Genesee & Wyoming Inc. Q2 2008 Earnings Call Transcript

Genesee & Wyoming Inc. (GWR)

Q2 2008 Earnings Call

August 4, 2008 11:00 am ET

Executives

Mr. Walsh

John C. Hellmann - President, Chief Executive Officer, Director

Timothy J. Gallagher - Chief Financial Officer

Analysts

Christian Wetherbee - Merrill Lynch

Jason H. Seidl - Dahlman Rose & Company

Edward Wolfe - Wolfe Research

Neal Deaton - Stephen’s Inc.

Robert Dunn - Sedody & Company

Michael Fontaine - BB&T Capital Markets

Presentation

Operator

Welcome everyone to the Genesee & Wyoming second quarter earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Walsh, please go ahead.

Mr. Walsh

We will start with the Safe Harbor Statement and then proceed with the call. Some of the statements we will make during this call, which represent our expectations or beliefs concerning future events are forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 to provide a safe harbor for such statements.

Our use of words such as expect, estimate, anticipate, plan, believe, could targeting, budgeting, or similar expressions are intended to identify these statements and are subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our current expectations including but not limited to factors we will discuss later and the factors set forth in our filings with securities and exchange commission.

Please refer to our filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward -looking statements we make will be realized. We do not undertake any obligation to update this information and you should recognize that this information is only accurate as of today’s date. Reconciliation of non-GAAP measures disclosed on this conference call to the most directly comparable GAAP financial measures are posted on the investors section of our web site www.gwrr.com and within the press release for today’s earnings conference call.

On the call today we have two speakers, our President and CEO Jack Hellman and our CFO T.J. Gallagher. I will now turn the call over to our President and CEO Jack Hellman.

John Hellmann

As always I would like to start our call this morning with safety. For the first six months of 2008 our injury frequency was 1.6 reportable incidents for 200,000 man hours, which is 14% better than the same period of 2007. Through June four of our nine principal operating regions have not had an FRA reportable injury.

Now turning to our financial results for the second quarter of 2008, our earnings per share from continuing operations were $0.44. Our EPS increased $0.05 or 12.8% in the second quarter despite the significant increase in our tax rate due to the expiration of the short-line tax credit. The higher book tax rate was the equivalent to a $0.09 per share reduction in our second quarter earnings per share.

From an operating results perspective our second quarter was a straightforward one. Our operating income increased 39% over last year or 30% excluding gains on asset sales. In essence $2.5 million in gains offset the rapid increase in diesel fuel costs in May and June. Our reported operating ratio was 80.6% in the second quarter of 2008 or 82.2% excluding the asset sales. This compares with an operating ratio of 83.0% in the second quarter of 2007 so we improved by any measure.

Our revenue in the second quarter was approximately $153 million which was a 22% increase overall and 15’% on the same railroad basis. The bottom line is its strong same railroad pricing, which increased 11% per carload, excluding the impact of currency, more than offset its same railroad volume decline of 3% or around 6,000 carloads.

Our principle volume shortfalls in the second quarter were related to coal shipments where flooding in the Midwest delayed 25 unit trains of coal or roughly 3,300 car loads to our Illinois region and lumber and forest products shipments, which declined 3,800 car loads versus the second quarter of last year due to the poor US housing market. We expect to recover the majority of the coal shipments over the remainder of 2008; however we do not hold similar optimism for lumbar and forest products.

In May we highlighted new revenue that we expected to come online in the second quarter, including the Maersk terminal in Virginia, a new ethanol plant in Oregon and a new wooden pellet plant in the southern region. All of these facilities did commence shipments as expected, although generally with a slower ramp up. As of today we expect Maersk will be on target to reach a run rate of 30,000 containers per year by year end and the ethanol plant has overcome various production issues and is now receiving inbound grain and shipping outbound ethanol and DDG at its expected run rate of around 10,000 car loads per year; however the wooden pellet plant is currently shipping well below it’s target of 6,000 carloads per year.

I am pleased to report that each of our new acquisitions performed well in the second quarter. At the Maryland Midlands cement shipments are benefiting from the weak US dollar which has curtailed competing cement imports.

At KG Industries we had a good first month led by shipments of scrap and steel.

Finally, Rotterdam Rail Feeding continues to increase its port business and we recently approved the purchase of three new locomotives to further expand their services in the port.

This morning I am also pleased to announce that we’ve signed an agreement to acquire the Ohio Central Railroad System for $219 million with additional contingent consideration of approximately $25 million. The transaction is subject to customary closing conditions and is also contingent on approval from the state of Ohio for the transfer of an operating agreement for one of the railroads.

The Ohio Central is composed of nine short line railroads located in Southern Ohio, Northern Ohio, and Western Pennsylvania. The railroads operate over 445 miles of track with 64 locomotives and 184 employees. Please note that a map to the lines is hyperlinked to our acquisition press release.

The railroads have a diverse customer base including four solid waste landfills, multiple coal mines, coal fire power plant, steel producers, ethanol facilities and a cement plant among others. We look forward to building on the management teams’ extraordinary success in developing such high quality railroads in both Ohio and Pennsylvania. Given the proximity of GWI’s New York Pennsylvania region we see numerous benefits in establishing a close relationship among the properties, especially given the customer and commodity overlap.

In 2009 we expect the Ohio Central Railroads to generate approximately $70 million of revenue, approximately $20 million of operating income and approximately $12 million of depreciation and amortization with capital expenditures of approximately $6 million. At financial close we expect the acquisition to be immediately accretive to our earnings per share and increasingly so over the course of 2009 as several customers are in the process of increasing shipments.

We expect to finance the acquisition of the Ohio Central by increasing our Senior Credit Facility by $314 million to a total of $570 million. Pro Forma for the acquisition, we expect our total debt to capitalization to be 54% and to be within our maximum senior leverage ratio of 3.5x funded debt to EBITDA. Following the transaction we expect to have remaining revolver capacity of $170 million assuming that we make the expected contingent payments on Ohio Central, KG and RRF.

As you are all aware, current conditions in the credit markets are less than favorable and we are pleased to be successfully completing a debt financing. It is essentially business as usual with a group of world-class commercial banks.

The first seven months of 2008 have been active for G&W as we have closed three acquisitions and just announced another with a total enterprise value of approximately $390 million, including contingent payments. Two of the acquisitions, Maryland Midlands and KG are nice tuck in properties with excellent growth profiles. Another, Rotterdam Rail Feeding positions us for growth in the European market and also utilized our port railroad expertise. Finally, the Ohio Central Railroads are a significant US franchise.

At G&W our focus now is on successfully integrating these recent acquisitions in accordance with our operating and financial plans. Given the quality of the railroads that we have acquired, the resilience of our core business in a difficult North American economy and a macro environment in which both the high price of diesel fuel and overall public policy should ultimately favor rail, we look to the future with optimism.

With that I’d like to turn the call over to T.J. to review the quarterly results in detail.

T.J. Gallagher

Starting with the results from continuing operations, operating revenues increased 21.9% from $125.3 million to $152.7 million. Same railroad revenues increased $19.3 million or 15.4%. Same railroad freight revenues increased $8 million or 10% due to an increase of 13.6% in average revenues per carload on volumes that were down 3.2% year-over-year. Please note that the strengthening of the Canadian and Australian currencies versus the US dollar represented 2.6 percentage points of the increase in average revenues per carload.

Same railroad non-freight revenues increased $11.3 million or 25.2%. Significant drivers of this increase include $4.9 million in higher fuel sales, $1.7 million in higher accruing and $1.1 million in higher iron ore services, all from Australia, and a $3 million increase in industrial switching and US port railroad revenues.

Same railroad carloads decreased 6,300 or 3.2%, 4,200 carloads or nearly 70% of the shortfall, was due to the discontinuation of Halles [ph] traffic on the Meridian Big D Railroad [ph]. In addition, as Jack noted, same railroad lumber and forest products declined 3,800 or 16.4% due to the continued downturn in the US housing market. Offsetting these volume declines were higher farm and food carloads which increased approximately 3,200 carloads or 22.1% due to temporarily higher volumes in Australia. The big picture is that that pricing environment remains very strong and despite the weaker volumes same railroad freight revenues increased in nearly all commodity groups.

During the second quarter of 2008 we had operating income of $29.7 million compared with operating income of $21.3 million in 2007, an increase of 39.2%. Our operating ratio was 80.6% in line with our guidance as two factors not included in our guidance offset each other. First fuel prices in the second quarter increased $0.45 per gallon from the end of the first quarter and this increase in fuel prices had a $2.2 million negative impact versus expectations. This impact was offset by $2.5 million gains on the sale of assets. Also the delays in coal shipments due to the flooding in the Midwest in June reduced operating income by approximately $1 million. We expect the coal volumes delayed in the second quarter as a result of the flooding to be pushed to the third and fourth quarters.

Earnings per share from continuing operations were $0.44 in the second quarter of 2008 compared with earnings per share of $0.39 in the second quarter of 2007. In addition to the operating factors discussed previously, namely the high fuel prices due to a sliding in the gains on asset sales which had a combined $0.02 negative impact to earnings per share, we had a $0.02 reduction to earnings per share related to tax accruals in Canada, as our effective tax rate was over 2% higher than guidance.

Moving to discontinued operations, we reported a net loss of $0.07 million or $0.02 per share I in the second quarter of 2008. We continue to seek a solution in Mexico that would include a settlement with the governor of Mexico and a sale of the equipment and concession to a third- party buyer.

Moving to free Cash Flow, our continuing operations generated free cash flow of $16.2 million over the first six months of 2008. For the first six months of 2007 our continuing operations generated $35.6 million in free cash flow. Net cash provided by operating activities included the use of $14.7 million in working capital in the first six months of 2008. The largest factor here was a decrease in our payables by $12.6 million of which 40% was due to a reduction in interline payables and the rest due to timing.

Moving to guidance let me refer you to our earlier Safe Harbor Statement that noted a few statements are subject to a variety of factors that could cause actual results to differ materially from our current expectations. These statements represent management’s expectations regarding future results as of today, August 4, 2008, and we do not undertake any obligation to update this information.

Our guidance for the third quarter of 2008 assumes that the Ohio Central acquisition closes on October 1 and therefore does not impact third quarter results.

In the third quarter we expect revenues between $153 and $158 million and an operating ratio of around 80%. We anticipate net interest expense to be approximately $4 million and we expect our effective tax rate to be around 38%. Diluted shares are expected to be $36.4 million and D&A to be around $11 million. The bottom line is that we are expecting earnings from continuing operations between $0.45 and $0.48 per share.

Our guidance reflects a significant reduction in grain shipments from Australia from August through October as stockpiles that have been largely exhausted until the new harvest arrives in November and we are also currently in the midst of negotiating a new long-term grain haulers contract. We expect the loss from discontinued operations to be around $400,000 in the third quarter. As the ongoing costs of liquidation have been reduced, we will also have additional legal and buyer due diligence costs in the quarter.]

Our updated guidance for continuing operations for the full year 2008 is as follows:

We are expecting revenues between $615 and $620 million and an operating ratio in the range of 81% to 82%. We anticipate net interest expense will be $17.5 million and we expect our full year effective tax rate to be 38%. D&A should be approximately $43 million for the full year and diluted shares are expected to be $36.4 million. The range for our full year guidance is therefore unchanged at $1.60 to $1.70 per share and we have a little outside opinion of the timing of the Ohio Central closing. Note that this total EPS outlook includes reported earnings per share from continuing operations for the first half of 2008 at $0.75.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christian Wetherbee - Merrill Lynch.

Christian Wetherbee - Merrill Lynch

I wondered if you could touch on the acquisition there for a second. I guess just to make sure I’m clear here, you guys anticipate a full funding of the purchase price through debt as it stands right now?

John Hellmann

That is correct. We have been to the market and received commitments.

Christian Wetherbee - Merrill Lynch

Okay and then as you think about the contingent payment [inaudible] should be looking at a kind of 12-month horizon there or just something shorter or longer?

John Hellmann

We don’t know. You can’t project it.

Christian Wetherbee - Merrill Lynch

Your guidance for 2009 contributions from the acquisitions, does that include the benchmarks that are anticipated for those contingent payments?

John Hellmann

Yes, that’s a good point Chris. Yes you would assume the full price with that full contribution. That’s a good way to model it.

Christian Wetherbee - Merrill Lynch

You give some of the break down then where you can see some of the carload impact in the press release but is there any impact in non-freight revenue or is this all going to be freight revenue?

John Hellmann

Principally yes, unlike some of our more recent acquisitions you are going to get largely through freight, probably 90% plus through freight so you won’t have the discrepancy you’re seeing now between reported carloads versus how much the acquisitions are really contributing to non-freight revenue. So this will be very straight forward.

Christian Wetherbee - Merrill Lynch

If I could then touch really quickly on the non-freight revenues, is this a reasonable run rate to assume for the go-forward period and for the rest of the year on a quarter-by-quarter basis or do we still have some kick-in from I guess KG closed later in the quarter, so should we see the incremental benefit up from the 61 and change that you reported this quarter?

John Hellmann

You should assume that you’re going to get more incremental impact from the acquisitions as you know and the iron ore business is also continuing to build, so you’re going to have growth there. Of course the wild card in non-freight is just the diesel fuel sales, which is whatever the price is. From the other categories run rate plus.

Christian Wetherbee - Merrill Lynch

You don’t break out what the diesel fuel is as part of that non-freight number?

John Hellmann

Yes we do, you’ll see my queue [ph].

Christian Wetherbee - Merrill Lynch

On the tax rate, T.J. you noted it was at a $2 million negative accrual in Canada that impacted the tax rate?

T.J. Gallagher

Well the $0.02 per share.

Christian Wetherbee - Merrill Lynch

$0.02 per share, okay what was that on a dollar basis?

T.J. Gallagher

Similar thing [inaudible] shares it is $7 or $800,000.

Christian Wetherbee - Merrill Lynch

And that’s a one time event?

T.J. Gallagher

Yes.

Christian Wetherbee - Merrill Lynch

Okay so $38 is your guidance going forward?

T.J. Gallagher

For the full year yes, for the quarter and for the full year.

Christian Wetherbee - Merrill Lynch

Lastly on Mexico, when would you expect, I know you have guidance in the third quarter including some loss of term discontinued absent [ph] —, when do you think that’s going to work its way through and you’ll be done with that is it still [interposing].

T.J. Gallagher

Well we’ll see. We actually have a signed agreement to sell the assets right now, but as with everything we’ve done in Mexico we’re waiting until the check is sent before it’s completely done. We have a signed deal right now and we’ll see how it plays out.

Operator

Your next question comes from Jason H. Seidl with Dahlman Rose & Company.

Jason H. Seidl - Dahlman Rose & Company

As we look at tier price in the quarter, should we be looking at roughly about 6%?

T.J. Gallagher

What you’ll see in our investor presentations in a few weeks, when we get it out there, you’re going to see North American price increases on the order of the high sevens low eights. For the past three years we have been typically running about 200 basis points from the cost ones pure price and so that trend continued in the second quarter.

Jason H. Seidl - Dahlman Rose & Company

Okay and how much for Australia?

T.J. Gallagher

We don’t break out price increases for Australia separately, but if you think about it, overall average rate per car increase is 13.8% or 13.6% on a similar basis and so it’s going to be higher. In response to the currency, I mean we’ve had a 10 to 12% currency improvement year-over-year.

Jason H. Seidl - Dahlman Rose & Company

T.J. if you excluded currency and fuel out of that for Australia where would you be at roughly?

T.J. Gallagher

I don’t have Australia in particular off the tip of my tongue, but I’ll tell you if you look at our business as a whole and exclude fuel, we’re around 6, 7%.

Jason H. Seidl - Dahlman Rose & Company

The OCR, how are you guys going to manage it, is it going to be added to the New York ten region or is it large enough to be it’s own stand-alone region?

John Hellmann

We’re going to meet with the employees tomorrow and so we haven’t finalized how the management will be. Suffice it to say it will be a significant entity in its own right. It is obviously a very large region; it’s of similar size to many of our other operating regions: having said that, there is some obvious geographic proximity customer overlap, commodity overlap, means that it’s going to make an awful lot of sense for a New York PA in Ohio to be managed together.

Jason H. Seidl - Dahlman Rose & Company

Just some quick line up questions on your average revenue per car load for both auto parts and farm and food. There were some big swings in terms of the year-over-year increases compared to the first quarter. Are we just looking at mix issues here in each of these line ups?

T.J. Gallagher

Auto is mixed. We had some more Canadian and that’s just from a currency. Farm and food, the overall increase in three months, that increase year-over-year was Australia primarily and a large amount of that was interstate drains so that’s the reason.

Jason H. Seidl - Dahlman Rose & Company

Jack, could you give us two quick updates, one on the BHP and the big dam project and where the bidding stands there and also on the tax credit in Washington?

John Hellmann

The tax credit has not been passed. It’s gone to the senate I think three times and it hasn’t gotten the 60% necessary to stop the filibustering process and ultimately to get it passed, so I’m sure there will be another run or two at it before year-end.

In Olympic dam in Australia, I don’t have an update there. There is a lot going on in the mineral sector in Australia. BTP hasn’t made any recent announcements that I’m aware of as to what they’re doing, but it’s obviously the whole infrastructure of the state of South Australia is being prepared for its future, but I wouldn’t have anything more than what BHP has publicly disclosed.

Jason H. Seidl - Dahlman Rose & Company

On the tax credit, there seemed to be a lot of bipartisan support for that, so I guess I’m a little bit surprised that it’s been getting shot down. Do you have any idea why the opposition to it right now?

John Hellmann

It’s not opposition to the tax credit; it has huge bipartisan support. The issue is it’s too small its own right ever to be introduced as a stand alone non-controversial bill. It always gets embedded in a piece of tax legislation that’s got something in it that gives either the republicans or the democrats heartburn; so it’s just a victim of the political process. It has nothing to do with its intrinsic merits in its own right.

Operator

Your next question comes from Edward Wolfe of Wolfe Research.

Edward Wolfe - Wolfe Research

The acquisition, you talked about $20 million of EBIT in ’09, is that based on what it’s doing in ’08 or has that got some synergies and other things that you’ve assumed?

T.J. Gallagher

A chunk of that is a ramp up of specific customers who are increasing shipments now, so this is a property that continues to be on a very strong growth trajectory that we expect to continue through ’09 and beyond. The management team has done an extraordinary job of building this business, you can tell from the diversity of what I’ve described that it’s for railroads of this length there is incredible traffic density.

Edward Wolfe - Wolfe Research

So is it fair to say that on their own if you hadn’t purchased them that would have been a fair run rate $20 million or is there also some back room removal?

T.J. Gallagher

You should assume that they would have gotten it there themselves.

Edward Wolfe - Wolfe Research

But we should think in terms of if you run it more efficiently there could be upside beyond that?

T.J. Gallagher

Yes, we philosophically go into acquisitions of short lines assuming they’re going to be well run properties as is. There is plenty of incentive for other short line operators to run their properties very well. We assume there is going to be some things that we do well that we can bring and we assume that we’ll probably learn something new from them as well. So, yes one would hope that there are some things that we can bring to the operation so there is more efficiency and upside and conversely I hope there are some things that we can bring across to our other regions to make them run better.

Edward Wolfe - Wolfe Research

Jack am I reading the inflection in your voice right when you say there’s $170 million of potential balance sheet powder that you’re going to run what you’ve got here for a little while unless something just falls in your lap, is that the right way to interpret that?

John Hellmann

That’s an interesting question. Philosophically as a company we’ve always made acquisitions and run our businesses assuming that we would be comfortable with what we had forever and we didn’t have to do any acquisitions. I mean we’re obviously built to grow by acquisitions, but there is no acquisition imperative in terms of the company’s psychology. What’s happened of late, given the collapse in the credit markets is that well capitalized companies like ours are finding ourselves in a very opportunistic position to do transactions that others aren’t able to complete.

What I would say to you is that we’re very comfortable with what we have and we’re going to be focusing a lot of management time and making sure that these new acquisitions are integrated and hitting our financial plan as we always do, but I would also say that for the right deals, the right deal at the right price, we’re still going to be looking because it’s a very unique time in the credit markets and as you saw evidenced by our capacity to tap those credit markets recently in a sort of business as usual way, well we’re in pretty good shape thanks to our track record.

Edward Wolfe - Wolfe Research

The safety bill that passed the senate on Friday, is there any impact at all to short line?

John Hellmann

I’m not aware of any.

Edward Wolfe - Wolfe Research

On CapEx you alluded to some new loco’s in Rotterdale and so forth, what’s your [inaudible] run rate and how do we think about that going forward?

T.J. Gallagher

We are purchasing about $9 million US of locomotives and those locomotives have capabilities to run both in the port as well as further into Germany. It extends the reach of, they’re similar units to the five units that we currently have there and it just consolidates the importance of this franchise within the port as the preeminent independent operator.

Edward Wolfe - Wolfe Research

For the full year ’08 what is a good guidance for net CapEx?

T.J. Gallagher

The purchase will be phased in with I think one in ’08 and two coming in, in the first quarter of ’09. There is a shortage of this type of equipment so we’re actually fortunate to be able to access it. So let’s say, call it UN US dollars, call it $3 million more here in ’08 and another $6 million coming in ’09 roughly.

Edward Wolfe - Wolfe Research

Was the old guidance around $45 million for ‘08?

T.J. Gallagher

No, the old guidance for ’08 was closer to $60, $61. The $45 was the maintenance CapEx and not so we announced also an extra $18 to $20 of business expansion CapEx at the same time.

Edward Wolfe - Wolfe Research

I just want to be clear, $61 was a gross number, I had asked about net CapEx right?

T.J. Gallagher

Are you including the grants?

Edward Wolfe - Wolfe Research

Yes.

T.J. Gallagher

Yes what we said in our guidance was $61 million of 2008 CapEx offset by $11 million of 2007 grants and we also made an assumption at that time that all of the 2008 grants CapEx which would be spent would be reimbursed. So it was $50 million net with the caveat that if we didn’t receive all the grant money for it, it’s still valued in ’09 our net CapEx could be higher. So from there yes you would add $3 million.

Operator

Your next question comes from Neal Deaton with Stephen’s Inc.

Neal Deaton - Stephen’s Inc

For the breakdown of the car loads, the 140,000, I know you said they’re mostly coal and steel and solid wasted, is there any way you could elaborate a little more, just for modeling purposes, what the percentages are roughly of that 140,000?

T.J. Gallagher

Not at this time, sorry about that. I would just, for modeling purposes, I would include it as a single line item. It would be really tough to model because there is a lot of growth in the asset and so a lot of the commodity groups that are growing at different rates and so even if we gave you the static current numbers you would be having to go line item by line item guessing at growth rates. We think the simplest way to think about it is based on that ’09 run rate.

Neal Deaton - Stephen’s Inc

Would you mind repeating what you said for the breakdown of non-freight revenue, what it was in the quarter? I know you mentioned $1.7 million and higher accruing but I didn’t get the $3 million?

John Hellmann

Same railroad non-freight revenue increased $11.3 million. The key drivers were $4.9 and higher fuel sales, $1.7 in higher accruing, and $1.1 with the one steel switching. All of those are in Australia then and of course there is the $3 million increase in industrial switching and port railroad business.

Operator

Your next question comes from Robert Dunn with Sedody & Company.

Robert Dunn - Sedody & Company

I was just wondering, kind of moving into 2010 how fast do you think you’re going to try to lever down? I mean is that going to be the main use of free cash moving into the out years, would that be a good assumption?

John Hellmann

Yes, you should assume that we can take it down about one turn per year based on our current free cash flow generation inclusive of all these transactions. So, you can take it from 2.5 to 3.5 in 12 months.

Operator

Your next question comes from Michael Fontaine with BB&T Capital Markets.

Michael Fontaine - BB&T Capital Markets

I just wanted to ask a quick question on the acquisition front. You have done a few here and it looks like the personal tools are kind of creeping up a little bit. Do you still see much out there that’s attractive to you?

John Hellmann

I would say that the valuation on this asset was probably a notch lower than it’s been and I think we’re finding all of our acquisitions that we’re doing now we’re not compromising our hurdle rates on; so we’re very comfortable with what we’re seeing and what we’re paying and we continue to see good opportunities out there.

Operator

Your last question is a follow up from Chris Wetherbee with Merrill Lynch.

Christian Wetherbee - Merrill Lynch

I just have one quick follow up on the farm and food side. T.J. I think I missed what you said about the volume impact on the go forward run rate. Is that going to come back in on the volume side?

T.J. Gallagher

Yes. There was, think of it as a surge in the second quarter in grain in Australia as the grain shippers empty their bins and as I also mentioned, so essentially the second half of 2008 grain in Australia will be greatly reduced versus the first half.

John Hellmann

The port of Battle is not going to be shipping any grain in the month of August, just as an example, so the only grain shipments we’re going to have in Australia are going to be interstate grain movements. You should assume that volumes are going to be, I can’t quantify volumes for you because it’s grain and because the interstate movements are on a spot basis, but you should assume they’re going to be very low through basically the next harvest which comes in in November; so you’re going to have three months of low shipments and then we’ll start shipping the new harvest, which as of now looks about average as far as we know, but it’s something that requires regular monitoring. It’s too early to call, but it currently looks average.

Christian Wetherbee - Merrill Lynch

So assuming that type of seasonality, we would expect yields to jump up in the third quarter, but then volumes to jump up potentially in the fourth quarter depending on what the harvest looks like?

T.J. Gallagher

Generally that is absolutely correct, however we are in the midst of negotiating a new long-term five-year deal, so I don’t want to get into the meat of that negotiation, but it may be a little different for the next three months.

Over the long term, you are absolutely right. The new long-term deal will have the same mechanism that it’s always had and the way you already think about the grain. We’re in a unique window of time right now. We’ve never had them close it down all together on the grain like this and it’s because of two back-to-back years of drought, there is nothing left in storage.

Christian Wetherbee - Merrill Lynch

Any potential timing update on when that agreement gets signed?

John Hellmann

By the next harvest or it’s not going to move.

Christian Wetherbee - Merrill Lynch

Actually by November, approximately?

John Hellmann

One would expect sooner than November, because there is a lot of demands on our equipment that could be deployed to other use, so it will be done in short order.

Well, thank you all for joining us this morning and we look forward to speaking with you again on the third quarter call. Have a good day.

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