Ladies and gentlemen, thank you for standing by, and welcome to The Andersons 2019 Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Director of Investor Relations, John Kraus.

Thanks, Andrew. Good morning, everyone, and thank you for joining us for the Andersons third quarter 2019 earnings call. We’ve 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 the recording 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 1934 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. The company believes adjusted pretax income, adjusted pretax income attributable to The Andersons, EBITDA and adjusted EBITDA provide additional information to investors and others about its operations, allowing an evaluation of underlying operating performance and better period-to-period comparability. Adjusted pretax income, EBITDA and adjusted EBITDA do not and should not be considered as alternatives to net income or income before income taxes as determined by generally accepted accounting principles. On the call with me today are Pat Bowe, President and Chief Executive Officer; and Brian Valentine, Senior Vice President and Chief Financial Officer. After our prepared remarks, Pat, Brian and I will be happy to take your questions. 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 review our third quarter 2019 results. I’ll start by providing some thoughts on each of our four business groups. After Brian presents a business review, I’ll conclude our prepared remarks with some comments about our outlook for the remainder of the year and give you a brief look into what we’re beginning to see for 2020. Our adjusted third quarter results were roughly $3 million lower than our adjusted third quarter 2018 results. But given the challenging ag markets and weather conditions that three of our business groups have faced, we’re encouraged by the outcome. I’m very proud of our team and what they have accomplished over the past year. Our ability to manage through those difficult conditions reinforced the strategy to acquire Lansing Trade Group as many of the business lines we acquired helped offset a lack of opportunity for our Eastern corn belt assets caused by late and reduced planting. The Ethanol Group continued to remain profitable during the third quarter despite a difficult margin environment when many in the industry incurred significant losses and reduced production or shut down entirely. Results for Plant Nutrient Group were somewhat improved, and the Rail Group’s lower results were primarily due to less car sales during the period. The Trade Group was profitable on an adjusted basis, improving significantly on the large loss it incurred in the third quarter of 2018. The poor planting weather in our core Eastern footprint and the resulting limited farmer engagement during the quarter hurt the performance of those assets, even as our Western assets performed very well. Market conditions in the spring caused an acceleration of income recognition into the second quarter, which contributed to the lower third quarter…

Thanks, Pat, and good morning, everyone. We’re now on Slide number 5. In the third quarter of 2019, the company reported a net loss attributable to The Andersons of $4.2 million or a loss of $0.13 per diluted share and an adjusted net loss of $2.3 million or $0.07 per diluted share on revenues of $2 billion. In the third quarter of 2019, we reported a net loss of $2.1 million or $0.07 per diluted share and adjusted income of $500,000 or $0.02 per diluted share on revenues of $686 million. It’s important to note that those 2018 results included pretax income of $5.1 million or $0.14 per diluted share from several Maumee Ventures investments. The company recorded an income tax benefit for the third quarter of 2019 at an effective tax rate of 55.1%, which was up slightly from the third quarter 2018 rate when the company recorded a tax benefit at an effective tax rate of 48.5%. Both rates were impacted by several discrete tax benefits. In the current quarter, the company recorded $3.6 million of federal research and development tax credits primarily associated with the construction of our ELEMENT biorefinery. Our long-term debt-to-equity ratio decreased slightly from the prior quarter end to 0.96:1, and we plan to continue to reduce that measure in the coming quarters. Our target ratio is 0.8:1. We expect a 25 basis point reduction in the borrowing spread on our main credit facility beginning in December as a result of decreasing leverage. This should result in a reduction of go-forward interest expense on the order of $2 million per year. On a related note, our short-term borrowings declined by almost $300 million during the quarter, which is consistent with the typical seasonality in our business. Total company adjusted EBITDA increased from $27.5 million…

Thanks, Brian. We entered November with some continuing market uncertainties, including global trade and the results of a late harvest. On the positive side of the ledger, the integration and operation of our more diversified Trade Group continues to pay great dividends. In addition, recent improvements in ethanol margins that enabled us to hedge forward into the fourth and first quarters have provided some optimism for that business as well. We’ve managed through what was among the worst Eastern planting seasons in many years. Late and reduced planting in several of our core Eastern draw areas have resulted in smaller harvest. This will negatively impact the earnings of those Eastern grain assets well into 2020. The unresolved trade war with China is having a lingering detrimental effect on both Trade and Ethanol groups. Primary nutrient prices continue to be soft, but we think a likely increase in corn plantings in 2020 will help the Plant Nutrient Group improve. And for the Rail Group, while North American railcar loadings remain lower year-over-year, we expect utilization rates to stay above 90% and cars under lease to continue to increase. We’re more optimistic about our company outlook than what is reflected by the market in our recent stock price. We continue to work hard to improve what we can control. Our current initiatives include the following five. One, optimize the Trade Group performance. In its first year since the acquisition, we’re capturing synergies ahead of expectations, melding our cultures and maximizing the best of both organizations. We’ve aligned around a defined profit center-driven business model to provide line of sight focus on customers’ trading opportunities and cash flow. Two, identify and implement additional Trade Group expense synergies and other expense reductions around the company. We expect to increase Lansing run rate savings from…

[Operator Instructions] Our first question comes from the line of Ken Zaslow with Bank of Montreal.

Hey, good morning guys.

Good morning, ken.

Just two questions. One is when you’re talking about the asset portfolio strategy, can you talk about the criteria that you’re looking to? What type of assets are still in the potential to be sold? Or how do you look at that? That’s my first question. And then I have another question. Patrick E

Sure, Ken. I think at the very start of this, three, four years ago, we had some assets that were not – positive cash are not attractive, and those were quite obvious. And we took action of those, either selling, in some case, closing, some facilities. We continue to look at that all the time. Most of those, the areas that have been – disappointed us have all been taken care of. So we don’t see that as a big shift in assets coming into next year. But for example, we announced the pending sale of our fertilizer business in Canada. That’s part of Thompsons. That still will be closing later, but that was an asset that was a solid business but probably better run by the local Canadian company, Sylvite, who’s acquired it than we were. And then we optimize that business from that action. So there may be – I’d say, it’d be smaller things, kind of like that.

Okay. So the second question is can you talk about the ethanol industry in a couple of terms? One is how much capacity do you think is permanently taken out because of financing and liquidity issues? And where do you think we’re going to end up with the EPA on the 15 billion gallons?

Yes. Those are two really good questions. I think there’s been quite a bit of a reduction in production, either slowing or shutting, that happened, that got SND back in the balance in the last two quarters. We slowed production at our plants at times when it wouldn’t make sense as much as 20%, 25% during the period when we had high basis corn levels in some of our Eastern plants. We took all our shutdowns during the period, so all of our plants, other than the new ELEMENT plant, have had their fall shutdowns completed. And we installed new technologies as far as our processing at the plants that can help us perform more efficiently. We’re up and ready to run full, and those plants are in good shape. But the status of other plants in the industry, whether they’ll come back or not, I couldn’t venture to guess that. High basis levels will be around a little bit for a while, but the spot margins have improved quite a bit in ethanol here for the fourth quarter and actually even into the first quarter of next year. So there’s a little bit brighter outlook than there’s been for a while.

And where do you think the EPA will end up? How do we kind of handicap that? Is it going to be somewhere between 14 billion and 15 billion? It will be on the higher end, like how do you think about that?

Yes. I think I would be more to the high side, and some of the small refinery exemptions as we get into 2020 may come at a more question. The biggest card to be played for next year will be China. Is there a trade deal? Does a trade deal include ethanol? And how much ethanol gallons could be exported? Because we’re at a pace of the 14 billion to 15 billion for this year. China has potential to buy up to 1 billion gallons, and maybe that’ll take time to move into it, but any movement of exports to China in 2020 will be a real strong shot in the arm for the industry

Great. I really appreciate. Thank you.

Thanks, Ken.

Our next question comes from the line of Ben Bienvenu with Stephens.

Hi, thanks. Good morning.

Good morning, Ben.

I want to ask about Lansing and the impact it had on the quarter, particularly with respect to the goals and opportunities between Eastern and Western corn belt. What move did Lansing make to help navigate that more challenging environment? And then your updated commentary on the synergy capture moving from $10 million to $15 million, where do those incremental synergies come from?

Thank you, Ben. So it’s been an interesting period in agriculture here the last couple of quarters. I think the acquisition of Lansing that has really helped us the most is really the point-to-point trading and being very nimble in domestic markets on truck freight and positioning grain and having those long-term relationships with key end users, whether it’s being crushers for our millers into Mexico, et cetera. So it’s done a really nice job positioning the basis and putting our grain positions in the right shape. It’s been a tougher time for what would have been traditional and the elevators in the East because we don’t have the big carry-on wheat that we were storing wheat in the year’s past and the crop size has been lower. The planting problems that incurred in Indiana, Ohio, Michigan, kind of the backyard of our assets, has caused farmers to hold little firmer to the stocks they have, waiting to see how harvest is going to position. With that arbitrage of basis and regional differentiation that’s happened that Bill Krueger and his whole team in Overland Park have done a great job positioning the grain markets and putting us in a better position. The assets in the West have done very well. We have – harvest in Louisiana was fantastic. Those assets and crop conditions in West in the general are pretty solid. So the Trade Group is stronger definitely with the acquisition of Lansing.

Okay, great.

The second question – yes, yes, the second – maybe Brian to answer the second part of your question.

When we think about the synergy capture, I would say it’s just – it’s a combination of things that we continue to uncover is continue to uncover is the collective teams as we really try to bring together the best of both in the organizations, whether it’s people, processes, systems. And so there’s places where we have some just natural efficiencies on the people side. But then there’s a variety of other areas when we think about some of our trading and trade clearing and insurance and just a variety of other areas as we continue to combine the collective group.

May I build on that, this is Pat. On the synergies on the top line, one thing that showed up right away as Lansing had a long-standing group that traded ethanol and DDGs, and combining those teams with our Ethanol team has really paid good benefit. So it’s opened up more markets that maybe we hadn’t reached previously, and just interaction between those traders and maximizing the assets we have has paid good dividends.

Great. Pat, you talked about this higher basis, particularly in the Eastern corn belt, lasting or lingering into perhaps early next year. I’d be curious to hear your thoughts on this ramp. Although it’s been moderate sequential ramp that we’ve seen back in ethanol production, to what extent do you think continued elevated basis helps to keep some of that production ramp at bay? And then any comments that you could provide in elaborating on what hedging you might have done for your Ethanol Group into 4Q would be helpful.

Sure. That’s – it’s a good point. It’s really critical in the market right now. So it’s hard to know the outlook of certain plants that are closed or have some production idle and their timing of start-up with delayed harvest timing. We actually did a really nice job. I mean we ran our plants right into shutdown. We almost run them out of corn or have very little inventories during that time and got our shutdowns done, ran a little lower pace in the quarter and did some really effective hedging and selling around that. Coming into the fourth quarter, at the start of October, we had about 40% hedged for the quarter and about 10% hedged into the first quarter of 2020. And we’ve worked a little more on that since that time, as margins have had a nice little pop here for fourth and into first quarter, usually, at a time when the market is quite a bit weaker. So that’s a pretty good sign. And like you mentioned, how can we keep this SND in balance and what will production rates do, how much we’ll ramp up, the impact of stocks, that remains to be seen. But we feel our ethanol plants are in good shape right now. We’re pretty much excited about getting into next year. We’re starting out in a little better position.

All right. Congratulations on the solid execution. I know it was a challenging environment.

Appreciate that. Thank you.

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

Yes, good morning everybody. Thanks for taking my question. I just want to dive in a little further, I think it was probably Ben that asked the question. But the – Pat, now that you’ve got 100% of Lansing’s earnings in that Western corn belt, that obviously complements what the legacy Anderson business is on the Eastern corn belt. If we were traditionally looking at how you were formed before now with the really difficult conditions and maybe probably quite a bit lower crop production for corn in the Eastern corn belt, we would probably have a different outlook on your total grain earnings for 2020 because you wouldn’t normally – you need another crop year, you need another harvest to really get the benefit of that Eastern corn belt. But with Lansing, maybe we need to readjust how we kind of think about the total mix and how that might look for 2020.

Eric. So pre-acquisition of Lansing, our traditional Eastern grain assets would be in tough shape because the basis levels are high. Farmer hasn’t sold that much. We did have an early book of stuff we bought from farmers quite a long time ago. But right now, they’re kind of holding tight there to see how their crops come in. There’s a very important WASDE report, I think, as you know, coming up Friday. We’ll kind of see what yields will do. Some in the West have been quite strong, in Nebraska, and Iowa have been really good. Yields around here are spotty. It kind of depends on when things were planted. We’ll likely have a little bit more moisture in corn and some drying income that will help some of our assets. But the key point you’re making is we’re a much broader, more diversified grain company with Lansing, and not only geographically but also the product mix and the customers and the focus on different byproducts. And they’ve been doing a great job positioning those businesses. And we feel good about that domestic flows and how we’re positioned. So it’s hard to compare. We don’t like to talk about legacy ANDE or legacy Lansing anymore. We’re one trade group going forward, and it’s really working well. We’re really pleased with the acquisition.

Okay. Yes. And so when you kind of look at the – again, kind of the near-term environment, fourth quarter is going to provide some – there are so many moving parts here that it’s really kind of difficult to try to put it all together. You’ve obviously got a – you’ve got a stronger basis. So maybe you’re getting some basis income in the fourth quarter and probably doesn’t offset all the negative basis implications for ethanol. But how do we look at the transition from the fourth quarter and first quarter into the final nine months of 2020?

Right. I think you’ve positioned well and others have commented on this as well, and with the delayed harvest, it’s kind of a staggered period. So the farm has quite a bit – grain stored on farm. They kind of want to see how the yields and how production comes, but it’ll be grain that’s going to come to market, right? And we’re already seeing that in some parts of the country. As I mentioned earlier, Louisiana had a phenomenal crop and had a really good run of procurement in Louisiana. Different conditions up here in the East, but we’re still confident about our trading opportunities. And we think that we have a very weak export market right now, and we have kind of a different position than we’ve had in years past. But that’s just – maybe create some more volatility going into WASDE and going into what potentially people are calling this Phase 1 of a China deal that could be signed as early as this month. So I think that’s a big thing that the market is anxious to see what will a trade deal be and what will the final crop production be. That’s the two big items on the demand side and the production side right now.

Okay. And just one final question, and I’ll pass it on. So obviously, farmers are trying to get their crops off the field right now, which is the priority number one, and we’re not really thinking about fall nutrient, let alone having probably either the weather or the soil conditions to do it. Does that – will you take more risk on inventory into the second quarter next year? Because obviously you’re going to have to have some makeup of volume to kind of compensate for not having fall nutrient. So how should we think about your nutrient numbers for next year, particularly second quarter?

Yes. It’s a really good question, Eric. So I think fourth quarter, as you mentioned, we have some pretty sloppy field conditions that might inhibit some application in the fourth quarter. If we had a really nice fall, beautiful weather, you probably get a little more put down here in the fourth quarter. Not so sure how that’s going to shake out. The weather is predicted to be colder and dry here for the rest of the month, so that’s a good thing for both harvest and some applications. I think going into next year, it’s really more of an outlook on corn planting. So we think we’ll see a nice increase in corn acres And I can’t comment on how we’ll position our fertilizer inventory, but we’ve been keeping fertilizer inventories very hand-to-mouth for the last couple of years during falling or weak markets. It feels like fertilizer markets have been soft. It probably will stabilize going into maybe an enhanced planting outlook for next year. And so we’re kind of encouraged, not runaway bullish, but we could see a better position for fertilizer next year.

Okay. Thanks. I’ll pass it on.

Thank you. And I’m showing no further questions at this time. I will now turn the call back over to Director of Investor Relations, John Kraus, for closing remarks.

Thanks, Andrew. 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 are available on the Investors page of our website at andersonsinc.com. Our next earnings conference call is scheduled for Thursday, February 13, 2020, at 11:00 AM Eastern Time when we will review our fourth quarter and full year 2019 results. We hope you can join us again at that time. Until then, be well.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect.