The Andersons' (ANDE) CEO Michael Anderson on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: The Andersons, (ANDE)

The Andersons Inc. (NASDAQ:ANDE)

Q2 2014 Earnings Conference Call

August 7, 2014 11:00 a.m. ET

Executives

Mike Anderson – Chairman & Chief Executive Officer

Harold Reed – Chief Operating Officer

John Granato – Chief Financial Officer

Nick Conrad – Vice President, Finance and Treasurer

Analysts

Ken Zaslow – Bank of Montreal

Farha Aslam – Stephens

Brett Hundley – BB&T Capital Markets

Operator

Good day ladies and gentlemen and welcome to the Andersons, Incorporated 2014 second quarter earnings conference call. My name is Steve and I’ll be your operator for today.

At this time all participants are in listen-only mode. We will conduct a Q&A session towards the end of the conference. (Operator Instructions) And as a reminder, this call is being recorded for replay purposes.

Now I would like to turn the call over to Mr. Nick Conrad, Vice President, Finance and Treasurer. Please proceed sir.

Nick Conrad

Good morning everyone and thank you for joining us for the Andersons, Inc., 2014 second quarter conference call.

We have included a slide presentation that will enhance our talking points this morning. If you are listening or watching this presentation via our website, the slides and audio are in sync. For those who are listening via telephone and watching the webcast, you should follow directions sent to you in order to sync the slides and audio. This webcast is available through the investors section of our website at www.andersonsinc.com. The webcast is being recorded and will be available on our website.

Certain information discussed today constitutes forward-looking statements. Actual results could differ materially from those presented in the forward-looking statements as a result of many factors, including general economic conditions, weather, competitive conditions, conditions in the company’s industries, both in the U.S. and internationally, and additional factors that are described in the company’s publicly filed documents, including its 34 Act filings and the prospectuses prepared in connection with the company’s offerings.

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

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

Now, I’ll turn the floor over to Mike for an opening comment.

Mike Anderson

Thank you, Nick. The Ethanol group had its best quarter ever with operating income of $33.9 million. This has led the group’s earnings in the first six months of this year to exceed any prior year full-year results. Margins in the ethanol market were strong and the group seized on that opportunity by producing a record amount of ethanol during the quarter.

The Plant Nutrient group second quarter performance was solid as volume increased due to the recapture of the majority the volume lost during the first quarter. In addition, our Grain group benefitted from improved space income in our grain operations and the addition of income from the Thompsons Limited joint venture. All these led the company to a first half earnings record.

The company also paid its 71st consecutive dividend in July. I will now turn this over to John who will provide details of the total company results.

John Granato

Thanks, Mike and good morning everyone. The company reported net income of $44.3 million in the second quarter, or $1.56 per diluted share on revenues of $1.3 billion. In the same three months of 2013, net income of $29.5 million was reported or $1.05 per diluted share on revenues of $1.6 billion. The majority of the year-to-year decrease in revenue relates to our grain business whose revenues decrease primarily due to lower grain prices which declined almost 25% in comparison to the same period of the prior year.

Now to a non-GAAP measure – EBITDA, earnings before interest, taxes, depreciation and amortization. The company's 2014 second quarter EBITDA was $90.7 million, an increase of $25.5 million from the same three-month period of 2013. Year to date EBITDA totaled $147.2 million which is an increase of $39.1 million compared to the prior year six month total.

Equity in earnings of affiliates was up $22.2 million and totaled $32.2 million in the second quarter. The positive year-over-year change was driven by an increase in earnings from our Ethanol LLC investments and the inclusion of income from Thompsons Limited which was added to our portfolio in the third quarter last year.

For the first six months of 2014, equity in earnings of affiliates totaled $52.7 million compared to $17.8 million in 2013. Average short-term borrowings for the second quarter were $165.2 million, a decrease of $15.6 million from the prior year. Other income was $3.8 million compared to $1.3 million in the second quarter last year. For the first six months, other income increased $19.4 million year-over-year primarily due to the $17.1 million pre-tax gain recorded on the partial redemption of the equity investment in Lansing Trade Group.

For the second quarter of 2014 the company’s effective tax rate was 34.2%, down 2.1% from the second quarter 2013 rate of 36.3%. The lower 2014 effective tax rate is due primarily to increased deductions related to domestic production activities and to the benefit of income attributable to non-controlling interest, which has not increased the company’s tax expense. We are projecting our 2014 tax rate to be 33.9%, the company’s 2013 effective rate was 36%. The lower effective rate for 2014 is due to the items mentioned in relation to the quarter and the correction made in 2013 with respect to accounting for the OCI portion of the company’s retiree, healthcare plan liability and the Medicare Part D subsidy.

The bridge in this next graph demonstrates which groups 2014 second quarter income is up or down in comparison to the prior year. The specifics behind these differences will be detailed as each group’s operating performance is discussed. Therefore to better understand the total company results, Hal will walk you through each of the six businesses.

Harold Reed

Thanks, John. Let’s start with the Ethanol Group, which achieved record operating income of $33.9 million this quarter. In comparison the group reported operating income of $10.6 million during the same three-month period last year.

The increased income is the result of significantly improved Ethanol margins, record Ethanol production, ongoing service fees and increased co-product income. Ethanol margins were supported primarily by ongoing increases in export demand, lower corn prices and excellent operating metrics.

Revenue was $226 million in the second quarter in comparison to $222 million in the prior year. Revenue will increase about 2% even though gallons of ethanol sold increased by 8% as the average price per gallon sold declined. Through June, the Ethanol Group has reported operating income of $53.7 million on revenues of $415 million. In 2013, the group had operating income of $13.1 million during the same six-month period on revenues of $422 million. As we’ve mentioned previously the results for Denison are not included in the equity in earnings of affiliates line, as this location is consolidated due to our significant ownership percentage. Therefore the Denison income is included in the category Consolidated Operations and Service fees in the slide presentation.

This category has increased by $4.6 million this quarter in comparison to the prior year. As you may remember, in the first quarter there was a $4.2 million negative mark-to-market adjustment at the Denison location. This income was recognized this quarter when the inventory was shipped. However, as futures risk has also been hedged for the second half of the year, similar negative mark-to-market inventory adjustment of $2.5 million was made this quarter. That income will return in the second half of this year.

At this time we have approximately 75% of the third quarter and 33% of the fourth quarter futures risk hedged for our production. The majority of those hedges were placed in the first quarter, consistent with our strategy to lock-in reasonable forward returns when available in the market. Other hedges were added in the second quarter. We currently are managing margins in the spot market for the rest of our production.

The group has continuously made improvements to the plants. This can be seen from the fact that the group once again had record ethanol production this quarter and capital investments that have made to increase the plant efficiency have been beneficial for both ethanol and co-product productions.

The Plant Nutrient Group had operating income of $25 million on revenues of $312 million this quarter. In the same three-month period of 2013, the group reported $23.2 million of operating profit on $330 million of revenue. Volume increase in the second quarter as we regained the first quarter volume shortfall caused by the late start of the fieldwork. Margins were up slightly this quarter in comparison to the prior year.

This year, the Plant Nutrient Group had operating income of $23.6 million through the first six months on $420 million of revenue. Last year, the group generated operating income of $22.7 million on $442 million of revenue. Through June, volume is up approximately 6% and margins are up slightly. The group ended the first half and the strong month of June due to good weather and demand for Snyder’s [ph] applications.

Storage capacity of the Plant Nutrient Group increased to 902,000 tons from 867,000 tons in the same quarter of 2013. This was due to expansion of both dry and liquid storage in some facilities.

The Grain Group earned operating income of $10.4 million this quarter versus $2.1 million a year ago. The group had improved space income for the quarter allowing the grain operations business to return to profitability after a tough first quarter. In the prior year second quarter, market [ph] carry and ownership were negative impacted by the 2012 drought. The Grain Group also benefited from higher income from these investments.

The income for Lansing Trade Group was comparable to the prior year, even though we owned approximately 20% less than we did in the prior year.

Thompsons also had good income in the second year and in the prior year only deal expenses were recorded for that same period.

Grain Group revenues for the quarter were $656 million, which is down from the $891 million reported last year. This revenue decrease is primarily due to a lower average price of bushel, which decreased by almost 25%. The Grain Group’s operating income through the first six months of 2014 was $21.7 billion on revenues of $1.2 billion. Comparatively, the group’s first half operating income in 2013 was $10.4 million on revenues of $1.7 billion. The year-to-date results for this year include a pre-tax gain of $17.1 million from the partial sale of the groups Lansing Trade Group Holdings.

As noted in the last quarter, storage capacity of the Grain Group has declined slightly since the prior year from 141 million bushels in the second quarter last year to 139 million bushels this quarter, due to the loss of some storage space. The rebuilding of some of this space is already underway.

Last quarter, we mentioned the corn planting progress in our region and in the country was behind the five-year average, but there is ample time to get the crop in. Then [ph] the corn crop got in and the weather is cooperative with the few minor exceptions and now it appears we’re likely to have record yields in both corn and soybeans. Yield estimates are currently in the range of 167 to 173 bushels per acre for corn.

As of Monday, crop condition report showed a 73% of the corn crop was good or excellent. At the same time last year, the rating was 64%. As it relates to the soybeans, yield estimates are currently at least 45 bushels per acre and the crop condition report showed that 71% of the crop is good or excellent. At the same time last year, the comparable soybean rating was 64%.

The Rail Group reported operating income of $6.7 million this quarter on revenues of $33 million. Last year, the group reported $9.7 million of income on revenues of $39 million. Gross profit from the leasing business was down slightly even though both the average lease and utilization rates were higher this quarter as the fleet has decreased in size.

This quarter, the group recognized $2.5 million in pre-tax gains on sales of railcars and related leases and non-recourse transactions, whereas last year $4.4 million was recognized on similar transactions. During the first six months the Rail Group had an operating income of $21.7 million and revenues of $86 million. In the same period of 2013, operating income amounted to $24.3 million and revenues were $85 million. These results included gains on sales of railcars and related leases and non-recourse transactions of $13.3 million in 2014 and $14.6 million in 2013.

The average utilization rate for the quarter was 89.3%, which was up over three points from the 85.7% experienced a year ago. The utilization rate as of the end of June was 89.1%; as of the end of the quarter the group has 22,162 railcars.

The Turf & Specialty Group had operating income of $2 million this quarter on revenue of $43 million. Last year the group reported $2.2 million of income on comparable revenue. Turf product tonnage was essentially flat this quarter in comparison to the prior year. Margin per ton increased slightly due to product mix.

The car [ph] business this quarter had higher expenses as usual as it continued to invest in operational improvements at a recently acquired facility. Through the first half of 2014 the group’s operating income was $3.4 million on $87 million of revenue. This compares to operating income $6.2 million and revenue of $90 million last year.

The Retail Group’s operating income was $1.6 million in the second quarter compared to $1.5 million reported last year on consistent revenues of $41 million. The group’s year-to-date operating loss is $700,000 on revenues of $69 million. Through the first six months of 2013 the operating loss was $1.6 million and revenues were $72 million. The 2013 year-to-date results included $800,000 in cost associated with the closing of the Woodville store.

Now, I’ll turn the floor back to Nick for the treasure’s report.

Nick Conrad

Thanks Hal. Current assets totaled $865.2 million on June 30th, a decrease of $42.1 million from the same period last year. Other assets added $95.6 million in property, plant and equipment along with rail assets leased to others increased $18.1 million compared to the second quarter last year. As a result total assets at June 30th were $1.9 billion, the increase of $71.6 million year-over-year.

Current liabilities were $613.2 million at the end of the second quarter, a decrease of $14.9 million from the prior year. At June 30th the company had short-term borrowings of $27 million, which is a decrease of $23 million compared to the same period last year. The average short term borrowing rate for the second quarter was 1.64%, down from the previous year’s rate of 1.92%.

Accounts payable for grain ended the second quarter at $164.2 million, a decrease of $30.8 million year-over-year and a decrease of over $28 million compared to the 2013 year end.

[Assets in the cash] recently the purchases of grain last fall under the delayed price of whole paid contracts had resulted in an increasing cash balances and related grain payables, which we expect to occur again this fall.

Long-term debt ended the second quarter at $300.2 million, a decrease of $100.8 million from the prior year second quarter. The average long-term interest rate for the second quarter was 4.49%. Year-to-date June 30th, the average long-term interest rate was 4.5% compared to 4.66% on June 30th last year. Long-term debt to equity ratio was 0.3 to 1 on June 30th, compared to 0.63 to 1 for the same period last year.

Total equity was $791.3 million at the end of the second quarter, an increase of $137.4 million year-over-year. At the end of the first quarter net working cap was $252 million, a decrease of $56.9 million from the 2013 second quarter.

Mike will now cover a few more points before we take questions.

Mike Anderson

Thank you, Nick. As many of you know, we’ve been working on an SAP implementation for over two years now. We’ve planned a phased implementation strategy. In May we rolled out the new financial system company wide and just recently completed the second quarter closing the system. We also implemented the new grain system at two locations in May. We learned a lot from this limited grain system rollout and are working to refine and improve the system.

We will continue to roll the system out to grain locations through 2015. In the future the SAP implementation will be expanded to include other groups. We want to express our thanks to the team that has been dedicated to building this SAP solution. We’re excited about the clear potential to connect employees, customers and information, in order to support the company’s relationships, growth and performance for years to come.

As we’re now utilizing the SAP system, additional expense will be seen at the corporate level as it was this quarter. Specifically, the system will begin to be amortized and there will be other ongoing costs associated with maintaining and hosting the system including an increased information technology workforce. Further as the rollout plan continues to be refined and implemented, there will be additional cost association with it including the higher external consulting and internal development costs.

In closing I would like to provide an outlook for the remainder of 2014, like simply we expect to have record earnings this year.

Based on the current margin environment and because we have hedged approximately 75% of the third quarter and about a third of the fourth quarter’s futures risks, we currently believe our Ethanol Group will have another excellent year. Clearly this is evidenced by the fact that their first half results have already exceeded any prior year full year’s earning record.

We continue to believe that our Grain Group will improve upon their 2013 results, especially considering the anticipated strong corn and soybean crops this year and a recent increase in space income. This will however be highly dependent on continued favorable weather during the growing season and the market allowing normal space income to be earned.

Further we expect both Lancing Trade Group and Thompsons to have good results in the second half.

Based on how the Plant Nutrient group ended the first half of the year, we continue to believe they will improve on their 2013 results.

We also anticipate our Rail Group having another strong year in 2014. In the first quarter we communicated that we expect earnings improvement in both our Turf & Specialty and Retail Group this year. This is still the case for Retail, however our expectations for the Turf & Specialty Group have decreased somewhat due to additional expenses in store sales and the com [ph] business. As we said previously, a typical year for us is where the second and fourth quarters are stronger and third quarters are softer. We expect that trend to continue in 2014.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And standby for our first question which comes from the line of Ken Zaslow of Bank of Montreal. Please go ahead Sir.

Ken Zaslow – Bank of Montreal

Hi, good morning everyone.

Mike Anderson

Good morning, Ken.

Ken Zaslow – Bank of Montreal

So I’m just kind of-- I just think about a big picture question. The first half of the year you kind of head on $2 number and assuming -- can you talk about how you frame the earnings power around that in terms of when we’re going to start to see it into the fourth quarter and into the first quarter next year? And what do you actually expect to see in terms of the overarching earnings power because it seems like you are still under earning – I know you said that you are at record? You expect the record profitability for 2014, but you’re already two-thirds of the way of last year numbers and you’re only half way through the year. So can you frame that a little bit for us to see what you’re thinking really about earnings power?

Harold Reed

Yeah. Thanks. Ken, this is Hal. Just a couple of thoughts. First of all, I think as you know the most important thing about our quarterly numbers is that there are almost always the seasonal pattern for them. Okay? And the second quarter is always a pretty good quarter for us as is before. So we don’t want for the seasonal pattern to change much and we talk about the grain harvest being good and obviously that’s a fourth quarter and a first year next year opportunity. I don’t think we’ll see much change in how we see the results come across, but I think with the filling of the pipeline on the grain side and cheaper grain price with the ethanol business, both those things are supportive going forward as we discussed and the rail business seems pretty stable as we see slight increases in rates and utilization continuing to roll forward. I don’t think we see a lot of changes in pattern, but I think what you’re seeing is some good opportunity, especially with the forthcoming grain harvest.

Ken Zaslow – Bank of Montreal

Would you expect ethanol – ethanol seasonality should not be existed -- your ethanol margin should remain at these levels. Is there any reason that you would not expect this margin that you generated this quarter to be more sustainable for the foreseeable future yet, assuming that net gas prices or anything like that that doesn’t kind of come out of nowhere?

Harold Reed

Sure. Obviously, we had the potential pricing issues with net gas, etc. and obviously there is a certain dependency on the oil prices across the world depending on what they do in subsequent quarters. There is a seasonality to driving demand across the world. So there is some seasonality plus as we mentioned we’ve got three quarters of the third quarter already booked and the third of the fourth quarter already booked. So the spot margins that we’re adding to those have been good. It’s hard to understand why they’ll change dramatically in the coming quarters, but these are margins that no one has seen in the ethanol business. It’s hard to project forward long term that margins will stay at record levels forever.

Ken Zaslow – Bank of Montreal

And my final question. Can you tell about the opportunity associated with the BSR over the next 12 months? I know we’re starting to move up, what are you thinking of how high this can go and the stability at $0.50, $0.20 level or how do you think about it?

Harold Reed

Based on the facts of this recording period, we are ahead of the number to have one more tick of BSR added. However, as you know the actual spreads haven’t approached that full period value. Right? So we could potentially add another tick of BSR but not see the spreads increased much. Honestly, I think there is a lot of folks waiting to see just how big the corn and bean harvest is and exactly what the competition is for space this fall before we make a decision. So there is still a chance. We get another tick. I don’t see that spreads changing and dramatically now, the competition for space this fall will play a big force in what we see corn spreads as well as the wheat spreads do in this fall in the market place.

Operator

And your next question comes from the line of Farha Aslam from Stephens Inc. Please go ahead.

Farha Aslam – Stephens

Hi, good morning.

Mike Anderson

Good morning, Farha.

Farha Aslam – Stephens

Sir we have just some handpicking questions. The first one, Mike you had highlighted your investments in SAP. It looks like your other corporate -- it was about $7 million to $8 million higher year-over-year in the quarter. Is that something that we should expect on an ongoing basis as you invest in the system?

Mike Anderson

Thanks Farha. How are you?

Farha Aslam – Stephens

Good.

Mike Anderson

Good. Let me address that. In the quarter specifically, there are really four items that caused the year-over-year increase. One was the go live and the amortization of the capital for SAP that has started. In addition, there was increased equity compensation. Relative to last year there was also a timing issue related to equity compensation, last year we’re delayed in granting those and this year there is also increased incentive comp. Now looking forward, I think the second quarter is a reasonable proxy for the second half of the year run rate, although there probably will be some quarter-to-quarter variation.

Farha Aslam – Stephens

Okay, that’s helpful. And then I noticed that your interest expense was significantly lower than we had been anticipating. Any color, John, that you could give on interest expense for the second half and kind of going into next year.

Nick Conrad

Hi, Farha. This is Nick. As I indicated in my comments regarding grain payables, we’ve continued to see a pattern of delayed price and other contracts causing decreases in cash balances in the fall and appropriate increases in grain payables all of which suppress our burrowing activity and so I think the pattern the last several falls will probably continue again this year.

Farha Aslam – Stephens

Okay, that’s helpful. And then on ethanol, you had highlighted that you are hedged for the third quarter and partially into the fourth quarter. Two questions. One, do you hedge DDGs as part of your hedge strategy when you hedged ethanol? What exactly is included in ethanol hedges for you?

Harold Reed

Yeah. Good question, Farha. This is Hal. We’re 75% approximately hedged for the third quarter and realize we’re slightly into the third quarter already and we’re about 33% hedged for the fourth. So when we talk about hedging, we hedge the futures portion for the corn and the ethanol and the natural gas. So we do take into account the value of the DDG on the outbound side, the net corn hedge along with the ethanol and gas hedges. So it is net in that regard, but obviously there are spaces across all the different commodities that is not hedgeable until we actually transact in the cash markets.

Farha Aslam – Stephens

That’s helpful. And then just some color on your forward ethanol hedges as you see them. Would you say they are as good as sort of the spot margins that you delivered or sort of the overall margin per gallon that you delivered in the second quarter better or worse to sort of how we should think about modelling that segment because it’s so much volatility there?

Harold Reed

Yeah, I think it’s pretty simple to say that those hedges are not at the current spot margins and not at the same level as the average second quarter margins. As the deferred markets in ethanol are almost always at an inverse, we have the deferred margins that are lower than the current spot margins than the average second quarter margins.

Farha Aslam – Stephens

Okay, thank you. My final question, Mike, you haven’t done a transaction in terms of M&A so far this year and so any color you can give us on what you’re seeing in that M&A market and what sort of interest to you?

Mike Anderson

Yeah, we’ve got a pipeline out there and we’ve not been successful or success may not be the right word. We’ve not been willing to necessarily come to terms on some things that we’ve looked at on our judgment -- but we have additional things in the pipeline and we would expect the M&A to be an important part of our growth over the next several years as this is not going to be very predictable from the quarter to quarter.

Farha Aslam – Stephens

And any areas of particular interest for you?

Mike Anderson

Yeah, the prime—I would say consist of— we have primary focus on M&A in the grain, rail, plant nutrient areas. Ethanol has some appeal for growth, but again value is pretty important in the judgment on when you want to participate. We did a little bit in our turf and specialty and we would look to do some incremental additions there also.

Farha Aslam – Stephens

Okay, that’s helpful. Thank you.

Operator

And your next question comes from the line of Brent Rice from Telco [ph]. Please go ahead.

Unidentified Analyst

There’s just a couple of quick questions. Hal, you had mentioned the possibility of record production this year. When you look at the primary states you guys operate in, can you give us a sense of how the crops are looking state by state and guessing Indiana is probably flat, Illinois up a lot, but I just kind of wondering from the color perspective. Your thoughts on that.

Harold Reed

Yeah. As you compare year-to-year, I would tell you that pretty much every state is on that we’re in and some of them quite substantially as you might guess. If you look at the last series of -- last Mondays announcement from the FDA with crop reporting. Virtually all of our states are higher in both corn and beans and bean story is not yet told. The right temperature is the right range and people are talking about 45 of soybeans, but we’re going to put pretty wide eyes because the right weather here with the crops that started already could offer some pretty good potential, but they are all better.

Unidentified Analyst

Have you been watching some of the production agencies on the future side, some of the major players are kind of taking the top off the estimate kind of coming back in line that were some otherwise. We’ve gone three to four weeks without rain in probably two-thirds of the corn belt. Any thoughts on that?

Harold Reed

Yeah. There were, I think, a lot of people that again we’re looking at huge numbers. I think clearly the US FDA-167 is total low end of the range. Most of the rest of the people are close to the 170. We don’t see any people in the 174 to 180 range any more but we did for a while but the last few weeks is right we pay the net off. We would agree there is some discussion about exactly what harvested acres will be given the process I described, and right now I think what the US FDA shows is a fairly conservative harvested acres number relative to the total plant. So there is a variety of things going on but the grain the last three weeks in a lot of places has taken – the huge top potential off of that crop.

Mike Anderson

We really do need some moisture for beans --

Harold Reed

We do, yes.

Unidentified Analyst

Thinking about that, I would imagine you get some monstrous basis coming into favorable play for you 4Q, 1Q, any additional color you like to give on that?

Harold Reed

Not favourably, I mean export demand has been quite good, basis value that the growth has remained strong. So it’s going to take a shift to get us – wants to do crop starts, it’s going to take a shift to move us that way. So people are little bit cautious, farmer price -- the prices are lower and farmers are not selling. So we haven’t seen a lot of push on that side. So and then the question – and from your perspective becomes as – if we do see the basis improvements, sometimes, is it end of Q4 or is it more into Q1 of next year? So there is the timing question as well. But you are right, the crop decides – it should suggest to keep up all base [ph].

Mike Anderson

And I am going to just add some more color to that. One thing we know for sure, we don't have -- we have significantly more carryout this year than last year, call it a billion bushels. And so we don't have that front end demand that we had last year to consume the front end of last year's crop, competing for taking away from bushels available that go into space. We have reasonably good harvest weather, we don’t know what the harvest weather is going to be this year, we just don't know. So if we have ideal harvesting weather, whether it comes fast, that will add to the pressure on basis to put it lower. Let’s say we get into a rainy pattern, the fact is – besides the fact, we have got lots of space out there. We also have another interesting dynamic that’s developed over the last several years and that's monthly consumption continues to go up with primarily ethanol plants added to livestock and you don’t need – if the harvest would stretch out because of bad weather, let’s just say it stretches out a month, I am speculating, then you need a month less space for that. The farmer will try to tuck stuff away because of the flat price. It’s setting up to be a decent year for what we acquire corn at especially during the year, based on what it looks like it’s coming at us. But there is always an element on that as you got to wait to see the likes of the rise.

Unidentified Analyst

With that, perhaps I got the curiosity -- you see the heart of the corn belt, reasonably good basis relative to what you guys do and then you go to the fringe states like North Dakota, maybe down to the south and you’re seeing some tremendous discounts to CME prices. Are there arbitrage opportunities that you guys have to put that given –

Harold Reed

Well, I was just saying that our arbitrage opportunities are obviously broader than they used to be, especially with addition of our Tennessee assets, that’s a southern crop, it’s a different timing generally than the rest of the crop, and a different territory and tributary to the market at the river system. So that’s probably our biggest opportunity. Plus as you know, that’s where we are seeing a really rest solid, that’s a big part of -- what they do is in their merchandising arenas, find those arbitrage opportunities and they’ve got facilities all the way up to Iowa and down to Louisiana. So they are in the marketplace physically and that’s their expertise. So we are looking for both of those things to help, it’s a great question.

Mike Anderson

I am glad you asked that, because this is very interesting – here we are getting into August and on paper we have enough carryout, plenty of carryout, but you look at underneath that carryout, what states it is in, and then how tight is the farmer holding as opposed to the commercial holding. And real-time you know exactly what you said, Brent, you have some areas where ethanol plants are back away, they’ve got enough – they’ve got enough bought – large freights than highest back-off some – there has been reasonable selling, commercial is on holding its drive to real key basis, yet there is a number of areas, pockets in the Midwest where basis is surprisingly strong, and -- when you look at what supposedly the stocks are on paper and that does create opportunity.

Unidentified Analyst

Couple other quick questions and I am done. Any potential fallout from the Russia sanctions that are kind of going back and forth?

Mike Anderson

Sure, I mean that’s always is a wildcard. It’s primarily on the wheat perspective but because of their position in energy and other nutrient market as well, there could be a variety of fallouts. So we’re watching it closely. I think the world is watching it closely, it’s taken a lot of that into account across some of the commodities. So it’s important, right now there is – to manage through that and produce the crops that they could normally produce, the question might be about the distribution, so watching it closely and hopefully it defuses a bit and it is an important factor.

Unidentified Analyst

Is my memory wrong or was there a time when you guys at Lansing had pretty significant – I think it was chicken feet exports to Russia?

Mike Anderson

You are in the ballpark that we haven’t blocked that from our memory given the experience. But it had to do with food – the chicken themselves, not the feed.

Unidentified Analyst

Are you exposed to that or is it just a normal part of business –

Mike Anderson

We are not in that market anymore.

Unidentified Analyst

And then my final question – have you hedged any in your 2015 ethanol?

Mike Anderson

No, we have not.

Operator

Thank you. And your next question comes from the line of Brett Hundley from BB&T Capital Markets.

Brett Hundley – BB&T Capital Markets

Just had a question on fertilizer, on your plant nutrient business, as we think about the fallout, was there – I mean I know it’s early but I am thinking more of 2015 at this point. Can you talk a little bit about your forward outlook for that industry and for your business, specifically I am trying to think about how potentially continued softness in pricing would play out with any volume growth that you guys might have and how that might trickle down to the bottom line? I hope that makes sense but just wanted more of an outlook on your business specifically.

Harold Reed

Yeah let me take a couple of different paths down that one for you. First of all, we do expect on a global sense – we do expect less corn acres planted next year in the US. So we expect them to be down. Obviously what goes first though is marginally, so even if you expected acres to be down a few percent, most of those acres come out of them marginally, not out of the normal rotation in the corn belt, although some of it will. That’s one piece.

Second, I think, is our strategy over the last few years to get more and more into the specialty products, variety of things that we do well and that’s one – one, because that market is a bit more stable in volume, and two, because it’s a bit higher-margin. So we’ve moved that direction over the past years and continue to move that and hope that helps stabilize the income of that even if acres move up and down. I think you're right with the lower corn price farmers may want to spend a bit less but this year will be another fairly sizable income year for farmers given the yield, also given the yields this year they see exactly the value of putting nutrients into the soil, and you’re going to have a lot of people having 200 plus bushel corn and realize that the nutrients are taken out of the oil to grow that and they’re going to want to put it back in for that opportunity again. So there is a lot of competing forces, I agree it’s a bit of – it looks a bit flat from an acres perspective and a ton perspective in the bulk side, because of maybe the acres and the slightly lower flat price but we still like the place we have in that market, we like our move into the specialty side of the business. And farmers love growing corn and so we’re pretty hopeful that it’s just a small delay here in the acres number, small decrease in the acres numbers next year and that may be the negative piece.

Brett Hundley – BB&T Capital Markets

That’s really helpful, Hal. So I guess it sounds like from your commentary that even with that potential next year, you feel relatively supportive about the earnings level in your fertilizer business going forward.

Harold Reed

That’s the case.

Brett Hundley – BB&T Capital Markets

And then I just had two questions, within rail. First, if we can just talk about utilization rates in rail, and how we should think about the different moving parts within your business and how that can support or improve utilization rates into a) the back half of the year, but then next year as well?

Mike Anderson

Well, a couple things. First of all, obviously the utilization rate has trended higher here, we’re up about 3% from last year's numbers. I think we’ve shared historically in the past numbers that are a few percent higher than that. The numbers are generally tied to something like GDP and the general economy in the US. It continues to chug along a bit and so we feel good that the utilization rate can continue to inch higher. We’ve also shared the lease rates generally for most of the past quarters with maybe one exception, have also slowly increased, some of that’s by specific car type and specific some clean cars have been in high demand but lease rates have generally gone up. So I think we feel good about the fact that we will see higher utilization and stable to increasing lease rates going forward. As we – we believe the economy to be reasonably stable at this point.

Also what’s in place is that some of the railroads have had a bit of a tough time getting their traffic flow on their rail. And honestly from our perspective that's good for us, because if the efficiency of the rail lines isn't as good as it could be, that you have any more cars to move things. So we don't see that changing dramatically in the next year. They are working on improvements but it isn’t changing dramatically. So the general outlook there is good. The other pieces of that business are deal income. We talked about sales of the cars and the income generated by that piece, and then our shop income. So the deal income on a year-to-year basis can change. I think year to date we’re about $1.5 million different from the previous year, we’re below that previous year, that’s a good chunk of what we are below in the year-to-year earnings and it’s just the deal flow comes, and when it does, we’ve talked about that often. Our repair business is down, I think $0.5 million as well year on year -- $1.5 million, okay. And so that’s the second piece of the decline year-to-year.

So we are working on some improvements in that business. We think there is opportunities going ahead because of a lot of work that’s going to expect to be done on rail cars, so we look for that to pick back up a bit and we are working on that side of the business. So I think clearly the utilization rate and the average lease rates side of the fleet are all -- the biggest pieces of the business and then deal flow is what it is and we talk about that as it comes to the table.

Brett Hundley – BB&T Capital Markets

And then just as a follow-up to that within lease rates on the rail business, I mean what is the main determinant there right now going forward? I mean is it the type of car that’s coming off of a lease generally right now, you have a better mix there and you feel more confident that you’re going to have an improved rate or steady rate going forward. Is there some other determinant to that?

Harold Reed

Well, at this point in time it’s truly a function of the fact that hand car rates have gone up substantially. Rest of the car rates have gone up a bit but hand cars have gone up substantially. And so on that portion of our fleet as those deals come due, we see substantially increased numbers and that’s the biggest single factor in the rate. As I said in total the portfolio of our cars and the total US fleet is as high as the GDP and we’ve seen GDP increase slowly and so we expect to see that continue. So it really is mostly about the whole -- all of the oil and gas exploration and movement that occurs by rail right now that’s driving the largest segment of the increase in the market.

Operator

Ladies and gentlemen, I would now like to turn the call back over to Mike Anderson for closing remarks.

Mike Anderson

So I want to thank you all for joining us this morning. We also want to mention for those that are interested, there are appendix slides to this presentation available on the andersonsinc.com website at the investors tab under the second quarter earnings call replay. Our next conference call is scheduled for Thursday, November 6 at 11 AM Eastern Time to review our third quarter 2014 results. We hope you’re able to join us again at that time, until then have a wonderful day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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