Anderson Q4 2007 Earnings Call Transcript

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 |  About: The Andersons, Inc. (ANDE)
by: SA Transcripts

Operator

Ladies and gentleman good day. Welcome to the Andersons Inc. 2007 year end and fourth quarter earnings conference call. My name is Mike and I will be your operator today. At this time all participants are in a listen only mode and we will facilitate a question and answer session at the end of the presentation. (Operator Instructions) As a reminder ladies and gentlemen this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call Gary Smith. Sir please proceed.

Gary L. Smith

Good morning and thank you for joining us for the 2007 year end and fourth quarter conference call. As you know certain information that will be discussed today contains 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 and conditions in the company’s industries both the United States and internationally and additional factors that are described in the company’s publically filed documents including its 34 Act filings and the perspectives prepared in connection with the company’s offerings.

It also includes financial information of which as of this call our company’s independent auditors have not completed their audit. Although the company believes the assumptions upon which the financial information and its forward-looking statements are based are reasonable, they can give no assurance that these assumptions will be proved to be true. Let me turn it over to Mike Anderson for his comments and we’ll be available for questions at the end of the call.

Michael P. Anderson

Good morning everyone. As we announced yesterday in the press release both our full year and fourth quarter net income and EPS set new records for the company. Our grain and ethanol and plant nutrients groups had quite good years. In total the company achieved net income of $68.8 million for the year or $3.75 per diluted share on revenues of $2.4 billion. Last year the company reported a net income of $36.3 million or $2.19 per diluted shares on revenue of $1.5 billion. This represents revenue growth of 63%, net income growth of 89% and EPS growth of $1.56 a share. The revenue growth experienced this year has come from several sources including higher grain and plant nutrient prices, higher grain bushels and plant nutrient tonnage and ethanol sales that we’ve made on behalf of our ethanol joint ventures.

Our fourth quarter performance this year helped solidify our full year results. In total the company achieved net income of $23.5 million or $1.28 per diluted share on revenues of $785 million. This compares to the same three month period last year in which the company reported net income of $13.8 million or $0.76 per share on revenues of $463 million. Being able to report record earnings for both the quarter and the fourth consecutive year is truly gratifying. However, to fully understand the total company’s results let’s take a look at each of our five business groups.

Starting with the grain and ethanol group its fourth quarter operating income of $30.1 million was $17.8 million higher than it’s year earlier result. Although revenues are not necessarily a good indicator of performance the group’s total revenue were up $243 million in the fourth quarter of which $144 million is attributable to sales of grain made to and sales of ethanol made for the ethanol joint ventures. Remember as part of our origination and marketing agreements we earn fee income for these services but no margin is recognized on the transactions. The income results for the quarter are up mainly due to improved performance within our affiliates, Lansing Trade group and the ethanol joint ventures. Our income from the group’s investment in Lansing Trade Group was higher in the fourth quarter than it was from the three other quarters combined. Also both the Albion, Michigan and Clymers, Indiana ethanol plants were in operation during the entire fourth quarter, this compares to the prior year when only the Albion plant was in operation. This lead to a substantial increase in both our share of the Ethanol, LLC income and management in marketing fees earned for the quarter. Additionally this increase in ethanol production has had an added benefit in that our grain business earned additional fees from originating corn for the ethanol plants and for marketing the distillers dried grain produced at the ethanol plants.

I’m pleased to report that construction is complete on our third ethanol plant in Greenville, Ohio. The plant is currently in start-up mode. We dumped our first load of corn this week and we’re scheduled to begin production within the next week. For the full year the grain and ethanol groups operating income was $65.9 million which is more than double its previous record income of $28 million earned last year. This year-to-year increase is due to significantly higher earnings in our ethanol business and Lansing Trade Group investment. An increase in space and fee income and year-to-year increase in development fee income of $3.5 million that relates to fees we earned for the establishment of our Ethanol, LLC’s. Total revenues for the year were $1.5 billion including $407 million in sales of grain and ethanol made for the ethanol joint ventures as part of our origination and marketing agreements for which only a fee is received. This compares to revenues of $791 million in 2006. Total revenues in the grain and ethanol group have increased this year due to an increase in bushels sold, a considerable increase in the average price of the grain sold and an increase in the gallons of ethanol sold.

The rail group continued to see modest growth in revenues gross profit and operating income in the fourth quarter. In total the rail group had operating income of $3.8 million this quarter and $28 million of revenues, compared to last year income increased by $400,000 and revenue was up $4 million or 17% this quarter. However, maintenance expense continues to be an issue for the group. Maintenance expenses remain high due to the elevated costs of steel and railroad labor rates and the higher frequency of wheel set replacements. The group’s non-leasing businesses which are the rail car repair shops and the manufacturing unit, experienced both higher sales and gross profit in the fourth quarter in comparison to last year. The rail groups operating income for 2007 was $19.5 million which is the same as 2006. The group generated revenues of $130 million which is a $17 million increase from the prior year. During the year the fleet grew to more than 22,700 rail cars and locomotives which is about 8% higher than the year earlier. The groups average lease rates have remained stable despite a slowdown in the overall rail industry. The average rail car utilization rate for 2007 was $92.6% and ended the year at 93.4%. Including gains from rail car sales and related leases entered into during the year, gross profits of rail group leasing business was higher than its 2006 results. The rail car repair and manufacturing businesses experienced lower gross profit during the year but saw some improvement at the end of the year.

The plant nutrient group achieved record operating income of $8.7 million during the fourth quarter. This is $7.4 million improvement over last year’s results. Fourth quarter revenues for the group were $140 million in comparison to the $67 million reported last year. The net income record resulted from significant increases in both volume and margin. Sales volume remained high in the fourth quarter as a result of increased wheat acres planted and increased in earlier customer purchases. We believe this increased demand is due to customer expectations of continuing nutrient price escalation and a concern that certain products may become unavailable later in the year. For the full year the plant nutrient earned a record $27.1 million on $466 million of revenue. Last year the group generated operating income of $3.3 million on $265 million of revenues. This represents revenue growth of 76% and operating income growth of $23.8 million. The group earned $10.4 million in 2005 which is the best previous year.

Due to the groups storage capacity it was able to purchase and store inventory until it was later sold as the inventory appreciated significantly between the time it was purchased and sold, the group’s margins were also significantly higher. The group’s margins were also positively impacted by price increases. Total nutrient volume for the year increased by more than 40%. This was influenced by both a 20% increase in corn acreage and market share growth. The increased demand for corn is a result of ethanol production impacted the group’s performance as corn requires more nutrients than other crops. Corn requires approximately 2.5 times the nutrients per acre than soy beans require and 1.7 times as much as wheat. We are currently anticipating a strong corn planting in 2008 as well however, we do not envision that planting will reach the records established in 2007.

The turf and specialty group had an operating loss of $800,000 in comparison to operating income of $200,000 in the prior year. It is typical for this group to incur a loss in the fourth quarter do to the seasonality of its lawn business, and actually the loss in the fourth quarter was less than we had anticipated. Total revenues were $19 million for the quarter compared to $18 million in 2006. Moderate sales increased in the fourth quarter is due to a significant sales increase in the dispersible granule product category and a 9% increase in sales in our corn cob division. For the full year the turf and specialty groups operating income was $100,000 on $104 million in revenues. Versus last year the revenues were down about $7 million an operating income was $3.1 million lower. The 2007 short fall was attributable to the continuing escalation of raw materials cost and reduced sales of insecticide and fungicide products that resulted from dry weather in the spring and the summer. Cob business had lower earnings during 2007 due mainly to the need to outsource some of the cob which resulted in higher cob costs for the year.

In our retail group total revenues were $50 million in the fourth quarter which were $1 million higher than the same period in 2006. These revenues included additional sales generated by the Andersons market store that was opened in Sylvania, Ohio this year. However, same store sales were down 2.8% during the quarter. The groups operating loss of $600,000 for the period was significantly below the operating income of $1.9 million reported for the same period last year. The majority of this difference was caused by the retail group reporting the $1.9 million impairment charge on certain retail assets. The group was also affected by a decline in operating income in the Toledo area market which includes three large stores and the new market store. The retail group’s total revenues of $180 million for the year were up $3 million while operating income was just over breakeven, this was significantly below the $3.2 million the group earned in 2006. This year-to-year income differential was caused by the same factors mentioned in the fourth quarter the most notable of which was the impartment. On a positive note the average sale per customer increased just over 3% during 2007, which was partially offset to decline the same store customer counts of about 2%. Now I’ll turn the floor over to Gary for his treasurer’s comments.

Gary L. Smith

The company’s 2007 effective tax rate was 35% that’s up 2% from 2006. In 2006 we had an ethanol small producer’s tax credit that was not available in 2007. In addition, our state and local income tax rates were higher in 2007. For 2008 we’re forecasting a tax rate of 36.8%. Interest expense for 2007 fourth quarter was $5.7 million up $1.9 million form the same period last year. For 2007 in total the company’s Interest expense was $19 million up $2.7 from the previous year, mainly this change is occurring in the short term expense area. Our interest rates were up slightly but our average outstanding borrowings were up significantly as well, more than $61 million for 2007. EBITDA for 2007 was $151 million versus $96 million in 2006. For the year ended our earnings from affiliates totaled $32 million up $24 million from the same period last year. Other income for the company totaled $22 million versus $14 million in 2006 and those items in other income include $3 million for a business interruption claim which hopefully will not repeat, $5 million from the sale of some Chicago board trade shares that we sold. Unfortunately, we only had one seat so we don’t have an additional one to sell, and then thirdly about $5 million in transaction fees for development of the ethanol plants and we don’t expect to earn at this level, at the same level in 2008.

Turning to the balance sheet I think you’ll notice that our total assets are $1.3 billion as opposed to just shy of $900 million last year. And I’d like to point out something that we’ve showed you in the last two quarters, talked about in the last two quarters but because this affects the total gross assets I think it’s important to repeat it one more time. During the second quarter 2007 the company’s balance sheet was expanded as a result of an accounting change that was made to reflect the FAS FIN 38-1. We adopted this recent interpretation which allows for net reporting of margin dollars along with the fair value of future and option contracts held with the Chicago Board trade. We have also elected to revise our presentation of commodity contracts from our previously disclosed net method to a gross method. Our prior presentation was consistent within this practice but this revised presentation will provide additional information about our activities and counter party risk. You’ll note the following additional lines on our balance sheet, margin deposit net, commodity driven assets will both be current and long term, and commodity driven liabilities will both be current and long term.

Current assets increased to $915 million by year end from the revised year end balance of $554 million. Since 2006 year end trade receivables have gone up $19 million. The increase was driven by the grain and ethanol group with an increase of $22 million and trade receivables in plant nutrients were down slightly by $3 million while the other units were relatively flat. Margin deposit net has increased by $15 million as well. Inventories increased by $206 million to over a half billion dollars from last years revised year end balance. Compared to the 2006 year end levels the largest increase by far came [inaudible] at $181 million. This increase is a result of higher grain prices and more bushels owned. The plant nutrients and turf and specialty group’s inventories were up $21 million and $3 million respectively due to a higher raw material prices. The other groups were essentially unchanged.

At the end of 2007 the company’s total inventory was more than $62 million bushels down 4 million bushels form our year earlier position. But remember that I said earlier that our owned bushels are actually greater and the 62 million bushels includes both owned and stored for other people. Net working capital at the end of 2007 was $178 million, an increase of $16 million from 2006 year end. Cash and cash equivalents at the end of the year of $22 million was down about $1 million compared to last year. Included in this balance is $5.5 million held in an account which is routinely used for certain light kind exchange rail car transactions. Total assets at the end of December 2007 were $1.3 billion as I said earlier an increase of $456 million. Along with the increase in working capital investments and advances to our affiliates added $60 million, and the company’s pension asset added $10 million and of course the commodity derivative inventory accounting change as noted earlier added about $121 million into the total assets.

At the end of 2007 our depreciation totaled $26 million, total capital spending including investment in affiliates at the end of 2007 was $55 million versus $50 million for the same period in 2006. Rail car purchases and sales were $56 and $47 million respectively during the year. Rail car purchases and sales for the same period last year were $86 million and $65 million respectively. Our total long term debt totals $189 million, $56 million is non-recourse and $133 million is recourse. That’s an increase of about $32 million and that’s all in the recourse column if you will. Our total funded debt to equity ratio is .37 to 1 and that’s exclusive of our non-recourse debt and at year end our average interest rate for all long term debt was about 6%. Of course we ended with total equity at $357 million, that’s up $86 million from last year’s number. Hopefully, you received your dividend check on January 23rd, when we paid our first quarter dividend on $7.75 per share. Mike

Michael P. Anderson

Before we take questions a few comments, first I’m obviously pleased with the earnings growth we’ve achieved this year. Our full year and fourth quarter income and earnings per diluted share were both records. I don’t want to miss this opportunity to thank the entire team that’s made our current year performance possible. That being said, please remember that many of the company’s businesses are cyclical in nature. For instance we currently anticipate a drop in corn acres and the economics in the ethanol industry have changed over the course of the last year. That being said, I also want to reiterate that the company is committed to growth, positive sustainable growth. We are continually looking at potential opportunities. As you know we’ve been deliberately growing various business units for several years and we intend to continue doing so. In recent years we’ve increased the size of our rail car fleet, entered into the ethanol business, expanded our partnership and investment with Lansing Trade Group, added physical locations and developed proprietary product lines. Based on how we’ve positioned ourselves I’m very excited about the future of this company. That concludes my prepared remarks. Gary and I will now be happy to answer questions that you have. So Mike we’ll turn it back to you.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) The first question comes from the line of Heather Jones with BB&T. Please proceed.

Heather Jones – BB&T Capital Markets

I have a few questions, one going back to plant nutrients as far as your comments implied some forward buying by farmers and I was wondering if that was significantly greater than what you’ve seen in previous years?

Michael P. Anderson

I don’t know if I would say significant. It was noticeable so that’s why we commented on it. But there’s the pipelines also been relatively empty, Heather. But we’ve seen definitely tick and buy.

Heather Jones – BB&T Capital Markets

Okay and as far as your comments about your view on corn plantings. I believe on your Q3 call, I can’t remember exactly, but I want to say you said in the $5 to $6 million decline range. Given what corn price has done over the last couple of months, have you modified that view?

Michael P. Anderson

We look at it regularly but I’d say that’s really pretty close to the range we’re thinking 5 to 7 million acres lower. And we know in our region, we know we’ve planted more wheat so that’s a certainty so that comes out of something. Soy bean prices are really strong, wheat prices are strong, but corn prices are strong. So there’s going to be those crops are going to continue to gain some ground. We’re highly confident beans will gain back some acres this year. So let’s just say we’re still in the same range.

Heather Jones – BB&T Capital Markets

Okay [inaudible] country.

Michael P. Anderson

Yes.

Heather Jones – BB&T Capital Markets

Okay. Speaking of wheat, was there any wheat that you owned out right, i.e. fixed price where you could sell at current prices and reap you know, windfall. I mean do you own any grain out right like that or is it all on hedged contract.

Michael P. Anderson

We or principally, we’ve stated this before, The Andersons, and actually Lansing is principally this way too, although they have more emphasis on overall trading but we are principally a hedger, offsetting flat price risk and we are a willing to trade in the spreads. One, to capture space income and two where we see special opportunity, as a result we don’t as a matter of course have un-hedged inventory of any consequence. We do have substantial hedged inventory in Toledo which is, we’re very happy that we have. And last year the wheat market did provide some nice opportunities in the area of trading spread relationships which we were able to take advantage of some of that.

Heather Jones – BB&T Capital Markets

Okay. And did you increase your position in Lansing this year?

Gary L. Smith

Well we’re planning on it but we haven’t done it as of yet. But we will be increasing our investment in Lansing for 2008.

Heather Jones – BB&T Capital Markets

And I can’t remember how much you’re able to add a year but are you going to go over majority ownership this year?

Gary L. Smith

Probably not.

Heather Jones – BB&T Capital Markets

Probably not. Okay. Well my final question on DDG’s do you hedge any of those?

Gary L. Smith

I’ll tell you how we handle this. We look at for roughly for every ton of corn you put in you’ve got a third of a ton or so of DDG coming out the back end. And DDG is really really tracked with corn price. It’s been 105% above corn on a per ton basis, 80% on the low side so it moves at a pretty good relationship with corn. So what we actually do in essence we hedge the DDG by not quite hedging as much corn when we buy the corn. So if we’re going to want to take a position in corn of a million bushels we actually will only flat price a portion of that with the portion we’re not pricing, in essence relating to the DDG that we’ll have on the back end.

Heather Jones – BB&T Capital Markets

So point being the DDG’s have gone to call it 170 to 180 a ton?

Gary L. Smith

Right.

Heather Jones – BB&T Capital Markets

We should assume you’re going to see the 170 to 180 a ton that you didn’t lock it at some lower price?

Gary L. Smith

Well again, let’s just say we’re buying a million bushels of corn ahead Heather, because we’re going to consume it. We could do two step transaction, flat price a million bushels of corn and then sale one third of that but we do a one step transaction and only price roughly two thirds to 70% of the corn. So in essence we hedge the DDG in corn, at the time we’re buying corn and selling ethanol. When we’re doing the complete what we call crunch in essence by corn either flat price futures derivatives, sell ethanol either cash or derivatives, buy natural gas cash or derivatives and in essence we are hedging the DDG by not quite buying as much corn.

Heather Jones – BB&T Capital Markets

Okay.

Gary L. Smith

So we’re locking, when we can we lock it all up together. To the extent we’re more in the spot market then obviously that’s not the case and we’re seeling it half the spot but we’re also buying corn in the spot when that occurs.

Operator

And the next question comes from the line of Farha Aslam with Stephens. Please proceed.

Farha Aslam – Stephens, Inc.

Starting with your partner trends, volumes this year were up 40%. Mike could you give us some color as to what you think volumes will do in 2008?

Michael P. Anderson

Yeah. You know a little color on the 40, and I don’t remember the exact statistic, but from 2005 to 2006 we had a drop and then we went back up. So we went back to the old five years, not up quite as much as 40% but it was up a really really nice increase and we’re gratified. We think that this year a couple of things, one if corn acres are lower which we project then we would have the, and we get two and a half times the nutrient put on corn versus soy bean that reduction in corn acres will then have a simultaneous reduction in nutrients. So we should see if we’re down 6, 7 or 8% in corn acres then we’d expect a little volume decrease. I also think I don’t know how big this is going to be put especially on pot ash and phosphates I think that we could see given the price activity, that we could see some decision making by making some modest reductions in usage and I don’t have a good feel for that to tell you the truth that’s going to come at the time the farmers planting. So we expect volume but although you didn’t ask this, for anyone following the fertilizer market in January price market we’ve had pretty substantial increases again in the price of nutrients and as you know we tend to accumulate inventories given the sizable investment we had in storage space. So that, assuming the prices would stay high, that would be to our advantage.

Farha Aslam – Stephens, Inc.

So do you think the advantage would be as much as you saw in [inaudible]?

Michael P. Anderson

I’m really not surprised you asked that but I’m not going to try to speculate on that right now. But we’ve got a nice, we’ve got one thing leaning us down a little and one thing leaning us up.

Farha Aslam – Stephens, Inc.

Okay and then moving on to your grain business. You’ve changed the way you purchase grain for your elevators given the current commodity cycle. Could you share with us how that might impact sales or profitability of that business?

Michael P. Anderson

Yeah. What we’ve done with the highly escalated corn prices, for anyone that follows us, we often buy grain out as much as three years out ahead in various types of cash contracts that we have and with the escalation in grain prices and the resulting impact on margin calls and our viewing point that at least for right now, we view this escalation, nothing lasts forever, but this is a little different than just supply induced price movements. There’s real demand coming from China, India, demand for protein, bio-fuels and what not. We’re putting the governor on some of the forward out purchasing and slowing that down either from in some cases saying we won’t buy way out there or it’s got to go through certain approval processes and we’re adjusting fees depending on that. We’re making very few adjustments in the current crop year go through, and when I say current crop here I am talking 08 year, that would be fall 08 through the following year. So we’ve made very, very minor changes other than I’d say maybe a bit of a governor and actually there’s some interesting opportunities in buying right now that come from take $5.00 corn and if you really understand the crop insurance business is opportunities for to give them both yield and upside protection. So we’re emphasizing that more right now. So I don’t think our changes should have a dramatic, they should have very little impact over the next year and a half and I don’t think they’ll have much of a long term impact. Frankly, most of the industry is taking a look at the buying practices and hedging practices given the dynamics that are going on right now.

Farha Aslam – Stephens, Inc.

And Mike you often give us color on the basis. It currently looks like corn’s average but soy and wheat might be low basis compared to historicals. Can you give us income opportunities in the various crops right now?

Michael P. Anderson

Sure. Corn basis is pretty strong with the recent, this last week escalation in prices it’s dropped off just a little bit. It is staying reasonably strong and with the ethanol plants that are in place and new ones coming on, despite the fact that we’re projecting a reasonable sized carry over this year with the prospect of lower acreage and the ongoing demand we expect it to stay strong. Frankly, wheat which was pretty low basis for years is now moved back to where it’s converged with futures and is trading, I think at levels that would be more historically normal for this time of year and are relatively good in the old crop. That’s in soft red wheat. Basis levels are through the roof for certain types of wheat like Minneapolis wheat, Durham wheat, high protein hard wheats, as there’s just a flat out shortage of those. As you look to the new crop though wheat basis is really, really cheap, soft wheat basis because of this huge crop that we have coming on and that bodes relatively well for us to be able to accumulate some good levels.

Soy bean basis on the other hand is really really low. Which means that as you’re stuff that’s been bought before that you’re selling today it’s moving through with less appreciation than we typically would expect and I think that’s interesting given the fact that we’re projecting an extremely tight carry over. I think it’s responsive to the fact that at these prices farmers are selling aggressively, elevators are selling aggressively to not own such high priced inventories and we have South America coming at us. So the bean carry opportunities are not as significant but corn and wheat for the Andersons are kings when it comes to space income and we’re feeling pretty good right now.

Farha Aslam – Stephens, Inc.

Okay my final question and then I’ll pass it on. Could you give us some color on your Greenville plant in terms of your hedging opportunities there and how much we’re able to sell forward?

Michael P. Anderson

Yeah I will and I might as well talk about Albion and Clymer’s to. We’ve said before that we’re substantially hedged at Albion and Clymer on the major inputs and outputs and at reasonable levels albeit that at the time that we put the hedges on and we’ve talked about this before. The corn market we had to pay carry or higher prices than the spot at the time and the ethanol we had to sell out discounts because it was inverted or contangled as they say, for 2008 very little for 2009. In Greenville by the time we put that whole LLC together the market had already moved substantially in corn and ethanol and we elected to not put stuff on a hedge. We had a very small as we’re about to open, we have a very small amount working out the next month or two that we locked in. So we have a substantial amount of this year’s yet that we have to buy the corn and sell the ethanol and for anybody watching it the forward margins are not very healthy in ethanol right now. Although the spot margins continued to show positive returns.

Operator

(Operator Instructions) Our next question comes from the line of Brian Millberg with Piper Jaffray. Please proceed.

Brian Millberg – Piper Jaffray

I guess the one thing I’d like to talk about is you mentioned this market share issue with the fertilizer. Can you tell me a little bit about that? How you achieved that? Is that just in the south eastern portion there? The Ohio, Tennessee area or?

Michael P. Anderson

We’re primarily, our footprint is facility wise is Ohio, Michigan, Indiana and Illinois and we do some business in the states that touch those states I mentioned, and we’ve had a long term focus to work to try to gain market share with our customer base and it’s relatively, I mean it’s not like we’re gaining large amounts every year, but we continue to keep meeting our objectives and that’s been really additive. We were blessed, if you look at the past year, if you looked over our history there’s some years where our big storage investment storage space is not always paid. This past year it paid substantially both from the fact that we had value of inventory go up but also it gives us the ability to position product ahead of time and when there’s allocation and shortages it tends to play to our advantage because of the ability to increase our inventories ahead of time. So we won on both those fronts. So the market share gains are in our existing territory as opposed to in new territories. Gary did you want to add anything?

Gary L. Smith

Yes we’ve got great relationships with our suppliers and obviously if you don’t have that, that’ll get you into a position where you’re going to suffer with your supply side. We work with both the suppliers and vendors as well as the customers to satisfy the market.

Brian Millberg – Piper Jaffray

Okay and then one last question because of the severe weather in the Tennessee, Kentucky, Southern Ohio area is that where you see most of the corn shifting? Or what’s your thought about that?

Michael P. Anderson

No I actually you know when you say corn shifting I’m assuming you mean reduced acres.

Brian Millberg – Piper Jaffray

Yes over the soy beans or to even cotton maybe.

Michael P. Anderson

I think that as you look at the southern acres the weather we’ve had now by the time we get to planting I’m going to assume that most of that impact or all of it will have abated. And I think you’re going to get down to, if you look at our territory which was dryer last year and yields were a little lower in parts of Ohio and parts of Michigan with higher nutrient prices and the bean price you might see subtly a little more shift. But in general I think that you’ll see areas that added corn last year that farmers will proportionally just shift a little bit more to beans and a little bit out of corn so I don’t think you’re going to see huge massive acreage shifts in some of which you saw in the south last year, maybe you’ll get a little bit more shifting back in that area. But I think it’s going to be pretty proportional.

Operator

(Operator Instructions) Our next question comes from the line of [Charlie Wincher] with Wall Street Access. Please proceed.

[Charlie Wincher – Wall Street Access]

Mike and Gary with the planting attention for corn down but demand expected to rise especially given 50 or 60 new ethanol plants coming on line this year in the United States, that might require another 2.2 million bushels I’m going to guess, and you know as you say some carry over as the end of last fall, what is your expectation for corn prices this year? And how does higher corn prices flow through and affect The Andersons in different ways?

Gary L. Smith

Okay that’s a good question because Charlie what you’ve keyed up is this likely reality coming at us that we are going to need either more corn acres then we’re going to likely have in 08 as we look out to 09, or we’re going to have to have continued yield increases, or both. Or, we’re going to get acres that are going to be able to show up which could be more acres and I’ll put in my plug for freeing up some of the conservation reserve program acres. So we are going to need, if you look out to 09 we’re going to need to get acreage back up based on everything I think we can see in front of us today. As far as how prices go for us obviously, that means that we have to finance higher priced inventory for this corn leader. Soy beans put more demand I would say on our short term lines of credit. Just for the base value of inventories to the extent that prices stay high - like recently we’ve had the reality of having to increase our short lines to support escalating prices to support margin calls in huge number of dollars. Now, if we assume that prices are high and don’t go substantially higher than there, then we maybe won’t have quite the impact on the maintenance margin but it’s for us the high price is just we need more cash to keep fuel in the business we have. What it does do for our customers, it tends to create a healthy net income situation at the farm level and I think we all end up benefiting from that.

[Charlie Wincher – Wall Street Access]

But what about the impact on your ethanol business? I mean I don’t see any alternative but corn prices to just keep going higher and higher, I mean maybe they’ll go to $6.00 or $6.50, heaven knows where they can go. But what if along with that you have gasoline prices drifting down because of recession of covering more and more of the country and where’s this leave the ethanol guys?

Gary L. Smith

I guess I’m not surprised you came back with that and you notice I didn’t answer that in your first question. I think in the end if you kind of calculate, let’s start with to the extent there are mandates and I’m not sitting here necessarily as a proponent of mandates but to the extent they are that can cause what would be viewed as uneconomic actions to happen to fulfill the mandate, so put that aside. In the end if we get into a situation like you’re talking about $6.50 or $7.00 corn, if gasoline prices, its not just gasoline prices drifting lower you’re also talking ethanol prices. I think we still have the availability to work substantially more ethanol into the market to get up to at least 10% in the United States which would be roughly 15 billion gallons and economically that should be able to be supported at roughly $0.40 premium to unleaded gas and today ethanol is trading at a discount to gasoline. So gasoline can go down and ethanol can go up. But with them amount of ethanol plants coming on stream quickly, of course I think that’s why we have prices like we do.

I was going to say that in the end if you have economics driving it and you look at the impact of $1.00 increase in corn on what that does to your variable cost for reducing a gallon of ethanol then you look at it for what it does to your variable cost for producing a pound of beef or a pound of pork or chicken or eggs. It’s pretty easy, to I think conclude that you’ll keep putting corn to feed before and you’ll slow down or shut down ethanol plants before you’ll dramatically shut down feeding and I think most of us would prefer to eat first. So I think kind of the dark side of ethanol is the combination of what you’re talking about Charlie. It’s just that simple.

On the other hand we’ve shown an amazing ability to get yield increases. I think that’s going to continue to occur. I mentioned the CRP again and hat was put in at a time when we had low grain prices and we were moving out of paid set asides, there was an environmental element to it, there still is. But there is a substantial amount of land out there that all of us are paying for that is not in production that I believe could be put in production. I think that’s terribly unfortunate especially given the situation like your describing Charlie. So I would hope at some point in time we’ll see the productive amounts of those lands come back into production to help mitigate the risk that you laid out.

[Charlie Wincher – Wall Street Access]

Yes but I think, you know what did grow 13.2 billion bushels of corn last year and the carry over was a billion something or you know a billion and a half, but you’ve got these ethanol refinery’s coming on line this year that will produce I think 4.8 billion gallons of ethanol. That takes about what 2.2 billion bushels of corn so you know against last year’s production you’re talking 15% to 16% increase just to feed the incremental ethanol plants coming on stream and you know certainly yields aren’t going to jump up like that year-over-year, there’s no way possibly,

Gary L. Smith

I mean I get your point.

Operator

And we have a follow up from the line of Brian Millberg with Piper Jaffray. Please proceed.

Brian Millberg – Piper Jaffray

Yes. I just wanted to cover the retail briefly. First of all, I think that your store year-over-year was actually pretty good considering the retail sector right now. So even though it was slightly negative I think that’s a pretty good accomplishment guys. But I was curious how the food business is doing at your food market?

Gary L. Smith

I think we, I’m pretty sure we said before, that it started slower than we had anticipated and we obviously, we opened in May, had start up costs and we’re anticipating losses and it was worse than we expected. We are making significant, we have made right towards the end of the year and are doing it right now, significant changes in the product mix and focusing on customer experience. I think we made our food store, it’s a beautiful store but I think we made the food part of it too much like the food areas in our existing stores and as a result some of the changes that we’re making we are seeing increases in daily sales and customer counts but frankly, we have a ways to go. It’s a pilot, I’m proud of what we’re trying to accomplish here and we’re going to see over time whether we’ve got something or not.

Brian Millberg – Piper Jaffray

And then can you give us a little more color on this impairment, how much of that was related to the food market? And you’re other stores?

Gary L. Smith

That was related to the food market.

Operator

And we have a follow up from the line of Farha Aslam with Stephens. Please proceed.

Farha Aslam – Stephens, Inc.

Could you share with us some color on rail in terms of where rail lease rates are going today and kind of your outlook for capacity utilization going into next year?

Michael P. Anderson

Rates are relatively - the rates that we’re experiencing in our leasing year-over-year are relatively stable and flat and I’d say maybe the markets down just a hair. We’re having pretty good success in reletting cars, we’re in that 93% utilization and we focus on that substantially. We’ve seen for the first time in quite a while in January a modest up tick in car loads on rail roads. So I think you know our position is in the used car space and we have the ability and in managing that we have the ability to I would say to be aggressive in making sure our cars are placed and we’re going to do our best to see that that happens. We were able to pick up a few more cars last year. I’m expecting with rates generally below levels that support new car replacement that’s a generalization depending on car type and the industry, that’s not necessarily true. We’re now starting to get into that and we’re coming of a long lead time, we still have new cars that are coming on stream that were ordered one year ago or two years ago. But we’re staring to move into that phase were we’ll likely be scrapping more than we add on so I think we’re, my opinion generalization and maybe by car type by car type, this would vary by industry. We’re feeling pretty stable right now. I’m hopeful, we’re hopeful, our teams hopeful we’re gong to have the opportunity o help grow the fleet here given these circumstances like the last time we were I would say off the highs.

Farha Aslam – Stephens, Inc.

Right.

Gary L. Smith

[Inaudible] scrapping comment has to do with the industry not the Andersons

Michael P. Anderson

Yes. Thank Gary. The scrapping comment has to do with the industry where we would there’s those periods where you’re adding more cars every year than the industry scrapping which grows the fleet. Then you tend to go to a period where the opposite happens and I think we are about to enter into that period. I’m feeling pretty good about the position we have in here because as we mentioned the maintenance again that‘s an ongoing thorn in the side of just the profitability and we’re going to look to continue to expand our rail car shops. So I like the position we’ve got.

Farha Aslam – Stephens, Inc.

Okay. Great and you didn’t sale any rail cards during the quarter, just to confirm?

Gary L. Smith

It was limited.

Michael J. Anderson

Just going to make sure. Yes it was minuscule, not noticeable, a little blimp. So basically not.

Farha Aslam – Stephens, Inc.

And so going into next year would you anticipate being able to deliver at least flat earnings given that you’ll have higher number of rail cars?

Michael J. Anderson

You know it’s there’s some elements to the rail car business that are run rate like and it with the [inaudible element I think I feel very good about. Manufacturing and shops we had a down year, I would expect that we could do that or better. But we did for the course of the year I think we have roughly $8 million in gains on sales and so that is a quarter-to-quarter, month-to-month, year-to-year and opportunity-by-opportunity situation so I’m not going to sit here and predict what we will and won’t do on that particular component. Every year it seems like some opportunity comes up but it’s hard to know exactly how much we’ll do.

Gary L. Smith

And we’re continuing to look for opportunity to grow it and we’re also expanding our shop operations as well.

Operator

At this time there are no other questions I’d like to turn it back to management for closing remarks.

Michael J. Anderson

Thank you. Thanks for being with us. Appreciate your interest and your questions. Next conference call is scheduled for Thursday May 8th at 11 AM eastern time to discuss and review our first quarter results. As you recall, we do not provide guidance in the first quarter, in this quarterly call, annual call, we do it at the end of the first quarter because of the importance of the spring season and to allow us to see how things are shaping up. So that would be our intent at this time. So again thank you very much and we’ll see you later.

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