Archer-Daniels-Midland Co (ADM) 2001 Q4 法說會逐字稿

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  • Editor

  • Operator

  • Good day ladies and gentlemen and welcome to the Archer Daniels Midland Company 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 anyone should require assistance during the conference, please press *, then 0 on your touch-tone telephone. If anyone should disconnect and needs to rejoin, please dial 1-877-817-7175. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Larry Cunningham. Mr. Cunningham, you may begin.

  • LARRY CUNNINGHAM

  • Good afternoon. I have a safe harbor statement to read. Some of our comments today constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. The statements are based on many assumptions and factors including availability and pricing of raw materials, product pricing, competitive environment, and related market conditions, operating efficiencies, access to capital, and actions of governments. Any changes in such assumptions or factors could produce significantly different results. And now, I will turn the conference over to, Doug Schmalz, our financial analyst. Doug?

  • DOUGLAS SCHMALZ

  • Thank you Larry. Our net earnings for the quarter ended June 30, 2001 were $56,099,000 and $0.09 per share that compared to earnings last year of $59,587,000 and $0.09 per share. Earnings for the quarter ended June 30, 2001 include a loss in security transactions of $32 million that is $0.20 after tax with $0.03 a share and a loss from the private equity fund investment to $19 million, $12 million after tax with $0.02 a share. Last year's fourth quarter ended June 30, 2000 included a loss of $108 million, $72 million after tax or $0.11 per share related to plant shutdowns and abandonment. Last year's quarter also included earnings from our private equity fund investments of $17 million, $11 million after tax or $0.02 a share and a tax credit related to the re-determination of foreign sales corporation benefits of prior years, as well as various other tax issues of $60 million or $0.09 a share. Excluding these items our earnings for the currently acquired were $88 million or $0.14 per share compared to $62 million or $0.10 a share in last year's fourth quarter. Earnings for our fiscal year 2001 were $383,284,000 or $0.61 per share that compares to $300,903,000 or $0.47 per share last year. Fiscal year 2001 results include losses on security transactions of $56 million, $35 million after tax $0.06 a share and a loss from results of our private equity funds of 28 million separately, which is $17 million after tax with $0.03 per share and also a gain of $95 million or $0.15 per share from the sale of our CIT investment. Excluding those items, earnings for fiscal year 2001 approximated to $341 million after tax or $0.54 per share that compares to an equivalent amount of fiscal year of 2000 of $262 million after tax or $0.41 per share.

  • Last year's reported earnings of $301 million included abandonment and write off of $72 million or $0.11 per share, gains in security transactions is $6 million or $0.01 a share, and gains from results of our private equity funds is $45 million or $0.07 a share and $60 million or $0.09 per share of tax credit. Average shares outstanding were comparable last year at 632 million average shares for the quarter and declined slightly for the fiscal year to 633 million shares. Our net sales and other operating income increased 9% to $5.3 billion for the quarter and increased 8% to a record $20.1 billion for the year due primarily to increased volumes. As discussed in prior quarterly conference calls, last year's net sales and other operating income, as well as cost of goods sold have been reclassified to reflect the new accounting regulations and reporting revenue growth as the principle versus net of an agent. The adoption of that issue resulted in the company reporting total sales value of grain merchandised in lieu of the net margins of grain merchandised in net sales and other operating income. The cost of merchandised grain is reported in the cost of sales and thus this reclassification had no impact on our previously reported gross profit.

  • Earnings from operations increased to $174 million, $32 million for the quarter and $701 million from $490 million for the full year. Last years results were asset-related at $108 million charge for asset abandonment's and writedowns. Excluding the effects of that charge, earnings from operations increased 24% to $174 million for the quarter, an increase of 17% to $701 million for the fiscal year. Excluding the effect of abandonment and writedown charge last year, our gross profits increased 15% to $352 million for the quarter and 8% to $1.4 billion for the year, as overall operating conditions improved over prior year levels for most product category. These improvements were despite the increased energy cost of approximately $40 million for the quarter and $137 million for the full fiscal year. Our oil seed crush margins improved in the fourth quarter compared to last year reflecting the capacity reductions previously put in place and the increased yield demand. Despite high-energy costs, wet corn milling results improved over prior year levels due to lower net corn costs and improvement in prices and volume. However, the low capacity utilization in the sweetener product category, a weak starch market, and more bioproduct, corn oil products resulted in lower sweetener earnings for the quarter. Our domestic wheat milling results declined as milling margins continued to be pressured by the industry capacity situation. As we have previously reported, we have closed some of our domestic mills and continued to analyze our own capacity situation. Results of our foreign milling locations particularly in the Caribbean and Canadian regions, remain good.

  • Our grain export margins remain very thin as weak demand from Europe and continuing worldwide GMO concerns continued to put pressure on the export markets. However, country grain origination, storage, and handling revenues were good, and grain results improved over last year. Also, our Tabor joint venture reported improved results for the quarter. Our river barge transportation operating results declined due to a weak export markets; difficult river conditions early in the quarter, and significantly higher fuel costs negatively impacted the operation. Vitamin E results declined from prior year levels, as very competitive pricing conditions as new entrants are coming into the market and lower sales volumes negatively impacted those margins. Our cocoa results, and particularly the chocolate product category improved over last year, results reflect the positive cost impact of our restructuring efforts. Although our selling, general, and administrative cost for fiscal year 2001 were $731 million, which is about the same as $729 million for fiscal year 2000 as increased advertising costs were about offset by decreased bad debt cost. We continued to aggressively control operating cost and implemented cost reduction initiative this past year. Excluding the impact of acquisitions and new ventures, we do not anticipate any significant increase in our SG&A cost for the coming year. The company has made investment expense - investment interest expense increased 3.6 million in the quarter and 7.6 million for the fiscal year due primarily to the reduction in capitalized interest as our capital expenditure levels decreased this year. Our overall borrowing was up slightly, but that was offset by the decreased rates. Our losses at the marketable security is $32 million for the quarter compared to a loss last year of $3 million for the fiscal year overall loss of $56 million compared to a profit of $10 million last year.

  • Equity in earnings in affiliates declined to $4 million for the quarter as earnings from our private equity fund investments declined to a loss of $19 million this year compared to a profit of $17 million last year for the quarter. This was partially offset by improved results of our Tabor and other joint venture investments. Equity in earnings of affiliates for the full fiscal year 2001 was $105 million, which includes the $95 million gain on the sale of our CIP investment and the $28 million last from our private equity fund investments. Fiscal year 2000 equity in earnings of affiliates included profits of $6-7 million from the private equity fund investments. Excluding the impact of the non-taxable gain on the sale of our CIP investment, our affected tax rate for the fourth quarter of the year is 72.5% and including the effect of the non-taxable gain our effective rates for the full fiscal year is 26.6%. The effective rate for fiscal year 2000 was 15%, which reflected the $60 million tax credit recorded in the fourth quarter. Excluding the net tax credit for fiscal year 2000 our rate would be approximately 32%. Cash flow from operations for the quarter, particularly net earning plus depreciation and amortization were approximately $196 million, and our capital expenditure were approximately $60 million for the quarter. For the full fiscal year, our cash flow from operations were $956 million and our capital expenditures were approximately $275 million. With that, I will turn it back to Larry who will go through some of the operating results.

  • LARRY CUNNINGHAM

  • Thank you, Doug. We are pleased to begin our discussion with the oil seeds portion of our business where our profits for the fourth quarter were up significantly compared to a year ago. As a matter of fact, our oilseeds profitability for the entire fiscal year, those earnings were up by about 50%. So, we are happy to report that we have current more margins that are growing at higher levels than a year ago. We think these levels are also sustainable ... certainly in the near term. Our US capacity on oilseed crushing is reasonably balanced. At this point, we see no reasons to restart any of our crushing facilities, but we would hope that sometime in the coming months that we will be able to resume our operations that had been partially closed down. The demand for soybean meal is strong and as part of the result of that replacing oatmeal in many parts of the growth. Additionally, there are more animals on these boosting the demand of protein meals. We suffered with a glut of vegetable oil over the last year or so, but we see some positives in the global vegetable oil inventory reductions. The inventory peaked to about 3 billion pounds ... it is currently at about 2.5 billion pounds, which is flat with last quarter. However, there are a couple of things that are going to further drop the vegetable oil inventories. One of them is a smaller Soy seed crop in Canada and the other one is the growing use of vegetable oils as the primary ingredient in making biodiesel. This is mostly in Europe, although we are beginning to see some interest here in the States. We have two facilities at ADM, which manufactures biodiesel; both of them are in Germany, one in Leer, and one in Hamburg. In fact, we have just doubled our capacity for making biodiesel and we will manufacture and market about 220,000 metric tonnes this year. That works out to something around 100,000 [_____] per day.

  • The European market in Germany is about 700,000 metric tonnes currently and growing, and the entire European market is about 2 million metric tonnes and it is also going to continue to grow as the European officials are calling for a mandate to use 2-7% renewable fuels, above diesel including soy oil, we think, is going to fit in the picture and we also think there is going to be continued increase in making ethanol from wheat, corn, and other starch sources in Europe. Our cocoa business also reported a nice fourth quarter with profits up 33% compared to a year ago. At yearend conference, we are up shortly, from a small loss to very near acceptable levels of profit in fiscal 2001. Our product line rationalization around the world has substantially completed and the structure and market conditions in cocoa have improved. The demand for chocolate in the US is good and the basic ground is improving. So, we expect continued improvements in our returns in the cocoa business. Our protein specialty business showed improved profitability this quarter as we resolved some process bottlenecks. But on a year-to-day basis, our profits in protein specialty are different from the prior year. Demand continues to grow all over around the globe for soy-containing foods, especially so in North America and in Europe. Our market test with Soy seven-faster in Denver continues to show promise and we think the prospects look very, very good for soy inclusion in meat and dairy and other processed foods. In nutraceuticals, profits are down from last year mostly due the continuing price pressures in vitamin E as additional capacity has been brought on stream. However, during the last quarter we did see an upturn again in vitamin E and we continue to hope that has recovered. We continue to review our plans for our natural vitamin E cobranding program after the success we have had at the Chicago market. Currently, we have 17 customers in our old facility-cobranding program and 40 customers signed up in our new facility co-branding program.

  • We believe these cobranding opportunities provide greater value for both ADM as well as our customers. There is very strong demand continuing for our cholesterol-lowering sterols in a growing variety of food application. And we continue to live to our opportunities to develop new products with technologies for food ingredients as evidenced this quarter by our licensing of technology to explore new applications for Archer Daniel Midland. Interest in our diglycerol oil also continues to remain very high. Soy milling profits for the fourth quarter were well below last year and while we were on path for the year our results were down to about 20% from fiscal 2000. We continued to suffer from overcapacity. However, there has been slow progress for correcting the situation. During this past quarter, there were two additional factories closed, one in North Kansas City and one in Iran, Ohio, and this was in addition to earlier closings announced this year by ADM and Conagra. There are rumors of several other possible closings. At ADM, we continue to always look and evaluate our milling operations and our other manufacturing facilities to make sure we are operating at the optimal mix. At this point, it has been estimated there are 95,000 100 mills of flour capacity has been closed out of an estimated total 1.5 million. The industry however is running at about 85% of capacity utilization and we need this to be higher operating rates than that or to get back to normal operating profits.

  • We are seeing some minor improvements in margins just recently as a result of somewhat higher food prices. Our bioproducts business is still returning unsatisfactory profits. In the fourth quarter, the results were a 20% better than a year ago and on a yearly basis they were 36% better than they were in the prior fiscal year. However, they are still unsatisfactory. The main culprit is the low pricing for Lysine. Pricing for the quarter would have averaged somewhere around $.0.60 and part of the reason for that was corn prices have gone up and this has made it more economical for people to use products like the soybean meal, as opposed to the combination of lysine and corn. So, there still remains too much capacity for lysine and market conditions being weak as they are, are not helping that. So, we would expect Lysine results to remain marginal for sometime. Food additives, the fourth quarter results were down somewhat from last year, although at yearend they were up 30% compared to prior year. Citric acid is currently experiencing very poor pricing as competitors seek to bring on new announced capacities. The two principle ones are [_____] citric plant in Brazil and one that is soon to start in Canada, which is Young Buns [Flower] and corn products. The good news about citric acid is that demand continues to grow at the 5-6% per year rate. In our Lactic acid area, we are seeing better profitability as our plant operations grew. Demand remains strong for lactic and we think that it has an exciting future for petrochemical replacements.

  • Xanthan business remained strong. In fact, we are expanding our Xanthan capacity and should have that on stream sometime in May 2002. With our feed business, we have come from a small loss in the prior fiscal year to a nice profit in fiscal 2001. I am sure, you are aware, during the last six months we have completed the acquisition of consolidated nutrition, and we will consolidate that business with our more mixed business and rationalize them both to improve the profitability. And I think it is fair to say you can expect decent profits to continue in the feed business and we believe that we will see a continued rationalization and consolidation as evidenced by the lands of [Blake's] acquisition of the [Carina] mills. Grain, hard core, and Tabor although fiscal year profits were down slightly, fourth quarter results were strong with good results of both ADM grain and at Tabor. Farmland is now fully integrated into our ADM operations and it adds elevators in Kansas, Oklahoma, and Texas and a membership base across the United States. It gives us an opportunity to increase our grain movement especially wheat, from member coops, to member coops through ADM system. Currently, only about 20% of the coop members put their crops through farmland elevators. So, there is quite a lot of upset and we will be aggressively going after that. The recent volatility in world grain markets has given us an opportunity because of the volatility and the fact that the people are now more interested in taking forward positions as opposed to just buying on a spot basis.

  • Our export business continues to be weak, primarily due to concerns about GMO crops and increased sales out of South America and increased sales out of China especially corn out of China. Our ability at ADM to assure product integrity through identity preservation and increase the ability will offer and advantage in the future for those who want the crops to be segregated. What could go wrong did go wrong in our hardcore business. We had very high-energy costs, as Dough indicated, then we had a drought in the fall, we had record cold winter in the upper Mississippi, we had ice on the river in the north up until almost May, and then we had floods in the spring. In spite of all of those difficulties though, we did manage to turn a profit. In corn wet milling, our fourth quarter profits were up from the last year, year-to-date wet corn milling results were up 35% from the prior year. Ethanol profits were up sharply from last year, demand remains very strong in part because of the demand towards ethanol to replace NTBE in California, but in our other markets where ethanol is used for acting in carbon monoxide containment the demand is also growing. We are responding to that by looking at how we can make and market additional ethanol. We are in the final stages of adding about 50 million gallons per year of incremental ethanol production at our Peoria drying mill.

  • We are also actively looking at incremental expansions at our other ethanol plants and places to profitability expand our ethanol business. Relatively low cost expansions can be done to maximize our existing network of plants and facilities. This could very well include utilizing surplus high fructose corn syrup, and amino acid capacity for the purposes of making additional ethanol. We are having discussions with several groups in the state of California and we are hopeful that we will find ways or new technology to be able to take some of the surplus crops in California and convert that into ethanol. Looking at corn sweeteners, our results were down compared to the fourth quarter last year and also compared with the entire year. Energy costs were a factor, but they have reasonably leveled out and we soon should have a very good full year indicator as we bring on additional boiler capacity for steam and coal generation as indicated in the course of our largest plants. Corn oil prices have moved up recently; they are about $0.17.5 a pound with doing most of the fiscal year, they are below par levels and that was an adverse effect on our sweetener profitability. Demand for sweetener products at ADM as well as industry numbers were very flat, and I think that is the reflection of the flat sales of the carbonated beverage industry. Capacity utilization is somewhere around 85%. So, it is our view that the profit challenges will continue to face this and have fructose long term.

  • So to summarize, we are very, very pleased with the upturn in operating earnings especially in our core businesses. We will see continued improvements and infact we know, we must continue, we have got our return in share holder equity up from 4.9% of prior year to 6.3% today. But, we know we have got the work cut out for us in terms of improving up on that. So, that will conclude our comment section of today's conference call, we will be happy to answer any questions.

  • Operator

  • Thank you sir. Ladies and gentlemen, if you have a question at this time, please press 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from John McMillin of Prudential Securities. You may proceed.

  • JOHN MCMILLIN

  • Good afternoon guys.

  • LARRY CUNNINGHAM

  • Hi John.

  • JOHN MCMILLIN

  • Thank you for the percent changes in some of these businesses. Can we expect the exact numbers in the annual report or the filings for the segments?

  • LARRY CUNNINGHAM

  • I think the report format will be much along the lines of what we have used last year John.

  • JOHN MCMILLIN

  • Okay, so just percentages for these various businesses. Now, I have last year's quarters and Doug, obviously I know all these numbers have been changed because of new accounting rules. Last year I stripped out the various nonoperating items and I got a fourth quarter of gross profit number that was different in the 206, that is in the release. I am actually looking at the 314 number ... the truth is I cannot remember where I got it a year ago. What do you looking at as a pure gross profit number last year from operations in the quarter?

  • DOUGLAS SCHMALZ

  • 314, I think you are looking at is a 206 versus a 108 of the writedown. And that's the number you have got, right?

  • JOHN MCMILLIN

  • Yes.

  • DOUGLAS SCHMALZ

  • That's what we really look at because that really was the one off unusual item last year.

  • JOHN MCMILLIN

  • Okay.

  • DOUGLAS SCHMALZ

  • So, comparing 314 to 361 this year.

  • JOHN MCMILLIN

  • Okay. That's probably the best representation of the operating improvement in the quarter.

  • DOUGLAS SCHMALZ

  • On gross profit, yes.

  • JOHN MCMILLIN

  • Got it. And, Larry, you said that your return on equity for this year was 6.2 to 6.3% and it would be a struggle to improve that. Could you elaborate on that because that is a little disappointing, if I heard you right?

  • LARRY CUNNINGHAM

  • Well, if I have said we are going to struggle as I have misspoke, John. I am optimistic that we will see further improvement in improving that return on equity number this year. I am optimistic about it.

  • JOHN MCMILLIN

  • In the struggle, you meant was that it has been a struggle to improve it and you will keep struggling.

  • LARRY CUNNINGHAM

  • I don't think I said struggle.

  • JOHN MCMILLIN

  • Okay, I am just ...

  • LARRY CUNNINGHAM

  • Not things easy John.

  • JOHN MCMILLIN

  • I think the industry has become more disciplined may be at once experienced enough and pained at some rationalization and there is certainly no big goals to be the biggest any more. So, it just seems to be a little bit more rationalization. Do you have a target for, you know, these numbers that report we reported today were below the Street expectations, I know you don't give specific guidance, but just in terms of the ... do you have any kind of targets on return on equity earnings or any kind that you can share with us.

  • LARRY CUNNINGHAM

  • No. We know from our history and from what generally shareholders expect that we need to get somewhere atleast in the 12% return on shareholder equity this year and we think this coming fiscal year is going to move us further in that direction. We know the direction John, but we don't know how large the steps are going to be this year. But, we know we have to get back to that level of return.

  • JOHN MCMILLIN

  • Great, thanks a lot.

  • Operator

  • Thank you. Out next question comes from Christine McCracken of Midwest Research. You may proceed.

  • CHRISTINE MCCRACKEN

  • Good afternoon.

  • LARRY CUNNINGHAM

  • Good afternoon Christine.

  • CHRISTINE MCCRACKEN

  • Just one, you had mentioned that your sweetener capacity realization, I think, was around 85%. Is that correct?

  • LARRY CUNNINGHAM

  • That's correct.

  • CHRISTINE MCCRACKEN

  • Okay, then where is the increased demand on ethanol. Could you give us an idea of where you are sitting on the utilization for corn grains?

  • LARRY CUNNINGHAM

  • Well, we had a point where we were utilizing most of the corn that we can grind Christine between fructose and ethanol. So, we are looking at a number of options some of which, as I said during the formal comments could mean that we had more in fermentation and distillation equipment and taking the starch from high fructose corns or from aminoacids where we have over the past. Other options would include, perhaps an increasing the grind as well.

  • CHRISTINE MCCRACKEN

  • Okay, if I remember that correctly that the addition of further capacity for grind is pretty expensive. Could you give us some idea on where the capital expenditure is going to be for the next year?

  • LARRY CUNNINGHAM

  • Well, I don't think I have that, but you know certainly the building Greenfield facilities where wet milling and ethanol is expensive and estimated the cost of the $3500 per daily bushel. So, if you wanted to build a plant that made 100 million gallons of ethanol a year, it will cost you about you $300 million to build that plant. That is why we are much more interested in incrementally expanding facilities that we already have.

  • CHRISTINE MCCRACKEN

  • Okay, that would be for the fermentation and that would not be for the grain, correct?

  • LARRY CUNNINGHAM

  • That would be for the bushel, waste treatment, fermentations, everything.

  • CHRISTINE MCCRACKEN

  • Okay. Well, that said, I guess would you give us some idea of where that is going to be for the year, maybe in a quarter or so?

  • LARRY CUNNINGHAM

  • I think that would be fair. We should have that all sorted out for December or when we have our next conference call.

  • CHRISTINE MCCRACKEN

  • All right, and then just one other question wondering with the tightening grain that we are seeing now and with things shifting around ... I am wondering that if you expect a better pricing outlook here as we had in the next year on sweeteners, starches, bioproducts, are you seeing any kind of positive momentum regarding that and that's for tightening up on grain.

  • LARRY CUNNINGHAM

  • That is a good question. We hope so. However, there is too much capacity on aminoacids around the world and there still is excess capacity for how fructose expenses are up and I think ADM is unique in the ability to be able to swing starch away from these other finishing areas to produce more ethanol. Most of the people in the wet milling industry do not even manufacture ethanol. So, you know they are going to be way down by the surplus fructose capacity. I think everybody as John McMillin indicated, has probably had another 12 months of learning experience, and how much fun it is not to have unsatisfactory result. So, I wonder whether that can all translate into higher prices and higher margins, I think remains to be same.

  • CHRISTINE MCCRACKEN

  • So, you are not convinced that we are going to see any near term improvement in sweetener prices or starch prices.

  • LARRY CUNNINGHAM

  • Well, unless something extraordinary happens that is unlikely. I think you know the move of converting excess capacity by us and hopefully perhaps by others and to ethanol could have adverse effect. If we could resolve our situation with Mexico and have access to the fructose opportunity down there that certainly would bear well for higher margins.

  • CHRISTINE MCCRACKEN

  • We have not heard anything on that, right?

  • LARRY CUNNINGHAM

  • No, we have not. The corn refiners association initiated the case about two years ago before the world trade organization and we have won that case. The world trade organization told the Mexican government to fix that problem and they have not done that job.

  • CHRISTINE MCCRACKEN

  • Right, thank you.

  • LARRY CUNNINGHAM

  • Welcome.

  • Operator

  • Thank you, our next question comes from [Robert Back of SMC] Capital Management Corporation. You may proceed.

  • ROBERT BACK

  • Yes, pursuing the advantage that you have competitively in being able to switch back and forth between fructose and ethanol and the MTBE opportunity in California. Could you just comment briefly on how you are going to fill into that market?

  • LARRY CUNNINGHAM

  • Well, we mentioned that we are bringing on an additional 50 million gallons of ethanol production at our Peoria facility. I guess with regards, particularly to the California market, Robert we intend to serve that in two fashions, we will send rail cars from some of our production facilities particularly the Cedar Rapids, which is on the western edge of the Corn Belt towards California, but we also will use, the Mississippi as our ethanol pipeline. We can fill barges at our Peoria plant; we can fill barges at our Clinton plant, both of which are now on for the waterways. We already have something in the order of 80 tanker barges that were used previously for our ethanol exports. We will take them down the Mississippi, transfer them to the ocean vessels and they will go to the refiners on the west coast just like the MTBE or crude oil does today. So, that's the logistics of how we will take care of it and as we indicated earlier, we are examining every opportunity for additional ethanol production by incrementally expanding our existing corn plants.

  • ROBERT BACK

  • And there is no prospect of any of your competitors being able to do both ethanol and fructose?

  • LARRY CUNNINGHAM

  • Sure. [Cargill] is one who produces both ethanol and corn sweets today. But I don't think anybody has nearly the twin capability that ADM has invested over the years nor anybody else will do that. I think probably almost any of our wet milling competitors manufacturers about 100 million gallons a year. And we will probably go ahead and close the 100 million gallon.

  • ROBERT BACK

  • So, you are much bigger than [Cargill] in terms of ethanol market share in the United States.

  • LARRY CUNNINGHAM

  • Yes.

  • ROBERT BACK

  • Thank you.

  • LARRY CUNNINGHAM

  • Welcome.

  • Operator

  • Thank you. Our next question comes from Leonard Teitelbaum of Merrill Lynch. You may proceed.

  • LEONARD TEITELBAUM

  • Thank you and good morning, afternoon, or evening wherever you are. I would like just to talk about two or three things here. Do you anticipate any type of a re-opener given the history with energy this year with future hike HFCS contracts or is it going to be done in the same way as it has always been done?

  • LARRY CUNNINGHAM

  • Well, I have not been able to predict with my crystal ball as yet, Leon, but my expectation is that it would probably be drawn on the same basis as it has been done previously.

  • LEONARD TEITELBAUM

  • Okay, second of all, you used to hedge the energy in now, it did not hedge you in terms of other companies that are revenue based nearly as much. Is there any reason that this would have been hedged in maybe a little tighter than it was? I am talking of energy now.

  • LARRY CUNNINGHAM

  • We have energy and that is reflected in the numbers.

  • LEONARD TEITELBAUM

  • Okay, this was just rolling over the hedge. I have estimated it to be just, you know there is nothing to go on somewhat less, but it wasn't material. I am just curious as to how actually you used hedges, that's all.

  • LARRY CUNNINGHAM

  • Leonard, let me ask when did we take the hedge on the account?

  • LEONARD TEITELBAUM

  • Now, the trade to China that spiked the markets here. Was that unexpected, and how did you participate in it if at all. And I am talking about China buying US corn.

  • LARRY CUNNINGHAM

  • About China buying US?

  • LEONARD TEITELBAUM

  • China came in about 232 metric tons of products through here, that was a kind of surprise everybody in spite the corn market is up a few weeks ago. Will you participate in all of that?

  • LARRY CUNNINGHAM

  • I am sure we will.

  • LEONARD TEITELBAUM

  • Okay. Now walk with me a little bit, please. You have got wheat that you are trying to get capacity rationalized, is there any reason I think that would not be better next year then this year.

  • LARRY CUNNINGHAM

  • I think our oil mill results should be better than this.

  • LEONARD TEITELBAUM

  • Unless you get a repeat of this, it seems like it is almost half. Okay. In your corn wet milling here, if energy prices are down, corn has trended up slightly, why should not we expect HFCS margins to be better next year than this year if energy costs were a major composition.

  • LARRY CUNNINGHAM

  • But, hopefully that will be the case.

  • LEONARD TEITELBAUM

  • Okay, suppose should be a ...

  • LARRY CUNNINGHAM

  • We won't know until we get into the heat of negotiations coming December.

  • LEONARD TEITELBAUM

  • But you guys have been around the block so much, so you guys know what the parameters are going to be, you know what you are trying before, but are you geared up for that ...

  • LARRY CUNNINGHAM

  • That's a $64,000 question.

  • LEONARD TEITELBAUM

  • And it better be more than $64,000. On ethanol, the swing capacity figure that we are all trying to be banding around, we know where the plants are located, or atleast part of them. How much would it cost to take the back hand and to switch it to ethanol to HFCS and may be swing as much as a 100 million and not 50 million gallons of new capacity based on existing front end grain. That should not be a monumental engineering feat.

  • LARRY CUNNINGHAM

  • I do not. We have been in the ethanol manufacturing business for 23 years so, there is not going to be a real challenge to engineer the thing, but I know it is going to cost 10s of millions of dollars to make that kind of a conversion.

  • LEONARD TEITELBAUM

  • Okay, I guess what I am trying to say is the projected increase of 600 million and how we are going to scramble like hell to find it, I think it might be a bit of a over statement. Could you comment on that?

  • LARRY CUNNINGHAM

  • I think the suppliers are certainly going to be there by the end of calendar 2003 to permit California to get all the ethanol that it needs to make that switch as well as for New York and some of other states that are in various stages of eliminating MTBE also be supplied.

  • LEONARD TEITELBAUM

  • If we try to put a trade on for fructose ... I think you alluded to earlier in talking to either Bob or to Christine I could remember switching HFCS for ethanol coming out of Mexico does not seem to be a major challenge. Correct?

  • LARRY CUNNINGHAM

  • Not from the technical point of view.

  • LEONARD TEITELBAUM

  • So, ethanol should certainly be up over the next year, it used to be about 20% of rare price of gasoline switch would be ... that would be the ratio of fructose, if gasoline went up, the regular unleaded went up, ethanol would reflect about a 20% change in that. If that is not pretty fully contracted, what is your contracted ethanol prices now?

  • LARRY CUNNINGHAM

  • How many questions have you just asked today?

  • LEONARD TEITELBAUM

  • I just wanted to know first of all, if a relationship exists between the rare price of gasoline and ethanol today, or is that contracted for. And if it is contracted, what is the contracted price?

  • LARRY CUNNINGHAM

  • Well, our contracted pricing is confidential information, but I think if we assumed an average value of about a $1.30 per gallon, we would not be too far of the margins.

  • LEONARD TEITELBAUM

  • Okay, now if gasoline prices come down, would you expect ethanol to come down or are you pretty well through most of next year to $1.30.

  • LARRY CUNNINGHAM

  • Same portion of that will come down. Some of that is indexed to gasoline.

  • LEONARD TEITELBAUM

  • That was a point that I was talking about earlier, Larry.

  • LARRY CUNNINGHAM

  • So, and then we have about 10% of that so long as it is on square basis.

  • LEONARD TEITELBAUM

  • Okay, but for that one should at least be flat if not up for next year, because your volumes are going be up.

  • LARRY CUNNINGHAM

  • Well, the volumes can be up, but the price can move in different directions depending on what happens to the gasoline price.

  • Operator

  • Thank you, the next question comes from [John Reece from Bronson Mayo]. You may proceed.

  • JOHN REECE

  • Thank you. Hi Doug and Larry. Hey, if you want to retain your most improved medal in the IR game, it would be very helpful if you could get the release of something more than half an hour before the conference call?

  • JOHN REECE

  • Do you hear me, Larry? Did I get lost?

  • JOHN REECE

  • Okay, thank you. With respect to the farmland transaction in addition to the elevators in three states, what else was required there?

  • LARRY CUNNINGHAM

  • The inventories that were in those elevators, of course, looking mainly at property. And we of course retained of some of their key employees who had good connections and that just fits very nicely into the AVM network, the global network that we already had and it has strengthened our position in the weak foreign areas.

  • DOUGLAS SCHMALZ

  • The service group also have enlargement?

  • LARRY CUNNINGHAM

  • Yes.

  • DOUGLAS SCHMALZ

  • How do you acquire that active?

  • JOHN REECE

  • Good. Basically it expands your capabilities a bit and your geographic reach a little.

  • LARRY CUNNINGHAM

  • That's correct.

  • JOHN REECE

  • So, far it has had some struggles, are there any obvious ways to continue the improvements you are expecting there?

  • LARRY CUNNINGHAM

  • Yeah, I think we have a task force working at top floor even now, John looking at ways of reducing costs and improving efficiencies and boosting profits.

  • JOHN REECE

  • They have actually packed it away, good enough. One last thing, a while back Larry mentioned the possibility of straight use of part of the oil glut as fuel, has anything further been done with that?

  • LARRY CUNNINGHAM

  • The biodiesel would probably be the closest thing to that, I guess, fortunately the circumstances that made us look at that have gone away. That was a combination of very high natural gas prices and very low corn oil prices. At the time when we were talking on that point, John, corn oil was selling for $0.09 a pound and its up to $0.17.5 cents a pound. Natural gas is down about half from what it was, so that's no longer a viable option.

  • JOHN REECE

  • That certainly changes the arithmetic, doesn't it?

  • LARRY CUNNINGHAM

  • Really does.

  • JOHN REECE

  • Fair enough. Thanks much.

  • LARRY CUNNINGHAM

  • Welcome.

  • Operator

  • Thank you. Our next question comes from [Rob Park of _____]. You may proceed.

  • ROB PARK

  • Good afternoon. Question with regard to energy cost. At what point do you feel that with your hedging ... you are sort of apples-to-apples on a year-over-year basis?

  • LARRY CUNNINGHAM

  • At what point do you we feel ...

  • LARRY CUNNINGHAM

  • Well, I think perhaps level dropped now. So, going forward unless we have significant increase that may be clearly comparable level.

  • ROB PARK

  • Versus a year ago?

  • LARRY CUNNINGHAM

  • Versus a year ago, at this time it is about, yes it is about even. Not up much as we were about 30 million in the first quarter last year.

  • ROB PARK

  • Okay.

  • Operator

  • Thank you. The next question comes from [Avinash] of Goldman Sachs. You may proceed.

  • AVINASH

  • Yes, good afternoon. For lets say about 100 million gallons of ethanol, what does it cost to put in the fermenters, distillation, etc?

  • LARRY CUNNINGHAM

  • I am not much sure that I know the answer to that, you know we talked earlier about what it cost, about a $1.50 per gallon, that's about 150 million approximately.

  • AVINASH

  • Right. Okay. So, it is roughly about 350 for the whole thing. This is about $1.50. You are obviously going to, you know you would like to add capacity to meet you know what could be a pretty sizable increase in demand due to California. What percentage of the money that you are going to have to spend has been spent already? Or it is pretty much all of it yet to be spent to you are getting close to starting to spend?

  • LARRY CUNNINGHAM

  • Well, the only money hardly that we spent at this point has been the incremental expansion of the oil and that was of the minor expenditure as the large sums as we go forward are yet to be spent.

  • AVINASH

  • Is that spending that starts in the next month, next two-three months. I am just trying to understand the timing of that spending.

  • LARRY CUNNINGHAM

  • Well, I think the decisions that we make in the next three months will trigger the spending plan that we have, the spending is probably going to play over the next 12-18 months, I guess.

  • AVINASH

  • Right. Or in other words, I can ask the question this way. Let us say that the spending starts on January 1, 2002. Does that give you enough time to put that capacity in line to start supplying the market in January 2003? How much time does it take to actually build this capacity after you decide you want to spend the money?

  • LARRY CUNNINGHAM

  • I think, you know, it is probably 12-18 months to do the construction phase, but we also have environmental permits and approvals that we have to get before we see the construction.

  • AVINASH

  • Right, okay. I am with you. What is your view about the likelihood that California ends up dragging its feet on the MTBE bend?

  • LARRY CUNNINGHAM

  • Well, personally I don't think that is very likely because the consumers in California are tired of having contaminated drinking water. I think there is enormous pressure from them to get rid of this problem and start contaminating the wells out there. Secondly, I think you know there have been a number of fast action lawsuits. As a result of the polluted wells and I think the longer MTBE is used the more legal liabilities potentially are out there, and I think there is just no reason for them delay. The California Energy Commission just completed the study ... they released the results of that last week and the conclusion was by December 2003 there would be enough ethanol capacity and then some to take care of the California requirement.

  • AVINASH

  • Okay, nice. That makes sense. Last question on unrelated topic. You have mentioned the export markets being hit by GMOs. What part of your exports is seeing premium pricing for segregated material, which is not GMO?

  • LARRY CUNNINGHAM

  • We are getting premiums on some of our dent corn exports to Japan. We are getting premiums on some of our edible soy proteins going to Japan and to Europe and then you know we get premiums for some of the traditional crops as we always have to White Highland soybeans, waxy maize corns, especially varieties like that.

  • AVINASH

  • Right. I was just trying to understand in terms of the total bushels, is this on 1%, 5%, 8%, and 10%. I am just trying to understand the magnitude.

  • LARRY CUNNINGHAM

  • Probably pretty close at 1% or even less than that.

  • AVINASH

  • And is it that pretty much consistent with where it was say a year ago?

  • LARRY CUNNINGHAM

  • In terms of volume, it is higher than that it was a year ago, but it still is not a great number.

  • AVINASH

  • Right, okay. Thanks a lot.

  • LARRY CUNNINGHAM

  • Welcome.

  • Operator

  • Thank you. The next question comes from David Nelson of Credit Suisse First Boston. You may proceed.

  • DAVID NELSON

  • Good afternoon.

  • LARRY CUNNINGHAM

  • Hi, Dave.

  • DAVID NELSON

  • Just to get some numbers straight. Did you add back the $0.11 from last year's plant shut downs and call that nonrecurring. Your year-ago number really would have been $0.20 versus the $0.14 this year, will that be correct?

  • LARRY CUNNINGHAM

  • Yeah, but then we had $0.09 cash credit or in other way.

  • DAVID NELSON

  • Right.

  • LARRY CUNNINGHAM

  • We are bringing that back.

  • DAVID NELSON

  • So, you would not have the tax credit if you did not have the plant shut downs.

  • LARRY CUNNINGHAM

  • No, no. The two are unrelated things, but the two kind of went off, that tax credit was related to previous years determination of fiscal benefits.

  • DAVID NELSON

  • Right, okay. On capital expenditure, 275 this year borrowing increases in ethanol as you expected to be in the similar ballpark next year?

  • LARRY CUNNINGHAM

  • Yes, we really think that that is around the 300 million range that you are talking.

  • DAVID NELSON

  • Okay. Thank you very much.

  • LARRY CUNNINGHAM

  • Okay.

  • Operator

  • Thank you. The next question comes from [Andrew Shapiro of Avondale] Capital Management. You may proceed.

  • KEITH MAY

  • Good afternoon, this is [Keith May]. My question is regarding the ethanol market and what legislatives are there any other vertical hurdles from or milestones that you are waiting for before you expand that capacity to a greater plane.

  • LARRY CUNNINGHAM

  • Well, there is a bill being passed or proposed in the House of Representatives to remove the oxygenate requirement from the Clean Air Act, and it was voted down by a margin of 33-23 in the Energy Committee last week. So, that's the only one that I am aware of that is still pending. Now, there are legislative bills that have been introduced in both the House and the Senate to have permanent percentage of gasoline supply coming from renewable fuels and those range anywhere from 3% to 2% and work currently at about 1% of the US gasoline supply coming from ethanol today.

  • KEITH MAY

  • Second question, you mentioned a 50 million gallon incremental expansion at one of your plants across all of your plants. How many gallons do you think you have on an incremental basis or just by removing bottlenecks, before you start building Greenfield new plant, how many incremental gallons do you think you can add on.

  • LARRY CUNNINGHAM

  • Keith, we are in the process of sorting that out now, but it could be as much as much as 2 million gallons.

  • KEITH MAY

  • And I think you get a cost at approximately $1.50 as incremental and improve the 58 gallons at Greenfield.

  • LARRY CUNNINGHAM

  • Not that high.

  • KEITH MAY

  • I am sorry?

  • LARRY CUNNINGHAM

  • It would not that high. It should be lesser than that

  • KEITH MAY

  • Less than a $1.50?

  • LARRY CUNNINGHAM

  • Yes.

  • KEITH MAY

  • Okay, thank you.

  • Operator

  • Thank you, our next question is a follow-up from John Macmillan of Prudential Securities. You may proceed. Actually, this is [Jeff Cantor]. Good afternoon everybody.

  • LARRY CUNNINGHAM

  • Hi, [Jeff].

  • JEFF CANTOR

  • I may have missed this. But did you give what your soybean margin crushing were well, year-over-year, I know this season was slow.

  • LARRY CUNNINGHAM

  • We did not, if you should pick up your Wall Street journal and do a little calculating, it would be that cash price margins are about $0.85 and if you look at October, our future will come up with about $0.60.

  • JEFF CANTOR

  • Fair enough, and does that disappoint you?

  • LARRY CUNNINGHAM

  • No, we always like to see them but I think it represents a good progress from where it had been.

  • JEFF CANTOR

  • No, I meant the board going out through October.

  • LARRY CUNNINGHAM

  • Well, I don't think it is terribly active at this point.

  • JEFF CANTOR

  • Okay, if I look at your current question complex it just seems like fundamentals are beginning to improve here, where in the fall we could see pretty some decent returns considering the meal demand from Europe, China, less palm oil capacity being taken out, is that ...

  • LARRY CUNNINGHAM

  • I think that is a fair view.

  • JEFF CANTOR

  • Sorry?

  • LARRY CUNNINGHAM

  • I think that is a fair view, yes.

  • JEFF CANTOR

  • And nothing was mentioned with respect to the losses that was growing up with respect to the high fructose corn syrup, you know, looking at all the losses, are they pretty much all behind you right now was that a major one or there any residual ones that we have continue to track?

  • LARRY CUNNINGHAM

  • I think if you look into our 10Q, Jack, you can get a pretty good catalogue of what is less there. This was major one, because it was a consolidation of 22 individual transaction losses that it had been moved into one. So, our 10Q will be much briefer next time than it was this time around.

  • JEFF CANTOR

  • Unfortunately I am not a lawyer; I think you have to be one to read those press releases, but bottom line is whatever is outstanding for our HFCS is relatively immaterial, is that fair to say.

  • LARRY CUNNINGHAM

  • Yes.

  • JEFF CANTOR

  • Thank you. And finally, your grain prices have been all over the places over the past week or so. You know, just net, net the volatility of grain prices, is that a positive for you or negative, can you just help us work through that a little bit, please.

  • LARRY CUNNINGHAM

  • I think our balance is positive and it does create some volatility in markets ... typically in the oil seed processing complex as the price of the raw material goes up, the products that come from it also move up and there is a chance to have improved margins there. In terms of what happens with our grain merchandizing and grain trading operations they tend to do better with more volatile markets, the corn part of that business where we tend to sell at fixed prices, tend to be affected badly when prices go up and help when the prices go down.

  • JEFF CANTOR

  • Okay, and then just one last question. I am sorry. The $0.60 crushing margin that is feature for October, you know what we noted what that you would think that we should windup being a potential conservative number. Is that fair?

  • LARRY CUNNINGHAM

  • Well, that's difficult to predict, but you know the seasonality of the business is such, [Jeff], that demand will be stronger in the fall than it currently is.

  • JEFF CANTOR

  • And right now, they are about $0.85?

  • LARRY CUNNINGHAM

  • I just picked up the journal and calculated that number this morning.

  • JEFF CANTOR

  • Fair enough, thank you very much.

  • Operator

  • Thank you, our final question comes from David Driscoll of Salomon Smith Barney. You may proceed.

  • DAVID DRISCOLL

  • Hi, good afternoon, gentlemen.

  • LARRY CUNNINGHAM

  • Hi David.

  • DAVID DRISCOLL

  • All right, well, we have got a lot out there, let us see this. May be just a few things that I would like to talk about. On the soy side, you had mentioned that you are thinking about two plants that might become operational after being idle. So I think we have about somewhere between 8-10% of US capacity down and somewhere around 14% of South American capacity taken off-line since the beginning of 2000. What is the crush margin [sugar] point, when you would bring on those two facilities?

  • LARRY CUNNINGHAM

  • I think, it is probably a function of volume demands as well as what the crush margin is and as long as we can keep up with the demand with our existing facilities, they will do that. So, I think it is more a question of being able to meet sales demand with production facilities that were prior to the recharge.

  • DAVID DRISCOLL

  • So, what you estimate your current operating reserve for those few existing, you know the ones that are currently operating those facilities.

  • LARRY CUNNINGHAM

  • Above 95%.

  • DAVID DRISCOLL

  • Thanks. On the starch side of your equation, would you say ... I know you have been asked a question about this 10 times on this call, but are you more likely to switch starch from one product category to another, namely ethanol rather than add front end grind.

  • LARRY CUNNINGHAM

  • Yes.

  • DAVID DRISCOLL

  • Okay, so when obviously to meet that, that implies that you are not going to pursue a market share strategy defense in high fructose or in the amino acid side.

  • LARRY CUNNINGHAM

  • Well, we are not totally going to walk away from those businesses and put all of our eggs in the ethanol basket. We are looking at several different possible scenarios and among them are incremental expansions including front end grinding capacity.

  • DAVID DRISCOLL

  • Okay, but you know I guess the thing that everybody is trying to get comfortable is that you are understanding that the essential large market share player in North American high fructose, that if you were to significantly shift some grind into ethanol, you know, it seems like it has the ability to tighten the fructose market as well as contributing to your total ethanol balance. So, is that would you say the basic strategy that you know, is a sort of the play right now.

  • LARRY CUNNINGHAM

  • That's one of the answers we are looking at, but we have also indicated looking at where we are, looking at scenarios where would add brand as well as ethanol finishing capacities.

  • DAVID DRISCOLL

  • Right, very good. Okay thanks very much.

  • Operator

  • Thank you. Our next question comes from Chris Walters of First Manhattan. You may proceed.

  • CHRIS WALTERS

  • Hi, given your answer to the last question that about more likely to switch high-fructose finishing capacity to ethanol, why did you believe in an earlier comment that your high-fructose margins would not return any time soon.

  • LARRY CUNNINGHAM

  • Well, we do not make the decision on what we are going to do with regard to transferring any HFCS capacity into ethanol. So, we are going to go until decisions are made and you know what our game plan is, it is difficult to get that, in fact it is difficult to predict what will happen to fructose margins even should we take that step. We are not obviously the only producer of high-fructose corn share.

  • CHRIS WALTERS

  • I thought you indicated that you would probably make that decision within the next 3 months, is that correct?

  • LARRY CUNNINGHAM

  • Yes, we did say that.

  • CHRIS WALTERS

  • I mean given, an 85% utilization rate on the fructose side and that historically that did account for 30-40% of your operating profits, you know, with an ROE it is 6.5% today, it seems like it is about an obvious way to improve the margins in that business as well as accomplish the goal of adding the ethanol needs.

  • LARRY CUNNINGHAM

  • We are looking at that.

  • CHRIS WALTERS

  • Okay, very good. Thank you.

  • Operator

  • Thank you. So, that concludes the question and answer session program. Please continue with your closing remarks.

  • LARRY CUNNINGHAM

  • I think we have none. We look forward to our next conference call and have a good afternoon.

  • Operator

  • Ladies and gentlemen, thank you for participating in today's conference call. This concludes the program and you may now disconnect.