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The Andersons, Inc. (NASDAQ:ANDE)

Q1 2008 Earnings Call

May 8, 2008 11:00 am ET

Executives

Michael Anderson – President, Chief Executive Officer and Director

Gary Smith – Vice President Finance & Treasurer

Analysts

Farha Aslam – Stephens, Inc

Brian Millberg – Piper Jaffray

Heather Jones – BB&T Capital Markets

Operator

Welcome to the first quarter 2008 The Andersons, Inc. earnings conference call (Operator Instructions) I would now like to turn the call over to Gary Smith.

Gary Smith

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 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 perspectives prepared in connection with the company’s offerings.

It also includes financial information of which as of this date of -- time of the call, the company’s independent auditors have not completed their review. 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. Mike Anderson Chief Executive Officer I will be available for questions at the end of the call. Mike

Michael Anderson

As noted in our press release we generated net income of $7.8 million or $0.42 per diluted share on revenues of $713 million. In 2007 we reported net income of $9.2 million or $0.51 per diluted share on $407 million of revenues. Although our first quarter results did not exceed the earnings record we established during the same period of last year. It was our highest first quarter earnings from operations when one time and non-recurring items are considered.

Remember that the first quarter record establish last year of $9.2 million included $3 million gain on the sale of a Chicago Board of Trade stock and $5.4 million in non-recurring development fees related to the ethanol plants. These two items are included in other income. Comparatively the only non-recurring fee received this quarter was the final $1.3 million development fee for the Greenville ethanol plant.

Therefore I feel great about our overall performance especially considering that the plant Nutrient Group and Rail Group both established new first quarter earning records. However, to fully understand the total company results for the quarter we’ll take a look at each of our five-business unit. Starting with the Grain & Ethanol Group, it had an operating income of $2.2 million in the first quarter versus $10.2 million a year ago.

It should be noted that part of this $8 million differential is due to the prior years first quarter having $4.1 million more in the non-recurring development fees included in the earnings which I mentioned earlier. The other significant change is that our grain business suffered a basis loss during the quarter of just over a $11 million as the cash markets for corn, beans, and wheat did not raise at the same pace as the furthers market, mainly in the new crop grains.

In contrast income from the ethanol joint ventures grew significantly during the most recent quarter. The Albion and Clymers ethanol plants were in operation during the entire quarter and the Greenville plant open in February. This compares the last year when only the Albion facility was operating during the first quarter. All three plants are now operational, both our share of the ethanol LLC income and management of marketing fees earn for the quarter have increased.

Additionally, this increase in ethanol production has had an added benefit and that our grain business earns additional fees for originating corn for the ethanol plants and for marketing the distiller’s dry grain produced at the ethanol plants. Further first quarter income from the group’s investment in Lansing Trade Group was significantly higher in the first quarter of this year. As it relates to our grain business and this is an important point, I want to mention that we expect to regain the majority of the basis losses realized during the first quarter later in the year. We’ve already seen some of this basis begin to return in April and early May and we expect more to return as basis levels improve.

I need to make one additional observation about the grain business. That is the corn planting progress in our region and the U.S. is quite a bit behind the five-year average. What’s possible to make up a lot of this up in a short period of time if weather cooperates, as if now it is behind, although revenues are not necessarily a good indicator of performance within the grain and ethanol group, total revenues were $499 million up $255 million from the first quarter of 2007?

This quarter includes $186 million of grain and ethanol sales made by the group in accordance with origination and marketing agreements between the company and its ethanol joint ventures for which it receives a fee. This is $146 million more than was reported for these sales in the prior year.

Other factors that have influenced the higher revenue result in the Grain & Ethanol Group are considerable increases in bushels sold, significant increases in the average price of the grain sold and more than tripling of the gallons of ethanol sold.

The Rail Group established a new first quarter earnings record with an operating income of $6.4 million, which more than double the $3 million earn during the same three months period a year ago. In total, group revenues of $35 million for the quarter were up $9 million. The group has continued to achieve growth and revenues, gross profit and operating income. Contributing to this improvement was $2.2 million in gross margin we realized from the sales some rail cars.

Almost all these gains were from the preferred non-recourse sales and lease financings and not from outright selling or disposing of the rail cars. Last year’s gains on sales were approximately $1 million. Absent gains from sales, operating income from leasing was still higher, in spite of the fact that some lease renewals were made at lower rates. This is partially due to the fact that our asset base has been depreciated to a level that has led to wider re-let spreads.

Maintenance costs per car were slightly lower this quarter. However, I feel I should not it is too soon to know this expense reduction will become a long-term trend. Gross profit from the leasing business was also higher due to a higher utilization rate and growth in the size of the fleet. The group now has over 23,200 cars and locomotives, which is 10% more than it earlier total.

Also the average utilization rate, which is the percentage of the fleet in service for the quarter was 93.4% in comparison to 92.5% last year. The gross profit of the rail car repair business also grew during the first quarter as a fifth repair shop was added in the second half of 2007. We also added a sixth repair shop last month in Anaconda, Montana.

The Plant Nutrient Group also had a record quarter, reporting operating income of $7.5 million on revenues of a $105 million. These earnings are unprecedented in the first quarter as it is typical for the group to break even or record a loss during this period. In the same three-month period of 2007, the group reported $400,000 operating profit on $67 million of revenue. Those of you who were following us last year will remember that 2007 was a great year for this industry, the sales volumes were high and margins increased due in part, to the appreciation of inventory on hand that was then sold.

Although volume during the first quarter was down slightly in comparison to the prior year, margins have continued to increase primarily due to continuing inventory appreciation. We believe that the Plant Nutrient Group’s first quarter results are clearly indication that the group will have an excellent year in 2008. Of course this partially predicated on the belief that approximately 86 million acres of corn will in fact be planted this spring.

I also feel I should mention that at some point in the future, there is a risk that the inventory price appreciation could reverse on one or more of our products. In other words, what goes up will likely come down. As was recently announced, the Plant Nutrient Group purchased Douglass Fertilizer and Chemical, Inc. at the end of April. Douglass has five facilities in Florida and one in Puerto Rico and a specialty liquid nutrient manufacturer, retailer wholesaler, whose product lines complement the group's existing product lines.

Douglass had sales of $47 million in 2007, and we are anticipating a smooth integration of Douglass into our Company. Further, we believe that the acquisition will be additive to earnings this year. The Turf and Specialty Group had operating income of $2 million this quarter on $40 million of revenue. Last year, the group reported $1.8 million of income and $36 million of revenue. Turf products' tonnage was up slightly year-to-year. Gross profit per tone was also up slightly in spite of record high raw material prices due to a larger percentage of sales coming from proprietary products such as Contec DG. The new disbursable products plant that opened at the end of 2007 has been performing well and is exceeding original production expectations.

We are expecting the Turf and Specialty Group to have a significantly improved year in comparison to 2007 operating income results of basically breakeven. The Retail Group had a disappointing first quarter. The group incurred an operating loss of $3.4 million, which compares to $2.3 million loss for the same period last year. Total revenues of $33.7 million for the first quarter of 2008, were similar to the $33.8 million in revenue recorded for the same period in 2007.

The 2008 revenues however, included sales from Sylvania, Ohio Market store, which opened in the second quarter of 2008. Same store sales actually decreased 4.9% for the period. The sales decline is believe to be primarily due to the overall declining consumer spending. Margins for the group were also reduced due to competitor sales pressures. Now, I will turn the floor over to Gary for his Treasurer's comment.

Gary Smith

Taxes for the first quarter, our rate was 37% that's up 2% from the first quarter of 2007. The tax benefits related to the 2007 charitable contribution of our Chicago Board of Trade shares was the primary reason for the increase in the rate for 2008. We are projecting a full year tax rate this year to be 37%. You will note that we have an allowance for doubtful account that appears at a separate line on the income statement at the end of this quarter, which balances as $1.8 million. This is due to increasing grain prices, we feel that there is a higher risk for our Grain and Ethanol Group, so we set aside some reserves, plus we've had an additional increase in allowance for the Rail Group.

Interest expense for first quarter 2008 was about $9 million and that's up $4 million from the same period last year. This change is all in short-term interest expense, mainly in short-term interest expense where the rates were actually down 1% on average, but our average borrowings were really higher than they were a year earlier. The skyrocketing grain prices were the principal reason for the additional borrowing.

EBITDA for the first quarter was $28 million versus $26 million a year earlier and the earnings from affiliates this particular quarter were up substantially by $5.8 million to $8.6 million for the first quarter.

Our current assets increased to $1.2 billion by the end of the first quarter from a revised year earlier balance sheet of $641 million. The majority of the increase was from $208 million commodity derivative asset, we have discussed these commodity derivative assets and liability accounts at length in the past three conference calls, so I will not repeat those comments, unless you ask in the Q&A. Since the first quarter of 2007, trade receivables were up about $55 million Grain, Ethanol was up $27 million, and Plant Nutrient was up $16 million.

Both groups experienced higher selling prices, which increased the outstanding receivables and Rail Group was up about $10 million and that was mainly driven by a quarter end sale leaseback which the money came in shortly thereafter as well as some higher revenues for the quarter.

You’ll also note that, when you get the 10-Q the higher commodity prices have increased our margin deposits, our net margin deposits by about $19 million versus the same period of last year. Inventories increased by $241 million to $558 million from last year’s revised balance sheet compared to 2007, the first quarter levels the highest increase by far came from Grain & Ethanol with inventories up about $190 million.

This increase was due to the higher grain prices as well as $2 million bushels – more bushels owned than we had a year earlier. The plant nutrients inventories were up $49 million once again with the higher raw material prices Turf & Specialty was up slightly and everything else was about even about unchanged. At the end of March 2008 the company’s total grain inventory and this in-house was 61 million bushels that’s down 4 million bushels from the year earlier position. So, just keep in mind our ownership position is actually higher but our total bushels in-house was actually down.

Net working capital at the end of the quarter was $275 million and increase of $114 million from the first quarter of ’07. Total assets at the end of first quarter $1.7 billion and increase of $671 million over last year’s level. Along with the increase in current assets investments and advances to our affiliates added $50 million and we have an additional pension asset of $10 million and our railcars assets leased to others increased by $38 million.

At the end of the first quarter depreciation totaled $7 million, total capital spending including investment and affiliates at the end of the quarter was $52 million versus $39 million at the same period in ’07, railcar purchases and sales were $28 million and $2 million respectively during the first quarter. Those same numbers for 2007 were $7 million and $17 million respectively. Our total long-term debt is at $331 million that’s an increase of a $177 million from last year, you recall in some of our recent securities filings that we issued a $195 million in senior unsecured notes on March 27th 2008, our long-term funded debt to equity at this point is 0.76 to 1 and that’s exclusive of the non-recourse debt.

So, that includes the $195 million that we just received and our average interest rates is still as below 6% so, that’s on a long-term side I am talking about. We paid our second quarter dividend on April 22 of $7.75 we continue to enjoy outstanding support from our bankers. We have a syndicate line of credit rate now just over $900 million that’s up from $350 million at the end of the year. The average long-term borrowing for the quarter was above $516 million. So we’ve been using quite bit of that $900 million.

Our business is traditional experiences seasonal peaks in valleys and earnings in case needs. We understand this, we try to work with lenders and we have a fundamental understanding of these normal business cycles as well.

Michael Anderson

As I mentioned earlier our results for the first quarter did not established and earnings record. However, when non-recurring items are considered we did have the highest first quarter earnings from operations we ever had. I want again reiterate the company has committed to grow, positive sustainable growth both organic and adjacent that’s next to us in areas next to us.

We’ve been deliberately growing various business units for several years and we intend to continue doing so. Just since the beginning of the year, we have added another railcar repair shop, opened the third ethanol plant and purchased Douglass Fertilizer and chemical which has five locations in Florida and one in Puerto Rico.

I’m particularly excited about the addition of Douglass Fertilizer that just occurred in last week, as this acquisition is consistent with the Plant Nutrient Group strategic goal increase their footprint and national market share through geographic expansion. Next as I do at each first quarter earnings release I want to communicate our earnings expectation for 2008. We currently anticipate that our full year earnings will be in the range of $3.65 to $4 per share.

This compares to our earnings per share of 375 reported in 2007. Please remember however with the diversity of our business units there are numerous factors that could impact these results. Samples of which are weather patterns in the agricultural planning and growing seasons, timing of sales of rail cars, plant nutrient prices and performance of our equity investments which we’re seen in the ethanol production plants and Lansing Trade Group.

As the year progresses we will again revisit our earning forecast and if warranted we will update our guidance at that time. This concludes our prepared remarks Gary and I will now be happy to answer any questions you may have. So, Towanda I will turn it back to you.

Question and answer session

Operator

(Operator Instructions) Your first question comes from Farha Aslam - Stephens, Incorporated.

Farha Aslam – Stephens Inc.

Could you Mike share with us some color on basis. How much of this is an issue of simply timing similar to what happen in 2006 and how much is it with what’s going on right now with delivery and the convergence between features and cash?

Michael Anderson

Yes, none of this has real relevance to prior years it’s an issue that we have experienced or experiencing now. Maybe there is a little bit of this with wheat before but when we saw this unbelievable run up of futures prices in the first quarter. Minneapolis wheat at one point in time got over $20 bushels soybean, wheat over 12 and while now we had beans 15.

We had a situation where the ability to sell the cash grain or the cash grain just did not move up at the same level as the futures and in fact, that is exactly what we are talking about convergence where you would expected especially in delivery markets where at some point in time the basis levels would approach the futures price and for example, at the end of the our new crop wheat basis in Toledo and you can get this readily everyday from the market it was 60 end of July, by the end of the March we were a $1.50 end of July.

By the end of April we’re back to 41.10 under the July and circumstance we had is the futures are going up. If we would keep buying as the basis, we mark-to-market our inventories our forward contracts in the futures positions, we mark-to-market everyday and our perspective was that we need to slow down the pace of buying and the way you do that is you lower your basis and we need to slow it down because we weren’t sure were we are going to be able to sell it.

While the markets although still high, have settle down a bit for example wheat, July of May week which was 438 a bushel a year ago, March was 929, $9.29 at the end of the March and like I said it got up over $12 as of the close yesterday May weak was 795 of bushel. Corn actually is a bit higher, bean are down from the peak.

So it’s now settling down and, but we are in a volatile situation right now, but I would say the bulk of our basis right down was on the forward positions we owned for new crop corn, wheat and soybeans typically we are accumulating in our storage bins and harvest and we hold through the harvest and post harvest season and honestly we believe that, the bulk of that loss and I mention that we had a little over $11 million of pre tax operating loss on basis in the quarter, should come back this year.

Farha Aslam

When you look at your plant nutrients business, you had calculated out 77% increase in your inventory level from the end of the year. Would you say most of that is pricing or how of that is volume?

Michael Anderson

I am not sure I understand the 77% Farha.

Farha Aslam – Stephens Inc.

Did you mark, your inventory levels at the end of the year in plant nutrients was $63 million, and Gary did you say it was up $49 million from the end of the year your inventory positions today?

Gary Smith

I’m just trying to figure out where your comments from. That was the inventory position was up $49 million.

Farha Aslam – Stephens Inc.

Right, so that’s $49 million. How much of that was just the mark-to-market and how much was that volume increase?

Gary Smith

Well, keep in mind on plant nutrient we do not mark-to-market the inventory for profit purposes. When we are with the exception of – of yes, with the exception of when there is a deterioration of value, then we mark-to-market at the end of a quarter, but whatever we buy it at that’s we are caring at for the most part. So, that $49 million is our purchase price increase.

Farha Aslam – Stephens Inc.

Mike could you share with us how you got that sort of 15-time increase in fertilizer in your Plant Nutrients business. What really fueled the increase?

Michael Anderson

One the 15 times, of course when your just above break-even that multiplier’s maybe not the best thing to use, but what fuel the increase is margin and the margin was fueled by having accumulated product in our storage space and prior to selling it inventory appreciation occurs and in selling at the market we captured a sizable margin increase. Our volume was actually sales volume, was actually slightly lower in the quarter.

So, Tonnage was actually slightly lower so with it came from the fact that we were able to sell at prices that at the market that were substantially about where we bought it and putt it in the inventory and we - -does occurring even as we speak right now, but at some point of time we are replacing some at the current market and obviously if you replacing the current market there is not much opportunity and at some point of time we will run through this pretty amazing situation, positive situation that we have had, but we should have, as I indicate we should have a very good year in this group.

Farha Aslam – Stephens, Inc

Interest expense for the full year, Gary what would be your estimate?

Gary Smith

I don’t have an estimate right now.

Michael Anderson

And also what grain prices are going to do.

Gary Smith

What we’ve done with our long-term debt and you consist multiply that by 6% and that’s probably fairly close so looking at debt balance was some increases and decreases, but I wouldn’t expect a huge amount of change in the balance we have got right now, but just to put in perspective on the demand for cash. $9 million of the interest for the quarter was $4 million above what it was a year ago.

That's substantial and if you look at that the peak we hit $660 million at one point in time during the quarter in March. So, just so you know we’ve never seen those kinds of levels in this company before and that’s reason we went out to the bank and requested an increase and they have taken it up to $900 million. Our balance right now is quit a bit below that 666, but -- and one of the reasons it’s down is because we brought in that senior unsecured notes, which was a $195 million as well, but I can’t give you an estimate at this point on where that interest expense is --

Michael Anderson

We have pretty high confidence it’s going to stay high through the year.

Operator

Your next question comes from Brian Millberg - Piper Jaffray.

Brian Millberg – Piper Jaffray

Yes, I would like to talk a little bit more about the fertilizer inventory you mentioned this cautionary statement. As the year goes on obviously fertilizer costs are going to increase for you as you run through this older inventory. Can you give us any color on that? I mean we are talking -- some of these numbers are coming out anywhere from 100% to 200% higher, at the wholesale level right now.

Gary Smith

As you recall we had a very good year last year and very good third and fourth quarter as we were experiencing the run-up and as we manage our positions through this spring season, this spring season will be good, direct in this second quarter, but then we are in the position of recharging for the next year and from our perspective these unprecedented fertilizer prices, even though they could go higher, we don't think it would be prudent to be filling up our storage space with these kind of numbers.

So we are going to take a more cautious approach as we move into that and I gave the caution what goes up, comes down; I don’t know for sure it comes down, but at some point I mean I just wonder, how long can it just keep going up and give you this what are called tailwind on inventory appreciation. I got to believe at some point in time things settle down in that regard.

Brian Millberg – Piper Jaffray

If prices continue to go up, let’s say 25% on a year basis, something a little more reasonable, how much of that you think you’re going to be able to pass on? Are farmers going to be able to afford that, that $6 grain?

Gary Smith

You’ve got a US farmer, you got a world market, and if you get to a point where the market says too much, that in of itself will likely cause price deflation. At this present time though with $6 corn and soybeans and wheat where they're at, despite the -- I mean just the absolute increase in cost for those basic crops; the economics are still pretty solid. Not every crop, not all produce has gone up consistent with that and so not every crop has the same economics as our main ones, but corn is the big driver and today it pencils still, so farmers are going to use new trends.

Brian Millberg – Piper Jaffray

Do you think you might re-look at issuing guidance again? Let’s say first week in June once we really know what’s been planted.

Gary Smith

If we feel at anytime that we feel that our guidance that was issued needs to be revised we would revise it and whether that’s first of June or middle next week or next quarter, we would do that if we saw that we are appropriate.

Brian Millberg – Piper Jaffray

The number for the quarter, the EPS missed consensus and I was just wondering how you felt about the quarter, did it meet your expectations?

Michael Anderson

I’ll tell you one and I appreciate the need and desire for you to put out quarterly numbers. I think it is helpful and as you know we don’t put out quarterly number because of when you get things like just where our basis pricing is at the end of the month, it can really impact a quarterly number, but I feel fantastic about this quarter for two reasons or all three; record P&G, record rail, and if you dissect the rail and pullout we only got a little over a million of income of rail comes from additional sales and those are non-recourse, not dispositions, so the base business got lift.

You have got in this Grain Ethanol Group, you take that; we’ll call it roughly a little over a $11 million of a basis loss, highly unusual for us and my opinion today has changed, we would communicate it; that will come back, you translate that into EPS if we hadn’t had that and I know it’s real. I’m not trying to hide from it, I just feel it comes back and then you add an affect that we had some unusual items in last year’s number that did not recur this year; positive items last year that did not recur, that were substantial and you go back just a few years in our first quarters you often didn’t see income or if you did, it was very little. I feel fantastic about what this team is doing right now.

Operator

Your next question comes from Heather Jones - BB&T Capital Markets.

Heather Jones – BB&T Capital Markets

You have seen some significant narrowing of the basis in corn and soybeans and maybe in certain contracts on wheat, but in some contracts wheat has widened and I guess I am wondering does your guidance assume that wheat narrows to normal levels or just narrows some or just if you could give us more color on what it explicitly assumes.

Michael Anderson

Yes, to give you an example we started Toledo, Ohio; started the year at 60 under the July for new crop and we started the year of new crop beans at 43 under the November. At the end of March we were $1.50 under our new crop soybeans, wheat in Toledo $1.15 under the November down $0.72 in the soybeans down $1.10 under for new crop soybeans in Toledo and actually the same basis for wheat in July.

Our assumption is that by the end of the year, not necessarily in new crop and remember in these new crop positions we’ve got all the space 87 million bushels of space that we will be filling up and then generally after new crop basis appreciates again. Our assumption is that by the end of the year, we will have comeback past the numbers that we had and value these new crop. I mentioned wheat and beans posses for the big basis losses for the period.

We will in fact comeback and improve against the numbers we had, where we entered the year at. I feel pretty confident about that. Now, what will we improve to those levels right in July for wheat or right in October for soybeans, I’m not so sure, but by the end of the year, I feel pretty confident.

Heather Jones - BB&T Capital Markets

So you’re saying that wheat is the biggest problem. By the end of the year, fast forward into ’09 you believe that basis levels will be around that $0.16, $0.40 discount for July and November ’09 feature.

Michael Anderson

The ’09 will be very relevant then. It will really be the weekly buy in ’08 and have bought already and what will it be worth by the end of this year and what I’m saying is I am reasonably confident that we will have gotten back to caught 60 under of -- we will appreciate it up, 60, under the December or the May which will be substantial improvements to 60 under July number for ’08. December weeks trades well above the July and I just feel that we will back and even those numbers are not historically strong numbers to tell you the truth Heather.

Heather Jones - BB&T Capital Markets

I am now concerned is this is positive; several companies I follow, is do you think that, I hate to use the word permanent, but a long, long-term dislocation relative to spot and futures just given the level of speculation in the futures market, but also the influence of the weak dollar on futures prices.

Michael Anderson

I think the former for sure and I think the latter also. Now whether it’s permanent, I would say temporary.

Heather Jones - BB&T Capital Markets

Yes, I don’t want to use the word permanent, but longer-term.

Michael Anderson

Well, yes. We have had our substantial inflow of various type of fund money that’s supporting futures levels and has supported future levels, at above levels that are represented by the cash market, but lets take wheat in particular that got over $12, it’s now down to $8, it’s in a much more rational relationship to corn. That’s going to cause more wheat to be fed, than would have been fed before and the futures market is doing a lot of that work.

My fear was the wheat stayed at $12 and we had all those wheat produced, we might have to have $3 under basis to get it into the feed market and had no relationship in the delivery markets. We appear to be coming back to where there is correlation now between cash and futures. Do we have perfect convergence? No, I think there’s issues around the long-term viability of the Chicago border trade market, that we got to find out how this shakes out, because if we don’t feel comfortable using it as a hedging mechanism, then we have to find another alternative, but at least stuff’s coming together again now.

Heather Jones - BB&T Capital Markets

Have you sold giving that you have to bring in inventories now at higher prices on a plant nutrient side, is there any chance that fertilizer prices comeback to earth and you bought an high cost inventory, or as you’re bringing in inventory are you selling at board?

Michael Anderson

Well, we have that conversation a couple of times a day and concern might not be the right word, just managing the price risk of a commodity, of something that’s moved this far; if it turns and goes the other way and drops and you have ownership that can cost you.

Our team is spending a significant amount of time, trying to make sure that we got our positions inline with what we think is comfortable for us and yet you want to have product for your customer too, so our expectation would be and one that happens that we’ve done a reasonable job, that we won’t be perfectly protected, but we’ll have done a very fine job, gain substantially more on what we’ve been able to sell at large margins than maybe hit that what occur.

Heather Jones - BB&T Capital Markets

Do you’ll now anticipate plant and nutrient and Lansing earnings to be up year-on-year, for the full-year?

Michael Anderson

Yes, I know last year I said the Plant Nutrient would be hard to see it repeating, but given that the first half is this most important half for Plant Nutrient, we are feeling pretty good about the ability to meet or exceed at this point in time. Lansing’s off to a good start and it’s a training business. We’d expect it to continue; they had a very, very fine fourth quarter last year. So -- but I feel pretty good about it. I just don’t want to trying and overly predict the Lansing one at this point in time. We are off to a good start; we are involved in some more things in Lansing. It feels pretty good, but we’ll see.

Heather Jones - BB&T Capital Markets

The Greenville plant, have you’ll marked in any more, that ethanol crush margin for this year and have you begun to lock in your ethanol exposure for ’09 yet?

Michael Anderson

The second one first and that’s the on Greenville; we have not really done much of anything for any of the plans for ’09 since we last talked, we have very little locked in. Forward margins for all of our plants; forward meaning, if I get out of more than a month, say two months, the ability to locking what we called crunch core natural gas and ethanol is still on a negative in all the positions out there forward. In the spot market it’s generally remained positive and so we have been able to get off to a reasonable start at Greenville and that’s continued up to the present day, but it’s -- we are not getting the opportunity to get what I call freebies, not freebies, like we are to lock stuff in ahead at numbers that make sense to us, but it’s still staying positive, in the spot.

Operator

Your next question is a follow-up from Brian Millberg - Piper Jaffray.

Brian Millberg – Piper Jaffray

I live in the Midwest and I see the outer-ring suburbs slowly sucking up the farmland and do you think the time for your retail stores may have past because the customer basis has changed to other locations.

Michael Anderson

No, not from a location perspective. We’ve got three still prime locations that are still prime from demographics and the three that are prime, there has been some changes, but we -- let’s take it beyond just the demographics. Retail in the US is -- the consumer in the US is just not spending this much money, so I would expect that’s going to have an impact throughout retail in general and so that just creates appropriate pressure for us on running a tight business. The demographics are not up -- as you are speaking to Brian, they are not a major factor for our stores and we don’t have that many of them. It’s just six stores.

Brian Millberg – Piper Jaffray

I am hoping that your lower maintenance cost in rail means you didn’t replace as many wheels this quarter.

Michael Anderson

You know I can’t answer because I just don’t know; I do not have the detail on that. We do know that eventually we felt at this wheel sort of stuff would catch up with us, but it’s going to be over multiple years. In any item where you see bigger cost increases, it creates a lot of incentive for the team to spend more time on understanding, analyzing and managing that and that’s what our team has done and I -- we said in the release, I don’t want to predict that we have a trend yet, but it did turn a little and that’s good and we are focusing on it.

Brian Millberg – Piper Jaffray

The Douglass fertilizer business that you purchased, I think we discussed this a little bit before; again it seems fairly labor intensive compared to your exciting fertilizer, in terms of specialty and turf business? How are those margins going to workout, are you able to keep prices up, high enough as proprietary products and with the service added component of the pricing or how is that going to work?

Michael Anderson

Yes and I don’t mean that, you said to keep prices higher. They do have some proprietary to sell some of their own brands and within our business we have about 10% of our business, maybe a little less in that is our own retail farm centers. So, actually some similar tonies that Douglass has, we have about the same amount of tons, but we have got that high labor component just like you are talking about and the services you provide need to be compensated sufficiently in pricing and we believe we will be able to do that.

It also distributes some wholesale stuff throughout most of the United States and do a fine job with that. So, I think this is going to really feel good about this being a win-win. We think we the Andersons will be able to benefit from some of the things that Douglass has done and we know that some of the stuff that we have been doing we will able to introduce into Douglass. So, we would expect some mutual top line opportunities.

Brain Millberg – Piper Jaffray

And will all of that income go into the Plant Nutrient.

Michael Anderson

Correct.

Brain Millberg – Piper Jaffray

Not in this turf and specialty?

Michael Anderson

There could be a small amount that goes into turf, yes; if it actually to the extent that it’s in primarily the professional with golf course industry, you could see some of that show up in the turf, but Douglass itself, the historic Douglass entity will be part of the Plant Nutrient group.

Brain Millberg – Piper Jaffray

Okay and then on the turf and specialty, you had a great quarter I think and I’m a little curious. I’m looking at some of the numbers coming out now; Scott’s for example showing downturns -- if that economy tightens, do you think any of that’s going to affect that business?

Michael Anderson

Anybody who has been following this for a while knows that we suffered big time of our strategy to move into consumer market as our house brand manufacturer across the nation did not work and we retreated from that and we do have some small consumer accounts. Our Anderson stores will be one of them and that’s the segment the Scott’s have reserved.

That segment is reacting to higher nutrient prices and sales are down a little, but our focus was to move into an area where we felt we had capabilities which was professional, and quality products we moved into patented disbursable stuff. So, the growth you are seeing is really; it’s our technology strategy is working. Now the quarter itself this is always our best quarter, so wait a little later in the year before you tell us how good we are doing. We believe our switching strategy is working at least in the sense that we have stopped the bleeding and we are moving in a northerly direction.

Operator

Your next question is a follow-up from Farha Aslam - Stephens Incorporated.

Farha Aslam - Stephens Incorporated

Could you please go through a little more detail on your Rail Group in terms of you had a very high utilization rate despite the affect that the economy is slowing; what do you think allowed you to get that?

Michael Anderson

We do have some issues. Railcar loadings it continued to be a little slower, so that would work against our utilization. Working for it, yes that we are in the used car space; we have given up opportunity in the new car possibly by going the way we do.

As our assets get written down and we go do re-let we are in a reasonably good position to be able to just say, “okay, I will accept an equal or lower monthly rate.” and we also happened to have a few sets of cars that have been part, that we were able to find good customer for and get them back into service. So, our niche is working.

Now, I think with these high fuel prices I believe are going to continue and the efficiency improvements of the railroad will continue to drive traffic off the highways, onto the railroads, that should be good for us. We are not big in container cars, so we don’t feel the impact of slowdown in business that relates to containers.

Coming into the US we are big into some basic commodities. Commodities as you know are wanted and desired. There is a number of things that’s just worked well and the team is working to get stuff placed.

One other thing, for those who don’t know who runs our rail business we were just talking yesterday about we peaked on railcar rates just a year and a half, two years ago and as that was going on we were ramping up new car building and that’s shutdown pretty much for the most part and the cycle from peak-to-peak was a quicker cycle than the previous two before, which I’m hoping do not allow for the building of quite as many car so that by going peak-to-peak quicker we are going to be able to come out of the trough a little quicker. So, things feel pretty stable frankly right now in that business. Stable maybe understated. I feel like we have got some stuff going in our favor right there.

Gary Smith

Majority of the cars Farha are also on five-year leases and so clearly 20% of those are coming off each year and I think there is another advantage we have and that we do offer full service leases and not everybody does.

Michael Anderson

Yes.

Gary Smith

So, it’s not just a financial lease.

Michael Anderson

The integration of the rail shops that we keep open and up across US it’s always been part of our strategy and it’s one more little additive thing; a shop in Georgia last year, a shop in Montana, so a full service we offer is just a little fuller now.

Farha Aslam - Stephens Inc.

Could you give us some color on railcar rates; kind of were a grain hopper traded at the peak a year and a half ago kind of where it is now.

Gary Smith

I have that chart in my office and I can tell you that kind of average rates are in the 350, 350 range now and I don’t want to say what it was a year or two years ago because I would be going from my memory and I don’t have it right at my fingertips and I don’t want to speculate on it.

Farha Aslam - Stephens Inc.

Could you just share with us your deal flow that you are seeing in that rail business?

Michael Anderson

We have seen some deal flow; it’s not huge, but we have been able to add to our fleet and I just suspect that will continue.

Farha Aslam - Stephens Inc.

And is the credit crunch currently affecting pricing at all or the players that are in the market? The credit crunch that’s currently going on in the market that higher credit conditions, is that affect deal flow at all and the prices that are being paid?

Gary Smith

We have actually seen some opportunities come up where some higher leverage companies are looking or maybe not higher leverage, but people are just looking for cash flow and doing a sale and lease back with somebody else owning that asset, makes some sense and so, yes we have seen transactions come in front of us that just somebody was just looking for dollar or ownership positions, just leasing them.

Michael Anderson

Farha, we can get that information to you, if you want a follow-up.

Operator

And at this time there are no additional questions in the queue.

Michael Anderson

Our next conference call is schedule for Thursday, August 7 at 11am Eastern Time to review the second quarter. We hope you will join us and if there is a reason to upgrade, update our guidance between now and then we will of course do it. Have a great day. Thanks.

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Source: The Andersons, Inc. Q1 2008 Earnings Conference Call
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