owners that have a desire to sell. And we are going to be looking for opportunities but I do not sense much in the way of distressed sale opportunities coming around.

Michael Cox – Piper Jaffray

Sounds good. Thank you very much.

Michael J. Anderson

Thanks Mike.

Operator

And your next question comes from the line of Joel Gleason from Oppenheimer. Please proceed.

Joseph A. Gomes, Jr - Oppenheimer & Company

Good morning, most of my questions has been answered but I just had couple of quick ones here. On the rail car assets that has been for sale in the GE and CIT, any sense further on what is going on in those sales? Are they getting closer to breaking that up or can you give us more detail there?

Gary L. Smith

Yes, the word on the streets was that initially, the GATX was going to acquire the GE fleet and that transaction has apparently fallen apart. We would have expected, that since we probably are in not in a position to acquire a fleet that size, any fallout from that kind of a transaction in terms of excess that they would have, we would get a shot at going after. And so until something happens, GE makes some decisions about it, I do not think that they are planning on piecemealing it off. But if they do, we are friendly with them and they have been a good source of inventory for us and we will be in a good position to start buying. Wachovia has the other big fleet, and since they are being acquired by Wells, we are not sure what their long term objectives are. We are very close with Wells and we will be very happy to help them deal with that fleet if they are not interested in retaining it. And CIT, from what we can tell, has decided to hang on to their fleet, at least at this point.

Joseph A. Gomes, Jr - Oppenheimer & Company

Okay, and one other on the ethanol side, seeing the recent news that the on VeraSun and then going bankrupt, but still operating their plants, does that put more pressure, do you think, on the ethanol industry itself or is it going to be more of just the same?

Gary L. Smith

If you are to take a bankrupt facility and write the debt down, and write off the equity, then you now have a new basis that is substantially below what the new construction cost was, I think, you got an advantage. Now, you have got to get a good financing and you have got to get it at a reasonable rate, you have got to recapitalize the business that does not necessarily change all the non-up front capital cost dynamics that is going on in the market. And I think, as Mike outlined, they are somewhat stressed right now.

Joseph A. Gomes, Jr - Oppenheimer & Company

Okay, thanks.

Michael J. Anderson

I would like to add on the VeraSun beside the Chapter 11, they did announce, I believe it was yesterday, that they have under construction a 110-million gallon plant in Minnesota that was close to complete. They go through all this and that might get completed but in the meantime, that production was not coming on what it was planned to. And I think that is not the only one. It is not only in VeraSun but I mean within the industry.

Operator

There are no further questions at this time. I would like to turn over the call back over to management.

Michael J. Anderson

Okay, thank you for joining us this morning. Our next conference call is scheduled for Friday, February 6, that is at 11 AM, Eastern, to review yearend results. Hope you will be able to join us and hope you have a wonderful day. Thank you and see you.

Operator

Thank you for your participation in today’s conference call. This concludes the presentation and you may now disconnect. Good day.

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