Good morning, ladies and gentlemen, and welcome to The Andersons 2018 First Quarter Earnings Conference Call. [Operator Instructions] And I would now like to introduce your host for today's conference, Mr. John Kraus, Director, Investor Relations. Sir, you may begin.

Thanks, Sandra, and good morning, everyone and thank you for joining us for The Andersons First Quarter 2018 Earnings Call. We've provided a slide presentation that will enhance today's discussion. If you're viewing this presentation via our webcast, the slides and commentary will be in sync. This webcast is being recorded, and 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 '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 assumption upon which -- assumptions upon which the financial information and its forward looking statements are based are reasonable, it can give no assurance that these assumption will prove to be accurate. On the call with me today are Pat Bowe, President and Chief Executive Officer; and Anne Rex, Vice President, Corporate Controller and Interim Chief Financial Officer. Pat, Anne and I will answer your questions after our prepared remarks. Now I'll turn the floor over to Pat for his opening comments.

Thank you, John, and good morning, everyone. Thank you for joining our call this morning to review our first quarter 2018 performance. After Anne provides the business review, I will wrap up our prepared remarks with some comments about our outlook for the balance of 2018, and then we'll be happy to take your questions. The first quarter results were better than those of the first quarter of 2017, but they were not what we expected. Our Grain Group outperformed our 2017 results, and the Ethanol Group finished slightly ahead of the comparable 2017 quarter. Rail performed about as expected but below 2017 results, and the Plant Nutrient Group continued to struggle with compressed margins across our primary and specialty nutrients segment. There were some bright spots across the company, however. While the net loss decreased by $1.4 million, our earnings before interest, taxes, depreciation and amortization grew by 29% to $27.7 million. In addition, on the productivity front, I'm happy to announce that we achieved our $20 million run rate savings goal one year ahead of our target and have set a new goal to save an additional $7.5 million in run rate improvement by the end of this year. Our results were also impacted by some nonrecurring expenses. We incurred $1.4 million in corporate-level severance cost. In addition, after giving considerable thought to how should we respond to the benefits the company has received and will continue to receive as a result of U.S. federal income tax reform, in March, we decided to issue a onetime $1,000 payment to every employee, other than my senior management team, in thanks and recognition for their hard work and commitment during the difficult market conditions we've faced together over the last several years. The financial cost of the decision was about $1.6 million in the quarter and was charged to each employee's business unit. We continue to manage our asset portfolio and balance sheet during the quarter. On our last earnings call, we announced that we had agreed to sell 3 of our Tennessee grain elevators. That transaction closed smoothly in April. Relative to our balance sheet, our Rail Group entered into an asset-backed lending arrangement during the quarter to allow the group to become more competitive in the railcar lease market. On the growth front, we announced in March that we're partnering with ICM to build what will be the world's most technologically advanced dry mill ethanol plant when it begins operating in the middle of next year. I'll speak later in the call about the outlook for the remainder of 2018 and some of the actions we are taking to improve our performance this year. Anne, will now walk you through a more detailed review of our financial results.

Thanks, Pat, and good morning, everyone. In the first quarter of 2018, the company incurred a net loss attributable to The Andersons of $1.7 million or negative $0.06 per diluted share on revenues $636 million. These results compared to the first quarter of 2017 when our revenues of $852 million generated a net loss of $3.1 million or negative $0.11 per diluted share. I'd like to make several observations that should help you more appropriately compare the 2 sets of results. The 2017 first quarter results included a $6.8 million pretax loss associated with the company's former retail business as well as a $4.7 million pretax gain on the sale of our Florida farm centers. The absence of the retail business from 2018 results accounted for 15% of the revenue variance and more than 70% of the $12.8 million gross profit variance year-over-year. We've also shared with you previously that there are new revenue recognition rules that became effective in January, which also impacts the comparability of the 2 periods. More than 75% of the year-over-year reduction in revenues can be attributed to the way we now record certain grain transactions, but there is no change in the gross profit earned on those transactions. The other significant impact of the new rules is to change the characterization of certain nonrecourse railcar transactions from sales to debt financing. We recorded a cumulative catch-up adjustment as of January 1, 2018, that included the addition of $37 million in financing obligations related to previous nonrecourse transactions. These new obligations drove a slight increase in our long-term debt-to-equity ratio, which rose to 0.53 to 1 during the period. Last year's results, included $1.9 million in pretax income from such transactions. The company's effective tax rate was 13.5% for the first quarter of 2018 compared…

Thank you, Anne. As we look forward to the rest of 2018, we still expect our overall company results to improve significantly over those of 2017. More specifically, we will continue our focus on operating efficiency by lowering our cost to serve and thus improve the performance of our business. We will also continue to look to improve our portfolio via asset optimization and invest in our core and targeted growth areas. The Grain Group delivered improved year-over-year results again in the first quarter and remains positioned for a better 2018. With a strong start in our origination activities, risk management enrollments and food ingredients business and with some price volatility back in the market, we are optimistic about our prospects for an improved year for grain in 2018. We're especially pleased with our performance in our food segment and continue to be interested in growing that business. A cold and wet April may cause some changes in planting decisions from corn to soybeans in some regions. Regardless of that outcome, the need for our storage capacity remains strong. The Ethanol Group's 2018 is off to a solid start. We entered the higher-demand spring and summer months with good near-term margins and strong DDG values. As we entered the quarter, the group had hedged about 40% of its second quarter production at reasonably good margins. While the pace of U.S. exports has been strong so far, the outlook for ethanol exports has become somewhat more muted given the political and economic uncertainty associated with the U.S.-China trade relations, which has hampered what might have been a more significant seasonal improvement in margins. Our spring ethanol shutdowns are now all behind us, and all 4 plants are operating well. Overall, we believe our ethanol facilities are ready to run at full…

[Operator Instructions] Our first question comes from the line of Heather Jones with Vertical Group.

So I had a quick question on the cost savings. How much of that $20 million was realized in '17? I'm trying to get to the year-on-year delta for that.

We don't have any specifics since it's on a run rate basis. So we continue to see a broad base of savings. Some of it was headcount reduction and process optimization and reduction in flat cost. We also have some margin improvements. So it's continuing to build as we go through the year.

But I mean, these costs, were they implemented in late '17 so you'll get most of the benefit this year? Or...

Heather, this Anne. Yes, we will achieve most of those this year.

Okay. Okay. And then on the rail leasing side, so you talked about higher utilizations. Are you seeing a bottoming in lease -- am I -- are you all hearing feed back?

Yes, just broke up, you said that we've seen a bottoming in what did you say, lease rates? I didn't hear you.

In lease rates. Are you seeing a -- like, are you seeing this stabilized?

Yes, I think we're seeing some stabilization. Like I said, it's creeping up. It's really by car type and segment we're getting gradual improvements. I think the highlight we pointed out, we're evaluating more some of our older cars because scrap prices are in the high -- in the highest level since October '14. So that's one thing we're looking at on some of our idled cars. But lease rates are slowly improving. Let's put it that way.

Okay. And then I wanted to talk about -- so your valuation, like, right now you all are down close to 10% today. And on a price to book, you all are near 3- and 5-year up -- 3- and 5-year lows. So just wondering, like, do you ever consider doing a share repurchase, which normally for a company as illiquid as this, I wouldn't think was a great idea. But given just the very depressed valuation that's just getting worse, was wondering, is that something that the board has considered doing with y'all's fund?

I think when we talk about share buyback. It's something that the board has the authority and privilege to do, and it's a tool that can be used, but there's no specific plans at this time to do that. But it's something that's evaluated on a regular basis.

So I mean, did -- what does the management and the board think about where the shares are trading?

Like you said, I think I'm disappointed with where our shares are trading because the underlying values at some of our business are quite strong. We talked about what's happening in the grain business, in the ethanol business. We've been direct about some of the challenges in fertilizer, and that looks like that some of those headwinds will persist. But the overall fundamentals of our core businesses are all pretty solid, so we are more positive in our outlook.

And our next question comes from the line of Farha Aslam with Stephens.

A few questions. First of all, on the planting season, your thoughts on the progress so far and the nutrient group here in the second quarter, were they able to hit that planting window?

Well, grains have been tough for us. We're behind on our fertilizer distribution. It's been spotty. This last week has been good. So acreage reports shows to be about 39% planted versus 44% average. We'll likely catch up with that with some good weather here in the next several days, but it was a slow start on fertilizer distribution. As you know, if we get a couple weeks of really good sunny weather out there, the farmers are -- can really get after it pretty fast. So this couple weeks ahead look to be real important for planting.

And so with the way the plantings are kind of turning out this year, would you expect your second quarter in Plant Nutrients to be up year-over-year, flat, down? How should we think about that for the quarter and the year?

Yes, our pace is a little bit behind. So some of it will pick up quarter-to-quarter, but margins remain pretty compressed. So it's likely to be somewhat similar to last year's pace. We don't get additional pickup. So while we might have some volume pushed from first to second, I think the margins have not picked up. So the one cautionary area we have was specifically around Plant Nutrients.

Okay. That's helpful. And then when we look at ethanol, I mean, it's fantastic that you got hedges on a good level because the market's been incredibly volatile. Some color on your thoughts on E15 potential this summer? And if E15 does get implemented, how many additional gallons do you expect would be blended? And what would that do to the margin profile for ethanol?

Yes, very good question. We're pretty positive when we've been asked about the likelihood of an E15 RVP waiver, and we believe it will happen, but likely not before this year's summer driving season is over. So the EPA needs to issue a proposed rule change and then have a 60-day comment period. And so it could drag on a little bit and miss this key driving season, but we're still optimistic over the long haul on an E15 RVP waiver.

And any thoughts on how much additional gallons E15 would allow the U.S. to blend?

Well, I mean, we don't have a specific number because you have to look at infrastructure and distribution, but it is going to give us a good boost to the industry. The -- ethanol exports have still been running a good pace in spite of some of the issues with trade barriers. I'm still optimistic about the export paces here. So we think the spring, summer can be a good period for margins.

That's helpful. And my final question is on grain. You highlighted that fundamentals in grain look constructive for the rest of the year. As you think about the potential for China to put a tariff on U.S. soybeans, would that be good or bad for The Andersons? How does that impact your profit outlook?

Well, it's been interesting, Farha, to kind of see volatility come back into the markets. You've heard a lot of us talking about wanting and needing to see volatility. I think one of the big points is not so much at the destination in China, but it's probably more to look at the origin. So in Argentina, the government of Central Bank kind of surprised the market with a huge near 7% interest rate hike just yesterday, and interest rates are now 40% and the peso has devalued about 25% since the middle of December. So the peso has stabilized a little bit in the last couple of days, but things are messy and precarious at best. So farmers, thus, will be holding soybeans and really don't have an incentive in Argentina to sell under the current environment. So that's kind of the here and now, and the China tariff potential is still hanging over the bean market as well as sorghum, ethanol, pork, et cetera. And this has kind of compressed the U.S. farmer, but there's still strong demand for both corn and soybeans coming out of the U.S. and other parts of the world. So we're really living in interesting times, and the good thing that's clear is uncertainty and dislocation brings volatility and that adds value to our capacity at The Andersons.

And our next question comes from the line of Omar Mejias with BMO Capital Markets.

This is Omar filling in for Ken. Just going back to Heather's question on cost savings, how much of that do you guys expect to fall to the bottom line?

It's a good portion of it because a lot of it is -- we've had some onetime cost to achieve, right? So maybe like in a severance case, but then our run rate on lower labor cost will continue. So those will stay stable over time. We've put in a lot of improvements investing over the last several years in IT. And so some of those IT costs come out as we get those new programs up and running and on solid footage. Other things come from like procurement and transportation, and those are more sticky, right? Now at any time you have some -- some costs are higher in some areas and lower in other areas. We've -- health care costs are higher. But the key things we're focusing on are things that can stick to our bottom line over time. Now margins, for example, in fertilizer can be determined by supply and farmers interested to buy, and that probably has a bigger determine of margins in that business, same with ethanol, on margins. But the focus on cost is something we can control, so that's why we try to work on that. It's something we can do consistently over time. And then when the margins are wider, we're in a better position.

Got it. So would it be fair to say, just order of magnitude, around 75% of cost savings? Is that a fair statement?

I'm not sure what you mean by that. So...

Just basically trying to get a sense of the run rate, what total would go straight to the bottom line.

So I think we -- I didn't quote an exact percentage of what's happening, but most of those will flow right to the bottom line as a high percentage. What margins do in a specific segment will determine overall profitability. So costs are something we can control, whether we have a very high-margin period in ethanol driven by other supply and demand equation. We know our production cost will be lower, and that's kind of what we're focused on.

Got it. That's helpful. And switching to ethanol real quick. With the closure of the Chinese market -- I know you guys gave some thoughts on exports to China at your Investor Day. Has anything changed with regards to profitability and outlook with that segment? Or is everything sort of -- is the outlook still intact?

I think some of the good things for us, our plants are running really well and in a high efficiency. We see the export outlook still to be 1.6 billion to 1.8 billion gallons of exports this year in spite of what could be some trade uncertainty. Could be good news, as we discussed earlier, about E15 coming up ahead of us. What the exact margins will do going forward, we'll have to see, but we're optimistic especially with an improved market for DDGs that are up quite a bit from last year. So our conditions are in a positive outlook for ethanol, how good they can be kind of the combination of exports driving gallons and corn price. So we're feeling good about our position in ethanol, and so we'll just keep the plants running well and get positioned for doing the best we can as far as managing our corn purchases and how we're hedging the forward sales.

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

Pat and Anna, I just want to quickly touch base on Lansing. You highlighted it as an area -- you're getting good, sustained profit recoveries there. And as I recall, oh gosh, when the business kind of went south a few years ago, you had a big position, I believe, in transportation and trading in frac sand, et cetera, in that area of the country. Are you getting a good recovery in that? How was the mix of business for Lansing changing? Is it going back to kind of the previous formula? And I'm just trying to get a level of sustainability for that.

Yes, Eric, very good question. Thanks for asking. In the case of the Lansing Trade Group, the turnup they've had has been pretty broad based. So it's not been driven by one particular segment. 90% of Lansing's business units are profitable year-to-date. So they have a good broad-based recovery. And as you said, they did sell and exited several underperforming businesses in 2017. So the outlook is stable and positive across all the businesses. The frac sand is one segment you brought up. That is doing quite well, has recovered and they're positioned well in the frac sand supply chain business. So we feel good about the position that Lansing is in right now.

Good. And then just overall in the grain business, obviously you had touched on earlier, I think, with Farha's question, but we do have some grain volatility back, which is really nice to see. We're actually even probably above break-even cost for farmers right now, too, which gives us a chance to maybe actually hedge forward at a black margin as opposed to a red one. But looking out this year, it appears that there's enough disruption globally that even if the U.S. crop comes in actually more normal, it's not going to be such a huge increase in supply as to -- it looks like we have a sustained turn in the grain market. I guess that's -- I just don't know quite how to ask that question, but I think, Pat, you probably know where I'm getting at.

I think you make a very good point, and I think you've heard this from other grain companies that in Argentina, production numbers are kind of what started this. So I mean, the Brazil numbers are a little bit less than [ suffering than they were ]; Argentina, 38 million versus 58 million. Last year is a big change. So we've seen a supply disruption from South America that kind of got the market moving a little bit. Our yellow corn and export -- and soybean export pace both lagged last year a little bit by about 250 million bushels but are still solid. And our global cornstarch will actually turn lower this year after peaking last year at about 230 million tons. So we're -- we'll be about 30 million tons lower and trending less in that market. So the corn market is shifting, but will still be about our fifth highest carry-out we've had since the '90s. So there's plenty of corn in the world, but the U.S. will need to grow a good crop or things will tighten up quite a bit. And bean stocks will turn lower as well, but less dramatic amount. Crush margins are really good for crushers, and we have plenty of soybeans in the world, but the trade flows are more encouraging. All 3 pits as far as carrying charges are slightly [ lower ], but compared to last year, but carries are still in the market for people storing grain. So there's an interesting shift that's happened, not dramatic. We don't have a huge, big, global crisis in any food crops, but we have seen a change from the oversupply we've had the last couple of years. So the market's starting to see a little volatility, and as you said, that's been good for our farmer customers with a little bit higher pricing.

Thank you. And that does conclude today's Q&A session, and I would like to return the call to Mr. John Kraus for any closing remarks.

We want to thank you for joining us this morning, and I also want to mention again that this presentation and slides will be -- 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 Wednesday, August 8, 2018, at 11:00 a.m. Eastern Time where we will review our second quarter 2018 results. We hope you're able to join us again at that time. Until then, be well.

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.