U.S. Markets open in 1 hr 20 mins

Edited Transcript of ANDE earnings conference call or presentation 7-Nov-17 4:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Andersons Inc Earnings Call

MAUMEE Nov 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Andersons Inc earnings conference call or presentation Tuesday, November 7, 2017 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John J. Granato

The Andersons, Inc. - CFO

* John Kraus

* Patrick E. Bowe

The Andersons, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Eric Jon Larson

The Buckingham Research Group Incorporated - Analyst

* Farha Aslam

Stephens Inc., Research Division - MD

* Heather Lynn Jones

The Vertical Trading Group, LLC, Research Division - Research Analyst

* Kenneth Bryan Zaslow

BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Andersons 2017 Third Quarter Earnings Conference Call. At this time, all participants are a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). I would now like to introduce to your host for today's conference Mr. John Kraus, Director of Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

John Kraus, [2]

--------------------------------------------------------------------------------

Thank you Christy, and good morning everyone and thank you for joining us for the Andersons Third quarter 2017 Earnings Call. We have provided a slide presentation that will enhance today's discussion. If you're viewing the 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 to non-GAAP measures may be found within the financial tables of our earnings release and in the appendix of the slide deck that accompanies this presentation.

Adjusted pretax income is our primary measure of period-over-period comparisons, and we believe that, it is a meaningful measure for investors who used to compare our results from period-to-period. EBITDA or earnings before interest, taxes, depreciation and amortization is a measure, we used to assess the cash flow generated by our operations. We have excluded the impairment charge we took in the second quarter related to our wholesale fertilizer business from both measures, as we believe it is not representative of our ongoing core operations when calculating adjusted pretax income, adjusted net income and adjusted EBITDA.

On the call with me today are Pat Bowe, 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.

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, John and good morning everyone. Thank you for joining our call this morning to review our third 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 a business review, I'll conclude our prepared remarks with some comments about our outlook for the remainder of the year. And then give you a brief look into what we're beginning to see for 2018.

Our third quarter results were little better than our third quarter 2016 results, but not as strong as we anticipated. In addition to continuing our work in some challenging markets, we incurred a number of unusual expenses during the period. At a very high level, we're happy to see the Grain Group continue to progress toward a more typical earnings range. Ethanol margins were lower year-over-year and the current forward crush margins don't show any near-term improvement compared to recent years. For the Plant Nutrient Group, just in time farmer buying and persistent over supply in most fertilizer markets, continue to compress margins. Overall, group continues to ride a slow market recovery.

Our Grain business results and underlying grain fundamentals are continuing to improve. We remain comfortable with our grain ownership positions and continue to enjoy wide carrying charges in wheat. So far, it looks like a good 2017 corn and soybean harvest and it will only exacerbate world supply and carry out into 2018, which have kept both prices and market volatility low. Our grain affiliates results were little worse year-over-year due to challenging conditions in Ontario, Canada for Thompsons.

The ethanol business was profitable despite lower year-over-year margins, which were driven by higher industry production and stocks. Weak international DDG demand in the last of our significant vomitoxin issues, both continue to deflate our DDG values. We continue to aggressively look for opportunities to produce higher value co-products, but we took a write-off when we canceled such an opportunity during the quarter.

The Plant Nutrient business was slow in the third quarter, which is typical and it's a typical quite season for the group. Wholesale nutrients volume was up 7%, but margin per ton was down 28%. Low grain prices also continue to suppress farmer demand for value-added nutrients. Notwithstanding these difficulties, third quarter performance would have improved year-over-year, if not for a legal settlement charge.

The Railcar market seems to be slowly recovering, but continues to be over-supplied, pressuring lease rates. As we expected a quarter ago, our utilization rates rose again sequentially and it approached the third quarter 2016 rates. We continue to buy cars in the secondary market. We also scraped some mostly older underutilized cars and sold some others as solid profit. After several consecutive quarters of growth, repair business experienced to sales setback and incurred some expenses related to a tragic fatality in one of our rail repair facilities. We've also opened another rail repair facility during the quarter and have several others we are potentially looking to add.

I'd like to update you on our ongoing key initiatives, including the sale of our retail store properties, productivity and cost savings efforts, our system's refresh in achieving a zero-harm safety culture, that all are adding to shareholder value. We closed on the sale of 2 of our 4 retail store properties during the quarter. Those sales netted a combined gain of $5.7 million. The other 2 are under contract to sell. We currently expect to close one in the fourth quarter and the last one in 2018.

We're continuing our effort to create a productivity culture. We're making good progress on our second $10 million run rate savings goal, which we still expect to reach by the end of 2018. During the quarter, we implemented a new company-wide indirect procurement system, which we expect to help us control, reduce and consolidate spending and improve the time and accuracy of processing payables as well as manage payment terms more effectively. Our broader IT system refresh continues to perform well in the Grain Group and we plan to go live with the first wave of our Plant Nutrient locations early next year.

We also continue to vigorously promote our zero-harm safety culture and notwithstanding this quarter's unfortunate tragedy, those efforts are paying dividends. Our recordable injury and last time metrics continue to improve with each lower than about 70% compared to 2 years ago. I'll speak later in the call about our outlook for the remainder of 2017 and will also provide some of our thinking about how 2018 is shaping up.

John Granato will now walk you through a more detailed review of our financial results.

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thanks Pat and good morning everyone. In the third quarter of 2017, the company reported net income attributable to the Andersons of $2.5 million or income of $0.09 per diluted share on revenues of $837 million. These results were better than in the third quarter of 2016 when our revenues of $860 million generated net income of $1.7 million or $0.06 per diluted share. The 2017 third quarter results also include $4.4 million in pretax income associated with the company's exit from its retail business.

Earnings before interest, taxes, depreciation and amortization or EBITDA improved year-over-year by 14% to $32 million. Our long-term debt is somewhat lower than at this time last year and our debt-to-equity ratio is basically unchanged by 0.50 to 1. Our target ratio is 0.80 to 1, so we have capacity for growth. We next present bridge graphs that compared 2016 reported pretax income to 2017 pretax income year-over-year for the third quarter and adjusted pretax income for the first 9 months of the year. The third quarter, the Grain Group's fourth consecutive year-over-year improvement was again driven by strong storage income.

Ethanol's results were down primarily as a result of softer margins, but also due to having recorded $1.5 million expense, when it canceled a potential capital project following results of preliminary engineering work.

Plant Nutrient's results were negatively impacted by a $2.2 million legal settlement expense that occurred in the quarter. Rails comparable leasing income and better car sales results were more than offset by a soft quarter for the repair business and $750,000 in workers compensation and other expenses resulting from an August fatality in our Maumee repair shop.

Retail's improvement relate almost entirely to gains on the sale of 2 former store property. We are in the process of selling our remaining 2 properties. For the 9 months ending September 30, 2017 grain results improved by more than $33 million from 2016, again primarily due to strong storage income. Each of the other businesses are down year-to-date compared to the same period in 2016. Ethanol results are slightly lower, but would be improved year-over-year, if not for the potential capital project write-off, I noted earlier. Rails results are lower, primarily due to comparatively slow start to the year-end base leasing and recent difficulties in the repair business. The sale of 2 former retail store properties help to offset almost half the costs we incurred to close the business.

As we shared with you last quarter, Plant Nutrient had a triggering event related to its wholesale business, which resulted in a $42 million goodwill impairment charge. Notwithstanding that charge, the group's results for the first 9 months are somewhat better year-over-year for the Farm Centers, even after adjusting for the gain on the sale of the Southern region, but are lower in each of Wholesale Fertilizer, Lawn and Cob. With our goodwill analysis in the second quarter, we early-adopted the new Goodwill Accounting Standard.

By definition under the new standard, when you take a goodwill charge, the estimated fair value and carrying value of the impacted units are equal. As such the annual fourth quarter analysis will be sensitive to a number of variables, including lower projected revenues, profitability and cash flow or higher working capital interest rate or cost of capital. The analysis is also subject to general business in macroeconomic trends outside the groups control. Approximately $17.1 million of goodwill related to the wholesale fertilizer business remains on our balance sheet as of September 30, 2017.

Now we will move on to review of each of our core business units. Our Grain Group continued to improve year-over-year in the third quarter. The group reported pretax income of $2.6 million, a modest improvement over the pretax income of $1.9 million in the same period of 2016. Stronger wheat storage income and good margins on corn sales drove the group's performance. Base Grain earned pretax income of $3.4 million in the third quarter compared to pretax income of $1.6 million for the third quarter in 2016. There was little market volatility during the quarter compared to what we saw in the second quarter. Continued low volatility dampens trading opportunities and tends to limit farmers selling.

Grains affiliate, Lansing Trade Group and Thompsons Limited did not fare as well in the current quarter, as they did in the third quarter of 2016, combining for a pretax loss of $800,000 compared to pretax income of $300,000 for the same period of 2016. Primarily due to lower results of our Thompsons affiliate.

The Ethanol Group's performance fell well short of its third quarter 2016 results, primarily due to lower average margins. Improved third quarter pretax income attributable to the company of $6.1 million, which was $3.4 million lower than the $9.5 million in pretax income attributable to company for the same period last year. Margins continued to be stressed by higher ethanol production in inventory, in spite of strong exports. The group also continues to be negatively impacted by lower DDG margins due to both lower export demand and abating Eastern Corn Belt vomitoxin issue.

DDGs continue to trade well below corn values. Group's results were also negatively impacted by $1.5 million expense for preliminary engineering and design work on a potential capital project. Based on the engineering study result, the group determined the potential capital project did not meet their investment criteria. So the group decided not to move forward with the project.

The Plant Nutrient Group recorded a pretax loss of $7.9 million in the third quarter compared to a pretax loss was $7.2 million in 2016 third quarter. Plant Nutrients results were negatively impacted by $2.2 million legal settlement expense that occurred in the quarter. With this settlement behind us, we believe there will be no further impact to the group. Continued margin compression due to nutrient oversupply drove wholesale fertilizer performance lower, in spite of somewhat better volume.

In contrast, the relatively smaller Farm Center, Lawn and Cob portions of the business each posted better year-over-year third quarter results. These nutrient tons were up 12% year-over-year and margins were down by 41% per ton. Value-added volume was down by 4% and margins were down by 5% per ton. Margins in both product groups were negatively impacted by a persistent oversupply of product. We believe, we need to see a return of some supply demand balance and an increase in farm income before this business can begin to improve appreciably.

The Rail Group generated $6.1 million of pretax income in the third quarter compared to $6.8 million last year. Our utilization rates averaged 85.8% for the quarter, which is up 1.4% compared to 84.4% last quarter and slightly below the 86.2% in the third quarter of 2016. Average lease rates were down 3.6% year-over-year, lower utilization and lease rates were mostly offset by lower maintenance costs that produced base-leasing pretax income of $3.4 million, which was slightly higher than last year's results.

The group recorded pretax income from car sales of $2.7 million, up from $1.6 million of pretax income in the third quarter of 2016 and the $1.4 million earned last quarter. We still expect income from car sales for the full year to be comparable to 2016 results. However, the timing of sales transactions can move from quarter-to-quarter. The group is actively managing the fleet by scrapping older underutilized cars. These efforts, combined with the purchase of more than 1,500 mostly newer cars so far this year have allowed us to improve the average remaining life of our fleet. Group's repair business encountered some difficult condition. Sales were below expectations and down about 7% year-over-year. Repair business also incurred the workers' compensation and other expenses I mentioned earlier.

Now I want to spend a couple of minutes describing one certain and one potential significant headwind we see in the rail business for 2018. The first of the 2 is the result of some normal required maintenance based on the manufacturing dates of our tank car fleet. The second comes as a result of upcoming changes in accounting standards. Tank cars make up about 15% of the Rail Group's fleet or about 3,500 tank cars in all. Department of Transportation Regulations effective beginning in 2012, requires that any tank car running an interchange service in North America, whether inflammable service or not, must have the integrity of it's tanks tested and re-certified no less frequently than every 10 years from it's date of manufacture.

The cost to re-certify can range from $5,000 to $11,000 per car depending on various factors. We estimate our average cost on the 625 cars, we plan to re-certify in 2018 will be about $8,700 per car. Because they don't extend the life of the car, these costs must be expensed as incurred. Over the last several years the Rail Group has acquired a disproportionate number of tank cars that were built in 2008 in response to the ethanol boom. As a result of this bubble, rail expects its 2018 tank car re-certification expense to be approximately $3 million higher than in 2017. There are currently no other years in the 10-year cycle in which even half as many tank cars will need to be re-certified. Second, as many of you know, the Financial Accounting Standards Board has released new accounting standards for revenue recognition and leasing. These standards become effective for the company at the beginning of 2018 and the beginning of 2019 respectively. Certain transactions, the group has engaged in over time may no longer qualify for sales agreement under the new revenue recognition rules.

The group has recognized pretax income from car sale of an average of $6.5 million per year on these transactions over the last four years or almost half of our car sale pretax income. We continue to evaluate the application of these new rules and the interplay between them as it relates to the Rail Group. However, it is important to note that this accounting change does not impact the value of the fleet where it's capacity to earn lease revenue over time nor total earnings generated from these arrangements and has no implications on cash flow for these transactions, but may impact the income statement geography and timing of earnings recognition.

I'll now turn the call back over to Pat for a few comments on our outlook for the rest of 2017 and some early thoughts on 2018.

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks John. We're well into the fall harvest with the grain business that is hitting on more of its cylinders, though some concerns in our other 3 groups as we begin to consider prospects for 2018. The Grain Group has now achieved year-over-year improvements in 4 consecutive quarters. Low grain prices continued influence farmer selling behavior of what looks like another good crop. We're set up well to continue to earn solid storage income, although low grain prices and volatility or low volatility may dampen trading opportunities. While the 2017 corn harvest is behind its normal pace, we're seeing robust high quality crops in our dry areas. We expect to continue to earn good storage income through the remainder of 2017 harvest and into early 2018.

The Ethanol Group is working hard on production efficiency and all 4 plants are running well. In the third quarter, the industry continued to out produce demand, margins began to rebound in late July and rose throughout most of the quarter, but began to decline really rapidly in mid-September, despite high export demand, rising production and moderating seasonal driving demand have a concern about our margins for the rest of 2017 and into 2018. More specifically, we expect our fourth quarter results about half of the fourth quarter of 2016's unusually strong results in ethanol.

At Plant Nutrient Group continues to be impacted by an unfavorable combination of oversupply, low margins and an ultimate grower customer that are still making very conservative purchasing decisions due to persistent low farm income. The fertilizer industry needs to move toward a supply and demand balance to stabilize prices, which could lead to more normal buying patterns. We had a little better summer field program than in 2016, though the pace of deliveries has been slower than last year's. We continue to believe in the long-term strategic value of this business and are looking for growth opportunities in the value added nutrients sector.

Rail continues to be impacted by an oversupplied market. While there are some signs that a slow recovery is in progress, the improvement of our utilization rates continues to look like it will be very gradual. As John noted earlier, the combination of accounting rule changes and the one-year bubble and tank car certification expenses will make 2018 comparatively a challenging year for rail. In the absence of these 2 issues, we estimate our 2018 results would be 10% to 20% higher than in 2017. But with these 2 changes, we estimate our rail 2018 results will be 10% to 20% lower than in 2017.

We will continue to work on our productivity initiatives, with total targeted run rate savings of $20 million by the end of 2018. We expect to be more than 75% of the way to that goal by the end of 2017, with more than $15 million in run rate cost savings taken out since the beginning of 2016.

In closing, our 2017 company results to-date are disappointing, while we continue to work undaunted and undeterred on improving on many fronts. While our grain business has experienced a strong recovery, we see causes for concern about each of the other 3 groups as we look into 2018. Overall we think fourth quarter 2017 pretax income for our 4 group be comparable to those of 2016. We expect to see continued improvement from our Grain Group, but are feeling cautious about our prospects for 2018 for our other 3 groups, given the market conditions it appears will face, at least early in the year.

Before I turn the call back over to our operator to entertain your questions, I'd like to remind everyone that we will be holding an Investor Day, beginning at 8:30 AM on Thursday December 7. The presentation will also be webcast live on our website. We invite you to listen in.

I'll turn it back over to the operator for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

[Operator Instrcutions]. Our first question is from Farha Aslam of Stephens Inc.

--------------------------------------------------------------------------------

Farha Aslam, Stephens Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

I have a question on the Grain Group, they are seeing some strong improvement should benefit from the harvest, the harvest is coming in late. Is fourth quarter earnings going to be up year-over-year in your mind or should we think about that being more of a first quarter or first half benefit for next year?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

We are about the same would be our advice. So crop progress as you mentioned started out really nice, especially in Western belt and we had -- last 5 days of pretty strong rainstorms across all the eastern grain belt that really slowed things up. So for example, Ohio, the numbers reported yesterday, were 60% harvested in corn, Michigan is 57%, and Indiana is at 70%. So we've got a quite a bit of work to do. So with the 10-day outlook looks to be -- we got a beautiful sunshine here today. So we're about 2 to 3 weeks behind, but as far as the main part of your question we see that the number is being pretty similar to last year.

--------------------------------------------------------------------------------

Farha Aslam, Stephens Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

And then a longer-term question on ethanol, I know that perhaps the fourth quarter and first quarter will be a bit challenged in that group, but looking further out into exports and potential markets opening up, how do you think 2018 can develop for ethanol and particularly with Mexico and China?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

We've mentioned here that we see the quarter finishing pretty soft, especially compared to last year because remember fourth quarter last year we had pretty robust margins. Going into the quarter, we had about 5% hedged in the third quarter going in and we're about 50% now for the balance of (inaudible), but the margins just aren't there as high as we were a year ago. There's been a lot of rumor in the market, as you said exports don't get reported till the actual time of shipment, but there's been a lot of chatter about China coming into the market into next year.

Also some talk of India, Canada, Brazil -- both there are new business, but those aren't all 100% confirmed yet. So, the one thing we have to be positive about is the value of U.S. ethanol is really low in the world octane market and we're seeing good interest in Europe. So, if exports can pick up, that's going to be the key to getting ethanol margins higher. Without that keeping at record pace like we are at the [12 to 13] pace this year, it would be hard because we are just producing so much domestic ethanol. So we will tend to lean in to hedging opportunities in Q1 if margins -- opportunities arise, but we're a little bit cautious about ethanol margins going into '18.

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [6]

--------------------------------------------------------------------------------

Farha, this is John. The year is not over yet, but if we look at kind of run rate production for the year 15.6 billion gallons to 15.7 billion gallons, we see that going north of 16 billion gallons next year. So, as Pat alluded to, we're going to need some additional exports to soak up that capacity, otherwise we are going to need to see some capacity come out barring any significant changes in domestic ethanol demand going forward into 2018.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question is from Heather Jones of Vertical Group. Your line is open.

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [8]

--------------------------------------------------------------------------------

So I have a number of just -- really quick detailed questions. So when you talk about Q4 '17 being about half of Q4 '16 for ethanol, are you referring to per gallon or in total dollars?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [9]

--------------------------------------------------------------------------------

Pretax total dollars.

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

And when you talk about '18 versus '16 and you said with the exception of Grain, are you talking about you expect -- so you expect ethanol, fertilizer and rail to be down versus '17, is that, did I understand you correctly?

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [11]

--------------------------------------------------------------------------------

Well I think, we talked about headwinds there. And I would say that ethanol as we just talked about the year is going to be made probably in the second half of the year. So that's a wait and see rail, if you look at it this year is pacing about 80% of last year's pretax income. And so I think, if you -- we would expect that to continue for the rest of the year given kind of where we are in the year. And so, as Pat talked about given the headwinds probably down 10% to 20% relative to that pacing. And then, Plant Nutrient, again as Pat highlighted, we don't really see margin improvement coming unless we see some supply-demand imbalance that's getting fixed pretty quickly here as we grow into the key planting season in the second quarter. Also I think we need to recognize farm incomes are low. And so, -- although nutrient prices are low that is impacting farmer buying on nutrients, particularly on a forward basis as we look into '18. Again, not expecting necessarily erosion in that business, but not seeing a lot of potential for improvement either, other than in some of the cost take out initiatives the Group has taken.

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

I'm having a hard time telling this, if you're just trying to set appropriate expectations, sound a note of caution or it's because -- I mean when I look at pricing and I completely get that things are not robust by any stretch of the imagination, but you have had some capacity taken out and there has been improvement in Nutrient pricing. And per your comments about the wet weather, there were seemed to be some nutrients that have been leached from the soil, so I guess -- I have a really hard time seeing in '18 that's flat with '17 and so -- is this is just caution on your part, because we're in the middle just a lot of things in flux or what am I missing?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

I think you are making fair observations, Heather. But I mean -- we don't really see -- like you said there are some prices of some commodity fertilizer products that have rebounded here in the off-season. The question will be at these kind of prices [$3.47] nearby corn, value- added sales, which is our higher margin business that's a tough sale when corn prices are cheap, we experienced that this last year. We don't see grain prices rebounding strongly in the year to spike farmers interest to do more extensive value- added applications. Our volume has been decent, our pre-fills, we said was pretty good, but the margins have been hurt this year. Margins could be slightly better if we get some stability, but we're just -- can deliver just not that optimistic about seeing a rebound in fertilizer price since barring as you said, major reductions of capacity or something that happens in the marketplace from a pricing across the board.

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [14]

--------------------------------------------------------------------------------

I guess I should add that , if you look at the legal settlement obviously is not expected to reoccur. We have, as I noted taken some cost out of the business and there was severance in the business this year. So that does help move it up a little bit from where we were. But I think as we're talking about this, when you look at the core margin structure of the business, it just doesn't feel like you're going to see significant improvement.

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

And going to the rail side, with the re-certification expense. So it sounds like, if I understood you correctly, the way you're -- the average life of the different cars that it's unlikely you're going to see this much expense in another year over the next 10 years. So my gut is -- most of analysts will treat those as non-recurring. So are you going to call out each quarter, how much that expense was or given that it's unlikely to recur in '19 and '20?

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [16]

--------------------------------------------------------------------------------

I guess, to be determined what I would say if we think it was material to a particular quarter relative to the prior year's quarter, we would certainly point that out to you. But again we noted it was about $3 million relative to 2017.

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

And it kind of depends on our balance of our fleet. So this will impact about 575 tank cars to certification for next year. But in that we have ethanol, where we had a big chunk of them -- I'm sorry 625 total cars. But we also have [sweetener cars, vegetable cars] so it isn't just fuel cars, these are any kind of tanker that has to been re-certified and the cost we estimate to be around $8,700 a car, as John mentioned. So we're bringing that out this year, because it's a big chunk. It all came on board, mainly back to the ethanol boom, when we got those cars. We won't have a bubble quite that big in any quarter going forward.

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [18]

--------------------------------------------------------------------------------

Just maybe the way to think about it is, we have been re-certifying these tank cars all along. And just depending on age and what we have here is a bubble, so we felt that was important to be transparent and let everybody know, now that there is that $3 million-ish headwind for next year.

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

So, Heather, we should go back to normal maintenance expenses each quarter and not anything unusual from a large number of cars at one time.

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

In '19?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

Two final questions. On Thompson, how much of a problem was that -- headwind was that during the quarter and is that just a one quarter issue or do they have an issue with the harvest that's going to last for the next few quarters?

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [23]

--------------------------------------------------------------------------------

Well, their harvest is still ongoing and so that question on the harvest is [TBD].

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [24]

--------------------------------------------------------------------------------

But a similar fertilizer experience in Ontario than we did here down in the Eastern grain belt, so -- but it's not as big a factor. So the big thing for us is just to have good successful harvest to finish off, harvest season up in Ontario, similar to down here to make sure we're buying at the right levels and filling up space.

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [25]

--------------------------------------------------------------------------------

We do expect them --

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

So was the issue in the quarter, fertilizer or was the issue in the quarter handling -- commercial handling?

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [27]

--------------------------------------------------------------------------------

Little bit of both. It's not a big number, but we're just behind pace of previous year.

--------------------------------------------------------------------------------

Heather Lynn Jones, The Vertical Trading Group, LLC, Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

And my final question is, what is this capital project you were evaluating on the ethanol side that you decided to walk away from?

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [29]

--------------------------------------------------------------------------------

We've been looking at doing various technology implementations in ethanol been successful. Over the last 3 or 4 years with many new technologies that couple of squeeze out more juice so to speak. We also have been looking at value-added protein and how we can extract more value at our core products. We've done a pretty extensive work on a project and did pre-engineering and then as we summed up the total capital cost to build the plant it just didn't quite make the earnings expectations we had in mind for that.

So we shove that product -- project and thus we had to take the charge for the pre-engineering expenses during the quarter. We still continue to look down the road for opportunities to add value to co-products. Also there's -- technologies, we're very interested to implement in ethanol that can help our bottom line. So we're going to continue to look to add new technologies, unfortunately the payback just wasn't there and I thought it was prudent by our ethanol team to call off the project, because we didn't see the returns we would have liked for the project.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question is from Eric Larson of Buckingham Research. Your line is open.

--------------------------------------------------------------------------------

Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [31]

--------------------------------------------------------------------------------

Just a couple of questions. You talk about the farm belt, we know that farmer income is still pretty tough. I guess one of the questions that I have for you is -- I think we all know how the returns are penciling out. It kind of doesn't really matter what -- which grain you're talking about, how do you look at what happens next year from a planting perspective? I mean corn at [350] is pretty tough. Obviously, you have to look at next year at these numbers for next year to -- but still it doesn't really matter. I mean how do you -- how would you look at planting for '18 kind of settling up?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

I think you, it's interesting Eric you brought it up, and we have low crop prices across the board and corn bean ratio is kind in normal percentages, so it's not sending a signal to farmers to not plant corn. So we think we probably can see similar corn acres, at this it's early, right? But I think that would be unlikely to have a major shift, as you know our exports have just been pathetic in corn, so we are -- I think at 1.85 billion bushels versus 2.2 billion last year. So we're down about 17% on corn exports. And you've seen some of the big grain companies talking about the little bit of these challenge to the U.S. export markets on corn. So that probably will keep corn relatively subdued and -- current prices of wheat -- we have Chicago and Kansas city, both at 427, there has been a lot of short selling in the wheat market and so prices are just stifled here and it's a tough situation for our farmers with this kind of income.

--------------------------------------------------------------------------------

John J. Granato, The Andersons, Inc. - CFO [33]

--------------------------------------------------------------------------------

And it's the volatility -- the low volatility that really makes it tough for everybody, by the way.

--------------------------------------------------------------------------------

John Kraus, [34]

--------------------------------------------------------------------------------

Eric, I think the one other wildcard here is how much will bankers get involved in influencing planting next year. Obviously corn is more expensive crop to put in, but generally I think as Pat noted it doesn't feel like you're going to see significant shifts at this point, but that is a wild card out there.

--------------------------------------------------------------------------------

Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [35]

--------------------------------------------------------------------------------

I mean, it really is. Bankers have been getting involved over the last couple years, but I think this spring it will be even more pronounced. The final question I have, your wheat income year-to-date through the quarter -- I mean, we're running on the -- on the ticks, we're running close to 50% carry, I'm assuming you're not giving a tremendous amount of benefit from the ticks rate now. I'm guessing that the markets are maybe getting more closer to normal. Can you help us out, what that benefit may have been in the quarter and maybe year-to-date?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [36]

--------------------------------------------------------------------------------

Sure, we continue -- I think will keep 2 ticks on Chicago wheat into next year and one to two ticks throughout the year. Since you look at the -- wheat spread is about $0.78 nearby wheat spreads, because markets come under some spec selling pressure is a little bit narrow, we're only [$0.705] nearby in these -- so the spreads as you properly noted or end about 52% of carry on wheat and so that's lesser than it was earlier this year. Where corn and beans have wind out close to 80% to 90%. So we think there is going be opportunities for wheat to move back out and give good carries and we are pretty confident to hang on to the 2 ticks in the next year and probably maintain one into throughout the whole year.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question is from Kenneth Zaslow of BMO Capital Markets.

--------------------------------------------------------------------------------

Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [38]

--------------------------------------------------------------------------------

Just continuing the ticks, see you think that next year you're not going to get the trigger the other way?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [39]

--------------------------------------------------------------------------------

Yes, we think we might lose one. So like right now, we're are at 2, kind of depends how spreads play out through the course of the year. So we're thinking we will maintain 1 to 2. So it is possible to lose 1 on the weak ticks as spreads have spreads little bit narrower as we go through the year. But we think given the burdens on global wheat supplies, there is no reason that wheat shouldn't be trading at wider carries. And I think we'll see it go back to more normal spread relationship as time moves on here.

--------------------------------------------------------------------------------

Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [40]

--------------------------------------------------------------------------------

And then if you do think, where is the offset to the income from that because -- or is it just -- you're losing income in that or is there an offset that you're able to do something else to get (technical difficulty) kind of zero sum game?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [41]

--------------------------------------------------------------------------------

It's kind of zero sum game, but it also your purchase and sales if you end up having a margin on sales where we can sell wheat into the market at decent margins. But you want to -- maintaining that wider carrying charges for all grain is -- this is a part of the grain business that we are a little -- differentiate as a domestic store. These kind of wide carrying charges are good for us as opposed to I said weaker export markets right now. So if we can kind of maintain that space income throughout the year and that's one positive side, although we'd like to see a little more volatility or some things coming to the market -- trading opportunities.

--------------------------------------------------------------------------------

Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [42]

--------------------------------------------------------------------------------

I have a kind of the philosophical questions. Like look over the last couple years, you guys have built more ethanol plants and now we're in the state of overcapacity. As you look back, I mean do you think that was the right decision and how do you reassess that and would there be a point in time that you would think about slowing down production or changing your production levels. How do you think about that?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [43]

--------------------------------------------------------------------------------

Going back, we did build -- plants. We expanded our Albion plant a year ago and that's one of the better plants in the industry it provides really good margins. It has a good return for investment. So the answer would be yes, we would do that again. Even looking back on today's spot margins in the nearby, we're still optimistic about ethanol overall that -- as this export market is going to continue to grow, we see again opportunities not just nearby in NAFTA countries, Canada, Mexico, but China, Brazil also in Europe right now there's good opportunities for Octane. So we think the export markets going to grow and I think there are opportunities for technology to enhance new production methods of ethanol going forward. And we'd like to be part of that. So we think it's going to be a very good industry. It always has its cycles ups and downs as you all know Ken, and we're not as strong in the current margins as we were a year ago, but we still have positive margin through the business.

--------------------------------------------------------------------------------

Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [44]

--------------------------------------------------------------------------------

Then if I think about the Brazil exports environment, obviously there was a 20% tax tariff that they have on us. Do you think that's going to change? Do you think what other markets will compensate for any lost volume? How much lost volume do you think there will be in the export market next year and where do you think it's going to be compensated from?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [45]

--------------------------------------------------------------------------------

I don't know about a specific number, but I think that the big hopes are probably for China. We've heard, like you said opportunities if China declares to do something with their pollution problems and use in ethanol as part of that and imports would be a good way to solve that. That could be one big positive one. Brazil is the key one to watch all the time and we don't -- when we talked earlier about slowdowns, what we do in our plants -- we optimize production for costs when margins are good. And then what margins aren't good, we slow back production by using a little more expensive materials or methods to slow production, taking to complete halts and idling a full plan doesn't seem to make sense. It's more about pushing hard when margins are good and throttling back when they are less good and that's the practice that we've used in the past.

--------------------------------------------------------------------------------

Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [46]

--------------------------------------------------------------------------------

My last question on China, just to clarify. So you think if they went to the 2020 E10 policy that they would not be able to work down their inventories -- the core inventories and supply their own country as they would they would need to come to the export market?

--------------------------------------------------------------------------------

Patrick E. Bowe, The Andersons, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

Yes, you have to build a heck a lot of capacity too, right. So it's not ever a 100% certain, what will happen in China, but because the markets so big and if you did go to E10, you would need to import ethanol. And then the question is how do the economics look on Brazil versus U.S. at the time. But I think there is optimism around a growing export market.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

That does conclude our Q&A session for today. I'd like to turn the call back over to Mr. John Krause for any further remarks.

--------------------------------------------------------------------------------

John Kraus, [49]

--------------------------------------------------------------------------------

Thank you, Christy and thank you all for joining us. We want to thank you 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 Thursday, February 15, 2018 at 11:00 AM Eastern, when we will review our fourth quarter and full year 2017 results. We hope you're able to join us again at that time. Until then be well.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a great day.