Executives: Jim Burmeister - VP, Finance and Treasurer Pat Bowe - CEO John Granato -

CFO
Analysts: Farha Aslam - Stephens Inc. Brent Rystrom - Feltl and Company Eric Larson - Buckingham Research Group Ken Zaslow - BMO Capital

Markets
Operator: Good day, ladies and gentlemen, and welcome to The Andersons, Inc. Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

[Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. Jim Burmeister, Vice President, Finance and Treasurer. Sir, you may begin.

Jim Burmeister: Thanks, Chelsea.

Good morning, everyone. And thank you for joining us today for The Andersons second quarter 2016 conference call. For the purposes of today’s discussion, we have provided a slide presentation that will enhance our talking points. If you are viewing this presentation via our webcast, the slides and audio will be in sync. This webcast and the supporting slides are being recorded and will be made available on the Investor Relations section of our website at AndersonsInc.com.

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 1934 Act filings and the prospectuses prepared in connection with the Company’s offerings. Today’s call includes financial information for which the Company’s independent auditors have not completed their review. Although the Company believes that the assumptions upon which the financial information and its forward-looking statements are reasonable, it can give no assurance that these assumptions will prove to be accurate. On the call with me today are Pat Bowe, Chief Executive Officer; and John Granato, Chief Financial Officer. Pat, John, and I will answer questions that you may have at the end of the prepared remarks.

Now, I will turn the call over to Pat for his opening comments.

Pat Bowe: Thanks, Jim, and good morning, everyone. Thank you for joining our call today to discuss our second quarter results. As expected, the second quarter saw continued challenges for many of our groups. Net income attributable to The Andersons of $14.4 million, or $0.51 per diluted share, on revenues of $1.1 billion in the quarter compared to net income of $31.1 million, or $1.09 per diluted share, on revenues of $1.2 billion in the second quarter last year.

As we communicated on the first quarter call, we expected a difficult first half of the year in our grain and ethanol groups, and we have seen margin pressures in plant nutrients. Grain navigated this challenging market and saw some improvement relative to Q1. We saw no corn basis appreciation, which continued to limit opportunities to generate storage income on old crop inventories. But on the positive side, we are gaining traction in our cost reduction initiatives and have seen increased exports via the Great Lakes towards the end of the quarter, providing support for our turn towards better results in the second half of the year. Our Lansing grain affiliate again experienced difficulties, while the Thompsons operations in Canada delivered slightly better results year-over-year in the quarter.

On last quarter’s call, we said that the ethanol group would improve from the first quarter loss, return to profitability, and be above breakeven for the first half. They did just that. Margins improved through the quarter and the team produced more gallons than in any previous second quarter. Our plant nutrient group improved results in the quarter as well, although the benefits of higher specialty product sales were muted by margin pressure felt from oversupply of basic NPK in the channel. Downward pressure of lower grain prices and competitive pressures in a market flush with inventories drove softer volumes at our farm centers.

The rail group earnings were lower primarily due to the comparison with the second quarter last year, when you may recall we had a large lease termination settlement. Income from leasing and railcar sales were lower while our railcar service and repair business delivered a record quarter. I’ll speak later in the call about our outlook for the remainder of 2016 and the status of actions we are taking to improve our performance levels this year and in the longer term. John will now walk you through a more detailed review of our second quarter financial status. John?

John Granato: Thanks, Pat, and good morning, everyone.

In the second quarter of 2016, the Company generated net income attributable to The Andersons of $14.4 million, or $0.51 per diluted share, on revenues of $1.1 billion. This compares to the second quarter of 2015 when our revenue of $1.2 billion generated net income of $31.1 million, or $1.09 per diluted share. Depreciation and amortization in the quarter was $20.5 million compared to $19.1 million in the second quarter of 2015. The increase is primarily due to the assets acquired in the Nutra-Flo transaction last year. Earnings before interest, taxes, depreciation, and amortization, or EBITDA was $49.1 million for the quarter, down from $72.1 million a year ago.

Near breakeven earnings in the first half resulted in EBITDA of $55.1 million compared to $100.9 million in the first half of last year. Unallocated corporate expenses were $2.2 million, down from the $5.8 million in the prior year, primarily driven by lower incentive compensation accruals and a gain from the final true-up of last year’s pension termination. The effective tax rate for the quarter was 33.2%. Although year to date pre-tax income was just over $200,000, a small tax reserve taken in the first quarter and the deduction of net income attributable to non-controlling interest brings first-half net income to a loss of $273,000. We continue to estimate that the full-year tax rate will be about 33%.

Long-term debt at the end of the quarter was $399 million, down from the $417 million a year ago. Leverage remains modest, with long-term debt to equity at the end of the quarter at 0.51 to one, even with the ratio a year ago. Next, we show a walk to second-quarter pre-tax income from the prior year. Continued difficulties in base grain and grain affiliates resulted in a $16.2 million drop in pre-tax income for the group relative to last year. Margins in our ethanol group improved from the first quarter, but still finished below the same period a year ago.

Plant nutrient’s $4.7 million improvement over last year was muted by margin pressures. Unallocated corporate costs primarily improved due to lower incentive compensation accruals and the previously mentioned pension true-up settlement. Moving to the segment level details, we will start with grain. The first half of the year has been difficult for grain as market conditions continued to limit our base grain operations from realizing meaningful space income. The group reduced its pre-tax loss to $13 million compared to the $17.4 million loss in the first quarter, and was below the $3.1 million of pre-tax income generated in the second quarter of 2015.

Base grain operations were hurt primarily by a continued lack of space income, which accounted for more than $10 million of lower pre-tax income compared to the second quarter of 2015. Income from put-through, drying, and blending was modestly better in the quarter, and we saw an increased level of vessel shipments. The quality and yields of this year’s wheat harvest have been good in our markets, providing some upside in the quarter and, more importantly, lay a foundation for the second half of this year as well as 2017. Performance in grain affiliates was mixed. Results from Lansing Trade Group were negatively impacted by positions in their trading book primarily related to the soy complex.

These positions generated losses during a volatile second-quarter market. Lansing’s results were partially offset by slight improvement in income from Thompsons Limited compared to the same quarter last year. As previously announced, we completed the sale of our grain and agronomy assets in Northwest Iowa in May, which resulted in a small gain in the quarter. Also during the second quarter, we began operations at our new 2.9 million bushel elevator in Humboldt, Tennessee. The new construction was completed on time, on budget, and with a clean safety record.

On slide 8, we turn to the ethanol group. Margins steadily improved through the quarter, driven by seasonal driving demand, steady exports, and strengthening E10 plus demand. The group delivered pre-tax income of $6.2 million compared to $9.7 million in the same period last year. This offset the $2.7 million loss from the first quarter, which allowed the ethanol group to end the first half with pre-tax income of $3.5 million. This compares to the first half of last year, when pre-tax income was $14.9 million.

Our facilities performed very well in the quarter, producing a record 97.1 million gallons for a second quarter. This is up from the 96.3 million gallons produced in the same quarter last year. Construction of the expansion of our Albion, Michigan facility is progressing well and remains on schedule to start up in the spring of 2017. The plant nutrient group delivered pre-tax income of $23.5 million on revenues of $320 million. This modest improvement from the $18.9 million of pre-tax income last year on sales of $357 million was limited due to margin pressures throughout the quarter from low grain prices and high market inventories of most nutrient products throughout the supply chain.

Overall tons were up 4% in the quarter compared to the prior year, with specialty nutrient tons up 62%. Specialty nutrient tons increased to 22% of our mix from 14% a year ago, driven by the acquired product lines from Nutra-Flo. Basic nutrient tons were up the modestly and volume in our other category was down 22%. The primary drivers of this decline were increased competition at our farm centers combined with excessive inventory in the channel. As we enter the second half of the year, the industry is starting to see some supply curtailments in potassium and a drawdown of inventories, which may lead to more stable pricing in the fall and early 2017.

Results in the rail group were lower in the second quarter, primarily due to the comparison with the second quarter of 2015, when a large lease settlement was recorded. Pre-tax income was $6.6 million in the quarter compared to $21.7 million in the prior year. In addition, results this quarter reduced due to falling utilization rates, which averaged 88.6% in the second quarter compared to 93.5% in the second quarter of last year. Average lease rates were slightly down compared to last year and income from car sales were lower based on timing. Service and other income was $1.6 million versus $1.4 million in the prior year.

The railcar repair business turned in a record second quarter. This performance more than made up for the lack of earnings from the exited short-line railroad. The retail group produced pre-tax income of $1 million in the second quarter compared to $1.5 million in the same period last year. The lower results were driven by earlier timing of Easter, which fell in the first quarter this year, as well as lower same-store sales. The Company has made good progress on its initiatives to reduce ongoing costs.

To date, savings have come primarily from delayering our organization structures and gaining labor productivity in the grain and plant nutrient groups. I will now turn it back over to Pat, who will provide an outlook for the remainder of the year.

Pat Bowe: Thanks, John. We’re starting to see some opportunities for improved operating results as we move into the second half of the year. As the grain group moves towards fall harvest, we have the benefit of having had a good wheat crop in our markets, and we are seeing wheat spreads widen.

The good wheat crop, which is taking space in bins, should help improve basis opportunities in the fall and drive a return to normal space income. Nationally, corn and soybean crops conditions are very good, with some spots experiencing higher than normal temperatures. Although a lot of -- a few localized spots in our markets that have had lower precipitation, the crop as a whole is much better -- in a much better condition than it was last year in the Eastern corn belt. Additionally, increasing estimates for pre-harvest inventory levels, combined with a quality harvest, will create space income opportunities for the group late this year and into 2017. We are pleased to see margins return for our ethanol business during the second quarter.

As we entered the back half of the year, we had hedged 50% of our derived production. Less than half of these hedges were put on earlier in the second quarter as margins improved, with the remainder towards the second -- I’m sorry. With the remainder towards the end of the month. 15% of our production for the months of August and September have also been hedged to take some risk off the table and lock in margins. We currently see third and fourth quarter earnings in ethanol shaping up to be similar to slightly below the second quarter.

We have planned maintenance shutdown times trimming production volumes. Within our rail group we remain dedicated to mitigating risk through portfolio diversification, disciplined asset acquisition, and cost management. In the back half of the year, we still expect to experience mild softening of railcar demand as some commodity sectors -- including oil, sand, and coal, continue to experience weakness, which impacts overall traffic volumes and car demand. While we have lower weighted exposure to these industries, we do have some. On a positive note, the rate of the downward trend of railroad shipping volumes does seem to be slowing.

While we have positioned our portfolio well for this cycle, utilization and lease rates are expected to be mildly softer through the remainder of the year. In the plant nutrient space, we remain focused on leveraging our distribution base and pursuing an increased mix of specialty product sales that support our customers with solutions for precision agriculture. These products help lift our customers’ yields and are a more sustainable agronomic solution year after year. This year, plant nutrient has seen weaker margins as farmers made their input buying decisions just in time in a falling price environment, which creates margin pressure for NPK. As John mentioned, we are starting to see some of the large fertilizer producers curtailing some capacity in the face of lower margins.

This should start to help stabilize the market as we approach fall application season. Regarding our productivity initiatives, I’m happy to report that the Company is getting good traction and starting to bank the benefits. Run rate costs are being reduced significantly through synergies being taken primarily out of our grain and plant nutrient groups. Grain is seeing benefits from our new IT infrastructure as well as addressing other opportunities to streamline the organization. The plant nutrient group continues to drive synergies from the integration of Nutra-Flo, with continued benefits coming from the merger of the former turf and specialty group into the plant nutrient group.

We are confident that the Company will deliver on its goal of achieving over $10 million in run rate cost reductions by the end of 2017. We continue to look for opportunities which will allow us to accelerate and achieve savings beyond the $10 million goal. So, summing up the remainder of the year, we expect the second half of the year to greatly improve from the first half and believe that despite missing market consensus in the second quarter, we will be above the current consensus level of $0.81 per share for the full year EPS. We will now hand it back to our operator so we can take your questions.

Operator: [Operator Instructions] And our first question comes from the line of Farha Aslam with Stephens Inc.

Your line is now open.

Farha Aslam: A question on your slide in your slide deck on the variable storage rates, I’ve noticed that the first variable storage was triggered. Do you anticipate the next two levels to be triggered as well? And if so, how long do you expect this variable storage rate increases to last?

Pat Bowe: Great. I’ll take that question, Farha. This is Pat.

That’s a very good question and when we referred to those on to the call to the appendix, page 21. We described how what the industry calls VSR, or variable storage rates, work. It’s been a little while since we’ve been talking about this in the grain business. And this is very good news for The Andersons. As you know, we have a global big supply of wheat, which is a very different.

We have different situations for each market. Where soybeans globally and the bean complex is a little bit tight; wheat, we have a global big supplies. In the U.S. we’re coming off having a really good crop both in the West, in the hard wheat areas, and in the East, in our soft wheat growing areas. And the VSR mechanism was put in place by the CME and approved by the CFTC back in 2009 to improve the convergence of delivery economics, to improve cash futures convergence.

And it does just that. So in this case, as you mentioned, wheat has gotten to the level where we received the first tick, which is now in place, and we will receive that. The second tick, as you mentioned, to get the -- is still -- that period hasn’t expired yet. We still have -- I think its 12 days left to go on that. And we would categorize that as likely, because there’s still trading time left in that period.

But if the spreads stay as wide as they are and continue to stay at close to full carry, that that is a likely situation. And we’d put the third tick as maybe as -- in the category of possible. So, that remains to be seen and that will be further out until September, and a lot can happen between now and then. But it’s a good situation for The Andersons having Maumee as a registered delivery house. And I’m glad you brought that up, because it does help us with our storage income.

Farha Aslam: And do you expect that VSR to stay in place into next year as well? How long do you think that this VSR can last?

Pat Bowe: Well, that’s a tough question and that one is probably harder to answer. We think that we could see broad and wide carrying charges in wheat for some time, but a lot still has to happen with corn and bean harvests and what’s going to happen with the overall grain market into 2017. [Multiple Speakers] what the planning conditions are going to be for next year and acreage for next year for wheat. I think we will just stay tuned to how that looks going into later in the year, but right now going into fall, it looks good.

Farha Aslam: And then my follow-up is on ethanol.

Clearly you are very confident on your outlook for ethanol. Your commentary about profits being perhaps only slightly less than second quarter numbers, when the market conditions have weakened quite a bit. Is that a reflection of your hedge positions? Or is that a reflection of an improvement anticipated in market conditions?

Pat Bowe: We mentioned we have some hedged up; it’s not a big portion of our book, 15% of August and September, 1-5, so it’s not a large percentage. We will have some scheduled shutdowns later in the period which will have some -- reduce volume. So, having said that we still are excited about some situations.

The value of RINs are high and the demand of E85 is good. Margins have weakened from the peaks they were at just a month ago. So we’re just waiting to see how things go a little bit. On the bigger point, as we get into corn harvests, with our ethanol plants having paid high basis levels a year ago, we expect to see big relief on that. And we’re booking corn at good levels and expect to have a good corn supply right in our backyard of our plants.

That will be the biggest change from last year.

Operator: Thank you. And our next question comes from the line of Brent Rystrom with Feltl and Company. Your line is now open.

Brent Rystrom: Can you give us a sense of how both PNG itself and PNG’s customers -- how do you guys view the summer fill season? Does PNG order the NPK against orders from customers? Or do you guys actually have a book that’s somewhat exposed?

Pat Bowe: Brent, I’m not sure I fully understand your question.

Brent Rystrom: So, when you look at the fall application season, is PNG buying against customer orders? Or are you guys buying in anticipation of customer orders, and your book is somewhat at risk of pricing?

John Granato: Brent, this is John. We primarily buy at this time of year against customer orders. And we’re obviously in touch with customers, understanding where they think their fall applications are going to be. If you are asking about LCM exposure as we go into the fall, as you know, we have pretty strong risk management programs around inventory acquisition, and we will continue to keep those in place.

Pat Bowe: Especially, on the farm center side, where our salespeople are working directly with the grower, they have a plan program for what they are going to apply for the fall, and we have that kind of an overall program.

Then on the wholesale side, it’s more of a back-to-back business than it is an inventory pipeline business.

Brent Rystrom: For spring applications, are you guys doing any pre-fill -- summer fill orders now for next year, or are you following somewhat the similar pattern?

Pat Bowe: I think we just have to see how things are going. We really look at the market conditions, and if there’s an opportunistic way for us to position ourselves for spring pre-fill, we would. At this point we’re really looking at what margins are and the conditions of the overall marketplace. And really that’s a small portion of the overall --.

John Granato: I would just add quickly that there is some pre-bookings in place, but we’re early days yet, and we’ll have to see how it materializes as we move through the fall season, but there are some.

Pat Bowe: Good question on how the farmers are going to respond. We’ve seen a huge decline in fertilizer prices here over the last year and a half. Is there a point that the farmer says, I want to go ahead and lock that in. The problem is, with the big crops coming around the corner, we have taken our grain prices down, too.

It’s really, really about a farmer decision.

Brent Rystrom: And where I’m going, just getting off the CF call, having talked to Ellisbee [ph] and some of the other participants, the summer fill rates are running 20% to 30% below prior year -- or 20% to 30% below normal rates, let’s put it that way which implies that as you get into the ammonia application in November-December, or you get into the spring or [indiscernible] application next year, you’re going to have a lot more pressure on spot pricing in season, which may present an opportunity to pre-buy to take advantage of that spot pricing.

Pat Bowe: It could. That’s the opportunistic side of that business. I think we’re just going to keep close to the farmer and what their decisions making to be and timing of when they’re going to purchase, but I think you laid it out correctly.

If that played out that way, that could create a basis for appreciation in the market. But that remains to be seen, I guess.

Brent Rystrom: Just out of curiosity on Thompsons, how do the crops look in their footprint? Are they seeing similar issues to what Michigan and Ohio have seen, with the heat and dryness?

Pat Bowe: We’ve been out in all these areas, in our tributary areas, and I’d say probably Ontario is similar to Michigan and Ohio. So, where you guys have seen that we have a crop -- the government crop condition report in there, where parts of northern Michigan and northern Ohio have dry spots. And that same is true in Ontario, to some degree.

Not a disaster, but some areas that are dry and we could see some more rain. Could still be good for beans. It’s a little bit mixed, not as strong as we’ve seen in some of the Western belt or Iowa-Illinois.

Brent Rystrom: And then thinking about Lansing’s and Thompsons, how do you think about them -- or how should we think about them as we consider your implications for the back half? Do you look at Lansing’s and Thompsons as getting back to meaningful profitability in the back half? Do you look at it as a breakeven contribution? How do you think about that?

John Granato: On Thompsons, and I think we’re expecting a similar back half to the front half of the year. And on Lansing’s we’ve seen really some improvement or stabilization at the DDG market.

And we expect a better second half from Lansing, and we expect them to be profitable in the second half at this point in time. So, good improvement over the first half.

Brent Rystrom: And so, John, just to clarify. You mentioned DDGs getting better, and earlier I believe you guys had mentioned soybeans as being part of the issue in the first half. So I’m just curious, can you correlate those two for me, just to tie that tighter?

John Granato: Well, the first quarter Lansing performance was primarily related to DDG conditions, and the second quarter performance was really related to trading positions in the soy complex.

Sorry if I wasn’t clear there.

Operator: Thank you. And our next question comes from the line of Eric Larson with Buckingham Research Group. Your line is now open.

Eric Larson: Could you give us just a rough idea of what Nutra-Flo contributed to your nutrient profits in the quarter? I think this was the last quarter -- you didn’t have a lot of Nutra-Flo, I don’t believe, in last year’s number.

I think it was acquired in mid-May, but you were kind of already through the key selling season. Can you give us an idea of what that contribution was for plant nutrient?

John Granato: We don’t get down to that level. What I would refer you to is what we talked about in the script, where we did highlight that our mix of specialty went from 14% to 22%, and that’s really where we think the improvement is being shown. Obviously we talked about softer margins across the board in the nutrient space, but we don’t give a specific contribution for those particular assets.

Pat Bowe: And maybe to build on that, so now that we’ve been just close to a year here, the integration has -- we have fully integrated the business, but there’s still more opportunities to integrate.

We have, for example, opportunities where we sold Nutra-Flo products at historical Anderson locations, and thus takes out some cost in the supply chain. We’re optimizing SKUs, we’re optimizing freight, getting people in the right position. So we’re really digesting the acquisition and making sure we’re in a really strong position for our specialty products going forward. So it’s not like it’s a separate company. It’s one company with two different

product lines: commodity and specialty.

John Granato: And I would just note that as that mix changes, as we have highlighted previously, specialty nutrient margins are typically 2 to 3 times those of our base NPK. And so, as we get a better mix, hopefully we’ll see improved results going forward as well.

Eric Larson: Okay. Then just a follow on to the nutrient business, and it really kind of, it goes into 2017. If we have the crop that it looks like we’re going to have this year, with all the acreage numbers that we have, et cetera, it certainly is a positive in 2017, and a major positive for your grain group, but could there be a less of a recovery or maybe a softening in the profitability in the nutrient group next spring in the planting season?

Pat Bowe: It’s a fair question.

There’s a lot that can happen between now and then about planting intentions. How will the market respond to corn prices? We have an interesting situation, like I was saying earlier in the call, with the glut of global wheat market around the world. Soybeans, on the other hand, complete different story. We have a tight soy complex. We had a weak crop in Argentina and Brazil.

So exports, even in the last 10 days, were 2.5 million tons on beans. So you have an interesting demand outlook for soybeans, and will that keep that corn-bean relationship wide, and wide enough to get farmers to switch to beans in 2017. That’s one big question. And then the question is what will nutrient prices be and how much farmers will apply. And as someone asked earlier about will they buy some fertilizer early given the current situation in the fertilizer market.

So there’s a lot of dynamics in play, as you mentioned. We all think it’s bullish for agriculture in general in the U.S., especially built upon having some good crops again this year. So, I think what our outlook is specifically around the specialty business, in the low-salt liquid fertilizers and micronutrients are key to the long-term pursuit of higher yields through precision agriculture. And that’s our focus. We want to keep driving those products and how we communicate and execute that with the growers.

Eric Larson: Okay. And then, Pat, if you could just give us a quick, you talked about your productivity savings in the $10 million program that you, I believe you either talked about it at year end or at the end of the first quarter that you were implementing here. I think it was end of the first quarter. And you said you are starting to make some progress on that, would you expect to see the bulk of that 10 million of potential cost savings productivity in 17 or would that be the right assumption to make on that 10 million?

Pat Bowe: Yes, I think that’s fair. But what we’re trying to do is build momentum.

As John mentioned, we have done some de-layering of the organization. We’re working on how we can drive out all costs in procurement and in the supply chain. And we’ve had some really good projects that brought us some real savings right away, so in this quarter. We want to continue to build on that. Of course we had some one-time costs of severance that we have to, that would be below the line, but we will realize some of that this year.

And what we want to get at is a leaner, more efficient organization as we continue to build quarter by quarter. So we will be able to share more results as we finish the year and headed into next year. I’d just say that we have got good momentum. Everyone in the Company understands where we are heading. We’ve got clear targets by every business group, and I feel really positive that we’ll make our targets and exceed them.

Eric Larson: One other follow-up question. Utilization rate in rail, it dropped about five points or so this quarter. And you did cite oil and sand and -- which obviously is -- and you do have some exposure to that. Is that the primary -- is that the bulk of that delta? Or are you seeing some utilization rates softening elsewhere? Is it confined to the three areas that you outlined in your prepared comments?

John Granato: We’ve seen overall carloads for the U.S. down year to date about 12.1%.

Now, about three quarters of that is coal, and it’s been generally across the board. I will tell you that I think, as Pat mentioned, the recent weak weekly year-over-year results have shown smaller declines than the average for the year, which we do think could show a slowing of the rate of the decline. For the full year, I’ll tell you, we expect average utilization rates to be mid to high 80s for us. And hopefully that helps you.

Operator: Thank you.

And our next question comes from the line of Ken Zaslow with BMO Capital Markets. Your line is now open.

Ken Zaslow: I have a couple questions, actually. My first one is, you’re talking about delayering the management team and stuff like that, but I think that you’ve changed a little bit on the risk management team. Can you talk about what risk management changes you’ve made and what the process has changed?

Pat Bowe: I didn’t say anything about risk management changes.

I’m sorry…

Ken Zaslow: No, I don’t think you did, but I think there was -- I think you have added some people or [Multiple Speakers]

John Granato: I think, Ken, this is John. The comments were related to our management of nutrient inventories and that we have and continue to have a robust risk management program, where we’re always monitoring our inventory positions relative to our market read in the supply channel. So, maybe we misheard each other there, but those are the only risk management comments I think we’ve talked about.

Ken Zaslow: No, I understand that you’ve only made those comments, but I’m under the impression that maybe you’ve bulked up or changed a little bit of your grain risk management team at all. Is there anything of noteworthy there [Multiple Speakers] strengthened that up a little bit.

Is not the…

Pat Bowe: What’s noteworthy there is that we brought in the new President for our grain group, Corey Jorgenson, about four months ago. And we’ve kind of rearranged our regions after we sold the Iowa assets. So we have reshuffled our positions. We’ve had a couple retirements that have occurred, which are normal retirements. But we just have the right -- our same, mature team in the key trading positions and feel good about our risk management group downstairs.

So, no big changes other than that.

Ken Zaslow: On the railcar business, what will actually change the demand side of it? Or what do we look for to see that you don’t just level off at these levels? Is there a catalyst or is there either a positive development that’s in the pipeline that can help in 2017 and ‘18?

Pat Bowe: I think the biggest thing is really tied to GDP. As we are going on election-year and where we’re going to be for basic GDP, housing starts; exports of grain was going to, is a big thing for us. So we see more grain movement and railcar utilization and grain. A lot of the sectors have been pretty good, in plastic and some of the other, packaging materials and other things that we ship.

Overall seeing an improvement in GDP and just general economic conditions is the driver for rail traffic.

John Granato: And I think, that’s right, Pat. I do want to add, too, I think as you start to see some of the slowing, we should have better opportunities, candidly, to buy new rail portfolios or portfolios of used cars, as we typically have in the past.

Ken Zaslow: Okay. The next question is, you guys are obviously positioned in the Eastern corn belt.

Eastern corn belt is a little bit better, actually, the yields look really good on the Eastern corn belt. However, where you guys are located seems not as good within the Eastern corn belt. Can you talk to that, how we should think about that? Because we’ve been waiting for a good Eastern corn belt yield. We have it, but you are in Michigan and in places where maybe it’s not as good. Can you tell us how you are positioned?

Pat Bowe: I think the generalization actually isn’t true because you really got to look at the tributary crop conditions right where our assets are.

So, Champaign, Illinois; we probably couldn’t be in a better condition right now. Where our ethanol plants are located in Indiana and Ohio; great, great positions, there are parts of Michigan that are dry, and some of those are not in our backyard. There’s parts of Northeast Ohio that are dry that are not in our immediate backyard. Overall, you

are correct: Ohio, Michigan crop conditions as reported by the government are lesser than they are in Iowa and Illinois. But the increase from last year has been terrific, and this is, will be a bin-filler.

We’ll have plenty of crops to manage our assets in the Eastern grain belt. Also, there’s been bad crop conditions, in the far eastern part of the belt, if you want to call Pennsylvania and upstate New York and those feeding areas, have not had good conditions, which would lead to being optimistic about where we ship grain to. And same in the Southeast. Tennessee assets where we are had good crop condition. It’s rated 75%, so we feel good about where we are in Tennessee.

You really got to look out of your backdoor of each location, and we feel good about our assets and how we’re positioned. Every rain that keeps coming through is a good rain, though, so we really liked how things have shaped up the last two weeks. So we’re passing most across our key growing areas and continue to have those spotty rains are good for us.

Ken Zaslow: With every tick up in the VSR, how much does that add to your EPS? How do we think about that? Do we look at an operating profit? I think it’s $800,000 per period. How do I think about that?

Pat Bowe: Again, we put some information in the appendix on page 21, that each tick up or down in VSR raises or lowers storage $0.0001 per bushel each, per day, and could potentially impact future earnings to us about $2 million to $3 million per quarter.

Again, it depends on how much you have, where you have it, et cetera. But it’s a good thing for us and we feel good about the first tick in place. As I said earlier, the second tick we would call likely. We still have time to see that that spread maintains and wide carries. And a third tick is possible, but that’s a lot more opportunistic.

And a lot can happen between now and the end of that period.

Ken Zaslow: And my final question. When I think about 2017 and 2018 on your margin structure, will you be approaching, can you approach your normal level? Or will it take still another year or so before you get the capacity utilization rate to where you need it to be able to achieve that?

Pat Bowe: Assuming you’re talking about grain and for '17, I’d say yes. We had talked about our normal historical range of space income. We think in '17 we can get back to that.

Operator: Thank you. And we have a follow-up question from the line of Brent Rystrom with Feltl and Company. Your line is now open.

Brent Rystrom: Can you give a little clarity on a couple things? The specialty going from 14% to 22%. Is Nutra-Flo all of that and then some? There was some revenue from Nutra-Flo last year, correct?

John Granato: Nutra-Flo is the majority of that.

However, I will say we have been able to transplant some of the Nutra-Flo technology to our existing locations and capitalize on that.

Brent Rystrom: And then when you had mentioned the margins are roughly two to three times in the specialty nutrients compared to the base nutrients, when we look at PNG as, call it a $750 million a year business, base nutrients are -- how would you clarify that as a portion of that business? Is it a $500 million a year business?

Jim Burmeister: We haven’t broken out quite at that level of detail. Obviously you can make some estimates based on the tonnage we’re providing, and that’s part of the intent. We do want to make sure we give you the color of how we’re -- the main strategy we very much still believe in, in growing our specialty footprint and the higher margins that that affords us. And you’ll be able to see that success as we move forward as we continue to increase the mix of specialty products and grow that portfolio of products.

Brent Rystrom: I guess, Jim, what I am trying to get at is -- so if I look at plant nutrient as a -- let’s call it a teen type margin business. And the margins in specialty are two to three times the base, how do we think about that relative to the overall margin, which includes base but also some other stuff?

Jim Burmeister: I get where you’re going, Brent. I don’t think we’re going to disclose that in any more specifics at this time now. But your head is around the right math around why this makes a ton of sense for us to increase that mix. Again, though, the entire market saw compressed margins, though, during second quarter, which applied pressure up and down the chain.

Operator: Thank you. And our last question is a follow-up question from the line of Eric Larson with Buckingham Research Group. Your line is now open.

Eric Larson: I just have another follow-up, quickly on the fertilizer business, Nutra-Flo. I certainly know what the stuff costs, so the margins I can certainly understand are two to three times higher.

I know the price on that stuff, but my question is this. With your low-salt starters, are you indifferent whether corn or soybeans are planted, or would you rather see corn?

Pat Bowe: We’d rather see corn.

Operator: Thank you. And I’m showing no further questions at this time. I would now like to turn the call back to Mr.

Jim Burmeister, Vice President, Finance and Treasurer for closing remarks.

Jim Burmeister: Thank you, Chelsea. We want to thank all of you for joining us this morning. I also want to mention that, for those that are interested, that this presentation with the appendix slides, which we referred to quite a bit, are provided on our Investor Relations section of our website at AndersonsInc.com. Our next earnings conference call is scheduled for Tuesday, November 8th, at 11 AM.

We will review the third quarter results at that time. Thank you and have a great day.

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