The Andersons, Inc. Q1 2009 Earnings Call Transcript

May. 7.09 | About: The Andersons, (ANDE)

The Andersons, Inc. (NASDAQ:ANDE)

Q1 2009 Earnings Call Transcript

May 7, 2009 11:00 am ET

Executives

Gary Smith – VP, Finance & Treasurer

Mike Anderson – President & CEO

Analysts

Farha Aslam – Stephens, Inc.

Heather Jones – BB&T Capital Markets

Michael Cox – Piper Jaffray

Charlie Rentschler – Wall Street Access

Ian Horowitz – Soleil Securities

Operator

Good day, ladies and gentlemen, thank you very much for your patience and welcome to the first quarter 2009 Anderson Incorporated earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today call, Mr. Gary Smith, Vice President of Finance & Treasurer. Please proceed.

Gary Smith

Thank you Bill, thank you for joining us this morning for the first quarter conference call. As you know certain information that will be 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 and competitive conditions, conditions in the company's industries both in the United States and internationally, and additional factors that are described in the company's publicly filed documents including its ‘34 Act filings and the prospectuses prepared in connection with the company's offerings. It also contains financial information of which as of date of the call the company's independent auditors have not completed their review, although the company believes the assumption upon which the financial information and its forward-looking statements are based are true they can give no assurance that these assumptions will prove to be true.

Before Mike begins talking about our results of operations, I want to advise you that we have implemented FAS60 effective January 1, 2009 which relates to the presentation of noncontrolling interest, formerly classified as minority interest, in the consolidated financial statements. Under FAS60 noncontrolling interest is now included in the income statement captioned Net Income, net income attributable to the Andersons and earnings per share are comparable to those previously recorded as net income. In addition in the equity section of the balance sheet, noncontrolling interest is now presented as a component of shareholder equity. As we refer to net income during this conference call, we will be referring to net income attributable to the Andersons as defined by FAS160.

Mike Anderson, President and CEO, and I will be available for questions after the call. Mike?

Mike Anderson

Thank you Gary, good morning everyone. As noted in our press release, we generated net income of $5 million or $0.27 per diluted share on revenues of $697 million. 2008 we reported net income of $7.8 million or $0.42 per diluted share on $713 million revenue. Before we understand the total company’s results for the quarter, we will look at each of the five business groups.

Grain & Ethanol Group had an operating income of $5.7 million in the first quarter versus $2.2 million a year ago. It should be noted that the prior year included a $1.3 million in nonrecurring development fee income. Grain business had record results this quarter. The Grain business benefitted from significantly higher space income that resulted primarily from sizeable basis gains and reduced interest charges. In contrast last year, our Grain business suffered a basis loss of just over $11 million during the same period. The Ethanol business loss was less than $1 million this quarter as results from all three Ethanol limited liability companies declined significantly from the prior year.

With all three Ethanol plants operating for an entire quarter this year, fee income is up slightly. In the prior year the Ethanol business benefitted from margins being locked in before the decline in the Ethanol market. First quarter results from the group’s investment in Lansing Trade Group was significantly lower than last year due to Lansing having declined in its trading business. The cyclical nature of the commodity trading business coupled with the economic decline have impacted Lansing’s results this quarter.

Although revenues are not necessarily a good indicator of performance within the Grain & Ethanol Group, total revenues were $481 million which is consistent with the prior year’s revenues of $499 million. This quarter includes $206 million of Grain & Ethanol sales made by the group in accordance with the origination and marketing agreements between the company and its Ethanol joint ventures, this is $20 million more than what was reported for these sales in the prior year. As it relates to our Grain business, I want to mention that corn planning progress in our region and the US is behind the five-year average. It was possible to make up a lot of this in a short period of time (inaudible) as of now it is behind.

The Rail Group has been negatively impacted by the significant decline in North American rail traffic. The group reported an operating income of $900,000 this quarter on revenues of $27 million. Last year the group reported $6.4 million of income on revenues of $35 million. First quarter last year the group realized $2.2 million in gross margin from the sale of some rail cars whereas this year only $300,000 was recognized on similar transactions. Absent this gain from sales differentials, operating income from leasing was still considerably lower due primarily to lower utilization rates.

The average utilization rate which is a percentage of the fleet in service for the quarter was 86.8% in comparison to 93.4% for the same period last year. Gross profit from the leasing business was also impacted by decreasing lease rates and (inaudible) income, increased maintenance expense and the increasing storage expense associated with lower utilization rates. The group now has over 23,700 cars in locomotives which is 2% more than its year earlier total.

Gross profit of the rail car repair and manufacturing business declined significantly in the first quarter due to reduced sales resulting from the overall economic decline. The impact of this decline coupled with the fact that a significant portion of the US fleet was idle during the first quarter suggests that a further decline in the group’s utilization rate and corresponding financial result is possible in 2009. Downturns in the leasing market however also tend to provide us with car acquisition opportunities that could pay dividends in the future.

Plant Nutrient Group reported operating income of $2 million on revenues of $112 million during this quarter. In the same three-month period in 2008 the group reported $7.5 billion operating profit on $105 million of revenue. Overall, margins were down this quarter in comparison to last year. A favorable product mix and the recognition of high gross profit on deferred sales and prepaid contracts from 2008 had a positive impact on margins. The group however recorded $2.0 [ph] million lower cost to market adjustment on nitrogen and phosphate products in the first quarter which had a negative impact on margins.

Group volume increased due to the addition of eight Nutrient and lime facilities acquired subsequent to the first quarter of 2008. Excluding the newly acquired businesses, volume was down approximately 15% due primarily to the de-stocking of the agricultural retailer inventory and weather related spring field work delays. Reduced demand as a result of the delay in spring field work will likely result in further nitrogen and phosphate inventory adjustments. Also the group continues to carry wholesale and retail sales contracts in deferred sales into the second quarter that have good embedded margins which will help buffer the impact of any possible write-downs as has happened in the first quarter.

As we announced earlier this week, the Plant Nutrient Group has entered into a definitive agreement to acquire Hartung Brothers Inc. Fertilizer Division on July 31. We expect these six additional facilities to allow our Plant Nutrient Group to grow its value added product offering, expand its wholesale customer base to broaden its geographic territory. Five of the six locations are in Wisconsin and one location is in Southeastern Minnesota. Operating results from the two acquisitions we made last year were again additive to earnings this quarter and have continued to meet or exceed expectations.

The Turf & Specialty Group achieved operating income of $3.1 million this quarter on $45 million of revenue. Last year the group reported $2 million of income on $40 million of revenue. Turf products tonnage was up 13% from year to year, gross profit per ton was also up slightly due to product mix and we have not experienced any lower cost to market adjustments. As you recall, the group’s performance in 2008 was greatly improved over 2007 due to its focus on proprietary products such as ContecDG. 2009 the group has also grown the consumer and industrial lawn business by expanding their product lines and customer base. Therefore we are expecting Turf & Specialty to continue the earnings growth trend they have demonstrated in the last few years.

As is typical for the first quarter the Retail Group incurred an operating loss, a loss of $2.7 million however was a 20% improvement over the $3.4 million loss for the same period last year. Total revenues remained flat at $34 million for both 2008 and 2009. Customer accounts for the year increased slightly however this was offset by slight decline in the average sale per customer. The group continues to be impacted by the weakness in the overall economy however successful pricing and marketing strategies led to gross profit increases by more than 3% during this quarter. The group also continued to manage expenses and reduce inventory levels during the quarter.

Now I will turn the floor over to Gary for his treasurer’s comments.

Gary Smith

Thank you Mike. The taxes, the first quarter 2009 effective tax rate was 36%, it is down 1% from the first quarter of 2008 but up 3% when you compare it to 2008 full year tax rate. The increase is mostly due to the tax benefit related to the 2008 state income tax credits resulting from the 2006 construction of an ethanol facility, we are projecting right now our 2009 full year tax rate to be 37%. Our allowance for doubtful accounts which appears as a separate line item on the income statement this quarter was we took a charge of $191,000 that is down $1.5 million from the same period last year. The allowance for doubtful accounts was higher in 2008 due to the significant inventory price volatility experienced in Grain & Ethanol and the Plant Nutrient Groups, However since prices have settled down and declined we have less counterparty risk.

As of March 31, the company’s total interest expense was $6 million, down more than $3 million from the same period last year. Short-term interest expense for the first quarter was down more than $6 million while long-term interest was up approximately $3 million. Compared to the first quarter in 2008 our short-term average interest rates for the quarter were down more than 3% and the average short-term borrowings for the quarter was down approximately $0.5 million.

We ended the quarter with about $25 million in short-term bank financing which is a pretty significant drop. EBITDA for the quarter was $21.3 million versus $28.4 million for the same period in 2008. When you look on our Web site you will see that the EBITDA has been adjusted for the noncontrolling interest. In 2009, the first quarter’s pretax income included a loss of approximately $4 million in equity earnings or losses of affiliates versus earnings of approximately $9 million in the first quarter of 2009.

As of March 31, the current assets totaled $735 million, a $447 million decrease from a year earlier balance of $1.2 million. Commodity derivative assets and inventories were down $225 million and $177 million respectively when compared to the first quarter in 2008. In addition trade receivables have decreased more than $21 million that was driven by Plant Nutrient and Rail mostly the major contributors, also our margin deposits declined by $54 million in the first quarter. Most of the inventory decline was in the Grain & Ethanol Group which dropped about $174 million. The company ended the quarter with $60 million bushels of grain in our facilities and that is down approximately $1 million bushels from the year earlier number.

Our net working capital at the end of the quarter was $326 million, an increase of $51 million from the first quarter of 2008. Total assets at quarter end were $1.2 billion, a decrease of $480 million from a year earlier first quarter balance of $1.7 billion. In addition to the decrease in current assets, our other assets were down about $56 million, long-term commodity derivative assets were down $49 million and while property, plant and equipment along with rail car assets these two others increased by $23 million.

During the first quarter we generated a total of $8 million of depreciation, our total capital spending investments and affiliates for the first quarter was $3 million that includes investment and affiliates which was not significant during the first quarter of this year and that is compared to $24 million in the same period last year, this is all excluding rail cars. Rail car purchases and sales were $6 million and $2 million respectively during this quarter and a year ago those same two numbers were $28 million and $2 million respectively.

Our long-term debt totaled $317 million, a decrease of $13 million from last year’s year-end balance and our long-term debt-to-equity ratio was about 0.75:1 that is exclusive of the non-recourse debt so well within the ranges that we find acceptable. The company’s 2009 average interest rate on all long-term debt is about 6% and we ended with $370 million in equity that is up $4 million. We continue to enjoy good support from our bankers. We just completed the renegotiation of a three-year syndicate line of credit with 15 banks, these new lines of credit totaled $575 million which is down from our previous lines of credit however we think it is adequate to satisfy our funding needs for the near future. Mike?

Mike Anderson

Thanks. Before we take questions I have got a few more points. Considering the state of the economy and some of the specific challenges we have been dealing with, I feel okay about our overall performance this quarter.

Our Grain & Ethanol Group had mixed results with record performance of the Grain business being offset by the results of the Ethanol business in Lansing Trade Group. Our Plant Nutrient Group was profitable in a quarter that historically has often been a loss quarter; however they were again affected by lower cost to market adjustments. The Turf & Specialty Group is performing well as the value added and proprietary product strategy they have pursued continues to be successful. The economic decline however has had an impact on our Rail Group and to a lesser extent on our Retail Group. It is at times like these that I am thankful for the diversity of our business unit, this was no accident, we purposefully diversified over the years and the strategy has positioned us to remain a strong and profitable company during uncertain economic times.

As noted in the press release and after much consideration we have decided to discontinue our practice of giving earnings guidance at this time. But I am sure many of you are still wondering what this 2009 hold for the Andersons. Within the Grain & Ethanol Group I expect to continue to see mixed results as the Grain division should continue to prosper. However the Ethanol division will most likely continue to be impacted by the economics of the Ethanol industry I see our Rail Group continuing to be impacted by the slowdown in the rail shipment industry and overall economy, I expect our Plant Nutrient Group to provide a respectable return this year after the loss they incurred in the prior year. I believe that our Turf & Specialty Group’s proprietary and standard product line strategy should lead to continued growth in earnings from the group and lastly I believe that our Retail Group will continue to be impacted by the economic downturn.

As we announced earlier this week, we intend to acquire Hartung Brothers Inc. Fertilizer Division this summer. We expect these six additional wholesale fertilizer locations to allow our Plant Nutrient Group to continue their growth initiative which has proven successful so far. As I have mentioned before, we intend to continue growing as we have been for several years now albeit with appropriate caution given the current times. We have continued to explore opportunities in our growth pipeline.

With that we will open it up for question and answers. So Bill, we will turn it back to you.

Question-and-Answer Session

Operator

Thank you very much sir. (Operator instructions) Our first question comes from the line of Farha Aslam of Stephens, Inc., please proceed.

Farha Aslam – Stephens, Inc

Hi good morning.

Gary Smith

Good morning.

Mike Anderson

Good morning Farha.

Farha Aslam – Stephens, Inc

Just some color around your Ethanol business, it is really performing far above our expectations, could you give us some color on any contracts that you might have locked in?

Mike Anderson

We did have some contracts locked in ahead which was beneficial but it was not a substantial percentage and virtually none in wonderful locations. I would say we experienced reasonably good operating results in the plants themselves, productivity and throughput and we are trying to over a two-week period, sometimes the margins are quite ugly and sometimes they get close to breakeven and when they do we are willing to try to lock them in and so our expectations with the capacity we have in the Ethanol industry this year are that it is going to be very hard to achieve positive margins, so if we get to levels that we think are acceptable albeit at a loss we are willing to lock those particular ones in but we did have a little bit locked in ahead of two of our facilities which was of benefit and as we mentioned we now with everything up and running all three of the plants we have a slightly better fee income structure, yes all things being equal, we are pleased with a very small loss in that position.

Farha Aslam – Stephens, Inc

Great. So when you look at the Greenville plant, right now it is still up and running, if you have to look at the cash flow how bad would the Ethanol need to get for you to consider closing that Greenville facility?

Gary Smith

Well, it would have to get to a negative margin, there is no question. So it has to be below our fixed operating cost so that we could not satisfy the debt obligations and we are not there.

Farha Aslam – Stephens, Inc

Not there yet?

Gary Smith

No.

Farha Aslam – Stephens, Inc

And for the foreseeable future you anticipate that facility to continue to operate?

Gary Smith

Yes

Farha Aslam – Stephens, Inc

Okay and then when you look at your plant nutrients in the quarter what was the total volume, you have given us acquisition, what would be that number including acquisitions?

Mike Anderson

I am sorry, the question is what was the total volume increase including the acquisitions?

Farha Aslam – Stephens, Inc

Yes.

Mike Anderson

Yes it is interesting, without acquisitions it was down 15%, with acquisitions it was up 15%.

Gary Smith

Yes.

Mike Anderson

It is the exact same percentage, just one up one down.

Farha Aslam – Stephens, Inc

And then if you look at the acquisition you have just made which will close in July, how much on annual basis will that add to your volume?

Gary Smith

What we reported was $60 million in revenue last year and 145,000 tons of capacity and so you can compare that to – you can look at the sales dollars and from a capacity perspective, we have approximately 750,000 in capacity today with our other facilities. So that is the comparison we will have to work with. After we close the transaction my sense is there will be more information available through the 10-Q.

Farha Aslam – Stephens, Inc

Okay and my final question is on rail lease rates, could you just give us some color around those lease rates, what percentage they are up and down and what a standard rail car is going for today?

Mike Anderson

Yes, you used the word standard and that is wrong because there is no standard rate but I would say this versus the last high cycle we had 2005, 2006, we are down about 25% in lease rates and the trend will suggest to us that there is maybe another 5% or so drop coming but it really does depend on specific car types that we are talking about. So I am talking about maybe a typical grain covered copper [ph] we are down maybe $15 a car year over year and kind of average rates of those cars being leased and our mix as you know includes a mix of full service leases and those that are not full service. So we are clearly down year over year and it is trending a little bit lower. The asset values of our fleet are also going down. So I would say for us not that lease rates are important, they are terribly important, but the major driver of the drop in income is utilization much more so than lease rates.

Farha Aslam – Stephens, Inc

Okay, thank you very much for your comments.

Mike Anderson

Thanks Farha.

Operator

Thank you very much. Ladies and gentlemen, your next question comes from the line of Heather Jones of BB&T Capital Markets. Please proceed.

Heather Jones – BB&T Capital Markets

Good morning.

Mike Anderson

Good morning.

Gary Smith

Good morning Heather.

Heather Jones – BB&T Capital Markets

Just to follow up real quick on the rail question and your commentary in the release about utilization could go lower, I believe you, and I may have missed this, but I believe you said that you thought lease rates could go 5% lower, how much lower do you think utilization rates could go?

Gary Smith

We have spent a lot of time trying to model this so we kind of have a range, it is very believable to me that we could get to the 80% level, now that assumes that we continue to see rail car loadings down week to week anywhere 15% to 20% of all types and I would expect that to continue for a while but what we don’t know is just at what point in time will we stop getting more returns than we are putting back out on lease which is in essence the driver of the utilization, but the trend suggests that we will continue to drop in utilization. I can build a more pessimistic scenario than that too. So –

Heather Jones – BB&T Capital Markets

I am sure you could.

Gary Smith

So that does not suggest that that is exactly what we are predicting and I am not going to give kind of the range of the scenarios but it is reasonable for me to see that in the near future we could drop below the 80% level.

Heather Jones – BB&T Capital Markets

So going (inaudible) represent roughly 10% of our rail assets?

Gary Smith

Of the (inaudible).

Heather Jones – BB&T Capital Markets

Yes.

Gary Smith

It is a little less than that. It is approximately about 8% to 9%.

Heather Jones – BB&T Capital Markets

Okay so I assume there is meaningful weakness there and then of the remainder roughly 20% comes up for renewal every year and it sounds as if you are also having a fair amount of those that might get renewed as well.

Gary Smith

Yes that is correct. I want to add that obviously the utilization going down it is obvious that what you said is right on the money but we have been able this quarter to get some cars placed that are not renewals and we are seeing enquiries in the second quarter albeit not at the pace that cars are being returned. So it is not as if there is nothing happening out there.

Heather Jones – BB&T Capital Markets

So do you get a feel that things are worsening or do they seem to be not improving but you are sort of bumping along the bottom?

Gary Smith

Somebody used the phrase and it was heard a lot, I don’t know if it is comforting or not, the rate of decline is decreasing.

Heather Jones – BB&T Capital Markets

That actually is good news.

Gary Smith

So it is in that respect.

Mike Anderson

Actually statistics would say that it is declining.

Gary Smith

It is still declining and we would expect that for a while. Note that in the first quarter our shop business was down quite a bit in fact more than we thought it would be and we are seeing an uptick in that area right now in the midst of our income, it is a small piece of the mix but it is nice to see an uptick in that area going on right now starting this month.

Heather Jones – BB&T Capital Markets

Okay. Now moving on to other segments, going to your Ethanol business, first on the Greenville plant, is that still running at less efficient rates as your Albion & Climbers plant?

Gary Smith

Slightly.

Heather Jones – BB&T Capital Markets

So you have closed that gap some.

Gary Smith

Yes.

Heather Jones – BB&T Capital Markets

Okay. Given that you have only lost $1 million in the quarter, given the corn prices, Ethanol prices, etc, is it fair to assume that a lot of the loss from the plants was offset with those risk activities you do through TAAE [ph]?

Mike Anderson

No I think – we are working really hard on any given day to look at is this a data lock-in margin. Some of the risk activities that we have done before when we had our markets that were really trending in the direction will put us (inaudible) or would have us use some derivative strategies, I would say we are not doing anything really too aggressive to try and offset basic margins, for the most part we are working hard to lock-in margins when we can although we will still do a little bit of that and it is helping to some extent.

Gary Smith

Yes, historically there has been some arbitrage income there and in the 10-Q you will be able to pick that out.

Heather Jones – BB&T Capital Markets

Yes because it was a big help last year.

Mike Anderson

Yes in the first quarter last year in the Q it was around $5 million help and it is very close to breakeven this year. So it is much less trying to enhance by taking positions in the market than it is on a day where all of a sudden we can get a margin that we feel is worthy of bowing and taking albeit at a loss, we will jump on it.

Heather Jones – BB&T Capital Markets

Okay and what is your view on that business for the rest of the year? Do you believe, do you anticipate maybe still a sort of like the rail issue, sort of still negative not good but better than Q1?

Gary Smith

I am not going to necessarily say better in Q1, I would say the last six months of last year we were in a position in margins in spot and forward that made us feel maybe more like rail right now and we moved to a point where margins in the spot are albeit negative are a little better. But the reality is we have more capacity, we have substantial capacity still idle in the US. We have some new capacity that is coming on, some of that idle capacity will be coming back on as a result of new owners and firing up plants and although the margin structure for the blenders today absolutely supports blending Ethanol the limit of 10% Ethanol that we hope changes sometime in the next six to nine, twelve months and the mandate where it is suggests that we will continue to have volume of supply that is greater than demand which will continue to put pressure on margin.

What we don’t know is exactly what oil does in that mix to either help offer Ethanol margins and we don’t know what corn will do in that mix to either help or hurt the margins. But we are pretty pleased with the performance we had in Ethanol. We are not going to sit here and suggest that that will necessarily improve in the next nine months. We are going to work hard to try and limit the loss to as low a number as we can and maybe with a little bit of luck can bounce up a little but we can also develop a scenario for whatever reason oil (inaudible) economics are as good and/or we have a crop problem with a corn and that margin structure can get impaired and we move down to where demand is.

Demand today is above the mandate. If you move to a point because of the economics on the blending side that they are not all that friendly as they are right now then you can push demand back down to the mandate level and then you are into more negative margins for those of us in the Ethanol space. So it is I would say a very dicey situation as we see it playing out through the end of this year and I frankly as we look into the early 2010, as we look further out assuming that we have mandate in place and we look at capacity coming on we feel that we see a future that has us getting back into the black in this business.

Heather Jones – BB&T Capital Markets

Okay I have two more questions. One on plant nutrient, that was a surprisingly good quarter, just wondering I know you mentioned your commentary said normal margins for the rest of the year as compared to ’08 but going to these deferred sales contracts that benefited the quarter the prepaid contracts, how many more of those do you have left to realize during ’09?

Gary Smith

The vast majority of that was put on summer, early fall last year it would have been for the crop year that we are in which ends June 30 this year. So we realized the chunk of those in the first quarter and will have more in the second quarter and I am not going to disclose the exact amount but obviously if we had, I would say we had several elements in our gross profit mix this year, the $2.9 million mark to market obviously was a negative being offered by in that quarter, more gains, healthy margins as a result of this deferred business then we had some spot business that we were able to put through plus we have good margins in our specialty industrial business and the new southern region in the lime business we acquired were all positive.

Frankly when we got through February our view was that there was very little likelihood that we have any additional write-downs even though we still owned the inventory and that was based on kind of our outlook at that time but this planning delay with what is in the pipeline still the combination of those has caused some additional pressure on pricing which we think will likely continue here for a little bit. So as we did our end of the year release we were sitting at a timeframe I cannot remember the exact scope but we thought that we took the bulk of the write-down I think we said something to the effect that we believe that we have taken all or maybe substantially all and at least till now it is standing out that way. And the write-downs are only in certain nitrogen products and phosphate products, they are not in a number of our other products.

Heather Jones – BB&T Capital Markets

Okay and finally on the grain business, you had a pretty easy comp but even with that said it was still a really good quarter, the comparisons are not as easy going forward but still how we are looking at the basis for this it looks like you still could have a – that could be a good business for you for the rest of the year but we are just wanting to get your take on the outlook as far as the space income?

Gary Smith

I had a feeling that question was coming, you recall this time a year ago they offered that question and we were trying – in fact we said we believed all the basic loss that we took would come back, the bulk of that was and in fact we ended up having a really good full year space income year. This year we are having a record first quarter and the major driver, not the only driver, but the major driver is space income, that is something where timing is a big deal and the space income comes from a combination of what basis does, does it go up or does it go down, what the grain spreads are, and what we are able to lock in for and the storage income that we have in place, and as you noted we had a really good first quarter.

We are friendly to our green business but it is the opposite of last year but we think we front-end loaded some income as a result of just how the market moved relative to space income, so if we look at for the rest of the year we are not expecting the last reporter this year to do what they did last year, all things being equal we think we ought to be able to equal or modestly exceed last year’s total number. There is an awful lot of planning that has to take place and somehow or other we have to go through them. It is probably our standard disclaimer about this time every year.

Heather Jones – BB&T Capital Markets

No I understood, okay thank you again.

Gary Smith

Yes.

Operator

Thank you very much ma’am. (Operator instructions) Our next question comes from the line of Michael Cox of Piper Jaffray. Please proceed.

Michael Cox – Piper Jaffray

Thank you very much and congratulations on the quarter guys.

Mike Anderson

Thanks Michael.

Gary Smith

Thanks Mike.

Michael Cox – Piper Jaffray

In terms of your outlook on the Plant Nutrient side, I will be curious what your thoughts are on volumes excluding the acquisitions as you look through the balance of the year, it is down 15% where you think you will be if you look at the full year?

Mike Anderson

There are two things in that, there is the property which ends June 30 really this season and everything that is going on suggests that that trend will likely continue but we had a really good weather here in April and May. I think I would be sitting here for one we probably would not have had the mark-to-market issue we had and we would be sitting here feeling that we would gain back on some volume. So I think it is reasonable to assume through the second quarter we are going to have volume that is lower than the prior year.

Now, let’s get to the last half of the year. If you recall suddenly about August volume just shot off. Our fourth quarter and the end of the third quarter last year was unbelievably poor volume and we know why; prices were dropped like –were still high and were starting to drop; so, we would expect that in the second half of the year that we’d expect volume to be better than last year; so, if we look over a full year, there is the possibility we could gain back in the second half what we lose in the first half, but I’d say right now with the kind of the delay in the crop progress that I’d say even volume would be the best we would do but we should do much better in the second half this year than a year ago on volume on margin too given the mark-to-market issues we had last year.

Michael Cox – Piper Jaffray

Sure, that’s helpful. And in terms of the inventory adjustment you’re looking at potentially here in the second quarter, could you size that up relative to the $2.9 million that you took in Q1?

Mike Anderson

Yes. Originally, we’re right in the draft of this about a week or so, though we were saying that maybe we could have an increase; and, now just a little more delays in the weather and what’s going on the market suggests it is likely. I really will struggle to size that up for you, but I would say, I think – I feel right now, like we did at the end of the year that we believe we’ve taken the bulk of the write-downs; and I would say, again, only would be in phosphate and possibly nitrogen, and we have continued I would say, the continued deferred stuff we sold last year that we locked in margin on as we shift that will take margin this year. So, I’m sitting here expecting that the net of our margin will be a positive experience, knowing that we’re dealing with a situation where the pricing in the market could cause us to have a different feeling; but all I can say is I’m expecting us to return to a normal profitability situation overall. We’ve got some good things going on in the margin side; and then, there is overhang of this inventory position we’re working through that I would hope and expect would not be that significant in that what we’ve experienced so far this year might be in the zone of what we will experience; but I can’t say that with any certainty right now.

Michael Cox – Piper Jaffray

Okay, that’s helpful. So, I’m clear on this. It sounds like that perhaps the deferred sale and pre-sale, and if we were to match that up against the inventory investment that that’s approximately a wash. Is that fair to assume?

Mike Anderson

In the first quarter, the margin experience was more of a net gain in that relationship that you said; and I would hope and expect that is the same this quarter with more certainty on the deferred sale margin will have not as much certainty on the other; but I want to add in that we do a substantial amount of specialty fertilizer business, industrial business, which should be healthy margin; and as I indicated, our southern region and the new line of business have been additive to us in the first quarter, and the timing of their seasons would also suggest that this second quarter will be good quarters for them also.

Michael Cox – Piper Jaffray

Okay. On the acquisition of the Hartung Brothers Fertilizer group, could you talk a little bit about their inventory position and the comfort level you have of making an acquisition in these types of conditions?

Mike Anderson

Yes, I will. The closing on that is the end of July, and we would expect all of the inventory that they will have that would have been exposed – maybe potentially acquire higher levels have been worked through. They do a substantially more back to back in prepaid business so they did not have here the relative exposure in this business; but we would look at that as being a non-issue and one of the reasons why the closing date is when it is the time when inventory levels are quite a lot low.

Michael Cox – Piper Jaffray

Okay, that’s helpful. And my last question is on the Lansing Trading Group. I’m just wondering if you could maybe provide a little more color on what either income contribution or loss was for Q1 from Lansing specifically; and then, what your thoughts are on that contribution for the balance of the year.

Mike Anderson

Yes, we had a – it was a very modest loss, it was the negative stuff they called at the end of the year. In our first quarter call, we had some mark-to-market issues on a number of things that made for a very poor fourth quarter. There was a little carryover on one element of inventories that they have that is agreed as a negative. And in our proprietary trading, futures trading, derivative trading we had a modest loss that’s cyclical and seasonal. That was a drag. And one of the things that occurred over the last couple of years, we’ve got nice uptakes and income from biofuel trading especially with the ability to put stuff on ahead and the margin structure in Ethanol, which I described, were much more in the stock market.

There is very little trading out forward, and that’s true in a lot of the commodities as people are staying a little close to invest; so, some of the opportunities that we generally had have just not been out there. On some of their traditional business in the grain elevators that they do own have performed reasonably well here. We would expect to get back into the profit side; and right now, I would say we’re not expecting a banner year. Maybe last year’s results would be a reasonably proxy at this point in time. The difference is, last year, we had an exceedingly good first quarter and then we had a terrible fourth quarter so if we play out this way – and again this is a trading business, so each day you’re starting fresh but assuming what I’m saying plays out, then we should have played a bit better for the last three quarters in Lansing this year than last year.

Michael Cox – Piper Jaffray

All right, good. Thank you very much.

Mike Anderson

Yes.

Operator

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Charlie Rentschler of Wall Street Access. Please proceed.

Charlie Rentschler – Wall Street Access

Thank you. Good morning.

Mike Anderson

Good morning, Charlie.

Gary Smith

Good morning, Charlie.

Charlie Rentschler – Wall Street Access

On the short side of the balance sheet, there was considerable deleveraging in the first quarter; and I wonder if you could talk about – Gary went through some of those numbers pretty quickly but – what was driving that? What were you doing with all that?

Gary Smith

Well, inventory values were declining; and so, when the mark-to-market our grain inventory and get our margin deposits back, that’s all run through the balance sheet almost immediately; and I think in a normal year where you have the unknown grain early in the year and the closer you get to harvest then you have everything going, it often becomes a windfall of cash for us; but in this case, we came off of substantially higher values; and as a result, if you look at it quarter-over-quarter, it was a significant cash flow increase for us. We don’t typically see it quite this radical, but we don’t see the kinds of investments that we did last March, a year ago March, so – but it’s not a very positive thing for us; and, obviously, we’re pleased that we had the liquidity all during last year to satisfy the bankers.

Charlie Rentschler – Wall Street Access

Yes. So, I mean, you like the position you’re at right now?

Gary Smith

We sure do. Yes.

Charlie Rentschler – Wall Street Access

Mike, I wonder if you can get into the head of the Farmer Brown out there in the Corn Belt, what do you think is going through his head in terms of looking at the planting corn versus beans or vice versa, and his thoughts about expenses; in your case, of course, particularly fertilizers? Do you think he’s trying to pull back here and there? What’s your thoughts on that?

Mike Anderson

Yes, really good question. We have pegged corn planting around $84 million in that range and assuming the weather – if the weather cooperates, I think it’s still reasonable to – it’s going to be in that range; and that, I would say, in some areas of the geography where we are which takes Central Illinois, East Central Illinois, that ‘s corn country; and the specific farmers I’ve talked to out there are very clear that they intend to plant as much corn as before, and/or follow whatever rotations they have in that corn. The ability to get additional yield is such that they will not scrimp at all on the nitrogen; but they’re very cautious on phosphate and potassium, and letting their – I would say, their agronomic work on the – what’s in their soil, guide their decision. As you get into more ground that is maybe not productive for corn, but you don’t – near the advantage, it will stay in Northern Ohio, Michigan, and what not you’ll see more of willingness for – well, first of all, there is a bias to keep with rotation, so start with that; but there is also willingness to go with the more beans primarily because of the cost of inputs relative to output; and they don’t necessarily get the boost in yield like they would in East Central Illinois; so, we’re seeing a tendency in willingness to go to a little bit more bean acres.

On the cost side, there is no question that the corn price having – it’s interesting to see having drifted down to the $4 range when just a few years ago $3 would have been high; but we didn’t have inputs at the levels where they are at but there is no doubt that we’re seeing a continued rejection on the part of the number of farmers in the areas of T and K, not too much N. N prices have come down quite a bit as has phosphate; and they’re willing to buy and use the nitrogen that they had before; so, it was a nice run for a couple of years where income revenue topline was going up faster than input cost. Well, the opposite is true right now and so there is a tightening of the belt on the expense side.

Charlie Rentschler – Wall Street Access

Thank you for that very interesting appraisal. Last question about Lansing grain, are you happy with where you’re at, or do you think you’re going to continue to buy more of that?

Mike Anderson

Our plan all along was to potentially get up to around the 50%. We’re just under that and we’re happy with where we are right now.

Charlie Rentschler – Wall Street Access

Okay. Thank you.

Mike Anderson

Yes.

Operator

Thank you very much. And ladies and gentlemen, we do have time for one more question and it comes from the line of Ian Horowitz of Soleil Securities. Please proceed.

Ian Horowitz – Soleil Securities

Good morning guys.

Mike Anderson

Hi, Ian.

Gary Smith

Hi, Ian.

Ian Horowitz – Soleil Securities

Can I go through this mechanical question on the capacities, volume capacity for plant nutrients? In the second quarter on a year-over-year basis capacity line, we should be flat; and then, when we come into the third quarter due to the Hartung Brothers acquisition then we’ll start to see the increase in volume capacity. Is that right?

Gary Smith

Yes. August 1 and if the closing goes as projected which would be July 31, the third quarter would have an effect with Hartung coming in.

Mike Anderson

Yes. There’s just a modest increase in capacity because of the acquisition of Douglass Fertilizer which happened in the second quarter of last year and the total line business we bought which was in the third quarter; but there are – although, if you take Douglass, our new Southern region does substantial volume, they do not have substantial storage capacity, and the same is true with the total line business; so, from a theory perspective, it’s just as you said Ian; and the theory confirmed.

Ian Horowitz – Soleil Securities

Okay. And then, we’ve talked about some of your thoughts on M&A in this space; from what we understand, there is a lot of wholesale/retail operators that are in pretty challenging positions right now. Do you see yourselves continuing to kind of take advantage to this moment, the increase in your capacity?

Mike Anderson

Yes. That would be our intent. Now, that’s got to match up with the opportunity and we’ve been a potential seller or a merger candidate; and that, as we know, it’s uncertain until you actually sign a deal. But we really like the capabilities we have albeit we do manage our risk, our price risk well last year. We feel we’ve cleaned up our shop on that and we look at the current time as a time of opportunity and the recent acquisition we just announced an indication of that. We hope that we’ll be able to see more.

Ian Horowitz – Soleil Securities

Okay. And the remainder of the Hartung Brothers is going to stay back with them, and they’re going to operate their seed business and other retail operations, is that correct?

Mike Anderson

Yes. Seed there and their substantial produce business.

Ian Horowitz – Soleil Securities

Okay, right.

Mike Anderson

Correct.

Ian Horowitz – Soleil Securities

And then a quick question on grain. When we look at the recent grain stocks report, a significant amount of – there’s been a significant change in the amount of grain being held on farm versus downstream, what are your comments on this? How do you feel about this? How is this impacting your utilization needs in this business and then on top of that, planning progress is continuing to be – you guys had the challenge. How are you modeling utilization rights in the grain business over the next growing season if we continue to see underperformance in plan?

Mike Anderson

Good question. Yes. I mean, we’ve seen an expansion with the high prices, first with the high prices and repairing charges; over the last several years, we’ve seen an increase in the amount of on-farm storage built, and commercial storage has just been added; but during that time frame, also, we’ve added some ourselves, and the continued – over the last couple of years, the significant amount of consumption that’s taking place with new Ethanol plants embedded right in the heart of production country suggests that it’s logical that more grain will flow direct from farm to an Ethanol plant, as opposed to necessarily going through a terminal warehouse such as ourselves. But the overall amount of grain we’re growing is going up; so, we’ve been blessed with the ability to stay full when there’s carrying charges which there have been, and we’ve been blessed with reasonably good volume coming into our traditional facilities; but it’s also in direct shipment from farm to other consumption points as afforded us some nice opportunity in what we call Direct Ship trading business it has always been good for us.

We like what we see. One of the reason so much have been held at farm as basis levels were so cheap that it encouraged the farmers that had space to keep it there. They did what the market signal told them to do. As we look forward and you talk about our model, we do quite a bit of extensive modeling around – probably more so on the impact of planning on price; and we know one of the residual impacts on planning is if we have a draw down in corn stocks, there would be a reduction in the amount of income that could be made from what we call space income, so – and there’s something that we’ve – it’s something that we deal with the volatility that we deal with all the time. And so, we’re sitting here with our scenarios on what we call an average case, a better case, the pessimistic case, the worst case, and we’re running those numbers regularly. Both to understand its impact on our income, but probably more importantly understand the potential impact on short-term lines of credit to support margin calls; and then, we ran into that dynamic last year as we all know. So we cannot control what is the risk implanted. The market is setup to plant substantial acreage. Most years, we get it in. I suspect that we will but I’d rather be ahead than behind.

Ian Horowitz – Soleil Securities

Okay. What’s the impact of corn and bean switching away from the normal rotation to your grain business?

Mike Anderson

Well, corn is – first of all right now, wheat is a huge contributor to space income and we have substantial wheat stocks throughout that we would expect that unless something changes materially in the demand for wheat that was just lodged and their elevators will stay there and provide good income, and we’ll have the ability to originate more wheat this summer. So if the dominant piece of our space income right now, corn is second by far beans very little. So if we switch over to beans from corn, it is a hit both in volume because you don’t produce as much per acre and it’s a hidden space income. I do recall, we have had years where our space income has gone as low as zero, or to a modest loss versus we’ve had years per bushel was better than what we experienced last year although, last year was quite good. So it’s a major factor.

Gary Smith

And that switch will also impact the plant nutrients.

Mike Anderson

Yes, because corn takes more nutrients.

Ian Horowitz – Soleil Securities

Okay. Absolutely.

Mike Anderson

It’s a huge issue to watch literally in the next four weeks.

Ian Horowitz – Soleil Securities

But it doesn’t seem like – you guys have said that you’re running these different scenarios yet; but it’s still too early to tell from one direction or the other.

Mike Anderson

Yes, it is. And actually the future of market is an indicator of that, corn has bounced up just a little bit here; but it’s still saying in the $4 to $4.50 less than $4.50 for these corns. You could see, it bounce a little over the last couple of weeks as delay in corn planting occurred and the core markets is going to be your barometer of are we starting to get into a trouble situation or not. And so far, it’s not indicating that.

Ian Horowitz – Soleil Securities

Okay. Okay, great. Thank you very much.

Mike Anderson

Yes. Okay. I think that was our last question. I want to thank you all for joining us. The next conference call is scheduled for Thursday August 6 at 11 to review our second quarter 2009 results. We hope you’re able to join us then and until then have a great day and thanks for being with us. Bye-bye.

Gary Smith

Thank you.

Operator

Thank you very much, sir; and thank you, ladies and gentlemen for your participation in today’s conference call. This concludes your presentation for today. You may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!