Archer-Daniels-Midland Co (ADM) 2001 Q3 法說會逐字稿

ARCHER-DANIELS MIDLAND CO. CONFERENCE CALL

Good day and ladies and gentlemen and welcome to the Archer-Daniels third quarter 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 follow at that time. If any one should require assistance during the conference, please press * then 0 on your touch-tone telephone, and as a reminder this conference call is being recorded. I would now like to introduce your host for today's conference. Mr. Larry H. Cunningham, Senior Vice President of Corporate Affairs for Archer-Daniels. Mr. Cunningham, you may begin.

Good afternoon ladies and gentlemen, and welcome to our third quarter reports conference call. I have an obligatory statement to read. Some of our comments today constitute forward-looking statements that reflect management's current years and estimates of future economic circumstances and discreet conditions, company performances, and financial results. The statements are based on many assumptions and factors, including availability and prices of raw materials, product pricing, competitive environment, and related marketing conditions, operating efficiencies, access to capital, and actions of governments. Any changes in such assumptions or factors could produce significantly different results. We apologize for your receiving our release so late. We've had some telephonic difficulties in getting this one out which we though endeavor to get corrected before our fourth quarter release. At this point, I would now like to turn things over to Douglas J. Schmalz, our CFO, who will go over the financial highlights for quarter 3, Doug.

Thanks Larry. As you have seen, earnings for the quarter ended March 31, 2001. We are $93 million 149 thousand, or ¢15 a share compared to earnings last year of $103 million 29 thousand or ¢16 per share. Earnings for last year's third quarter ended March 31, 2000, did include a net gain of ¢5 per share related to earnings from our private equity fund investments. Excluding that item, earnings for the current year quarter were $93 million or ¢15 per share compared to $70 million or ¢11 a share, last year in the third quarter. Our average shares outstanding declined slightly to $634 million from $637 million last year as adjusted for the 5% stock dividend in September of 2000. Our net sales and other operating income increased 15% to $5.1 billion. Approximately, one half of the increase was due to increased merchandising volumes, and the remaining increase came primarily from increased ethanol volumes and prices, as well as increased sales value of oilseed meals. As discussed previously, in prior periods, net sales and other operating income as well as cost of goods sold have been reclassified to effect the new accounting regulations on reporting revenue growth as a principle versus net as an agent. The adoption of that issue results from the company reporting the total sales value of grain merchandised diet in lieu of the net margins of grain merchandised in the net sales and other operating revenues category. The cost of merchandised grain is reported in the cost to sales and industry classification has no impact on our previously reported gross profit. Despite increases in energy and fuel-related cost of approximately $39 million and higher net corn costs, earnings from operations did increase 22% to 183 million from 150 million last year,

as gross profits improved 10% to $370 million. Oilseed crush margins improved in the third quarter compared to last year, reflecting capacity reductions previously put in place, and good domestic meal demands. Despite higher net corn cost resulting from wheat corn byproduct values, wet corn milling results improved over prior year levels due to improved ethanol and lysine prices and higher ethanol volumes. However, increased sweetener prices which were not sufficient to offset the higher net corn costs and a weak starch market resulted in lower sweetener earnings for the quarter. Domestic flour millings results declined as excess industry capacity has put pressure on flour milling margins. Through the closure of three domestic mills, we have taken a step to reduce this excess capacity situation and hope to see some margin improvement in the future. Results of our foreign milling locations, particularly those in the Caribbean arena remain strong. Our grain export margins remain very thin as weak demand from Europe and continuing worldwide GMO concerns continue to put pressure on the export markets. However, country grain originations storage revenues were good and grain results improved over the last year. Our RiverBarge transportation operating results declined to a loss for the quarter, as weak export markets, typical river conditions, and significantly higher fuel costs, negatively impacted this operation. A nutraceutical vitamin E and isoflavone operating results declined from prior year levels as very competitive pricing conditions and lower sales volumes have negatively impacted margins. Our total results improved over last year reflecting improved margins due to lower commodity cocoa prices and good cocoa powder demand.

In addition, results reflect the positive cost impact of our restructuring efforts in this business over the past year. We continue to aggressively control our operating cost and have implemented various restructuring and cost reduction initiatives this past year. As a result our selling, general, and administrative costs stayed basically in line with last year with a slight 1% increase to $187 million for the quarter. The company's net investment expense, our investment income less our interest expense, increased $6 million in the quarter to primarily to reduce dividend income compared to last year, and also a reduction in interest capitalized on capital projects as our capital expenditure program has decreased in levels this year. Equity earnings of affiliates declined $56 million to $5 million for the quarter, as earnings from our private equity fund investments declined to a loss of $5 million this year, compared to the profits of $51 million a year ago. We consider these private equity funds to evoke financial and strategic investments, and they provide us with potential significant opportunities in the global food marketplace. Many of the funds have agricultural sectors as well as various infrastructure sectors. We generally have co-investment rights in these funds and many investments are in infrastructure projects such as ocean, ports, rail, and other transportation and communication projects, many of which are strategic to our commodity processing-type businesses. Many of these investments are in developing parts of the world, and due to the volatility of the global equity markets, we do expect the value of this portfolio which for accounting purposes is marked-to-market will fluctuate significantly from quarter-to-quarter. Other income of $15 million for the quarter includes a $6.9 million fee received on the breakup of IBP transaction, and also a $3.7 million gain on the sales of foreign soya processing joint venture operation.

Our current fiscal year effective tax rate is 32.5% compared to 33.5% last year, it's due primarily the increase benefits of our foreign sales corporation. Our cash flow from operations for the quarter which equals our net earnings plus depreciation and amortization should approximate about $235 million, and our capital expenditures will be approximately $70 to $75 million for the quarter. That concludes my remarks Larry, and I will turn it back to you.

Thanks Doug. Let's begin our discussion of our operations with the oilseed crushing business. Our profits were up compared with weak results we had in the same quarter, a year ago. Current board margins are running in the range of ¢60 to ¢65 per bushel. Cash margins for oilseed crushing and soybean crushing are between ¢55 and ¢60 per bushel, while these margins are okay, they are down a bit versus the end of last quarter due to the large crop coming out of South America, about 65 million tons up from about 55 million tons last year, and the drag on exports caused by the foot-and-mouth disease in Europe. But based on our outlook of things, we don't see a big pickup in demand for exports of oilseed products from the United States, and therefore, no reason to restart any of the crushing facilities that we have added a little to last year or so. We do see an increase in soybean plantings in the United States projected to increase the crop size by about 230 million bushels compared to last year. This should help continue good utilization of our current facilities and large supplies of raw materials. We do begin to see some positives on the horizon in terms of reducing the global glut of vegetable oil but has been burdening oil prices. The world inventory of vegetable oil peaked at about 3 billion pounds and it is now down to about 2.5 billion pounds and still dropping as a result of the slowdown in crushing operations primarily in North America. We have increased biodiesel interest in Europe and in Indonesia, and in fact, in Indonesia it has been estimated that biodiesel usage could use up to a third of the excess palm oil inventories that exist in that part of the world.

So we expect this also to help booster and support vegetable oil prices. Just as a matter of interest for you, our vegetable oil, specifically peanut oil was the original diesel fuel used by Rudolf Diesel when he first came up with his newly designed engine in the 80s and 90s, so what goes around comes around. Now let's move along to our nutraceuticals and protein specialty operations. Since last quarter, we have addressed and removed the bottlenecks in edible protein production that we mentioned in the last call. Demand continues to grow for soya-containing foods here and more specially in Europe in response to all of the concerns that they have about the quality of their wheat suppliers. In Denver, we have just introduced a line of pastas under our Martha Gooch label called Soy 7. Now you may recall from past conference calls, the FDA has approved the use of a health plan on the labeled products that contain 6.25 grams of Soy protein per serving. Our line of Soy 7 pastas contain 7 grams per serving. Interest has been the key and I am told that virtually every supermarket in Denver has eagerly accepted this Soy 7 line of products. Now we get the 7 grams of Soy into the pasta by adding our Soy [_______________]. It has no effect on the eating quality or the cooking properties of the pasta. Obviously, Martha Gooch is small player in pasta, and I am sure we would be very pleased to furnish Soy [_______________] to other larger pasta marketers to see interest developing as it has in our Denver test market. Profits from nutraceuticals, as Doug mentioned, are down compared to last year, this is primarily due to the increased competitive marketing conditions in vitamin E and isoflavones.

Overall purchases of vitamins by US consumers are down somewhat, including vitamin E, and we think this is mostly the results of consumer confusion over the properties of the different vitamins and supplements, and so I think they've backed away from the purchases of that. So we need to do some more educating on the value of vitamin E and vitamin C and the others that we markets. Speaking of that, we have just concluded our test market in Chicago where we used our natural vitamin E logo to promote the greater effectiveness of natural versus synthetic vitamin E. We realized our goal of boosting natural E sales by 15%, and we are now weighing our alternatives for the next step. As previously reported, demand for our cholesterol-lowering sterols continues to be strong, and in fact we are running at about 150% of the volumes that we were at this time last year. We are still developing new products and new technologies, including this last quarter, the licensing of technology that will allow us to process our phytosterols in different ways, so they can be used in a much broader variety of applications. Also in this last quarter, we announced our intent to form a joint venture with Kao Corporation of Japan to manufacture and market our vegetable oil that helps reduce cholesterol and aid weight-loss. Obesity is America's number one health problem, and we think there is a bright, bright future for this specialty patented vegetable oil. Results in our milling divisions were down compared with last year's quarter, mostly due to over capacity in North America, particularly in the United States. This is in the process of being corrected, as Doug mentioned,

we have closed three flour-milling facilities Portland in Oregon, Buhler Kansas and [_______________] Kansas. Just last week ConAgra now plans to close its large flour-milling operations in Buffalo, New York, and there are rumors of several other possible closings in the US. At this point, it has been estimated that around 90,000 [_______________] of flour-milling capacity has been closed out of an estimated total of 1.5 million [_______________] on the daily basis in the United States. We have begun to see some improvements in milling margins in this quarter. The USPA has forecasted about 60 million acres of wheat production this year down 2 million acres from the prior year. But with carry out of 950 million bushels, we should have a supply of about 3.1 billion bushels compared to last year's 3.3 billion. So it's possible we might see some increase in wheat prices which would pressure our higher flour prices. We are optimistic that we will close fiscal 2001 on a good move and bioproducts is profitable, much improved over the same quarter in the prior year. Beginning with lysine, we have higher prices, and that in part was driven by the demand of the use of both bone meal in Europe and most of the rest of the world. Pricing is currently in the mid ¢70 per pound, although we expect that could weaken a bit due to the softness in soya meal prices we are experiencing; however, we do expect lysine will remain profitable through the year. On another note with bioproducts we have decided to exit from tryptophan business, and therefore we have closed that part of our production facility for tryptophan purposes.

It was a very small volume product in the scheme of things, and it was unprofitable so we decided to close it and we will make use of the fermentation tanks and the equipment used for tryptophan manufacturing for other profitable products. Our feed businesses continue to be profitable, with profitability equal to the third quarter last year. On a year-to-date basis, feeds are showing substantial profit versus a substantial loss in the fiscal year 2000. We do expect further consolidation to take place in the feed industry, and we also expect decent profits to continue in the foreseeable future. Our grain and ARTCO businesses are a bit of a mixed bag, our grain results are ahead of what they were last year. This is primarily a result of strong profits and strong demand for the storage capacity at our country of origin's elevators. So we have experienced this storage income on large grain storage volumes. As I am sure you are aware the export business is very weak due to weak demand from Europe and due to concerns of our GMO in other parts of the world. The ARTCO river operations showed a loss during the quarter due in part of the poor export picture and due in part of the severe winter that the upper Midwest experienced. We had record snowfall and record cold temperatures in the upper Midwest. In fact we still can't get into the Minneapolis, St. Paul area because of ice. This is now of course being exacerbated by the flood conditions in the upper Mississippi. At the same time, the volumes of our ARTCO operation was negatively affected by higher energy cost, and as I mentioned before, weak export markets.

Cocoa results showed a strong gain versus last year's results. We continue to improve the profitability of the cocoa business with product line rationalizations and other cost reductions investments that we were making. Margins continue to improve, and we continue to make progress towards meeting our return goals in cocoa. Corn wet milling results were up between 20% and 25% compared with last year, this was lead by ethanol which had profits up sharply compared to last year. Demand continues to be very strong for ethanol, and we are making every gallon of ethanol that we can make at this time. We expect to see higher pricing come into effect, beginning April 1, as we have completed negotiations for our next 6-month contract period. On the demand side, Tosco has announced its plans to use ethanol year around in California, and in fact they are advertising, no MTBE at all of their California stations. Others in California are paying attention, and we think we will see others switch and replace MTBE with ethanol there as well in the relatively short term. We also are encouraged to see further switching of refiners in the Midwest and the upper South to ethanol from MTBE. On the supply front, we have made the decision to go forward with increasing our production capacity at the dry milling operation at Peoria.

We are waiting on the permits to be approved by the State of Illinois and we expect that we will be boosting production at Peoria sometime during this coming summer. At the Marthaville, Louisiana facility, after careful study, we have decided that the economics do not at this time merit investing in producing ethanol from corn. We couldn't see a way to get an acceptable return on our investment there. Using it is as a facility for converting excess government sugar and the ethanol still remains a possibility, but we don't see at least in the near term Marthaville producing corn to ethanol. We are actively looking at incremental expansions at our other ethanol producing facilities. It still appears to us that crude oil is going to be in $25 to $30 range for the foreseeable future. So prospects look good from the demand and from the buyer value perspective as well. On the legislative front, New Hampshire became the latest state to move to remove the MTBE, I don't know the total number of states now that have moved to remove MTBE, but it's got to be in the 2000 range. We continue to hear whimpers as I am sure you do, that Washington is close to making a decision on the redress by the State of California for a waver from the Clean Air Act. We are encouraged about the associations and by the other Rovers group and so forth to have contacts in Washington that we will have a favorable decision on the California waver, so we continue to be bullish in ADM on the prospect for ethanol. Corn sweeteners, in spite of our success in negotiating higher prices, profits for the quarter were down from last year.

The primary reasons for that were energy, as Doug mentioned, net corn costs especially the weakness in corn oil, where we saw corn oil down to ¢9 a pound have negatively impacted the corn sweetener business. Late in the quarter, we also experienced some manufacturing facilities at our Decatur plant, which affected results. The starch business in our corn wet milling section is very weak, in fact it's the worst I have seen in my 35 years in the industry, and it makes one wonder if others will take a look at converting some of that starch capacity into ethanol. Sweeteners will improve as the year goes on. We have already begun to see the positive results in moderation and energy costs, and we have seen some improved corn oil prices were up to ¢12 or ¢13 a pound, which will help to provide lower net corn costs for us. On the corn supply side, USDA has projected a 3 million acre decrease in corn plantings a switch to soybeans. But based on the historical average of 137 bushels per acre coupled with the carry off from last years crop of 1.7 million bushels, supply should be about 11.5 billion bushels, almost the same as what we had last year. As a result of our negotiations back in December and January, we have been able to achieve a modest increase in marketshare and corn sweeteners. So to summarize corn sweeteners, we still believe that calendar year 2001, compared to calendar year 2000, our sweetener profitability will show a modest improvement.

Food additives in this group, our profits were also up from the prior year beginning with citric acid where market conditions remain very competitive but profitable. The competitive increase is mostly as a result of new capacity brought on stream during the quarter in Brazil by Cargill. Demand continues to grow between 5% and 6% per year for citric, but we predict that the citric business will be tough at least through the end of this year. Demand for lactic acid is very, very strong. We mentioned removing some deep bottlenecks in our process during last quarters call. We have completed that, and we continue to see demand that is outstripping our production capacity, as people are looking very seriously at lactic as the beginning building block for making petrochemical replacement products. So therefore, we are looking at further expansion of our lactic capacity as well as yield improvements. Xanthan is experiencing good demand especially as it is used in the applications for oil well and natural gas explorations as a component in drilling products. In addition to lactic, we are also looking at the prospects for expanding our capacity of Xanthan. Demand for sorbitol is very, very good and we are enjoying decent margins on sorbitol and working on some new product development that could actually help increase the size of sorbitol market. Another announcement that we made during the quarter and I think looks ahead to the future of ADM is the formation of a technology counsel between ADM and Proctor and Gamble, with the goal to develop natural-based raw materials working together.

Proctor and Gamble brings a wealth of consumer marketing strengths and consumer product technical information, while ADM certainly brings a globally strong agricultural base product stream and also much processing expertise. The products that we targeted will be "food ingredient and industrial ingredients markets" with many of them being replacements for products currently made from petrochemicals. I know there have been a number of stories floating around in the trade about ADM and Farmland. We will confirm we are in confidential discussions with Farmland, but we can't go beyond that comment at this point. So to summarize our third quarter, we continue to improve results in most of our core businesses, and we are pleased to see this trend continue in our operating earnings, and we believe this direction will continue, enhanced by investments to strengthen our base and to grow our stake in higher value businesses. So ladies and gentlemen, that concludes the presentation portion of today's earnings report and we would open, we're up for questions.

Thank-you. Ladies and gentlemen, to ask a question, press the 1 key on our touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key, and if you are using a speakerphone please lift the handset before you ask your question. Our first question comes from David Driscoll of Salomon Smith Barney.

Hi! Good afternoon. I just wanted to go over the energy situation. I am still finding it a little bit difficult to try to accurately predict how energy costs are going impact you going forward, and I wondered if you might be able to help us out, I know that you guys have 25 cogeneration plants that are certainly helping this environment, but yet that alone does not really help me get to a conclusion as to how to make a change based upon the fluctuations in natural gas. Do you have a sensitivity that you might be able to provide where as natural gas changes by a dollar, what the sensitivity is for either the company as a whole or whatever product line whether it is corn or soybean processing? If you could steer us down that direction I think it would be a real big help.

David, I don't think that we have that information available. I think as we look ahead on energy though on a quarter-to-quarter basis, we think we will be less negatively impacted than what we have been in the last two or three quarters.

I might just add that year-to-date we are about 100 million energy over where we were a year ago, and that kind of came in about 20 plus millions in the first quarter, 30 some million in the second quarter, 30 some million in the third. First, second, and third quarters might be the higher quarters than that given everything else relatively constant. So we hoped to see that drop off a little bit in this next quarter and then in the summer months perhaps drop off some more and then it will depend on where oil prices and so forth going into the next year and natural gas prices.

So then if I got it correct, the second quarter and the third quarter, the impact from energy was approximately the same?

Well, not much different, one was 36, one was 39, relatively consistent.

Then, where was the largest shortfall that made up the difference between last quarter's ¢20 number and this quarter's ¢15 number?

I think the biggest difference from last quarter was grain and transportation was also significant at this quarter compared to last year's last quarter. And also, I think if you look down at various businesses, our crushing perhaps is relatively consistent quarter-to-quarter. Corn was offset and that's energy as well as just a weakening of oil price and so forth in our corn costs. The grain was off substantially between ARTCO and the grain division, and generally it, kind of, rolls down into the milling group.

Okay, would you expect the problems in the transportation segment to continue into the third quarter or in the fourth quarter, it sounds to me like we've got ...

There's flood conditions and that can impact us we don't know the total effect of that but we'll have to wait and see how that turns out. I hope it doesn't have a negative impact.

Right, right. Okay, thank-you.

Our next question comes from John McMillin of Prudential Securities.

Good afternoon. Doug, the press release says the net gain from sales of investments in the quarter was 0 versus 0, but in your statement you said you had some gain from equity sales and IVP and some other things that seemed to total about ¢1 a share. Can you just tell me what these security gains were in the quarter?

I really don't have any marker. We sold one business overseas which was 3.7 million. We have the fee on the IVP breakup. It wasn't sale over the investment as we categorized it here.

Okay, but if you add those two together that might have been depending on operating gain. Okay, I got that, and you know, in the past, Allan has been quoted saying some comfort with an ¢80 number for the year. Obviously, some things have happened to agriculture in recent months. Normally, when you give earnings guidance, you're forced legally to revise it. Do you have any revised guidance?

Well, I don't know but we've been in the business of giving guidance. I think ...

Well, I know that true but that's why I was so shocked to see Allan giving guidance on 2 or 3 occasions?

John, I think all Allan was doing was responding to numbers that were being quoted by people who are in the securities trade who put up numbers, but I don't think we gave any direction or any comments that would give direction to those earnings.

Okay, I mean, I just sat here and read 3 or 4 quotes where he did seem to give specific guidance. I didn't know whether you were revising him or not. Obviously, some things have changed.

Well I have read some of those same quotes John, and I can assure you that Allan did not say those. Those were comments that were made by reporters and dis not reflect what Allan really said.

Yep, okay. Thank-you.

Our next question comes from Bill Leach of Banc of America.

Good afternoon everyone

Good afternoon. Hi Bill.

Doug, could you repeat that IVP gain? I missed that number.

6.9.

Could you tell me, when you look at the sales gain of 15%, how does that breakdown between pricing, volume, and acquisitions and currency?

About half of that was really a volume in our merchandising operations. We've had a lot of merchandising groups around the world really and that's the biggest piece. The other half is, I would say about half price and half volume.

And last question I have. Where does your ethanol capacity stand now as you look to next year?

We will be in the neighborhood of 900 million gallons of ethanol capacity, perhaps a little more.

Okay, thanks a lot.

Thank you Bill.

Our next question comes from Mark Wiltamuth of Morgan Stanley.

Hi, good afternoon. A question on the corn sweetener front, you indicated you thought for the calendar year that you might have an increase in year-over-year earnings. That would imply some substantial improvement in the corn byproducts values from here. Could you maybe walk through some of your thinking there?

A couple of things Mark. I think the first quarter did not see the full impact of the increase in price negotiations. Some of those were not even completed until the middle part of January. Certainly, as we look from this point forward, we will be collecting all of those price increases. Secondly, we see co-products recovering, especially corn oils and there are net corn costs should be lower than they were in the prior year, and as I mentioned, we have a modest increase in market shares that we're able to gain, and the seasonality of the business from this point forward for the next couple of quarters is as you know, very strong. So, I think those are ...

.. reduced energy cost also.

Yes, you're right.

Okay, and if the corn oil prices do recover as you've mapped out, that should build well for your soya cross margins as well. Maybe you can give me some outlook on your predictions there.

I think that's right. The vegetable oils tend to swim in the same water. So, we would expect corn oil prices improve as a result of the reduction in the glut of oils on the world market. It would benefit our soft seed business, as well as our soya oil business and our cottonseed business here in the States.

Okay. Could you maybe do a little contrast in terms of order of magnitude and impact on the positives that you got from the mad cow situation with the EU banning meat and bone meal and some of these negatives you mentioned with the hoof-and-mouth disease?

Well, unfortunately I think we ended up probably with more negatives than we did positives out of it is the number of animals was decreased through slaughter from the foot-and-mouth disease, and you know, dead animals don't eat much soybean meal or lysine. So, we were more negatively affected than we were positively affected. I mentioned that the [YC], and in the short term as you'll think back Mark, we saw a run up in soybean meal prices from $140 a ton to $190 a ton, which have now drifted back down to have closed at $150 a ton. So, it was kind of a short-term gain we had on that side, and more of a long-term loss in terms of the number of animals being fed around the world as a result of foot-and-mouth disease.

And what's your outlook on how long before that gets cleaned up?

Well, the Brits are county-by-county now declaring parts of their country free of hoof-and-mouth disease. So, we would expect they will start replenishing the stocks, but at this point, it will take sometime to get them in place. You know, I think that's probably 3 to 6 months to get that process started again. In the meantime, we are seeing some increase in demand here in the United States for our animal feed production as demand for American beef supply is increasing.

Okay, thank you very much.

You are welcome.

Our next question comes from Leonard Teitlebaum of Merrill Lynch.

Good afternoon.

Good afternoon Lenny.

Okay, I've got a couple of questions, and I must admit, I screwed up pretty royally in my other income because I'd earnings, obviously, I think some of the street did higher than you did. Now, I am just wondering can you give us any kind of, Doug, an indication, how we can follow this thing because if you take a look at the nice 20% gain in earnings from operations as you define it but we got kicked in the head on the other income line. Now, what do we do? Do we take it all in one quarter? Or what's the best way to spread that out over a year?

We have to mark those investments to market every quarter, so as equity markets move, if there are public stocks in there, or if they are doing evaluations we are marking those to market as we go. So, we step on the equity funds which as we discussed before principally in the Asian area, Eastern Europe, Latin America, and Middle East area, as we have [_______________] and markets and so forth we are marking those to market, and it will be what it will be. I mean, I hate to say more than that but that's, I need to talk to the fund managers and with some of boards and so forth, I think everybody is still relatively ambitious on good returns over long term on those, but a lot of them are only four to five years in. Most of them have 10-year exit strategies, so we are four or five years away from seeing that. We had some exits and when we have the exits, we have had good returns and that's where part of that 50 came from a year ago. They exited a few other companies and then made some good return. Well, I guess it's always hard to predict.

Well, I agree with that Doug, and I maybe, I am only speaking for myself, but as I said I have been looking for earnings, and I will admit it better than ¢20 in the quarter, and we didn't have any choice but to try and put in the financial gains. I don't whether it is better to try and put this thing without the other income factor or not, because if it's going to cause this much volatility, we are really going to be at the mercy of a total unknown and unable to predict. So, I have got to do some thinking on that.

Yeah. I think.

Clearly, on the other hand it is real too, but I can tell you that you go through your litany of things that are doing well and there is a long list of them, and obviously we have got some soft areas and that's only to be expected. So, get down and say we got a 20% increase earnings from operations or either way our earnings are down and the reason is non-operating, and I think maybe we could use some help along that line. Also, I would pick up on John McMillin's point, I think whether it was unintended or not, I think there was some at least some implied guidance out there on what the year was going to look like, and I think on the first call basis I think you saw that we were all estimating and that number came in substantially different for non-operating items. I think if there is some way to kind of alert us to what's going on, I think it will help out the stockholders a lot. I really...

[_______________] really noted.

That's almost that's an observation, I am kind of at a loss Doug, as to figure out what to do in the fourth quarter. I think there is no question that fructose is going to be what it is and it's not going to be as good as we thought, but you've got some pick up in some other areas, and I was just wondering if there is something we are missing should we, from operations should we at least see a quarter in Q4 that would look a lot like Q3 from operations only?

I think what we said Lenny is that the direction in our core businesses is up, and we expect that direction to continue.

I'll take that as at least from operations that June isn't going to kick us in the head and then will talk offline about the other income line. Thank you very much.

Thank-you.

Our next question comes from Christine McCracken of Midwest Research.

Good afternoon.

Hi! Christine.

I am wondering if you could mention, you had mentioned that you were having some issues of flooding obviously with barge travelers, if I am not mistaken do you see the rapid facilities also possibly at risk. Are you seeing anything there?

No, I don't think we are concerned about any of our operating facilities along the river at this time. We have seen worse flood positions I'm sure it [_______________], which would be the one most logically affected by it, Christina. What we are anticipating at this time unless we get hit with heavy rain storms on the upper stretch of the river eventually works its way down, but at this time continuing to operate our facilities, we don't feel this is threatened by the flooding of the Mississippi.

Okay. And, then I was wondering, you had mentioned, obviously, that you are looking at, putting in some ethanol capacity, I think [________________] out your dry mill. Wondering how close you are getting now with maybe all this additional ethanol capacity on grind? Are you going to after some point put in more capacity for grind? And at what point do you make that decision? And what are we talking about in terms of timing and capital cost?

Well that's a good question. As we have maximized our finishing capacity of ethanol to match up with the level of sales that we have had, we have begun to run up against our branding capabilities. So, that is all partially of what we are looking at in order to be able to accommodate the continued growth and demand for the ethanol market, but we frankly believe this is going to be out there. So, part and parcel of the plans we are putting together to increase ethanol capacity, it's not only the distillation and finishing capacity, but also the front-end capacity to go with it.

So, at this point you don't have any additional, I guess, construction plans or spending plans?

We do it at the Oregon Facility Christine, but beyond that we are like a lot of other people in the industry. We have been around this business for 20 years and we think we understand it, and we would like to see a positive determination in Washington as to the legislative future of ethanol before we start putting large amounts of capital into satisfying the market, but certainly if the answers are right legislatively, we will prepare it and promptly move forward with helping satisfy the higher demands of ethanol and continuing our role as the market leader in ethanol.

And if I am not mistaken, it takes about 18 months to put that up?

Yes, that depends on the facility, but it's, I think in the range of 12 to 18 months.

Okay, and then one final question on flour and milling. As I understood it, a lot of the issues in that sector were tied to some cooperatives knowing condition. Are you seeing any consolidation or anything that would indicate that those cooperatives are going to be any less competitive going forward?

What I think is that they are stressed with the same problems that we are in ADM, if not more so on trying to get return on capital that they have invested. And so, I think the entire industry is going through the process of looking at all of its operating facilities, and things which won't have a chance of getting adequate returns and having shaped out the ones which do not, including a few, that we have announced. So, I don't think we have seen the answer to the shakeout in flour milling.

How long do you think that would be before we start, kind of, some bottom there?

Well, on a scale of 1 to 10 of what needs to happen is at about 5 right now, so, there are several more months of our consolidation that will have to take place, but I do think that with the reduced weak progress going to be the pressure on to try to at least offset those higher cost with improved pricing and hopefully improve margins.

Thank-you.

Our next question comes from Lara Palevitz of UBS Warburg.

Hi! Thank-you. I have a question about the GMO issues that you mention. I was wondering if you could be anymore specific in terms of volumes or sales as to how this issue impacted your grain business, particularly because as far as I remember, last quarter's conference call, you had indicated that the issue of surrounding StarLink had decreased substantially in your opinion and in the prior three months and now it seems as though you are indicating that its come back again?

Well, I think it is continuing to effect us Lara. I saw a number recently, which said that year to date, US exports of corn-free soya products were down 65 million bushels and that was compared with projections by USDA and a call for exports to be up by 330 million bushels, so that shows you the order of magnitude of what's happened, and I don't think that we have been uncompetitive price-wise with other people around the world. I just think South Americans, in particular, have been able to take advantage of the situation and take some of the business formally supplied by US farmers and merchandisers on the basis of having GMO-free material. It's happened in Europe, it's happened in Korea, and it's happened in Japan.

Do you see that continuing for the rest of this calendar year?

Well, as you brought up the StarLink issue and I am glad you did because I think that one is starting to fade into the rearview mirror, and I don't think we have the same concern with people trying to stay away from US corn because of the concern over StarLink. The testing for [_______________] I think are effective and I think we've regained the credibility that we could supply corn that's free from StarLink. With regard to the Europeans and their desire to have GMO-free soybeans and GMO-free corn, it will be more difficult to spot, although since we have a global presence in South America and some of these other countries, we are able to participate to some extent in exports to those countries.

So not to belabor this point, but I'm interested, the issue isn't really Asia, at this point what you are saying, the issue is Europe.

Yes, I think that's true.

And in terms of Brazil, just out of curiosity, the soybeans in Brazil, according to reports out of that country are not really GMO-free. Is that something that you have found to be the case, and that is having no impact on the perceived advantage that country has in the soybean market?

Well, I think, it's extremely difficult in today's market environment to guarantee that any country is totally free from GMO crops, including the South American countries. So, yeah, I think to your point, as time goes along the gap between the South American claims and the US claims will narrow.

Okay. Thank-you.

Again, to ask a question press the 1 key on your touch-tone telephone. Our next question is a followup from David Driscoll.

Hi! gentlemen. Just a couple of quick follow ups here. On the wheat division, could you give us the current operating rate that ADM is currently operating at within wheat?

I don't think we can give you that, David, but the estimate for the flour milling industry is between 83% and 85% in North America...

How does that compare to historically?

Its on the low side.

Okay. How about on the animal feed issue? As I understand it, the current count is about 1.7 million animals have been slaughtered in Great Britain due to hoof-and-mouth disease. You know, certainly, this raises some complexities as to the protein demand that those people will certainly have, and where would it come from - presumably the United States? Assuming that it does, is there a long-term net positive story out of this whole event, or is that as more of this protein demand shifts to the United States, this would incrementally be beneficial to you, because it would be better if you could sell your feeds here?

That's probably true, but I'm not sure that I agree with that scenario. I think, probably, we have a short-term gain in domestic production and exports from the United States, but I think our friends in the common market will find a way to rebuild their herds, rebuild consumer confidence in their products, and of course, as you know, David, we're heavily involved in oilseed production in Europe, and we would look to provide many of the proteins in helping rebuild those herds over there. I think, one of the things that's going to happen in the short-term, is that European consumers are going to increase in return to hovering away from, particularly beef, and that tends to be positive for us because poultry consumes larger amounts of our proteins and ingredients than do beef cattle.

Thank-you. And then a last question, just an interest expense question. Would you anticipate interest expense remaining flat into next quarter?

Yes.

Thank-you.

Our next question comes from Chris Walters of First Manhattan.

Hi! I was just reading your old annual report, in the last week or so, and there is a lot mention about improving your return on capital employed and I was wondering, (1) how you defined your capital employed in the business and what kind of target returns you hope to achieve?

As far as definition, we are really looking at based on our fixed investment base with a full charge against the operations for working capital needs on an interest basis. That's the way we internally measure. We don't really put out exact percentages of what we are looking for in the various businesses. I think over the term we said that we only anticipate that our businesses on an equity basis, but if you at our balance sheet, our fixed investments is fairly equivalent to our equity base. It should run on that 12%, 13%, 14% range and also lift the value-added products and so forth, incrementally, adding over and above that should be able to improve.

Okay, and can you comment on the current US high-fructose corn syrup capacity utilization and what you see for demand growth and supply growth over the next couple of years.

Well, I think we're still under 90% capacity utilization, Chris, when it comes to the HFCS capacity here in the United States. We think it's going to grow but modestly 2% to 3% per year in that range. A couple of things could happen with our impact that one of them is clearing our difficulties with NAFTA over access to the Mexican sweetener market for high-fructose corn syrup. We could probably send another 3 billion pounds of high-fructose corn syrup to Mexico, so we did successfully resolve that issue and that will take us up into the mid 90% in terms of capacity utilization. I think the other thing that I mentioned earlier in the call with sweetener margins being where they are and especially starch margins being as depressed as they are, I think people are likely to seriously consider converting that capacity into possible ethanol, again depending upon clear signals coming from the government authorities, an added factor is a long-term market demand for ethanol.

Uh-huh. And given your strong profits in ethanol, does that allow you to price more aggressively on your high-fructose corn syrup? You mentioned that you did gain some marketshare.

I think, it did give us an option and certainly at ADM and some of the other people in the industry can make ethanol when we were negotiating this year that others don't have. So, I guess the answer to your question is yes.

Thank-you.

Our next question comes from [________________] of Dodge & Cox.

How're you doing? I just want to go, if you could just clarify some of the balance sheet items. Doug, how are you doing?

Just fine.

Do you have a balance sheet available at this point or...

I don't have it here with me.

What about some number like short-term debt or net total debt or...

I think our short-term debts are going to end up with relatively same levels, a little bit down maybe.

From the previous quarter? And is the long-term debt flattish, was it up seasonally?

We issued, that's up a little bit because we have had that issue this last quarter.

Right. And what about the capex expenditures and also investment and investments to affiliates?

I think, our capex we think it is in the 70-75 million range this quarter.

And [_______________] is there...

Its running consistent with where it's been the last couple of quarters.

Right, so you're spending what should basically be maintenance capex.

That's correct.

And what about investment and investments to affiliates?

Generally little in addition there during this quarter.

Okay, thank you very much.

Our next question is a follow up from Leonard Teitlebaum of Merrill Lynch.

Doug and Larry, there's a lot of assets apparently coming up for sale. You mentioned that discussing with farmland, but we know there are some lysine facilities for sale in the Asian markets. In the past, I think, you guys would have jumped all over these. I'm just wondering, is there a change in philosophy here that some of these acquisitions are going to be much more deliberate that they've been in the past? I'm not trying to force an answer, just trying to get some kind of a feel for where we might be going in this environment.

I think that's a fair statement, I mean, we're looking at each one of these, you know, it's got to stick within our network. It's got to be a piece of the puzzle that we're trying to put together in this business, and if it doesn't fit in there we're not going to go out and expand to get it.

But that's a pretty damn big change from what it has been in the past.

Well we are going through this and everyone of the businesses that we're in, and I think there've been some permanent changes in conditions that dictate that we look at things differently than perhaps it was the case in the past. We're looking at the soybean business here in North America as an example. Its going to have to adjust its [________________] for an appetite that is mostly just what is consumed domestically with very little exports, and so, I think, that says that we're going to be more aggressive probably looking at some of these restructuring opportunities that come up elsewhere rather than here in the States, you know, one of this we [_______________] talk over in the same situation in the flour milling business. So, I think that you are correct that we are certainly considering things in a different light than we have in the past.

Thank you very much.

At this time, there appears to be no further questions. Would you like to proceed with any closing comments?

Thank you very much. We look forward to the next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect.