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Published: Sunday, 7/16/2006

Andersons blazes a profit track

BY JON CHAVEZ
BLADE BUSINESS WRITER

SOMETIMES, good intentions pay off handsomely in ways that were never expected.

Take the rail group at The Andersons Inc.

Last year it generated $23 million in operating income for the Maumee agribusiness - roughly half the $39 million brought in by the company's four business groups.

But more significant, the rail group's $23 million was from just $92 million in sales. By comparison, The Andersons' biggest and oldest unit, its agriculture group, also had $23 million in operating income - but on sales of $899 million.

Those results aren't bad for a business unit that didn't get its own identity or president until 2000 and was begun mainly as a way to keep the company's rail repair shop workers from being laid off.

"I think we were destined to be in the rail business sooner or later because we handle bulk material, fertilizer, and grain. Grain got shipped out in rail cars and fertilizer came to us in rail cars. So we were always around rail cars," said Rasesh Shah, group president.

The Andersons' involvement in ethanol lured investors recently, pushing The Andersons from $40 a share last November to $120 and then a 2-for-1 stock split.

But the less talked about rail group is the little engine that can. After a $340,000 loss in 2001, operating income has more than doubled each year since.

And ethanol is expected to power continued gains for the rail group.

With the growth of ethanol, and higher transportation costs nationwide because of high oil prices, "every type of car is in demand," Mr. Shah said. "I don't think the U.S. railroads have ever been this healthy."

The genesis of the rail group dates to 1990, when The Andersons spent $250,000 to expand a steel fabricating shop at its huge elevator complex on Illinois Avenue in Maumee where it had repaired its own fleet of 300 hopper cars for transporting grain.

The center had 22 workers, and it began to repair some of the 20,000 rail cars owned by other firms that rolled through the Maumee complex annually.

"When we started repairing rail cars, we actually ran out of work," said Gary Smith, The Andersons' treasurer.

So in 1990 the company bought 105 old rail cars for $10,000 each "to keep our people employed," Mr. Smith said.

But the company found that for each old car it repaired, it saved $25,000 of the cost of buying a new one and got a car that would last 20 years.

Mr. Smith said the company saw an opportunity.

Mr. Shah, then head of the company's engineering department, was moved to the rail repair shop, employees were borrowed from other departments, and the seed for the eventual rail group was nurtured.

Mr. Shah had a learning curve ahead of him. "I tell people, the only thing I knew about rail cars was I was stopped at a railroad crossing in 1989 and I was [complaining] about it," he said.

Throughout the 1990s, rail car companies were eager to reduce their fleets, and The Andersons bought at reduced prices, Mr. Shah said.

In 1992, the company tripled the size of the rail repair center and bought 150 cars, keeping 100 for its own fleet and leasing 50. Two years later, it expanded the center again and continued to add cars and lease them.

Most observers agree that 2003 was the year the rail group grew up.

That year it acquired 6,700 railcars and 48 locomotives, along with contracts to manage an additional 2,600 railcars, from Railcar Ltd., of Atlanta, a part of Progress Energy Inc., of Raleigh, N.C.

It also accomplished a stated goal of being among the top 10 rail car leasing companies in North America.

"That blockbuster deal they did with Progress Rail a few years ago was not only a successful deal for The Andersons, but I think what it did for the rest of the business is it made the company realize that it could play in the big leagues," said Charlie Rentschler, an analyst with Foresight Research Solutions in New York.

"I think, in a way, it stiffened their spine to move as quickly as they did into the ethanol business."

Last year, the rail group acquired 1,600 more rail cars, bringing it to its current fleet of about 20,000 rail cars and 89 locomotives.

That ranks as the eighth largest rail fleet in the United States, (the largest fleets are more than 100,000 rail cars). In addition to the Maumee facility, it has repair centers in Darlinton, S.C., and Waveland, Miss.

Its variety of cars can haul grain, steel, coal and practically everything but automobiles and hazardous materials.

The Andersons isn't taking a position yet on acquiring any tank cars to carry ethanol, but officials said adding more hopper cars to carry corn and distilled dried grains is a smart play.

Mr. Rentschler said he thinks the rail group's growth potential is unlimited.

"They have almost 1 percent of total rail car fleet so they've got a ways to go," he said. "But you tie that back into ethanol, and whether it's for their own ethanol transportation needs or others, the potential is huge."

Contact Jon Chavez at:

jchavez@theblade.com

or 419-724-6128.



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