The Andersons, Inc. (ANDE) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Q1 2012 Andersons, Inc. Earnings Conference Call. My name is Catherine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Mr. Nick Conrad, Vice President of Finance and Treasury. Please go ahead, sir.

Good morning, everyone. And thank you for joining us for the Andersons, Inc.’s 2012 first quarter conference call. As previously announced, we have changed the format of our conference beginning today. We have included a slide presentation that will enhance our talking points. If you are listening or watching this presentation via website the slides and audios are in sync. For those listening via telephone, watching the webcast, you need to follow the directions we sent you yesterday to sync the slides and the audio. This webcast is available through the Investor section of our website www.andersoninc.com. The webcast is being recorded and can be accessed on our website. As you know, certain information 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 in the U.S. and internationally, and additional factors that are described in the company’s publicly filed documents, including its ‘34 Act filings, and the prospectus prepared in connection with the company’s offerings. It also includes financial information, of which, as of the date of this call, the company’s independent auditors have not completed their review. Although, the company believes that the assumptions upon which the financial information and its forward-looking statements are based are reasonable, it can give no assurance that these assumptions will prove to be. Hal Reed, Chief Operating Officer; and John Granato, Chief Financial Officer will be on the call today with me. Mike Anderson, Chairman and Chief Executive Officer will provide opening remarks and will join Hal, John and me for questions at the end of the call. Mike?

Thank you, Nick. Before I get started I want to mention the recent appointment of John Granato as our Chief Financial Officer. John joined us with a varied background in many diverse industries that has given him both broad and extensive global finance and business leadership experiences. As John has just joined our company last week, Nick Conrad, Vice President of Finance and Treasurer is handling the financial part of the call today. In the future, however, John will be taking the lead role in these calls. Before we get started, John will make a few quick comments.

Thank you, Mike. First, I want to say, I’m very excited about joining the Andersons. In my limited time working with the team here, I have found everyone to be very engaged, open and committed to the success of the company. I know that each of you works closely with Nick and I also look forward to personally getting to know each of you. I’ll turn it back over to you now, Mike.

Hey, let me start by saying, how proud I’m to see record quarterly earnings. Both our Grain and Rail Groups had record earnings and the Plant Nutrient Group had a very strong quarter as well. I’d like to highlight some things we have accomplished so far in 2012 that demonstrate our continued commitment to growth. In the Grain Group, we are again increasing storage capacity as we continue to build a grain shuttle loading facility in Nebraska, it’s expected to open by harvest. Just last week our new ethanol investment affiliate The Andersons Denison Ethanol LLC acquired an existing 55 million gallon ethanol plant in Denison, Iowa, which brings the number of ethanol plant investments that we operate to 4. In January, the Plant Nutrient Group acquired New Eezy Gro, an Ohio-based specialty agricultural and industrial company. This Group also recently completed a major capital built at it’s Maumee, Ohio location that improve both its formulation capability and efficiency. And as always, we are reviewing further expansion opportunities at our existing facilities and additional acquisition opportunities for 2012. Hal, you can handle the performance review.

Thanks, Mike, and good morning. As we announced yesterday in our press release, we generated record net income of $18.4 million or $0.98 per diluted share on revenues of $1.1 billion. In 2011, we reported net income of $17.3 million or $0.93 per diluted share on revenues of $1 billion. In response to feedback from our analysts, we prepared this next slide to share an income bridged graph. This graph specifically represents which Group’s income is up or down this quarter in comparison to the prior year. The specifics behind these differences will be detailed as we discuss each Group’s operating performance. Therefore to fully understand the total company results, let’s take a look at each of our six business groups. Let’s start with the Grain Group, which had a record quarter with operating income of $19.4 million versus $15.1 million a year ago. The Group benefited from continued strong space income. Additionally, Lansing Trade Group had a solid performance again this quarter. Grain Group revenues for the quarter were $700 million, which is up from the $638 million reported in the prior year. This revenue increase is due to slight gains in both volume and average grain prices. I want to mention that corn planting progress in our region and in the U.S. is well ahead of both the prior year and the 5-year average. As of Monday, the USDA Crop Progress Report indicates that the U.S. corn crop is 71% planted, which compares to 32% last year at the same time and a 5-year average of 47%. We are obviously very pleased with these planning results and the potential impact it can have, and has already had in our agriculture business. We are hopeful that weather will continue to cooperate through the growing season. Now let’s discuss the Ethanol Group, which reported an operating income of $100,000 this quarter. In comparison, the Group had $3.6 million in income during the same period last year. The lower income is a result of decreased earnings in the 3 ethanol limited liability companies. The LLCs were negatively impacted by lower ethanol margins, resulting from increased industry production and lower demand led by declining exports. The plant’s investments in corn oil 85 and CO2, however, have produced profitable co-products that provide income even when the ethanol margins are not positive. Revenue this quarter is $151 million, which has increased due to a higher average price per gallon. In the prior year, revenues were $133 million for the same period. The Plant Nutrient Group achieved operating income of $5.8 million for the quarter. In the same three-month period of 2011 the Group reported a $5.1 million operating profit. This improved performance was due entirely to an increase in volume. The margin was down slightly from the prior year due to lower price appreciation in the period. The volume increase is primarily the result of good application weather in March and pent-up demand from the fourth quarter of 2011 when weather was not conducive to nutrient applications. An increase in volume combined with a higher average nutrient prize lead first quarter revenues for the Group to increase to $175 million, which is up from the $124 million reported last year. The Rail Group reported a record operating income of $8 million this quarter on revenue of $36 million. Last year the Group reported $3.5 million of income on revenues of $29 million. The Group’s revenue and income benefited from higher utilization and lease rates. This quarter, the Group recognized $6.3 million in gains on sales of railcars and related leases, whereas last year $4.8 million were recognized. The average utilization rate for the quarter was 85.7%, which was up from the 82.4% experienced last year. The Group now has almost 23,000 cars and locomotives, which is up from its year earlier total due to the acquisition of additional cars. The railcar repair business, manufacturing business and our short-line investment were all profitable during the quarter with the railcar repair business showing a marked improvement. Turf & Specialty Group earned an operating income of $2.2 million this quarter on $45 million of revenue. Last year the Group reported $3.3 million of income on $47 million of revenue. Turf products tonnage was essentially flat this year. Margin per ton however was down due to changing product mix. The Group continues to see higher results in it’s care business as a result of increased sales of patented products. As is typical for the first quarter, the Retail Group incurred an operating loss. The loss of $2.7 million was the same as the prior year. Total revenues decreased $1 million to $30 million in 2012. The sales decrease was caused by a lack of winter sales due to the moderate winter weather. The Group however continues to see higher sales in the grocery and specialty food areas. Now, I’ll turn the floor back to Nick for the treasury's report.

Thanks, Hal. Turning to taxes for the first quarter of 2012 the company’s effective tax rate was 36.6%, up 0.5% from the first quarter 2011 rate of 36.1%. We are projecting our 2012 tax rate to be 36%. The company’s actual 2011 effective tax rate was 34.5%. The lower effective rate for 2011 was due primarily to benefits related to domestic production activities and the income attributable to the non-controlling interest that did not increase taxes. Next, as to interest, interest expense for the first quarter 2012 totaled $5.3 million, down $2 million for the same period of 2011. This decrease in interest expense for 2012 is due to lower short-term debt levels driven primarily by lower 2012 grain prices in the first quarter 2012 versus the first quarter 2011. Our average short-term borrowings for the first quarter 2012 were $302.8 million versus $466.7 million for the first quarter 2011. The company’s average short-term borrowing rates for the first quarter were 1.97%, a decrease of approximately 1% from the same 2011 period. During the first quarter, the company was also an investor of excess funds with short-term investments averaging $13.1 million, a $5 million decrease from first quarter 2011. Now to a non-GAAP measure. Earnings before interest tax depreciation and amortization, EBITDA, for the first quarter 2012 was $44.5 million after adjustment for non-controlling interest, which was approximately unchanged from same period in 2011. The first quarter’s pre-tax earnings include $4.3 million in equity in earnings of affiliates, a decrease of 3 million for the same period last year. Income from the company’s investment in 3 ethanol LLCs decreased $2.7 million as compared to 2011. Turning to the balance sheet. At March 31st current assets totaled $1.2 billion, a decrease of $112.2 million from a year earlier balance of $1.3 billion. This decrease was driven by decline in commodity derivative assets current and accounts receivable. Commodity derivative assets current entered the first quarter at $33.8 million, a decrease of $144.9 million year-over-year. Accounts receivable net of reserves ended the 2012 first quarter at 204.4 million, compared to the first quarter 2011 changes in accounts receivable were the Grain Group and Ethanol Group decreased $40.4 million and $5.2 million, respectively, Plant Nutrient Group receivables increased $24.8 million, Rail Group increased to $4.9 million and Turf & Specialty Group was about unchanged. At the end of the first quarter, the company’s cash and cash equivalents along with restricted cash increased approximately $16 million as compared to March 31, 2011 ending balances. The increase was due primarily to the previously announced industrial revenue bond, the company received for its unsellable Nebraska location. Company’s inventories ended the quarter at $787.6 million, an increase of $12.6 million from last year’s first quarter. The changes in inventory from the same period last year were increases on our Grain Group of $30.6 million, Turf & Specialty Group of $2.6 million and the Retail Group of $3.9 million, which were offset by a decrease in our Plant Nutrient Group inventories of $24.4 million. Rail inventories for the first quarter 2012 were about unchanged as compared to last year’s first quarter. Net working capital at March 31, 2012 was $283.1 million, a decrease of $26.5 million from 2011. Total assets at March 31st were $1.8 billion, about unchanged from the 2011 first quarter ending balance. Other asset changes in addition to the changes in current assets include investments and other assets ending the quarter at $358.8 million, up $37 million from March 31, 2011. This increase was a result of equity method investments and other assets increasing $16.5 million and $20.5 million, respectively, over last year’s ending balances. Also property plant and equipment along with railcar assets leased to others increased to total of $83.2 million for the quarter due to business acquisitions, increase in capacity of existing locations in railcar investments. Commodity derivative assets non-current ended the first quarter at $1.2 million, a decrease of $11.8 million compared to the same period last year. Depreciation and amortization totaled $10.5 million at the end of the first quarter. Purchases of property plant equipment through the first quarter 2012 totaled $15 million versus $4.2 million for the 2011 first quarter. We had a business acquisition in the first quarter in the amount of $15.8 million. Railcar purchases and sales were $33.4 million and $10.2 million, respectively, through March 31st. Railcar purchase and sales for the same period of 2011 were $10.8 million and $9.2 million, respectively. In regard to liabilities recorded on the balance sheet, borrowings under the short-term line of credit at March 31, 2012 were $365 million, compared to $460 million at March 31, 2011. Commodity derivative liabilities current ended the first quarter 2012 at $34.1 million versus $67.9 million at the end of the first quarter 2011. Our long-term debt totaled $320.4 million, a decrease of $42.8 million from 2011’s first quarter ending level. Our total long-term funded debt-to-equity was 0.38 to 1. Company’s first quarter 2012 average interest rate for all long-term debt was 5.23% versus 5.41% for 2011. At March 31st, our commodity derivative liabilities non-current were $2.4 million, compared to a 2011 first quarter ending balance of $110,000. At March 31, 2012, the company’s total equity was $556.9 million, an increase of $75.8 million for the first quarter 2011. At April 23rd, we paid our second quarter dividend of $0.15 per share for 2012. Finally, we continue to enjoy good support from our banks. As of March 31, 2012, we had short-term lines of credit under our syndicated facility that totaled $735 million. Company also had long-term lines of credit under the same syndicate facility in the amount of $115 million. The total lines of credit available under the company’s syndicated facilities were $850 million. I’ll now hand the call back to Mike Anderson who will provide the concluding remarks.

Thank you, Nick. We noted in the press release that we are expecting 2012 to be our second best year ever. I just want to expand on our expectations for the year. First, we expect our Grain Group to continue to do well. However, despite record first quarter income, we still expect the Group’s 2012 operating income to be lower due to anticipated drops in space income, especially in the second quarter. You may remember that in last year’s second quarter conference call, we informed you that our large second quarter 2011 space income results were due in large part to the weak cash and future prices converging nearly end of the quarter, and that something like that would likely not happen again in the foreseeable future. Also, due to the low margins currently being experienced in the ethanol market, we expect the Ethanol Group’s full year results to be considerably lower than the prior year. That being said, we are pleased, the Group has remained profitable in the current ethanol margin environment, as they continue to provide services for a feed to sell co-products such as DDGs, corn oil, E-85 and CO2. We cannot predict exactly what Ethanol margins will do in the future. However, our outlook later in the year is positive. I expect our Plant Nutrient Group to have a very good year, as the demand for nutrients remains high, and we are anticipating a record corn crop. I see our Rail Group more than doubling their prior year income, as a benefit from increases in both their utilization and lease rates, as well as from the management of their fleet portfolio. For the year, I believe our Turf & Specialty and Retail Group’s performance will improve over the prior year, that this will of course be highly dependent on the number of factors. I want to again reiterate how pleased I’m with our company’s performance. At the last conference call I noted the appointment of Hal Reed as our Chief Operating Officer, and as I noted earlier today, we recently added John Granato as our Chief Financial Officer. I feel the depth and breadth of the experience these 2 individuals have, will allow our company to continue and expand upon our purposeful growth strategy. That concludes our prepared remarks. Hal, John, Nick and I will now be happy to answer any questions you may have. So, Catherine, we’ll turn it back to you.

[Operator Instructions] First question comes from Heather Jones from BB&T Capital Markets.

I have a few questions, actually. Looking at the likelihood of a very large corn harvest later this year, I was wondering if, I know, it’s very early to be thinking about 2013, but just thinking about what could actually be possible with potentially very large crop. Do you think that the large volumes there could be enough to offset the bases appreciation you saw in 2011 that your Grain business could possibly do a repeat of 2011 in 2013?

Well, if you just, Heather, this is Hal, sorry. There is a lot of things that are going on, but just to suggest that the corn space income in 2013 could offset the wheat in 2011, that’s probably not likely. The wheat income as we suggested was something had accumulated over quite a bit of time before the convergence occurred. There’s a lot of other good things that come with a 96 million acre corn crop like a lot more volume than we’ve seen in a while and maybe cheaper corn prices for Ethanol and more nutrients required for Plant Nutrient Group. But just to suggest the space income would be offset, is probably not quite going to happen.

Okay. Okay. And looking at Plant Nutrient, do you expect that to have -- you specifically said you don’t expect Ethanol and Grain to match last year. But I didn’t hear you say that on Plant Nutrient. So you -- it sounds like you expect Q2 to be down year-on-year, but do you believe that Plant Nutrient could actually match year ago results on a full year basis?

Right now, we expect Plant Nutrient to be down just a bit from last year. Again, it’s very hard to determine what the fall quarter would be just because of the timing of the fall. We did recognize last fourth quarter was off wet. It’s hard to predict this fourth quarter this year and make a comparison, but right now we see it a bit low below last year.

Okay. And then on corn oil, we’ve heard from a number of protein producers that taking out the corn oil has made it, so they have been forced to use the DDG’s at a lower level than they have previously. Just wondering what your thoughts on that and does the economics of corn oil more than offset potentially lower prices on DDG’s as livestock producers use it less.

Yes. Thanks. There are a number of different uses of DDGs, some of which are not impacted at all by the change in the corn oil extraction. Second, there are certain availability of fats that are more able to be controlled by the ingredient -- in the ingredients of the feed. So there are some manufacturers -- some processors that actually like it extracted. They can control little bit better with some other fat content. To answer the rest of your question, we have not seen a decrease in DDG prices this year, after we began extracting the corn oil. So we’ve gone through all these different scenarios, tested this, there is always different end users and as of now, this year our DDG prices are actually slightly higher than last year in a relative sense to corn. So we are hopeful that that continues.

Okay. And my final question is looking at your bushels and storage, they are up year-on-year and I realize, I think you have more bushels of capacity than you did a year ago. But still we’ve heard many in the industry talk about how tight the Eastern Corn Belt is. But yet, it doesn’t look like you’re really that much tighter than last year. So, do you think you’ve taken share or how well should we interpret this?

The bushels aren’t dramatically different. It is tight. I think it’s maybe a question -- somewhat a question of timing. We -- the difference between the first quarter shipments and the second quarter shipments has a lot to do with the timing of planting because that depends that matters to when the farmers deliver the last bushels. So the differences are not significant enough for us to make a general statement. We are fairly tight that’s best seen by looking at the estimates of the corn carryout in the USDA numbers as opposed to any one specific inventory numbers. Some of those could just be timing of shipments as well too. So, I don’t see those inventory numbers being dramatically different or having much of a relevance to the total carryout in Eastern Corn Belt.

The next question comes from the line of Farha Aslam from Stephens, Inc.

And so my question's really focused, first of all, on Grain. Wheat based income was clearly a really big positive last year and you’ve highlighted that’s going to be not the case this year. But in terms of sequentially, can you just point out to us, how much lower is wheat base income? We are hearing like it is maybe 20% currently of what it was in the first quarter?

Well, the ratio -- Farah, the ratio piece doesn’t make a lot of sense to anybody who is going to analyze the number, so let me try and help to give you any answer that I think will maybe make a little more sense. It is down substantially because of the lower spreads in the wheat spreads in the futures market and also because of the basis level. So our basis level last year at the end of the first quarter was about $0.30 under. It’s closer to option price this year. And the forward spreads from the May to the September last year were close to $0.75 last year and they are closer to $0.30 this year. So those 2 things together kind of indicate the potential or the lack of potential in Q2. Relative to Q1, the decrease in wheat spreads was pretty substantial from last year. I don’t know if your percentage is accurate, it could be a little bit more than that, little bit less than that. But in essence, in our case it was offset by higher than expected corn space income, which we somewhat expected this year as well. So hopefully that helps.

And so, in the second quarter, will corn space income help you out again as it did in the first quarter?

We are not likely to see much corn space income in the second quarter. As we have indicated before the stocks are starting to flow out, and it will be fairly low getting into and through the second quarter, so not much help.

Okay. That’s helpful. And then when we look to Ethanol, how much corn oil extraction have you implemented? Is it in your new facility yet and if not when do you anticipate putting that in?

Yes. Corn oil is in place and operating in all 3 facilities and we are working fairly well. So we are very pleased with that. It’s been a great addition. Are you talking about -- okay, all 4, I’m sorry, yes. Denison has a corn oil system as well. That was already in place at the time of purchase. So all 4, yes.

And do you generally -- are you been selling that corn on a spot market? Are you hedging it forward?

The corn oil? We’ve done some of both. We have a variety of different interested parties and off-take to some of it to help us hedged it. Some of them sell it forward and there’s a variety of methods we used to do the best we can to lock in our margins.

Okay. And how do you anticipate the P&L of the new facility to float through your income statement? Do you anticipate it to be simply part of your ethanol business rather than in the JV or do you -- are you planning to have a, kind of, management fee component? How are you thinking about that?

Well, the structure is similar to the other three managed facilities. Because of the level of investment, this will be consolidated into our reporting.

Okay. And then, my final 2 questions and I’ll pass it on. In terms of plant nutrients, the volume that in the second quarter, do you anticipate that it shifted -- some of it shifted to the first quarter or do you think your volume is still going to be very up year-over-year in the second quarter because last year your second quarter volumes were not that great?

Right. We do know that some was moved into the first quarter, clearly because of the weather conditions. We also know that there is higher acres of corn being planted. So the second quarter will have a plus and a minus. Some moved into first quarter and just some higher volumes, but generally we had last year was -- very wet conditions last year in May and that’s why the number in total was down. They are not going to be dramatically different, but there is a plus and minus here that’s going to depend on the weather finally.

Great. And then my final question is on rail. Lease rates, how much are they up year-over-year and at the end of the quarter, what was your capacity utilization?

I think we gave the utilization in the talk at about -- I think utilization was 85.7 versus 82.4.

But that was during the quarter but at the end of quarter -- was it end of the quarter versus start?

Did you say the end of the quarter?

Yes. The end of the quarter utilization.

Yes. It was almost exactly that, 85.6. And then on the lease rates, actually lease rates quarter-to-quarter up more than 10% year-to-year.

The next question comes from Ken Zaslow from BMO Capital.

John, you and I have something in common. We are both pretty new to the company. So my first question to you is actually so what brings you to the company and what do you think you are going to contribute? How do you think about it?

Well, I think I’m really excited to be here. I think there is great prospects for the company. It’s got strong values and has consistently shown a great trajectory in terms of growth and results. And I hope to bring some of my outside experiences to help the company grow, expand and improve their processes as they move forward.

Okay. Going to the actual business, let me ask a question, the backwardation on ethanol, can you -- can you talk to what you think is contributing to that and is there a point in time that you think that backwardation is going to flip around?

I think backwardation in the ethanol market has been there almost since the beginning of our investment in the industry. And it seems a little strange to us, but I think it would take substantially more space being built to carry inventories, to create a change in that. And I don’t see that occurring. So, as much as we may have thought that some of that would go away over time, the infrastructure isn’t there to suggest that that will occur. Nor are the buying patterns of the users seem like they are going to change at all.

Okay. Because it was invariable to other, a couple months ago. And it looked like it was getting tighter and then the ethanol prospects seem much more bullish couple of months ago, and it seems they have just turned backwardated again. That’s why I was just curious if there is a reason to think that it might actually flip the other way?

We don’t see much movement.

Okay. In terms of the early planting for wheat, can you talk about it that’s potentially going to be able to create a benefit to your bases just because the early planting should actually help you on the buying side. Is that a fair way of thinking about it?

The early plantings are actually for the corn crop and that’s a good thing. The weather has been very conducive to getting in the ground early and getting it going. And that could in essence produce a slightly earlier crop in the fall with a small carryout in corn and beans, a slightly earlier crop would be good for everybody’s benefit. So but again, the early planting is relative to the corn crop primarily.

I’m going to add a little color comment. It’s not just this question, but we -- it’s gotten lots of attention as it should over a number of years. We are relative to wheat and the ability to earn income from it, basis appreciation and from the combination of the basis and the spreads, we still feel really good about -- really good about it. For years, we had said that we had gone through a period where for all kinds of reasons we won’t go in today the wheat basis -- soft red wheat basis moved to triple digits under the nearby option. So, lower than a $1 and it never happened in the history of any of us here. I doubt, my grandfather saw that low in his time here. We knew eventually that we would get back -- convergence being defined as in the delivery market here in Toledo, that we would see cash and futures aligned and get close to each other with the basis being approximately the same as the futures. We had a high certainty. We didn’t realize it would take as many years as it did. So what we saw coming at us was at some point in time as we were accumulating wheat to put it in our empty space at $1, $1.20 under, $1.30 that eventually we would earn that $1 or $1.20, $1.30 on what I would describe as somewhat a one-time move. We didn’t anticipate that we wouldn’t move to this new delivery storage rate system that occurred a couple of years ago, which provided another wonderful boon, as spreads went significantly wider and allowed us to roll our hedges forward at much wider carries. And to be more specific, if historically you could earn $0.05 storage a month through the spreads, at times we were in a position where it was almost $0.20 a month. That didn’t last very long, quickly got down to $0.15 a month and is now gotten down to where I call it a little better than it had been historically, $0.05, $0.06, $0.07, $0.08 a month after interest. But recently here as everyone who owned wheat said, I can earn so much storing it, everyone that owned it, basically took it off that market, refused to sell it. The wider spreads contributed to that. So what occurred, again, last June, I maybe over hitting this too hard, was a very, very --- little bit in the third quarter too, one-time like event. I’m not going to say it’s extraordinary, that’s an accounting term. It was phenomenal. It was wonderful. Hal, give you the basis numbers from last year. It likely won’t happen again in our lifetimes. It was just fantastic. Now, we’re back to just really good times instead of stupendous times. So, I hope that helps. And put it another way, we are not going to get that space income back. And there’s nothing wrong with that. It was a bonus, I’ll call it. But we are in volatile markets. We have variance in spreads. We will have good times and bad times through that thing. And we’re just ecstatic that we were able to realize what we did in the past and we’re ecstatic that we are on a course towards second best year ever.

And let me just follow up with one final question on that. With your second best year coming, would you say that is a base year for which you expect to be growing off? I know it’s a conceptual question. But is that -- this year, is that the start of your base year without one times, without -- is that how you think -- is that how you guys think about it?

I think that’s a great question. I’m going to let Nick handle that one and I’m not ducking it because we are all on the same wavelength on it.

Speaking of wavelengths, Ken and everybody on the call we’ve talked over the last 18 months or so about this idea of a channel for our results with an upwards bias. So I think it’s a little dangerous to say 81 years of base year or it’s that much of an outlier plus or minus an average meeting. I think in general, we feel good about -- I like John’s phrase, the forward trajectory of a bounded range with an upward bias. And I think that’s as far as we would want to go, Ken.

The next question comes from Brent Rystrom from Feltl.

Yes. I’ve just got a couple of quick questions. The cash right now for corn in the Western Corn Belt is tending to run higher than…

Brent, could you speak louder?

Sure. I’ve seen the cash is tending to -- or the corn is tending to trade in the cash market in the Western Corn Belt higher than where its priced on the trading. And so I’m curious, if this big corn crop does come in this year, which I think is a big if here, but if it does come in, do you see in your Western expansion area, do you see an opportunity to pick up a lot of bases there, second half of the year on corn?

Yes. The bases opportunity is now. I mean, we’ve seen that inverse grow and grow to a point where it’s quite sizable now, because at some point in time, the inverse will close. It’s that last bushel at the end that is worth new crop values that will close, slammed at inverse together. So the opportunity we see out in the West is what we’ve been able to bring into this year from last and earn this appreciation in bases out there but you are right, it has been substantial out there.

How about soybeans? Hal, any thoughts on soybeans particularly in July and August as we look at may be historically tight carry out?

Yes. Again, a very historically tight carryout. As you know, we don’t carry as many beans as we do wheat and corn. So it’s not quite as big a deal to us, but this inverse is such a large inverse that it’s risky to take it out too much further past this early summer point here. So, I think that the entire balance sheet of the soybeans worldwide is going to be very tight. So it will be a risky summer play.

All right. And then final question, I’m just curious from the Plant Nutrient side, any thoughts on what you are seeing for fertilizer pricing for fall applications which would be primarily nitrogen?

Yes. Right now, we’re not seeing very much forward. It’s quite hand to mouth. We’re not interested in carrying too much more product than we figure we are going to use here in this busy spring. We are going to try to regroup in the summer and see what prices do. Given the early crop, we could see a pretty good size fourth quarter as far as application. So it will be an interesting equation between probably lower corn prices and probably larger demand to put fall nutrients down. So it will be a balance for the fall, but it’s hard to tell about prices right now.

All right. One final question, I have seen when you mentioned that Hal, do you see in your markets any evidence of a shift from corn to beans here in the planting season?

We haven’t seen much at all. It’s very interesting. Farmers love to plant corn. You know that. They love to plant corn and with this kind of weather, they’ve got the corn in and ready to go and they are planting all they can. So it’s -- which is good for us, but we haven’t seen much switch around here.

I would add although it won't huge amount of bushels with the warm spring we are having, we are getting -- progressing rapidly not just here but South. There’s lots of reasons to think that anybody who can double crop will double crop with beans behind the wheat if the weather holds up and we’re able to get the harvest done earlier than normal.

And Mike, when would that earlier than normal be, would that be the June harvest?

No. Well, June -- late June in Central Ohio, Central Indiana and South, but if it’s around the 4th of July here you will even see some people taking risk. And that will be with yield reduction. But we might see our first really good day historically typically the 8th, 10th of July up here, 1st of July in Central Indiana. And it should move into June in Central Indiana this year. So keep going south from there, with these bean prices in the need, lots of incentive to put them in if weather cooperates.

The next question comes from Christine Healy from Scotiabank.

Couple questions for you on the rail segment. Some good results this past quarter. I’m just wondering do you expect these utilization and lease rates to continue through 2012 or are you seeing continued improvement in this segment? Maybe some color on what’s going well, what’s not in that segment would be helpful.

Right now, we’ve continued throughout the course of the whole year to see lease rates and utilization rates creep higher. And right now, we see no reason for that to change.

And is there any particular areas like any certain types of railcars they are doing well and others that aren’t, maybe some color on that?

There are a handful of car types that are doing extremely well. Some of that are -- much of that due to the whole frac sand issue and so tank cars have traded at exorbitant rates and in some cases. And a few other car types that are used to haul some of the materials in the sand, that are also being traded at higher than normal rates. So those 2 are probably on the high end of normal rates, yes, we’ve got -- and of course, with the warm winter the coal car rates have probably declined, so that would be on the other side of the equation. But right now, and with the big grain harvest coming up, we expect to see grain rates starting to increase over the year as well as so.

Okay. That’s helpful. And then also on rail, you guys had higher gains on sales of railcars this quarter. You had disclosed in your 10-K that you were selling portfolio of 1400 railcars which resulted in gains of upto $9 million, just want to know is a portion of that still to be recorded in the second quarter than?

It’s an interesting question. We routinely sell various parts of the rail fleet through various methods, some of which are direct sales, some which are through financings. And we don’t really forecast forward in a disclosure basis what activity occurs quarter-to-quarter. So I think I will just leave it and say what we reported in the first quarter is accurate.

The next question is from the line of Ian Horowitz from Topeka Capital Markets.

Just a kind of go of on Christine’s question, how you said in the -- I think the prepared statements that the fleet total was about 23,000. Last quarter, I think we were at 22,700, which to me is almost like 23,000. Can we just get a little bit more detail, did it stay relatively flat or was there a slight increase in cars?

There was a slight increase in car numbers. So even net of what sales were we’ve increased the size of the fleet, so.

Okay. And if we look back at the utilization rate and the slight increase in cars, on a first derivative comment, it looks like the rate of change is slowing. Can we read into that at all or is there some seasonality here in terms of putting the cars to work?

There were some new cars purchased that were not in service at the time that impacts that equation a little bit. There is some seasonality, where at the end of a small grain crop waiting for a bigger one, but I don’t think it’s dramatic. Yes. It’s headed higher but maybe it’s slowing at this point.

Okay. And I look back and over the recent history I look at, kind of, I think 24,000 a little over 24,000 is kind of your peak railcar levels. Is that kind of the opportunity that we’re still looking at today? Do you think that 23,000 is a much more comfortable level now, or -- just how should we look at the growth or not the growth of the overall fleet size from here?

We move in and out of railcars at different times in their life and in the life of the industry in our fleet. So it’s hard for me to say exactly, where those numbers are. But we’ve been increasing it -- been increasing the numbers and the trajectory is still for us to grow that business. So I would certainly expect that be the case. We look -- we are looking at an awfully good year in rail and right now things that trajectory of what we’d like to do is moving higher as well.

Okay. So there is no internal bogey that you guys are 20,000 back to 24,000 or staying at 23,000?

No. No. There’s no kind of constraint like that. So…

Okay. And then in the comments, we talked about a decline in ethanol for the second quarter, we saw a significantly thin margins understandably so in the first quarter. Could you guys expect to see an operating loss for this segment in the second quarter?

That’s difficult to say. We haven’t seen margins change much throughout the course of the first 4 months or so. It’s nice we’ve got all the added co-products to add to our bottom line. Hopefully, we see the driving season begin a little bit here with the better weather and a little bit lower gasoline prices. And we get some of that full utilization back, the total gasoline in the United States has been down. But an uptick in that would sure help. So it’s just hard to -- it’s just hard to tell where we will be in total for the second quarter.

Okay. And can you comment at all, how about the utilization, the throughputs on your plants right now. How they’re running?

Well, the ethanol plants?

Yes.

Yes. Actually right now, it’s running extremely well. We’ve done our normal semiannual shutdowns here recently, a couple of them. So we’re running at about as good of capacity and with as good of conversion rate as we have had. So we’re pretty pleased. And the new plant in Denison, we’re making some tweaks to what was a pretty well run plant and we’re pretty happy with what’s going on out there as well.

Okay. And Hal, do you expect to see kind of typical ethanol seasonality occur this year? I know the futures market is not necessarily showing that. But I mean do you expect kind of strength, you said it would be a back half weighted to kind of 2012. I was assuming the mean that for ethanol as well. Do you see the typical price improvement, margin improvement that we’ve seen in previous years?

Well, it’s hard for me to really define what I think typical is in the ethanol business. So I’m a little reluctant to answer you. And the second quarter I would say seems pretty typical of what we’ve seen recently. The big inverses in corn in the third quarter make that just a little bit dicey and corn and ethanol have had a tendency to kind of travel together in price. So it’s going to be very difficult to see. We have plant shutdown. It will move in one direction. And so the whole economics for the -- of the third quarter maybe a little bit different. So it’s really hard for me to tell you what exactly normal would be.

Right. Okay. And one last question, I will get back in the queue. Mike, can you just talk a little bit about this recent ethanol acquisition and kind of why you did it, what your thoughts are on ethanol itself and can we continue to see these things coming from you guys?

Yes. Yes. Broadly -- corporately, integrating growth along with improving what we do as part of our strategy as we look at the balance sheet and where we’re -- and where we want to allocate our funds. We’ve got our internal approach on doing that and Ethanol is one of the areas where we have interest. And at the same time, it’s got to fit our model around the type of plant, the technology, the location. And in fact, we’ve got some internal percentages that we would be willing to go to in each of our businesses of which I’m not going to disclose but that along with the opportunity. So, I’m not going to sit here and say you should or shouldn’t expect another ethanol plant. It’s going to be how -- what do we see with the opportunity relative to our own internal allocation approach. I would tell you that we would expect to see growth -- continued growth in our grain business -- our based grain business and plant nutrient business and our rail business along with that. And the Turfs, especially a lot of it has to do with the ability for some of the products we develop to really hit and hold. If that happens we would develop there too. And it also likely won’t be the same percent increase at the same time for all of the Groups, because the opportunity doesn’t show up that way.

Right. I don’t recall. I don’t have the press release in front of me, were there financial terms disclosed in the press release on this acquisition?

We did not disclose a great deal of financial terms.

Okay. So then we can assume that it wasn’t material or significant?

I did not say.

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

Thanks. I want to thank you all for joining us and Heather, I appreciate your initial comments there. We have work to try to improve this presentation. I also want to mention for those that are interested that there are 6 appendix slides in the presentation available on the andersoninc.com website at the Investors tab under the first quarter earnings call replay. Our next conference call is scheduled for Friday, August 3rd at 11 a.m. Eastern Time to review our second quarter 2012 results. We hope you are able to join us again at that time. Until then, have a great day. See you later.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a very good day.