The Andersons, Inc. (ANDE) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Andersons' 2017 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen only mode, and later we will conduct a question-and-answer-session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. John Kraus, Director Investor Relations. Sir, you may begin.

Thank you, Amanda, and good morning everyone. Thank you for joining us for the Andersons' fourth quarter earnings call. We have provided a slide presentation that will enhance today's discussion. If you're viewing this presentation via our webcast, the slides and commentary will be in sync. This webcast is being recorded, and it and the supporting slides will be made available on the Investors page of our website at andersonsinc.com shortly. Certain information discussed today constitutes forward-looking statements and actual results could differ materially from those presented in the forward-looking statements as a result of many factors, including general economic conditions, weather, competitive conditions, conditions in the Company's industries, both in the United States and internationally, and additional factors that are described in the Company's publicly filed documents, including its '34 Act filings and the prospectuses prepared in connection with the Company's offerings. Today's call includes financial information, which the Company's independent auditors have not completely reviewed. 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 accurate. This presentation and today’s prepared remarks contain non-GAAP financial measures. Reconciliations of the GAAP measures to non-GAAP measures may be found within the financial tables of our earnings release. Adjusted pre-tax income, EBITDA or earnings before interest, taxes, depreciation and amortization and adjusted EBITDA are our primary measures of period-over-period comparisons, and we believe they are meaningful measure for investors to compare our results from period-to-period. We have excluded the impairment charge we took related to our wholesale fertilizer business and our grain business as well as the one-time benefits of recent US federal income tax reform both from adjusted measures, from both adjusted measures, as we believe those charges and benefits are not representative of our ongoing core operations when calculating adjusted pre-tax income, adjusted net income, adjusted earnings per diluted share and adjusted EBITDA. On the call with me today are Pat Bowe, President and Chief Executive Officer; and John Granato, Chief Financial Officer. Pat, John and I will answer your questions after our prepared remarks. Now I'll turn the floor over to Pat for his opening comments.

Thank you John and good morning everyone. Thank you for joining our call this morning to view our fourth quarter 2017 results. I'll start by providing some viewpoints on each of our four business groups and the progress we're making on our strategic initiatives. After John Granato provides the business review, I'll conclude our prepared remarks with some comments about our current outlook for 2018. Our adjusted fourth quarter 2017 results were considerably better than our fourth quarter 2016 results on an adjusted basis. Grain results continued to improve but some of our other groups markets remained challenging and we incurred a number of unusual expenses during the period. We’re happy to see the Grain Group continue to make progress toward a more typical earnings range weaker margins drove the Ethanol Group's results more year over year. The Plant Nutrient Group continued to struggle with persistent oversupply in most fertilizer markets that continued to compress margins. The Rail Group's results were hampered by a lower lease rates and some higher expenses for interest and depreciation year over year. Our grain business results are improving and underlying grain fundamentals are stable with good grain ownership income opportunities. As we expected however large global 2017 corn and soybean harvest have kept world supply in periods into 2018 for corn, soybean and wheat quite large which have kept both prices and market volatility low. That low volatility limits trading opportunities and continued low prices keep the farmer less interested in selling. During the fourth quarter our risk management services business was bolstered by farmers enrolling a record number of bushels in our freedom pricing programs. Our grain affiliates results were significantly better year over year as Lansing Trade Group rebounded from a very difficult 2016. We also announced late yesterday that we agreed to sell three of our six Tennessee grain elevators to Tyson Farms. The pending sale caused a revaluation of the carrying values of those six facilities which led to a $10.9 million of asset impairment charges. The ethanol business delivered improved results for the third consecutive quarter despite lower year over year margins which again driven by higher industry production and stocks. Better international demand for DDGs and the absence of any meaningful vomitoxin issues or cost improve our DDG values. The Plant Nutrient business worked to another difficult quarter, wholesale nutrient results improved year over year on an adjusted basis and while volume was up 12% margin per ton was down 26%. Our expenses for the quarter were otherwise much lower due to productivity and efficiency improvements the full effect of these cost reductions was muted by lower margins. The railcar market continues to be oversupplied keeping pressure on lease rates, as we expected a quarter ago our utilization rate rose again sequentially and it exceeded the fourth quarter 2016 rate, but these rates were lower year over year. We continue to buy cars in the secondary market purchasing more than 1200 cars in the fourth quarter and almost 2800 cars during all of 2017. We also scrapped mostly older underutilized cars and sold some others outright, but income from these activities was lower than in 2016. Repair revenue was down for a second consecutive quarter and margins tight. I'd like to update you on the progress we made on our ongoing strategic initiatives during the quarter. We named two new business presidents, kept advancing our productivity and cost savings efforts, made good progress on our systems refresh, took more steps towards achieving a zero harm safety culture and sold one of the two remaining retail store properties. In December we announced two changes to the senior management team. Jeff Blair succeeded Bill Wolf as president of the Plant Nutrient Group in December. In Rail, Joe McNeely has succeeded Rush Shah as president. Jeff and Joe each bring a wealth of talent and industry knowledge to their new roles. I want to again thank Bill who has retired for his more than 20 years of service to the Andersons and also want to thank Rash who will retire in July for his 40 plus years of service to the Company and more than two decades of leadership of the Rail Group. We are continuing our efforts to create a productivity culture. We're still making good progress on our second $10 million run rate cost savings goal. We're confident that we'll reach our overall goal of $20 million by the end of 2018. Our new company wide indirect procurement system implementation has gone well so far. The project team have all approached 90 day success metrics as standardized the Company indirect purchasing processes and have already greatly improved supplier information and data quality and visibility. We expect to begin to reap benefits of this system in real cost savings once we have amassed a few more months of data. Our broader IT system refresh also continues to go well as we planned we went live with the first wave of our Plant Nutrient locations in early January with relatively few issues. We expect the next wave to go live in March, and that substantially all of the wholesale fertilizer locations will be on the same new platform by yearend. We also continued to vigorously promote our zero harm safety culture. Those efforts are paying dividends and our recordable injury rate and lost time metrics continue to improve. We also closed on the sale of the third of our four retail store properties during the quarter, netting the gain of about $3 million. And we're working to sell the last store property in 2018. I'll speak later in the call about our early thoughts about 2018. John Granato will now walk you through more detailed review of our fourth quarter financial results.

Thanks, Pat, and good morning everyone. In the fourth quarter of 2017, the Company reported net income attributable to the Andersons of $68.4 million or income of $2.42 per diluted share and adjusted net income of $17.6 million or $0.62 per diluted share on revenue of $1 billion. The adjusted results exclude three items. $74.2 million or $2.62 of benefits from the recent U.S. federal income tax reform legislation, primarily related to deferred income taxes. A pre-tax $17.1 million goodwill impairment in the Plant Nutrient Group and $10.9 million of pre-tax impairment charges associated with the Grain Group's Tennessee facilities. These last two adjustments together equate to $0.82 per diluted share. Earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA for the fourth quarter of 2017 were $25 million and $53 million respectively. These amounts compared to fourth quarter 2016 EBITDA of $40.7 million represent a 30% year over year increase. These results were considerably better than those of the fourth quarter of 2016 when our $1.1 billion of revenues generated net income of $10.1 million or $0.36 per diluted share. For the full year 2017 revenue was $3.7 billion about 6% lower than the $3.9 billion in revenue last year and was driven primarily by the shipment of fewer bushels in 2017 than in 2016 and the closure of our retail business. Net income attributable to the Andersons was $41.2 million in 2017 or $1.46 per diluted share. Adjusted net income attributable to the Andersons was $32.3 million or $1.15 per diluted share this compares to recorded net income of $11.6 million incurred in the same period of the prior year or $0.41 per diluted share. Full-year EBITDA and adjusted EBITDA were $87.4 million and $157.4 million. The later number was a 27% increase over full-year 2016 EBITDA of 123.9 million. Our long-term debt is slightly higher than at this time last year but our debt to equity ratio is basically unchanged at 0.51 to 1. Our target ratio is 0.80 to 1 so we have debt capacity for growth. We next present bridge graphs that compare 2016 recorded pre-tax income to 2017 adjusted pre-tax income year-over-year for the fourth quarter and for the full-year. In the fourth quarter Grain Group's fifth consecutive year-over-year improvement was driven by continued strong grain storage capacity utilization and much better results from Lansing Trade Group. The Ethanol Group's results were down primarily due to softer margins, but did benefit from better DDG values and strong E85 sales. Plant Nutrients comparative fourth quarter results should take into account the $5 million of fourth quarter 2016 expense we incurred to consolidate the group's cob operations. The Group's 2017 results were negatively impacted by lower margins per ton. As a result of our annual review in the fourth quarter of carrying value of good will Plant Nutrient recorded a charge for the remaining $17.1 million of goodwill related to its wholesale business. With this attraction total company goodwill was $6 million at the end of 2017. Rail results were off in each of its key operating areas but mostly from lower base leasing and car sale income. Base leasing income was down due to lower average lease rates and higher depreciation and interest expense on a larger fleet includes income from car sales was down primarily due to having sold fewer cars out write from its portfolio. Retails improvement was driven by the gain on the sale of our former store property and the fact that the group incurred a $6.5 million asset impairment charge in the fourth quarter of 2016 after announcing that you would close the business. We expect this over the last remaining property later this year. Unallocated costs were lower by $2.5 million primarily due to lower professional and contract service expenses. For the year ending December 31, 2017, grain results after adjusted for the $10.9 million in NSE related impairment charges, improved by more than $39 million from 2016, again primarily due to strong income from grain ownership, income from affiliates also improve dramatically. Each of the other, three core businesses were down year-to-date compared to the same period in 2017. The Ethanol Group's results were down by about 25%, again due to lower margins. In total, the Plant Nutrient Group recorded $59.1 million in impairment charges related to its wholesale fertilizer business. 2017 results include a $4.7 million gain on the sale of the southern region farming centers. And 2016 results included a $5 million charge associated with the consolidation of the cob business. Overall 2017 full year results were almost $10 million lower than the comparable 2016 results after considering those unusual items. Our lawn business results were down from 2016 that division still return pre-tax income of 7.1 million. Considering the adjustment I just noted full year farm center and cob results were negligible. Rail results we are about 25% lower than in 2016 primarily due to lower utilization and declining lease rate and lower sales volume and margins in the repair business in the second half of the year. The sale of three formal retails to our property help to offset about 75% of the cost we incurred this year to close the business. Unallocated cost were lowered by $3.6 million again primarily due to lower professional and contract services expenses. Next let's talk about current popular subject income taxes. As we're all aware Congress enacted a tax reform law in December, the primarily impact of that legislation for corporation such as ours was to reduce the federal income tax rate from 35% to 21%. As a result, we were able to record a $74.2 million income tax benefit in the fourth quarter, or $2.62 per diluted share. A revaluation of our net differed income tax liability resulted in a $75.6 million benefit. Other changes in the law resulted in an additional $1.4 million onetime mandatory tax on previously differed earnings of certain of our foreign subsidiaries, only either wholly or partially by one of our U.S. subsidiaries. We also expect to receive benefits from the new law beginning in 2018 where we are still studying other ramifications of the new law, we believe that our all in effective tax rate for 2018 will be in the range of 23% to 25%. We also expect to be able to take ample advantage of the ability to immediately deduct much of our capital spending for the next few years. Now we will move on to review a beach of our core business units. Our Grain Group continued to improve year-over-year in the fourth quarter. The group recorded pre-tax income of $8.3 million and adjusted pre-tax income of $19.2 million before considering the $10.9 million of asset income and expenses related to our Tennessee assets. This represents a nearly 50% increase over the pre-tax income of $12.9 million in the same period of 2016. Stronger income from grain ownership continued to drive the group's performance. Base grain earned adjusted pre-tax income of $15.7 million in the fourth quarter compared to pre-tax income of $15.9 million for the fourth quarter of 2016. There was again a little market volatility during the quarter and low prices and wider carries incentive to owners of grain for whole rather than sale. Lansing Trade Groups are much better in the current quarter than it did in the fourth quarter of 2016 driving $3.5 million of pre-tax income from our grain affiliates, a $6.5 million improvement over the pre-tax loss of $3 million in the same period of 2016. Grain Group EBITDA and adjusted EBITDA for the quarter were $14.3 million and $25.2 million respectively. The later amount was 40% higher than fourth quarter 2016 EBITDA of 18 million. As we anticipated during our last call the Ethanol Group's performance now well short of its fourth quarter 2016 results primarily due to lower average margins. Group earned fourth quarter pre-tax income attributable to the Company of $6.4 million which was $5.3 million lower than the 11.7 million in the pre-tax income attributable to the Company for the same period last year. Margins continue to be stressed by higher ethanol production in inventory, in spite a strong export. On a positive note EVG values incurred to well above year ago levels towards the end of the quarter due to strengthening export demands in the end of the group's Eastern Corn Belt vomitoxin issues. The Plant Nutrient Group recorded a pre-tax loss of $18 million and an adjusted pre-tax loss of $900,000 in the fourth quarter, compared to a pre-tax loss of 3.8 million in 2016's fourth quarter. The 2017 reported loss included to $17.1 million charge for goodwill impairment that I mentioned earlier. Continued margin compression due to Nutrient oversupply drove wholesale fertilizer performance lower in spite a better volume. The farm center and lawn businesses were both profitable but less so then in the fourth quarter of 2016. The cob business recorded a small loss. Base Nutrient tons were up 10% year-over-year but margins per ton were down by 32%. Value added volume was up by 18% but margins were down by 24% per ton. The full year base nutrient tons were up slightly but margin per ton was down by 16%, value added volume was down slightly but margins were down by 19% per ton. Margin in both product groups were negatively impacted by a persistent oversupply of product. Group EBITDA and adjusted EBITDA for the quarter were negative 10.2 million and 6.9 million respectively, compared to 2016 EBITDA of 4.5 million. We continue to believe we will need a return of supply demand equilibrium and an increase in foreign income before this business can begin to improve appreciably. The Rail Group generated 6.7 million of pre-tax income in the fourth quarter compared to 9.7 million last year. Our utilization rate average 86.2% for the quarter which was up slightly compared to 85.8% last quarter, the 1.4% above the 84.8% in the fourth quarter of 2016. Average lease rates were down 12% year-over-year. Those rail lease rates and higher expenses produced base lease in pre-tax income of 1.9 million which was down by 1 million from last year's results. The group recorded income from car sales of 3.3 million down from 4.7 million of pre-tax income in the fourth quarter of 2016 and $2.7 million earned last quarter. The group sold fewer cars outright in the fourth quarter of 2017 than in the same 2016 period. From the fleet management perspective 2017 was a very active and productive year. The group spent a $107.5 million by almost 2,800 cars, the highest such annual figures since 2004 and 2005 respectively and scraped about 1,800 cars or about a 100 more than its previous high set in 2010. More importantly, the group grew the fleet slightly and increased its average remaining life in accordance with its fleet portfolio management objective. Group's retail business continued to face difficult conditions. Sales were down about 4%, and margins were squeezed year-over-year. The group's EBITDA for the quarter was $14.3 million or about 8% lower than the fourth quarter 2016 EBITDA of $15.6 million. I want to remind our listeners that the Rail Group will face a couple of significant headwinds in 2018, the first is that the group expects to incur additional portion of the large amount of expense to recertified some tank cars in 2018. Rail expects its 2018 tank car recertification expense to be approximately $3 million higher than in 2017. There're currently no other years in the 10 year cycle in which even half as many tank cars will need to be recertified. The second comes and result of changes in the accounting rules governing revenue recognition. The new standard which became effective on January 1st of this year will change the accounting for certain transactions the group has engaged in over time. These transactions will not qualify for sale treatment in 2018. The group has recognized pre-tax income from car sales of an average of $6 million per year on these transactions over the last five years, or almost half of our sales -- car sales pre-tax income. Also as the result of the transition rule only the balance sheet was impacted on January 1, 2018. Beginning in 2018 rather than recording lease expense for payments made by financial institutions the group will record interest expense and reductions in the financing liability as well as depreciation on rail cars impacted by the transition rule. It is also important to remember that this accounting change will not impact the value of the fleet or its capacity to earn lease revenue over time, nor the total earnings generated from these arrangements and has no implications on cash flow, for these transactions, another impact of the new revenue recognition standard result in changes in how we record the results of some of our transactions with customers. The only material impact of the changes will occur on certain sales contracts entering into by the Grain Group, realized gains and losses from origination agreements are currently recorded in gross revenues upon physical settlement of the contract. This treatment is based on our conclusion that we are the principle in the contract on the basis of risk and rewards, however the new revenue recognition standard requires us to evaluate whether we are principle or agent on the basis of control, rather than risk and rewards. We have determined that the Grain Group is the agent and certain origination arrangements, therefore realized gains or losses will be presented net basis beginning in January 2018 however as this change relate only to presentation of revenues and cost of sales within our income statement there will be no impact on gross profit. Well the impact of this change is dependent on commodity price levels we expect consolidated revenues and cost of sales to each decrease by approximately 10% to 20% for the Company and 20% to 30% for the grand group. I'll now turn the call back over to Pat for a few comments on our outlook for 2018.

Thanks John. As we look further into 2018 we expect our overall company results to improve significantly over those of 2017. More specifically we will continue to focus on the strategic objectives we discussed at our Investor Day in December in New York City. Focusing on both growth and greater productivity and efficiency, the Grain Group has now achieved year-over-year improvements in five consecutive quarters on an adjusted basis and while lower grain prices and lower volatility continue to influence farmers selling behavior and trading opportunities we like our ownership positions and anticipate that we will continue to earn solid storage income. We also expect our affiliates and particularly Lansing Trade Group to be set up for a much improved 2018. The group estimates are grower to plant 87 to 90 million acres of corn in 2018. Perhaps slightly below the 90 million acres planted in 2017. Serving plant in acres are expected to be 90 million to 92 million compared to 90 million acres planted last year. Total REIT acres that we're planted have been reported to be approximately 46 million acres into 2017 compared to 50 million acres in 2016, while there are concerns out west with dryness in the hard red wheat belt so our backyard soft red wheat conditions are favorable. Normal weather conditions during corn and soy planting and growing seasons should create a solid storage and merchandizing opportunity in the coming new crop year. The group will continue to work on originating more postures and accreting the income earned from its risk management services and specialty food business. The Ethanol Group continues to work through improved production efficiently. All four of our plants are running well. In the fourth quarter and through January the industry continued to out produce demand despite high export shipments historically high production levels and typically lower winter driving miles have express margins in the first quarter. Specifically, we expect our first quarter results to be lower than last year's results and they are breakeven. Our longer term outlook for 2018 is positive. Our Plant Nutrient Group continues to be impacted by an unfavorable combination of oversupply and lower margins. The fertilizer industry needs to move toward a supply and demand balance to stabilize prices which could lead to more normal buying patterns. We continue to believe in the long-term strategic value of the overall Plant Nutrient business especially in the value-added and long products we manufactured. Going forward we keep looking for growth opportunities in the value-added Nutrient sector drive sales by standardizing our go-to-market approach and develop new products to help farmers sustainably maximize yield and meet environmental challenges. Rail continued to be impacted by oversupplied market. While there some signs that slow recovery will continue the improvement of our utilization rates continue to look like it will very gradual. We think our average lease rates will remain under pressure for at least the first half of the year. As John noted earlier the combination of changes in accounting rules and the 2018 spike in tank car recertification expenses will make this year a challenging one for rail. We continue to estimate that our 2018 results will be 15% to 20% lower than in 2017 due to those two changes. That will not keep the group from actively pursuing its primary objectives to profitably increase the size and lower the age of its railcar fleet and to continue to expand its railcar repair network. The group will also evaluate opportunities in adjacent businesses as they arise. We'll continue to work on our $20 million productivity and efficiency initiatives. We feel confident in achieving that goal by yearend as planned. In closing, our 2017 company results were better than those of 2016 and became more encouraging as the year progressed in spite of the fact that we had to recognize some unusual expenses in the Plant Nutrient and Grain Groups. I'm optimistic that we will see continued and significant improvement in 2018, helped in part by the new income tax regime. While our grain business has experienced a good recovery and continues to get stronger we remain guarded in the near term about the prospects for each of the other three groups. I'll turn it back over to John where we can entertain your questions.

[Operator Instructions] And our first question comes from the line of Heather Jones of Vertical Group. Your line is open.

So I think I missed just a quick clarification. Did you say that you think Q1 '18 results will be below Q1 '17 for grain or was that ethanol?

That was for ethanol, good clarification. Those are my last comments about ethanol. For the quarter, we think we'll be below where they were a year ago, close to breakeven.

And then why is, because I mean did you all have good hedges coming into Q1 of…

Good point, we had some coming in, we've had a nice appreciation in DDGs of late which is really helping us that's more on a go forward as you go into the second quarter, that's going to help us a lot, as we mentioned all the vomitoxin issues we had a year ago are behind us, we've seen good fundamentals in the market as we’re looking out, exports look solid, DDGs I said as a percent of local corn volumes have improved. We still have a pretty balanced F&D but we're pretty optimistic about the latter parts of the year.

Okay, and I just wanted to revisit something you've talked about at your Analyst Day, the 300 million plus goal for EBITDA in 2020 and that's a very ambitious good goal and I was just wondering like if you could help us think about the cadence. Because we are obviously in 2018 so it's not that far from now and that would be very nice course between now and then. So I was just wondering if you could help us to think about, how that -- how you are stacking that up in your mind as the cadence?

I think that’s a good qualification, as the last couple of years, we have done a lot of call clean up. As you know we closed the retail stores, we sold some assets in our portfolio that weren’t performing as where we liked. We just announced last night the sale of some assets in Tennessee. So lot of about 16 areas the business needed improvement, of course to reach likely goal like that we have to have growth and growth has become in bigger volumes of our business and we need to do some M&A and build out to get there. Obviously that we would be probably more back end loaded. Some of it will depend on little bit on what the vagaries can be and the agriculture markets that time as you know we have faced a lot of headwinds in the last couple of years. We feel confident in the four businesses we have, each of them can have significant investment and we have dry powder on our balance sheet. So it will be a little bit more backend loaded but we are optimistic about growth as we look ahead.

And then on Lansing that was great to see for the quarter. Can you give us a better sense of like what drove that? And do they reach an inflection point or I mean -- how should we be thinking about Lansing?

I think we have seen a nice improvement at Lansing. They had a really poor previous year, so year-over-year it's quite of improvement. It will be interesting to watch the wheat story that’s starting to happen. They have been very active hard wheat traders historically, so that can play well to them. As you know they have had a frac sand business as part of their portfolio that has really turned around nicely for them. And probably more importantly a year ago, they just had some losers and some deals that didn’t worked out quite well for them that they didn’t have this year. And John you want to add any color on it.

You covered most of it, yes.

Our next question is from the line of Farha Aslam of Stephens. Your line is open.

Question on your Tennessee elevators, I thought that was an area you were interested in growing in because there was expanding corn production in Tennessee. So I was really surprised to see that you decided to divest it and write it down?

Thanks for the clarification there. So, we acquired these elevators in 2010 that was kind of the peak of the ag cycle, we felt good like you said about growing acres. What happened in Tennessee especially going to corn and beans away from cotton and other crops, one of the things we're probably looking back now there was underestimated at the time was the impact of cheap barge freight on the river and the fight for those bushels that go to the river to get pull for export. So in those elevators, so six elevators we struggled to meet our expectation level of performance. And then most important thing here is recently Tyson just pronounced the building of 300 million chicken production complex in Humboldt and that will require significant amount of corn to produce for seed. And we felt that this was the right time and situation to sell those assets to Tyson, so correctly we reevaluated our position in Tennessee in fact this was a proper decision to make.

And then when you look at your Rail Group, you guys highlighted that all that changes in accounting for the rail car sales. Was that bumped up the level of lease income that you'll recognize, you've be kind of post the adjustments in the current year?

It won't have a material impact on the lease income we recognize.

Farha, this is John. You may see -- you will see a revenue bump, but not a gross profit bump.

So, you used to recognize that as income, so now that income stream just goes away with the new accounting rules or does it kind of factor in into different?

We still make the spread that we did, but you don't get -- the gains essentially moves from the front end to the back end. So that when you -- you don't really realize the full gain until you actually divest the car fully, and so that's essentially what happens, it's the shifting in timing.

And so the timing is now pushed back all the way, so would you get rid of the car which might be 30 years, because I don’t know how long you hold your cars?

Farah, it's a little of both, it's John again. It's a little of both, the trade off if you will between the lease expense or the actually cost of sales that we record for payments to the bank are being replaced by interest and depreciation, which more often than not are lower than the payment to the bank. So the payment to the bank is going to be considered an interest payment and a principle payment, the interest goes to the P&L, the other to the balance sheet. And so we're going to recognize some of that spread over time as well.

So some of it is recognized in income book?

Yes.

And then my final question is on Plant Nutrients, your outlook for next year remains subdued. Could you give us sort of a longer term picture of how you expect that business to progress and what we should expect from that business?

Yes, I am going to start and John can chime in. I think there's some pros and cons as we look forward, Farah. So on the pro side we've seen some stability in some of the fertilizer ingredients with some of the miners and producers kind of creating maybe a -- I hate to call but try to stabilize prices in the market, so it's not done as freefalling as it was maybe in the last couple of years. So, it feels like there's some bottoming and some uptick occurring in some key ingredients, that's a stability we talked about. Farmers have been engaging with us. We've had good discussions with farmers and getting product on the books, as we saw it last year, our volume is pretty good, the concern side is really on margins, on the wholesale side, with low corn prices continue, just so happens on February insurance number -- the number for corn price was almost exactly the same as last year's price. So, we haven't seen any appreciation on corn price and acreage thus could slide a little bit, we mentioned it could be lower than the 99 acres planted last year, lower corn acres would hurt that on the numbers side, there's also some credit risk out there in the farmer community, so those are some of the negative things. Having said that we feel good especially about our specialty business and the productivity, they give farmers, and some of the solutions they provide, we're out aggressively marketing those products that we produce ourselves, and so in the long term we're optimistic about this business we like the Plant Nutrient business, we see growth potential in it, we did a robust farm economy to kind of help that out though.

This only thing I would add as we did see a pick-up albeit not on the margin side, but on the volume side this year and that's a good sign because we think as famer start to adapt the value add for all the reasons, we've talked about as you can see environmental impact, we believe and hope that will continue to stick as margins improve and as we've talked about we do get much better margin on the specialty side in the base in the NPK space.

Can we expect the value added side to continue to outpace the growth in the base as you execute your marketing programs and does that put right growth in the business?

I think that is a good assumption. That's our goal and that's our focus and while we're really working with our sales people on farmer engagement.

Our next question comes from the line of Eric Larson of Buckingham Research Group.

I'd like to go back actually to the grain business a little bit. Pat and John obviously in the fourth quarter you could get some pretty decent basis of depreciation you had some good ownership that was a nice positive in the quarter. We're seeing a little bit of life in the grain markets right now, so can you just talk about are you starting to see buyers starting to build little more brook on year end is it becoming a better merchandizing environment for you right now I think we're seeing it from other places I'm assuming that it is. Could you talk a little bit about that Pat?

I think you are really going to go interrupt by commodities so let's talk first in weather in Argentina which has been the story of late we've had this growing dryness in the pumpers growing region in Argentina and we're seeing soybean crop to drop as much as 5 million tons from 55 million metric tons down to 50. There are even some analysts and it could be in the 40s and you are seeing soybean meal markets really take off here in the last couple of weeks. Now U.S. has plenty of stocks 530 million that have been carryout to take care of any demand for that, but at least it's getting some action in the marketplace as you said little bit of volatility coming back in. At the same time which is getting some actions in the bean market corns has been quitter with our big U.S. stocks and kind of a more quite corns story, but the wheat market is starting to get little more interesting with this dryness in the western hard red wheat belt and that could be creating an interesting protein market trading opportunity this year. So it's something we're watching very closely. We like our stretch positions we have in each of our products and I think having the little bit of volatility coming back in the market would be really good for the industry.

Yes, and then back on to so we thank you and I think that's good overview. When you look at the wheat market I think you are still kind of running just a little bit over that 50% carry I think we still have two takes in the market maybe as down to one now. Are you…

We do that two ticks in Chicago and softer wheat market one tick in hard. We think we will continue to that but that could be a little bit under the bubble depending what happens here with carrying charges later in the year but we will likely carry one tick going forward.

And then the final question it's more strategic Pat. When you look -- you should mention this goes back little bit to Heather's question you know the 300 million EBITDA goal, and I think you answered it very well that you need to get some growth you need to redeploy some capital and do some M&A etc. So when you look at the market today we're sort of at the bottom of the cycle. There's places I think in the grain market for you to grow more of the specialty grains, which I think you do very well at, and we've thought you top off that in the past with a very depressed plant nutrient cycle. Is there a way to maybe you know at really attractive prices today consolidate some more of the fertilizer? And on the specialty end, where would you look to put what's the most attractive use of that capital right now in which areas that you would look at?

Right, as I mentioned we haven't had a high level we see investment opportunities in all four businesses, in ethanol in plant nutrient in grain and rail. As we talked about it, rail we've been making our fleet younger and more diversified and we'll continue to grow our rail fleet. In PN specifically, we've said at the investor day and more recently too we like the specialties space, we like that over our manufacturer part of that. We will look at wholesale nutrient you know facilities as they fit with us but we really like to have specialty space and are constantly looking for opportunities to grow their both green fielding at our own sites are bolt-ons as well as new products or even you're looking at M&A in that space.

And then the final question for John. John the tax bill obviously lower tax rates, how much actual --how much cash does the lower tax rate give to you folks to deploy elsewhere in your business. i.e., what is the impact in your cash tax rate?

You know Eric we're still evaluating, we did talk about the effective rates being between 23 and 25% but we haven't completed our full analysis as we look you know we got to project that across our plan over the next several years and we're still in the process of evaluating that and we'll be happy to give you an idea on the next call.

[Operator Instructions] Our next question comes from the line of Ken Bellow of Montreal. Your line is open.

Couple of questions, one is, with the new management in Plant Nutrient. How will that business be managed differently?

I think that's a very good point, we brought in someone who really a sales background and we think we have much more focus on the value added side and how we train our sales force and push it more aggressively. As we moved with our Nutra-Flo acquisition a couple of years ago and our own build out of the EZ-GRO and other products, our lawn business doing very well. We need to really retool our sales effort with precision ag tools or better online working with farmers so it's kind of making our sales efforts more sophisticated Ken, and I think that's you know what Jeff Blair is bringing and he's out in the field right now working with our teams and that's the key thing.

And I think we're going to work when we talked a little about this investor day on sales and operations planning particularly in that specialty space and I think we can drive some cost out of that process.

We're getting our SAP implementation done in PN this year, that'll help us a lot with data, we're going to be more data driven sales and planning as John mentioned.

Does that change your ability to generate to that 300 million as it’s a vision changes at all? Does that help? Is there any material effect on it financially if I think about it over the next couple of years? How I should know that?

I mean when you look back and when you have very nice periods of growth like we did in the Ag super cycle that’s a main economic driver and that’s a key part of it. But we can do a better job managing our sales and operating planning and maximizing the production rates at our assets but we can do a better job and despite what the market conditions are so we are focused on that right now, that’s one of our productivity initiatives we are underway now. But really pushing as a market is going to need more specialty ingredients going forward and environmentally friendly ingredients we think it’s a good position for us to really blow that specialty business more.

And my next question just on the ethanol side, how do you think about the production levels? Because over the last year I think what most people including at least us by surprised, was the debottlenecking and the production creep. How we ascertain and how much there is the left of that to go? And how you think about that in terms of production levels for 2018 and '19?

The good news is from a relatively balanced domestic market, the good side is exports or traders are predicting 1.7 to 1.8 billion gallons for 2018, so another uptick. And exports can really absorb a lot of that creep, the term you call. I think a lot of the major investments have been made, a lot of companies as well as debottlenecking ourselves included. I think there always going to be an innovation a lot of our innovation efforts are focused on the core product side where we're are working on DDGs, portal as well as just how we want to play it more efficiently. So I think there will be some creep but the good news is experts have been really solid.

And then just follow up on the exports. Could you frame how much you think that you will be how much you think Japan will be how much you think China will be and how much even Ontario could be? How this all developing in? And what is that kind of lead us in '18 and more importantly probably '19?

I don’t have a specific number country by country, but actually we finish the 104 or 5 and specifically without china right. So Brazil was our biggest expert destination, as far as 45 we think it's still upside potential there. Canada has been very solid. India has been increasing as well as the Philippines South Korea other Asian countries. But china is the trump part that’s really adding this year also from some improvement in even in Mexico. So it's pretty well rounded from a demand standpoint. And our corn price and absolute ethanol price still upside, so it was still the no location trace when it comes to ethanol. So we could see broad destination in increase in other products.

Could you earn your cost of capital in these businesses? And I'll leave with that.

Sure, sure.

Thank you and at this time, I'm showing no further questions. I would like to turn the conference back over to John Kraus for closing remarks.

Thanks, Amanda, we want to thank you all for joining us this morning. I also want to mention again that this presentation and slides with additional supporting information will be made available later today on the Investors page of our website at andersonsinc.com. Our next earnings conference call is scheduled for Tuesday, May 8, 2018 at 11 AM Eastern time, when we'll review our first quarter 2018 results. We hope you are able to join us again at that time and until then be well.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, you may now disconnect. Every have a great day.