The Andersons' CEO Discusses Agreement to Purchase 12 Grain Elevators and Two Farm Agronomy Centers from Green Plains Grain Company Conference (Transcript)

Oct.31.12 | About: The Andersons, (ANDE)

The Andersons, Inc. (NASDAQ:ANDE)

Agreement to Purchase 12 Grain Elevators and Two Farm Agronomy Centers from Green Plains Grain Company Conference Call

October 31, 2012, 02:30 pm ET

Executives

Nick Conrad - VP, Finance & Treasurer

Mike Anderson - Chairman & CEO

Hal Reed - COO

John Granato - CFO

Denny Addis - President, Grain Group

Analysts

Heather Jones - BB&T Capital Markets

Brent Rystrom - Feltl

Farha Aslam - Stephens Inc.

Brett Lund - Piper Jaffray

Operator

Good day, ladies and gentlemen and welcome to the Acquisition of 12 Grain Elevators and Two Farm Agronomy Centers from Green Plains Grain Company Conference Call. My name is Chanel and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the ends of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now turn the presentation over to host for today, Mr. Nick Conrad, VP, Finance and Treasury. Please proceed sir.

Nick Conrad

Good afternoon everyone and thank you for joining us for The Andersons Inc.’s discussion of its announcement of it’s asset purchase agreement to acquire 12 Grain Elevators and Two Farm Agronomy Centers from Green Plains Grain Company.

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

Some of the statements that we make in today's discussion will constitute forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements as a result of many factors including general economic conditions, weather and competitive conditions as well as conditions in the company's industries both in the US and internationally.

For a full discussion of the risks and uncertainties that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements, please review the Risk Factors section in the perspectives as filed with the Securities and Exchange Commission. All statements speak only as of the date hereof and we undertake no obligation to update publicly or revise these forward-looking statements for any reason.

On the call with me today are, Mike Anderson, Chairman and Chief Executive Officer; Hal Reed, Chief Operating Officer; John Granato, Chief Financial Officer, Denny Addis, President, Grain Group.

Mike, Hal, John, Denny and myself will answer questions at the end of prepared remarks by Hal and after Mike’s closing comments. Hal?

Hal Reed

Thanks a lot Nick; I appreciate that. For those of you out there looking through the slide deck, I will briefly walk through some commentary with those slides and hopefully get to your questions rather expeditiously.

Take a look first at the first slide that talks a little bit about the purchase, the acquisition of the assets, again 12 Grain facilities, two agronomy centers; $95.5 million for fixed and long-term assets and some other agreed upon working capital spend for inventories to weather the normal course of transaction, another course of business kind of things. This is an asset purchased in it's structure and the transaction is subject to certain customary closing conditions, just nothing out of the ordinary and also expect the closing to be, closing is based upon Hart-Scott-Rodino approval, we expect to have it in the next 30 to 45 days.

From a financial impact piece, we expect that the acquisition will be mildly accretive on a full-year basis in 2013 and I used that term because of the impact of the drought, of this year’s drought that we’ll see in the first half of 2013.

Just a few other highlights. This is the largest acquisition in the company’s 65-year history. It does increase our Grain Group storage by nearly 30% and it aligns with our geographic growth strategy for both Grain and Plant nutrient businesses. And as a final note, as you go on to your next slide, this clearly leverages our core expertise in the operation of grain assets.

A little bit of rationale which I just begin to cover. This is an opportunity that requires substantial platform of grain elevator assets. And as I mentioned earlier, leverages our core capabilities and the operation of grain assets, the management of space and enhances additional customer contact and customer relationships which we pride ourselves in.

They are top quality grain assets, they are in geographically diverse agricultural areas. This expands our existing presence in Iowa and provides us with an entry into the Tennessee market. The grain elevators and agronomy centers are all focused primarily in corn, soybeans and wheat, pretty much as we are in other territories. This does provide obviously opportunities for us to improve gross profit it builds on our core competencies of commodity market expertise, space management, bulk handling, risk management for ourselves and our customers and the long-term consistent relationships that we pride ourselves in.

Financially I mentioned that we will be mildly accretive with strong cash flows and we are also proud to add to our family about a 130 experienced grain operations and customer service personnel at these new sites. I believe you have some pictures there of some of the shots of the different grain assets. And also a map that shows our footprint of the different sites and locations. On the map of those locations you will see our existing grain locations the added sites in Iowa and Tennessee and in addition some of our agriculture related assets not just our grain elevators, but also ethanol plants and fertilizer locations as well as and some of our crop facilities as well that have also recently been in the news.

There are some details attached to talk a little about the capacity of all of the facilities; talk a little about their capacity, their locations and the railroads that they are on. We won’t get into a lot of detail about those specifics right now, if you have any questions about them we will be happy to talk about them in the question and answer session.

With that I will pause.

Mike Anderson

I am going to make a few concluding comments before we get to the Q&A. This acquisition is exciting for us; we are working on a new opportunity with a new team and new communities. We are executing on our strategy to expand our geographic footprint both our grain and plant nutrient groups. At the same time, we are fortunate to be adding skillful, knowledgeable and customer service oriented workforces. The drought aside this year has been big for us in terms of growth. This is an exciting time in our industry and exciting time for The Andersons, thank you.

Nick Conrad

I guess with that, we will open it up for the Q&A at this point.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Heather Jones with BB&T Capital Markets. Please proceed.

Heather Jones - BB&T Capital Markets

I guess and just wondering there are number of reasons this transaction is attracted, but wondering if you could give us a sense of the factor that was most attracted to you guys that you want to pursue those the most?

Mike Anderson

Well, that is a pretty board question. I do think that the two locations of the assets that will allow us to get close to a very good core group of our farm customers, which as you know as something that we are always desired was probably the biggest fees. They are good assets, they are in good shape and its not easy to find that kind of a opportunity in the grain business at this time. So both the opportunity require a good chunk of space with relatively good assets and some really close connection to our farm base in both areas as those were probably two of the attractive pieces for us.

Heather Jones - BB&T Capital Markets

And are these facilities in a position that you could expand them, forget to mention a good group of core farmers and you typically I think have not really pulled from much further than 50 miles. So is there an opportunity to build on to these facilities and increase the storage space.

Mike Anderson

That's a good question. As you know we look at all of our assets on an ongoing basis, and to answer that question continuously with all of our assets we will obviously take a very close look at all of these assets as we get into them and put them into our mix of capital spend and growth and acquisition kind of a mode that we are in and we’ll evaluate that very carefully in the coming months once we get all of our people on the ground and meet the customers and learn the markets in those areas. So its on our list of items to analyze very quickly.

Heather Jones - BB&T Capital Markets

Okay. And today Green Plains reported numbers and they had very strong results in their Ag segment and they talked about how the early harvest resulted from the drought and that basically a fair amount of earnings that will typically fall into Q4 were shifted to Q3. I was wondering if that is something that you think was distinctive to their operations or is that would you broadly expect that and secondly given that their operations were in markets that cropped or were better than say the eastern corn belt, do you expect those locations to fare better in the drought as far as in the aftermath of the drought and say your core footprint may.

Mike Anderson

Well, a couple of good questions there and I will try to segment them. I think in general because of the drought the entire grain industry is moving at a slightly faster pace than normal, as we get from Q3 into Q4. So that drought has impacted everybody to some extent. As we noted earlier this geographic diversity both in Tennessee and in Iowa is helpful to us both in our grain and agronomy business just spreading things out and more territories offers us more stability, more opportunity in localized droughts to prevent those from harming us as much as if you have all of our assets in one small area. So we do like that geographic diversity. I think that like you said maybe some of these areas weren't hit as hard as some areas we have in eastern corn belt and so that might offer some additional opportunity beyond the third quarter results that you mentioned earlier. Again the impact of the drought will be felt somewhat across the entire grain business through the first half of next year and we've talked about that, but we are excited about these assets in a geographic diversity that it gives us so you made a good point.

Operator

Your next question comes from the line of Ken Zaslow with BMO Capital Markets.

Unidentified Analyst

Hi this is Andrew (inaudible) for Ken. Good afternoon. First question can you provide some color on how you think about returns for these type of assets in terms of our returns on invested capital payback period and in particular synergies as well. Any color you can provide there would be great.

Mike Anderson

Well, obviously we don't share detail specifics about some of those things you asked, but I will talk a little bit about some of the synergies and some of the diversity. Clearly we just covered the diversity piece in Heather’s talk and as you are aware we do have an ethanol plant in Iowa and so there we have a few other things in that western territory but this Tennessee territory is new. The Tennessee assets are very interesting to us. That’s a market place that we've dabbled in around the edges. We’ve got some, lot of customers to the east of there and southeast of there; but again, I can’t share specifics with you about the numbers relative to the returns.

Unidentified Analyst

Okay, appreciate that. And second, you made a couple of smaller acquisitions and capacity expansions over the last several months and now obviously this bigger acquisition and you felt pretty comfortable with your balance sheet over that period. We're just wondering, how you think about your balance sheet now in terms of priority for debt pay down, future acquisitions, dividends and that type of things?

John Granato

This is John Granato. You know, we constantly monitor our balance sheet to make sure that we feel comfortable with both our access to capital and the -ability to have dry powder to do things. Obviously, this is a larger or largest acquisition. So we will be monitoring the balance sheet and keeping a close eye in and going forward but I believe we have good access to capital going forward?

Operator

Your next question comes from the line of Brent Rystrom with Feltl. Please proceed.

Brent Rystrom - Feltl

Just couple quick questions. Do you know, proportionally the mix of corn versus beans is in these facilities what typically the mix of businesses is?

Hal Reed

Well, we have a historical perspective. Yeah, the historical perspective is very similar to what our current assets have in place. And there’s obviously, little to no wheat in Iowa. The Tennessee assets are much more similar to our other mix. So other than that, it's not much different than what we've seen, you know, it’s not much different than what we have seen in the past.

Brent Rystrom - Feltl

Kind of a weird way to look at this for both you and Mike when you think about your hour east of the land that you sold last week for $21,900 per acre. So you are at mean and mean for growing corn in North America in this location. From a productivity perspective, these should be very, very robust assets compared to almost anywhere else you could have gone in the country is that a fair assessment?

Hal Reed

We love corn grown in Iowa. There is no question at all that it’s the place to be, we love increasing our storage space and our connections.

Brent Rystrom - Feltl

Rail service perspective, do you know what rail lines are on?

Hal Reed

Yeah, the details is here on the slide, there is, the Iowa facilities are, there is two on the CP and two on the UP and the Tennessee ones they are short line that is connected to the KCS with access to both CN and I am sorry both to the NS and to the CN in some cases, but there are some towns that are truck only, primarily the three or four locations in Iowa, so that should be on the slide I think some of those details are there.

Brent Rystrom - Feltl

Okay. And then from the perspective of Tennessee is that tied in into at all the Albion Ethanol facility, are those locations independent there?

John Granato

I am sorry I couldn’t quite hear you, could you repeat that?

Brent Rystrom - Feltl

Sure. The locations in Tennessee are they physically tied not just geographically at the same spot but are they viewed pretty heavily as sources for the Albion Ethanol facility that Green Plains operates or are they separate from that in that?.

Unidentified Company Representative

They are quite separate from that and they do like I said they do load rail going for quite a bit of their grain, so they are not closely tied there is some stored space at that facility the GPRE has maintained at their facility itself, its part of the marketplace clearly but now these are more rail loaders.

Brent Rystrom - Feltl

And then can you and again I had trouble getting the slide show opens, so this maybe in there but can you talk it all about non-competes that you might have with that Green Plains, how that might work going forward?

John Granato

The APA does have a non-compete brand and the APA has been filed is part of an 8-K. So then rather than spending a lot of time here, I will just direct you there but there is a non-compete and I think it’s pretty clear what it is.

Hal Reed

Yeah, and I would simply add that it is reasonable and we fully expect to be good partners with our sellers, so.

John Granato

It’s a quick highlight 75 mile radius around our facility is in three years, there is more details as I said in the 8-K filing.

Brent Rystrom - Feltl

And then my final question, this should have given the implications or return on investor capital should and that one you look at, I am assuming kind of on a go forward basis even the earlier question about the pull forward the business, there should probably $13 to $15 million of ongoing EBITDA according to what Green Plains were saying. And when you look at what you are investing plus working capital, the return you are getting on your capital from this looks like it’s going to be higher than your overall rate of return for the company, is that fair?

Hal Reed

You know Brad, I think what we said as it can be mildly accretive in ’13, we expect to be better in ‘14 with normal weather. I think that's enough detail for now I think.

Operator

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

Farha Aslam - Stephens Inc.

Can you just share with us some color regarding what fertilizer or additional kind of services you could layer on to these businesses and geographies?

Hal Reed

Well, I'll have Denny maybe explain just a little bit about what's at the two farm centers right now and obviously you asked for other services and all, I don't know, we will go into that but at least having tell you what's there at the two pharma centers, agronomy centers that we have. Denny?

Denny Addis

As Hal I think mentioned two of the Iowa locations are integrated into agronomy prior to GPRE, this was a cooperative. So you probably know as well as anyone a cooperative is integrated usually into all areas, fuel agronomy, feed and grain. So the Iowa facilities are, that's why the agronomy is there, it exists there. I thought I would say towards the Tennessee assets is actually one of the locations down there, it does a little bit of agronomy but its more cash and carry. But it’s too early to suggest that we would, there's opportunities let's say to integrate agronomy at other units. We just got to get our arms around; we've got first both in Iowa and in Tennessee and assess what makes sense for the customer long-term.

Farha Aslam - Stephens Inc.

And then, I am sorry for next year in terms of overall grain, I don't know if you are willing to speak about, could you just talk about carry the market with the current curve, is there earnings opportunities for 2013 for this business and 2014?

Hal Reed

This is probably a better question for us to cover on our call next week when we talk about our third quarter results. So if you can hold off, I mean I hate to make you wait that long but I think that's probably the right place for that because we can then talk about what happened in the third quarter and that will give us a little bit more of a platform to discuss that.

Operator

Your next question comes from the line of Brett Lund with Piper Jaffray. Please proceed.

Brett Lund - Piper Jaffray

I am on the call for Mike Cox. And just on the Tennessee assets, wondering if a few of those assets has anything to do with the irrigation expansion going on in that area, kind of similar to the opportunity you saw in Nebraska where grain handling hasn't really kept pace with production growth?

Hal Reed

That's clearly a piece of it but your last statement about the fact that there has been ongoing production growth that may not be as well covered by asset additions both on farm and commercial storage space, a lot of the eastern and western corn belt that has outstripped the actual farming increases and growth and for a couple of reasons the Tennessee assets probably are not, they don't have that same issue so we do like that a lot. There has been a lot of movement from cotton to corn in that Tennessee area as well. That's been a good pump of the total corn crops. So there is a lot of things that excite us about the Tennessee area and the future of it.

Brett Lund - Piper Jaffray

And just, I'm not sure if you touched on this but why buy the assets and not build them considering the high price tag of what you bottomed for?

Hal Reed

Well, the high price is really construction. I mean what we are looking at is prices of $20 million plus for the shuttle loaders that have been built in recent years in a lot of different places. So and those are very small assets. The other piece of it, like I said, is that this is a territory that we like quite a bit and there is some integrated agronomy assets with it. So it's kind of the model that we really like. It's hard to build the customer base and these assets come with a good customer base and a good set of employees. So there is a lot of reasons I think why I would take on the existing marketplace. It was pretty appealing.

Operator

I would now like to turn the call over to Mr. Conrad for closing remarks.

Nick Conrad

Well. Thank you. This concludes our call today. We look forward to talking with you all again next week.

Operator

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

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