Archer-Daniels-Midland Co (ADM) 2002 Q3 法說會逐字稿

Good morning. My name is

and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Archer Daniels Midland third quarter conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star, then the number one on your telephone key pad and questions will be taken in the order they are received. If you would like to withdraw your question, press star, then the number two on your telephone key pad.

I would now like to turn the call over to Mr. Allen Andreas.

You may begin your conference.

Good morning and welcome to Archer Daniels Midland Company's conference call for the third quarter ended March 31, 2002.

I am joined this morning by Doug Schmalz, our Chief Financial Officer, and Larry Cunningham, our Senior Vice President of Corporate Affairs.

And we plan a brief presentation, first of our financial numbers, and then Larry will follow of a discussion of our respective business interest and what are the latest developments in each of those industries.

Doug, will you please start?

Sure - thanks Al.

As you perhaps have seen now, our net earnings, as reported for the quarter ended March 31, 2002 were $117,184,000, or 18 cents a share.

And that compared to net earnings last year of 93,149,000 or 14 cents a share. Earnings for the quarter ended March 31, 2002 included a partial settlement to the company's claim related to the vitamin anti-trust litigation of $14 million pre-tax, eight million after tax, or one cent a share.

Our average shares outstanding declined two percent to 653,586,000 average shares for the quarter. That compared to 665,541,000 average shares last year.

Our net sales and other operating income increased 196 million, or four percent to 5.3 billion for the quarter due to recently acquired grain and feed operations. Our gross profit increased six percent to $390 million in the quarter due to improved oil seed crush margins and improved operating results of our agricultural services group.

In addition, this year included a $14 million gain from the vitamin claims, and these gross profit improvements were partially offset by reduced profits of the fuel ethanol operations.

Subsequent to March 31, the company did receive an additional 95 million before taxes, related to claims related to the vitamin anti-trust litigation, and that amount will be included in our fourth quarter results.

Our total operating profit of our reportable segments increased 20 percent to 254 million from 212 million a year ago. Operating profit of the oil seeds and corn processing segment increased two percent to 138 million from 136 million last year.

Oil seed processing results increased over prior year levels as oil seed volumes and crush margins improved due to increased meal demand and improved plant capacity utilization, reflecting recently idled plants. Our corn processing results declined from prior year levels, as lower ethanol sales volumes and prices negatively impacted operating results.

Sweetener results did improve slightly over prior year levels due to improved pricing, but still remain at unsatisfactory low levels.

Our operating profits of the agricultural services segment increased 84 percent to $38 million from 21 million last year due primarily to improved trading volumes and result of our Latin American and tougher trading operations.

Results of our transportation operations were slightly better than prior year levels.

Operating profits of our other segment increased 39 percent to 78 million from 56 million last year.

The increase includes the $14 million partial settlement of the vitamin anti-trust litigation related to our feed and animal health operations. In addition, improved results of our wheat milling and protein specialty operations contributed to the increase partially offset by decreased results of our cocoa and

operations.

Weak milling results improved, as industry capacity rationalization has resulted in improved run rates and improved milling margins.

Our protein specialty operations improved in the current quarter due principally to improved margins on

and concentrated protein products, resulting from lower raw material and manufacturing costs and improved process in

.

Our cocoa results declined from prior year levels as margins in

operations declined due to the excess

situation.

We continue to review our domestic and foreign

plant capacities to determine the optimal utilization of these facilities.

product results continue to suffer from low margins, as selling prices decline due to excess production capacity in the industry. Results from our private equity fund investments improved to a small profit from a loss last year.

Corporate costs reflected in the segment summary, which include our security transaction results, as well as unallocated corporate and interest expense, increased slightly to $78 million for the quarter, compared to $74 million a year ago. Company-wide selling general and administrative expenses for the third quarter were $200 million, compared to $187 million last year.

The increase of $15 million was due to the recently acquired grain and feed operations.

The company's interest expense declined $12 million due to lower average short-term borrowing levels and rates.

Interest income also declined $9 million, reflecting the decreased interest rates. Security transactions were not significant in the quarter.

The equity and earnings of affiliates increased to $47 million for the quarter from $5 million last year, as a result of our private equity fund investments. Tougher trading operations,

operations and

investment returns all improved over prior year levels.

Our effective tax rate for the third quarter of 2002 is 33.5 percent, compared to 32.5 percent last year. The increase

effective rate reflects our improved pre-tax operating results.

For the nine months ended March 31, cash flow from operations, equaled the net earnings plus depreciation in

amortization, increased to approximately $822 million. And earnings before interest taxes, depreciation and amortization increased to

billion.

For the nine months of fiscal year 2002, our capital expenditures are at the level of $244 million. Business acquisition costs were $51 million, and our share repurchases were $157 million.

We continue to show substantial liquidity, with working capital of approximately

at March 31. Our capital resources remained strong as reflected in the company's equity of $6.5 billion.

Short term debt declined from 876 million at June 30th to 691 million at March 31. Long term debt, including current maturities, remained relatively level at 3.8 billion, but will decline 400 million on May 1 due to the maturing zero coupon debt.

Our short term cash and marketable securities portfolio also increased $211 million and stands at one billion at March 31. These balance sheet numbers do reflect the consolidated results of Toepfer in which we acquired a controlling interest in February, on February 28th this past month.

With that I'll turn it over to go through the rest of the operations, Larry Cunningham.

Thank you Doug.

Good morning ladies and gentlemen. Some of the comments today constitute forward-looking statements reflecting management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results.

These statements are based on many assumptions and factors including availability, prices of raw materials, product pricing, competitive environment and related market conditions, operating efficiencies, access to capital and actions of government. Any changes in such assumptions or factors such as oil seed crush margins, ethanol pricing, or crop values could produce significantly different results.

To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events.

With that aside, let's talk about the oil seed crushing business.

Crushing results were up significantly versus a year ago. In North America we had a slight profit improvement, and this is mostly due to continuing strength in soy margins in North America.

We continue to see strong meal demand versus last year as a result of overall increased meal demand compared to last year, as well as the conversion from meals made from other oil seeds, particularly soft seeds.

We are pleased that Russia has recently decided to drop its ban on U.S. poultry imports, that fortunately came before any poultry numbers or meal demand was much affected.

Current board of crush margins are running around 65 cents, compared to about 70 cents at the same time last year. The demand for soybean meal in North America remains strong, and our crushing margins are about the same as they were a year ago.

Vegetable oil refining and packaging in North America had improved profitability. In fact, the profits were up nicely compared to a year ago, as a result of our cost reduction efforts, better capacity utilization and the closure of ADM facilities in Chattanooga, Tennessee and Sherman, Texas.

We're proud that our refined oil division was named Frito-Lay supplier of the year. We feel this is a

of our emphasis on customer service, quality and technical support.

costs and weak export sales of canola oil are limiting canola profitability. In fact, we've temporarily stopped canola processing at our plant in

until conditions improve.

South America

results showed a very nice improvement in profit versus a year ago. And, fortunately, Brazil, where we have most of our operations at ADM, has largely been unaffected by the events in Argentina.

In fact, we only have trading operations in Argentina and virtually no assets.

Brazil is mostly through harvesting another record crop that looks like about 41,000 metric tons of soybeans versus 38,000 a year ago - million.

Although farmers there are holding beans rather than sell at these levels, there's even talk of a carryover from this crop, which would be a first in recent memory. Our packaged oil business in Brazil continues to show improvement, and we have just extended our exclusive rights to market vegetable oil in Brazil under the

brand name.

In Europe,

results were also above last year's levels, led by good soybean

margins.

results in Europe, as in North America, are somewhat struggling.

results at our two facilities in Germany remain profitable, although new competition has somewhat effected margins.

The United Kingdom has just recently enacted tax incentives, which should stimulate demand for

there. For the time being, we would serve the U.K. from our German facilities.

Profits in our natural health and nutrition division are down in the third quarter compared to a year ago, with volumes, though, continuing to grow in all categories. Weaker vitamin E pricing is the primary cause for the lower profitability, although we see signs that vitamin E volume may be picking up, especially for natural source vitamin E.

Isoflavone volumes were up for the quarter, and we expect our agreements with

permitting time-release dosages of isoflavones to further strengthen sales. Phytosterol demand remains strong, and the results on the bottom line for sterols remains strong.

Our pilot facility for producing Enova oil, our diglyceride product, should be operational next month, allowing us to move forward with market development.

Our protein specialty business profits were up sharply compared with the same quarter last year, in which we had a small operating loss.

Improved profits and volumes in soy concentrates are the primary reason for that, and they continue to reflect the growth of functional concentrates in replacing other proteins in innovative food applications. We also concentrated on improving our cost, and we saw positive results in the way they improved yields and reduced production costs in our protein specialty business.

Flour milling results were up substantially from the same quarter last year. Industry capacity rationalization is a good part of the reason for that, resulting in an improved operating rates for the industry as well as for ADM.

It's estimated that operating rates in flour milling are in the 87 to 88 percent range. Volume growth is part of the reason for that, as the demand for flour grows at about two and a half percent per year.

And there was a recent report which showed that about nine percent of the industry capacity has been closed in the last two years. So the increase in demand and the rationalization of the industries capacity has resulted in improved operating rates, and therefore improved margins.

We do have some concerns about the weather impact on the U.S. food crop, although there appear to be adequate world supplies of wheat.

In our animal feed business, results were up nicely, and are still improving quarter by quarter.

We continue our focus on blending the former Moorman's and Consolidated Nutrition Feed Businesses together to improve costs and efficiencies. In fact, during the past quarter we closed two feed plants in Nebraska and Missouri.

As Doug mentioned, the profits in our ag services division were up strongly from last year, over 80 percent, with improved results in ADM grain, Toepfer and in transportation. Our concentration on solidifying relationships with our supplier base and offering them improved and expanded services is paying dividends.

And we're also benefiting from the size and efficiencies of our global network.

Our focus on destination selling is also continuing to pay dividends. There is uncertainty over international trade issues, especially China.

The status is a new U.S. farm bill and weather conditions in key wheat origination areas which make it difficult to project the continuing strength and results in this group. Transportation results will likely be negatively effected by higher fuel prices, lower exports and less northbound river traffic, in part due to the impact of steel tariffs.

This quarter's results for cocoa were unsatisfactory and below last year's results and margins. Demand and margins for chocolate and liquor remain OK, but over capacity in the industry.

And

, cocoa butter supplies continue to weigh on pricing and margins.

Addressing this, ADM closed, just this quarter, its cocoa operation in Savannah, Georgia and another cocoa grinding operation in Poland. A competitor also just announced closing a European cocoa grinding plant.

Recent reports show U.S. cocoa grinding is down 14 percent from year ago levels. These closings, and the lower grinds, improve capacity utilization and should over time improve margins.

Corn processing results were down sharply from the third quarter last year. This was mostly due to lower ethanol volumes and prices.

We sold down inventory last year, as opposed to this year, when we set aside volume, anticipating increased sales in California, which have yet to develop.

Prices were impacted by lower gasoline prices, especially early in the quarter.

pricing for ethanol was off by about 30 cents a gallon, compared to last year.

Regarding California, we remain cautiously - and I repeat, cautiously - optimistic that refiners will move ahead with replacing MTBE sooner rather than later, in spite of the one-year delay and the ban on MTBE.

Shell, Chevron and Exxon Mobile have stated publicly they want to convert now.

is continuing their program to replace MTBE, and BP is considering its options.

Together, these refiners distribute over 80 percent of the gasoline in California. There are both environmental and economic reasons to encourage their switch.

In Washington, Senate Energy Bill 517 is being debated. This bill contains provisions to ban MTBE nationally and to provide a renewable fuel standard.

Replacing MTBE nationally would increase ethanol demands by about 2.1 billion gallons annually, while the renewable fuel standard would scale up annually over the next ten years, reaching five billion gallons of ethanol demand in 2012. By comparison, ethanol demand in 2001 was about two billion gallons.

We do expect our volumes to pick up as the year goes along from current levels, as we pursue new markets in California and elsewhere. We also expect to see some price improvement as crude oil and gasoline prices have increased from levels we saw earlier in the year.

Sweetener results have improved from last year, but remain at unsatisfactory and historically low levels. We expect modest margin improvement from our price negotiations.

Mexico continues to be a frustrating opportunity. In January Mexico levied a 20 percent tax on soft drinks containing high fructose corn syrup, which drove beverage makers to convert to sugar.

And while President Fox has suspended this tax, customers have been slow in returning to high fructose corn syrup, given the politics in Mexico and the confusion created by this tax and other rumored actions.

Our industry did succeed in our case before NAFTA, and Mexico was recently ordered to terminate their anti-dumping duties.

In reaction to the NAFTA ruling, Mexico set a duty-free import quota of 148,000 metric tons of HFCS, with a 210 percent tax on surplus imports. The 148,000 ton amount is the same as Mexico's current quota for access to the U.S. sugar market for Mexican sugar.

This is not the final chapter in this long-standing battle, and USCR is now considering its options. But it seems clear Mexico wants a pound for pound trade-off.

At this point, we don't have all the final details of how Mexico plans to implement the quota, so we can't tell you exactly how this will affect our business, although we hope to recapture a good portion of our lost sales.

Our bioproducts business slipped slightly into the red versus a profit a year ago.

Worldwide lysine capacity utilization is about 70 percent, and current pricing is around 60 cents a pound. Low soybean meal prices are affecting pricing as well as demand for lysine.

In lysine, we're concentrating our efforts on cost reduction and yield improvements at ADM, and we're beginning to see positive results.

Our food additives business had results slightly above last year, led by xanthan gum, lactic acid and sorbitol.

Citric acid is still one of our most difficult businesses. This new capacity is now on stream in Brazil, and will soon be joined by new capacity in Canada.

Our

joint venture,

, had better results than last year, as both volumes and margins improved.

of the central European countries into the EU, we believe, holds promise for our joint venture.

So that concludes, Al, the formal part of our presentation.

Thank you, Larry.

Could we entertain any questions that anyone might have at this time?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad.

Your first question comes from

of Salomon Smith Barney.

Hi, good morning.

Good morning David.

Good morning.

I wanted to just talk with you a little bit about ethanol. There has been many, many articles out there and many viewpoints as to what it's going to take to actually allow the California refiners to switch.

And I'm just interested in your perspective as to the pipeline operator there, the

people, as to - you know, number one, are they a major impediment to this? You know they've come out with some contradictory statements, where I've seen one statement that says that they needed almost the refiners to unanimously vote to switch.

And then I've seen another one where it says that they can do whatever the refiners want to do individually.

So, obviously, the answer seems immensely important, because if there are a number of operators that want to switch, then it seems to be that the cautiously optimistic statement might certainly prove to be quite true.

Do you have any comments on that?

Well I think they're in a position at

to accommodate it either way, David.

But the facts are, if everybody who is using their pipeline facilities is doing the same blend, it's obviously much easier for them to do. But I think they have made the statement that they can accommodate individual refiners if that becomes necessary.

But, yeah, obviously it's more complicated. And I think to do the entire conversion would require them to spend some relatively modest sums of money to gear up to do it, but I don't think that's a major issue.

So then in terms of the contract pricing that was signed in April - because, generally, if I'm correct, the ethanol industry typically signs six-month contracts sometime in April - my question is really related towards, were those contracts fixed-price contracts or variable-priced contracts? And what I'm trying to get at is, what's ADM's sensitivity towards changes in the gasoline prices over the next six months?

For that period that you're discussing David, we have more of the business booked on gasoline indexed pricing formulas, as opposed to fixed.

So the price of the ethanol on those is obviously going to move up and down with the price of gasoline.

Then if I may, just a question on high fructose.

You know, last year at this time we were talking a lot about the impact from natural gas prices. Can you, can you quantify for us, or give us any sense to, you know, where you're, you know, the impact, and it should be a favorable impact, from lower energy costs from a year ago are?

And was that the real driver of profitability within that segment? Can you give any definition on the energy costs versus the price increase that was announced, you know, back in January?

Yeah, company-wide our energy costs are down, in the 15 to 20 million range.

OK, very good.

Thank you very much.

Thank you David.

Your next question comes from

of Credit Suisse First Boston.

Good morning.

Morning.

Morning David.

Congratulations.

Thank you.

... out there. You did well in a difficult environment.

One of the declines was in expenses, other expense dropped from 40, almost 45 million to 14 million. You commented on lower interest rates, is the 14 million on this line item something we should expect to continue?

Well I think from an interest expense standpoint it will. I mean, we're in a lower rate situation, we're having the 400 million which comes off here in May which is at higher interest costs which will really convert over right now into short rate.

So we should see improvements in our interest costs.

So we should expect a similar level of other expense ...

Yeah the other - yep ...

...in future quarters?

Excuse me?

So we should expect a similar level on this other expense line in future quarters?

Well I think the other big component in there, as you can see, is the equity in earnings and losses of affiliates. Which is ...

Which was notoriously difficult to predict.

Right, and more difficult to predict, but you know, we've seen in general I think some improvements in that, and of course Toepfer will go in not as an affiliate going forward, it will be consolidated.

So, that'll change that number some too.

OK, also you said, Larry I think said oil seeds were up significantly, and you talked about North America being up slightly, Europe's you said was above.

Where was all the stuff that took oil seeds overall up significantly when North America was up slightly?

South America, and our refining and packaging profitability were both strong performers

.

OK, great. Lastly, you know, you know you were talking before there on ethanol pricing in the future being somewhat indexed. Prices in the last quarter, were they indexed or more of a fixed nature?

We were effected more in the last quarter by the shorter-term nature of pricing. We don't have the quantity of forward pricing normally in that quarter that we'll be seeing in the upcoming period, I believe.

Great - thank you very much.

Your next question comes from

of Prudential.

Good morning, everybody.

Hi,

.

Al, instead of looking at the trades, maybe we can just look at the forest in terms of how the year is panning out.

You know, from my perspective, and I guess

, you know, things were pretty rough in February. Much rougher than they were when we went out there in November.

But then they started to improve a little bit in March, as slight margins came up and, again, gasoline came up.

Is that kind of how you're seeing it?

And maybe you can kind of just add some color to how the year is progressing in terms of the ADM turnaround story.

Well I think, John, that the overall import of the presentation today reflects what's actually happening in most of our core businesses.

The oil

processing industry is enjoying significant strength in the protein sector, and that has driven margins to a much more favorable level.

February is kind of an in-between month with respect to the transition from North America to South America.

And so there are some factors involved in that period of time. But I don't see any reason to think that the rest of this coming year is likely to materially change.

We've got some extraordinary factors that will impact the fourth quarter, but we've got still relatively markets in oil

and we've got a very significant question mark over precisely what the results will be for corn processing, depending on this resolution of both Mexico and of the ethanol issues in California. So outside of those major events having an impact on our bottom line profitability, our businesses are firm and strong, and the future looks fairly positive for our company.

And just in terms of how to gauge this ethanol issue, it does look like if this energy bill goes through Congress, it doesn't really help you short term, because the mandates that are in there are going to be achieved anyway, it looks like, in current demand. Is that right?

Well the energy bill really doesn't have an impact until 2004, and so we won't see a significant change, but I think, but I think that the overall commitment that will be made on behalf of the government to renewable fuels is a very positive development for the long term in this industry. Now as you know, we have a capacity of somewhere around 950 million gallons, and we have not expanded that capacity over the past period of time while others, particularly smaller farm co-ops have built a number of facilities, about 13 will begin production this year, adding almost 400 million gallons of capacity to the market, so we should be over the coming period moving into the mid two billion three, two billion four levels.

And there are still plans under construction to increase capacities beyond that for the coming year, so this business, assuming the energy bill is passed in its current form, is a very promising development for the long term. We, our ethanol business is really a co-product utilization of our front end grind, and so for us to materially change our capacities is a big investment, and we do not have current plans to do that. Which means our market share should decline somewhat in the coming year or two, as more and more farm co-ops pick up from the dry milling viewpoint, the production of ethanol to meet those market demands in California. We're hopeful that decisions will be made soon with respect to the pipeline.

We've gotten good solid support from the majors including Shell, Chevron, Exxon and of course Tesco, which has now been acquired by Phillips, has been a great supporter of our ethanol programs for some considerable period of time.

So, this business is on the right track and we are continuing to, from a co-product viewpoint, to enjoy refining volumes in our total plant capacities that allow us to achieve profitability, even during these difficult times.

And it was indicated in Larry's prepared remarks that ethanol prices were down some 30 cents per gallon in this quarter versus a year ago.

Did I hear that right Larry?

Yes you did John.

And so if you take your, your winter capacity, lets say 250 million gallons and then times that by 30 cents and got some kind of $70 million hit to the operating line. Is that kind of math ...

Yeah.

... roughly on?

Yeah I think so, but you have to keep in mind that even during this period we've had some forward sales that we had on the board ...

OK.

... that would have had higher prices and margins than that. We also had lower net corn costs than ...

Yeah.

Than we did as well. So, ...

And with other factors like energy, we still continue to enjoy profitability in the ethanol business.

And to the extent we get into a period over the next year or so where, again, California is not mandating it, but some users are consuming more of it, would the price of ethanol be linked, in you mind, to the price of gasoline? Or given the fact that you've got so much ethanol capacity coming on, could you see a wider spread - a much wider spread than existed historically between the price of gasoline and the price of ethanol?

We're seeing a wider spread now, which makes it very attractive for the majors to switch. And that reflects the fact that we've got additional capacity already on stream and we don't have markets for that volume.

So there's no question about what the premise that you stated is correct.

I think if a decision is made positively in California, we might see a return to a much better operating pricing environment for ethanol than what we've had in the past.

But our ethanol business is a very low-cost efficient business, and so as a result, we will be the most competitive players in this industry. So for us, no matter where the pricing is, we expect to continue to have good utilization of our ethanol fermentation capacity.

So that's the major uncertainty kind of going into fiscal 2003?

I would say that's correct.

It's in the corn processing area, and it's primarily related to a combination of the problems in Mexico with high fructose corn syrup, which have been somewhat alleviated by the recent announcements from Minister

. And there will be continuing discussions in Washington soon about that situation, to see if there will be a market there for more fructose than what we've had, plus the California ethanol situation.

Thanks for everything.

Yes, you're welcome, John.

Your next question comes from

of Merrill Lynch.

Good morning.

Good morning, Lenny.

Good morning.

I think both David and John probably covered all the important questions. They're the big cranium guys here.

But try and help me out a little bit, if you would.

If I take a look at my earnings per share and take out the settlement from vitamins, that's 17 cents. And then, I'm saying, if I take a look at the $14 million of, quote, "other expenses" that we've got here, I appreciate interest is in there. But that's at a different tax rate, right? That's your normal tax rate, where the vitamin would seem to be at a higher tax rate? Is that correct?

In other words, the $14 million was taxed at something. You said it was $8 million after tax, $14 million pre-tax?

That's - well, it's just rounding.

Oh, OK.

You know...

I guess what I'm trying...

...

something, and it rounds out to about $8 million after tax, approximately $14 million pre-tax.

All right.

But, no, the tax rate is approximately the same.

All right.

Let me tell you what I'm trying to get to here, is that if I take out the other expense from it, that's about a penny a share as well then. And I guess what I'm trying to figure out is, if my operating earnings before interest and security transactions, and equity and losses, et cetera, and we're talking somewhere probably around, back to around the 17 cent type number from operations, does that, does that work out to be about right?

Yeah, I think so.

OK.

Now, given the industry conditions that we see today, what you've said could happen and why would we not expect the fourth quarter, ex interest and gains in affiliates et cetera, to look a lot like this quarter? I mean I don't see, I would presume that fructose might get a little better, you've indicated on that.

Cocoa still looks like it's going to have some problems. Ag services should still be doing well, and Toepfer's definitely going to help you.

But if I've done my plus and minuses right, I should come in with an operating income number in the fourth quarter that looks an awful lot like this, unless you've got some clean up to do. Does that, is that right, or have conditions actually improved more than I'm giving you credit for, so far?

No, I think that's in

what Al said too. Interest is moving along, it's about the same rates as where we are right now unless something significant happens to the quarter.

there's nothing on the, I'll I'm trying to do is shortcut this damn thing to say look, if we, if this is right, we should be on tap for about a 17 cent fourth quarter. That's what I'm trying to figure out.

Well I think your logic is sound

, whether that turns out to be the right number or not I don't know, you know, we would have to refer back to our Safe Harbor statement.

Yes sir, I appreciate that.

I'm just, I'm trying look from an industry - listen, I'm not getting anywhere, but I figured, you know me,

...

But you're trying though.

... I'd give it a shot, OK? Now let's get back to a little bit to what John was saying here, because I think it's key.

Clearly the legislation on ethanol in Washington is probably multiple oriented than earnings oriented in the short term. But does it, or will it, bring additional pressure in the short term on California if it does pass?

I know Feinstein's against it, Davis has put in state option, to what degree if it's a federally mandated - if the current legislation that Daschle's written goes through, how much leeway do the individual states have to accept or reject the federal mandate?

Well there's the possibility of trading ethanol credits that come ...

Right.

... the senate bill Lenny, so, you know, that might confuse the issue of it.

But I think it does clarify that once and for all MTBE is dead and the schedule for the funeral was set out in the

.

So I think that will hasten people to say, why do we want to continue to have legal liabilities of putting MTBE into gasoline supplies, having that get into drinking water supplies, when it's cheaper and obviously more economical, environmentally friendly to use ethanol?

When does the bill come up for a final vote? We can't find that on any schedule that we've asked for.

Well, you know, the story yesterday was that Senator Daschle was going to ask for a closure vote for the energy bill itself today. And that the

portion could be voted upon on Thursday. But that's just the story on the street. I have no specifics other than that.

OK. Have you seen any change in anybody who is not contracted for fructose looking ahead orders when we had the warm spell back here? Did that engender any movement on further contracting?

I think...

For fructose, I mean - excuse me.

... 90 plus percent of it was done back at the beginning of the year. So there's been virtually no

business left out there.

Doug, would you expect interest in the fourth quarter to be about what it was in this quarter?

Down.

Was that down, Doug?

Down, yes.

Yeah, don't be embarrassed, speak up, Doug.

It's down.

So if it's good, speak up?

Yeah.

If not, don't?

Right. Sort of working on that score.

Actually, we've got these

million coming due in the middle of

.

Yeah - right, but those are - yeah, that's...

Those are zero coupons.

OK.

And that's a substantial hit, because we don't borrow that much in...

Well I was just going to say, are you going to lay in inventories ahead of the - are you going to change any physical inventory, buying habits or anything?

No.

No.

I mean that would be the same as it always is. We have an ongoing hedging program, and inventories come and go.

But...

Well I can't say I'm still not confused, but I appreciate your time.

Thank you very much.

Yes, you're welcome,

.

Your next question comes from

of Deutsche Bank.

Hi, good morning, everybody.

Good morning,

.

Good morning,

.

It's going to be tough to follow my verbose colleagues, but I've got a few questions left. I guess yesterday one of your competitors kind of mentioned that there was some price competition in the

business.

Are you also seeing that, and is that a longer-term concern for you? That's the first question.

Yes we are seeing some competition and soy

in a couple of respects. I think

producers are looking for market share gains themselves and looking to expand markets. And, as we mentioned during our presentation, functional concentrates are coming along and having an impact on - in some applications - replacing soy

at lower costs.

And in our particular case, we're benefiting from that.

OK.

We are ...

I guess the second question is to Doug, you know, and maybe also to Alan can answer this question.

You know, you took, you spent some money this quarter on reducing your shares, yet I think back at the November meeting you kind of suggested you felt the shares were pretty fairly valued, and is this just a kind of an eye towards your cost of capital, or you're not seeing any M&A ideas out there? Could you maybe comment on why the decent share repurchase this quarter?

We've got an ongoing program of share repurchases and our shares have traded right in this range for some considerable period of time, and so we've got scaled down positions that we have filled some in the past period of time. And so that has reduced the number of outstanding shares. But I think the overall picture, which is more important is the re-establishing of our balance sheet and the ongoing restructuring that goes on there on a day to day basis.

Because of the capital intensive nature of our business we've got solid cash flows and continue to show that.

So, we've got to go somewhere with our, with our cash flows and we continually monitor those markets. As we mentioned earlier, the 400 million will come due, so that will take a portion of the cash flows out for this year, and then our stock repurchase program which is really relatively small in comparison to the total cash flows coming in.

On the acquisition side, there's always a lot of activity going on in our businesses, and particularly now when we've got very competitive conditions as we've had for the past several years. And so our improvement in operating profits I think reflects the restructuring of those businesses in a very sensible fashion, and I would say it's not unlikely that we would have the possibilities of additional acquisitions and growth in our businesses.

This past year we picked up an interest in Farmlands, they're having some considerable challenges in their own balance sheets.

There are a number of assets for sale in our businesses around the world and we continue to monitor those on an ongoing basis.

So, because we're not capital constrained, the stock repurchase program is not having a material impact on our judgment with respect to mergers and acquisitions and all the other activities here.

Alan, you were I guess, view since you took over of kind of getting back and quicker to a ROE target, you know, most acquisitions tend to hurt that at least for the short term. But, I mean, do you see that there's enough M&A out there, whether it's - you know, I mean, we've seen

,

coming up,

.

You know, an increased activity. The opportunities that you see are more important than necessarily just focusing on what you have and getting back the

or targets?

Well all of the acquisitions that you mentioned there were bought by competitors of ours, not by ourselves. So in those cases, we felt that we could make better efficiencies around here at the kind of values that were reflected, or the position of those people in the industry, by continuing just to focus our attention on improving our yields, bringing down our production costs and restructuring our balance sheet in a way in which we got better productivity for our shareholders

a return on invested capital in the way in which we're utilizing our cash flows.

OK.

And then, Doug, can you comment on looking out to fiscal 2003?

Just any heads up on cap ex, depreciation amortization, tax rate and, you know, kind of numbers like that to help us forecast out?

I think on a cap ex basis, as we've discussed previously, you know, we're in the 300 to $350 million range on kind of a maintenance cap ex.

We don't see that significantly changing. As far as anything on acquisitions, of course, would be over and above that.

Right. And tax rate?

The tax rate could increase some. I mean we've got some issues that we're going to have to deal with.

We're not sure where the

and the

is going to turn up at the end of the day. But right now, we're going on the current legislation.

I mean that could effect our rate; you'll have to watch that.

OK.

And then depreciation amortization still running, what...

It should be relatively the same.

OK - OK, thank you very much.

You're welcome,

.

Thank you,

.

Your next question comes from

of

.

Good morning.

Good morning,

.

Larry, I think that you commented on Brazil not selling into the market for soybeans. I'm wondering, do you think this is sustainable, and what gives you confidence that they won't open up? Given the fact that China isn't importing, you'd expect them for some kind of - I would suspect, negative impact on

margins if that were to happen.

Well I think if it stays that way long enough, that's a possibility.

But I think at the end of the day,

, China is going to have to buy soybeans. And there's a history that's available on what their soybean production is, and I think it's probably fairly predictable what quantities they will buy. So it's, I think a question of timing until the rules which China put out on GMO, which confused issues, are clarified.

We now have permits to sell soybeans into China, as I think 19 or 20 other companies do, so I think that's one obstacle that's coming down.

And you know, the Brazilians are waiting on the market to bid the price of soybeans up before they turn them loose, which is an unusual tactic for them.

You know, normally, they rush to sell all of their beans as soon as they harvest them, so I guess to some extent it's a little encouraging to see them not try to market all of their beans, meal and oil at one time. And I think about holding on to some supplies until prices get higher and the, see what the level of the margins are.

And I think in the meantime that it has had a positive effect on keeping North American crushing margins at the present level.

Do you think once those supplies come onto the market it could pressure crushing margins at all?

Well typically that's the seasonality of things in North America. We're at the, of course the beginning part of putting our crop into the ground, and the Brazilians are at the point of harvesting theirs, and so normally it is a period of weaker margins for us.

But whether that's going to happen this time around or not I cant say.

And so theoretically next quarter you could have some pressure on crushing margins tied to these supplies coming to market?

Yes, that's entirely possible.

We do have Christine, about half of our processing capacity outside of the United States. So, to the extent that the U.S. margins are adversely impacted we might enjoy some better margins because we did in the last quarter down in South America, and also Europe has a significant impact on our oil seed overall margins. And they've been strong and protein demand has been good there.

OK, and then separately, on these, the income and equity, or the income from your affiliates, I'm wondering - this has obviously been a huge quarter for you. I'm wondering to what degree, you'd mentioned a number of different contributors there, Grooma, Toepfer, CIP, Private Equity, I'm wondering if you could at all give us any idea of what specifically was the big driver in the quarter, if there was anything that contributed more than another?

And to what degree is that sustainable, obviously you can't predict from quarter to quarter, but maybe you could give us an idea of what contributed the most, I guess, in the quarter?

They were the main ones, the ones you just mentioned.

So fairly equally, you'd say, or...

They all improved, I think is the most important thing.

closed their doors in the past year, and so the availability of a little better margins in the operating environment and the world trade of

and oils and also grains has really improved.

We've lost a lot of competitors there, and so we're in a stronger position than we have been for any number of years.

I think, also, that

has seen a significant turnaround in its business.

They are doing very well in both the United States, and they've shown some significant improvements in Mexico. And their business are coming off of a very competitive low level due to a number of factors in Mexico.

And so I think that's something of significance.

And then, of course, we did see a substantial slowdown in the problems with respect to our fund investments around the world this past quarter.

So we're hopeful that that will also continue to be stronger in the coming month as we see the recession easing and the economies across the world improving and reflecting a little better economic environment for those major investments.

And this quarter, specifically, this is probably the biggest quarter for these particular businesses and maybe in history?

No. Well I would say that...

At least for several quarters.

... say that for the last several years, this has probably been a significant turnaround. But it's not anything out of the ordinary with respect to the potentials of those companies generating profitability.

OK. And - but

come out of this line?

That's correct.

will come out because they - we've now acquired an 80 percent interest, and we will be consolidating their businesses in with ours.

And in the quest of doing that, we expect to gain new efficiencies and better performance and better overall contribution to our bottom line for our shareholders. The closer cooperation between us and the coops and between us and the

network, which is some 40 offices across the world, has added substantially to our transportation network and our fleet and our efficiencies and our global operations.

And so we look forward to continued better results from that whole

organization.

Thank you.

Your next question is a follow-up question from

of Salomon Smith Barney.

again.

I wanted to follow up on the China issue - China and the

rules. There's - the first question is - and just correct me if I'm wrong, but I believe that China imports very little soybean meal and very little soybean oil.

If that's incorrect speak up, but I believe it's right?

That's correct.

Then the issue was, you know, one of the last callers was asking about soybean crush margins.

If you have weaker demand from China, in terms of importing the beans, why would that necessarily weaken the soybean crush margins in either just America or South America?

Well it may not.

You know, I think the affect that it's had at this point is to pull down soybean prices, and to the extent that meal and oil values can stay at current levels, it's not going to have a negative effect on margins. But, how long that continues is difficult to predict.

OK, very good. I just want to be clear on that because I thought I heard, I thought I heard something different a moment ago.

But, second question would be, Alan you were making some comments about Farmland. Interestingly enough, in their latest disclosures they discuss the possibility that they may have to file bankruptcy.

What I'm really seeking here, interested in is just are there now other opportunities in terms of strengthening the relationship, i.e. buying more assets from Farmland because these guys appear to be in somewhat of a distressed situation?

There's no question but what that could be a possibility.

We're in very close touch with Farmland because of our joint venture and so we're, we are communicating with them on a daily basis. But should there be some mutually advantageous circumstances that would develop, it could, it could be a good opportunity for both of us to find additional transactions between our two companies.

Farmland has been challenged for the last year or two, and our joint venture reduced significantly their need for borrowings and as a result we have both enjoyed, I think, an improved bottom line profitability from the activities of those grain elevators. It's strengthened our deck, not only for our flour milling businesses here, but also in the export markets, and it added a good dimension to our business.

And so, we look forward to working together with Farmland if there are any mutual opportunities, we will cooperate in those.

Then, to you know, pick up a question that's more strategic in nature.

It seems to me that when I look at the USDA projections on soybeans, soybean meal and soybean oil demand, the numbers are quite good, you see soybean demand in something around six and a half percent for 2002. A lot of the growth in soybean production looks like it's really going to be coming out of Brazil over the next, you know, decade or more.

The issue for ADM seems one of positioning. Would it be fair to assume that a strategic focus of where you would perhaps want to deploy a significant portion of your free cash flow would be into Brazil, in either acquiring existing assets down there and/or construction of new soybean facilities?

Can you give us some comments on where you really see Archer Daniels headed as it pertains to South America?

I think there are two areas are of significant interest to ADM.

We've got a really solid position in both the United States and in Europe. And so the two areas that have the most significant growth potentials are in the Asia Pacific region and in South America.

As you know, our businesses now, on the oil

processing and refining and marketing side of refined vegetable oils, are in Brazil, as opposed to in Argentina, where the crop moves primarily into the export channels. And so we're fortunate to be in that position today.

Because we only recently began our expansion into Brazil, we have well located plants. We have added an entire network of grain

and origination systems there.

We have barges on the rivers. And we have positioned ourselves in an excellent posture with respect to the growth of that crop.

And the crop has moved from the south to the north, which has allowed us to become very competitive at our plant locations. And we've expanded some of those, and we've added to our origination capabilities.

And I see Brazil as an ongoing continued area of keen interest to us.

We are a small factor there in comparison to other players.

But our market share, which is somewhere around 10 percent, does not really reflect the amount of activities that we engage in there, because we do have operations that are running all year long because of their location and being in the middle of the crops. And that has added to our ability to have a more significant market share of the total

capacity in South America.

As you know, in the Asia Pacific region, we are in our joint ventures there

constructing several new factories. We will have a total of eight oil

processing businesses.

A couple in the interior, and several along the coast line in deep water ports. And we have an important, very strategic position in that market that will enable us to grow in the coming years and to be a major player in the production of meal and oil for the Chinese market, as well as for the Asia Pacific region.

So the temporary setback due to the genetic modification issues in China are basically resolved now. And that region has great promise for us in the coming years.

Two just quick follow-ups. Of those eight oil

processing facilities, is it correct that six of those are in China?

We have eight in China.

Eight.

All eight are in China?

... refineries I think we have a total of 13 factories in China, some are only vegetable oil refineries, but we've recently constructed several new factories ranging from in the south close to Vietnam, all the way up to Dalion, with a significant presence in Shanghai, where we have oil seed processing refining, packaging

flour milling. And so our network is growing and our strength in that region, together with our partners, which is COFCO, the Chinese government and the Kwok family, is the very, becoming a very significant factor in the meal and oil markets in that region.

OK, thank you very much.

You're welcome.

Your next question is a follow-up question from

of Credit Suisse First Boston.

Thank you.

Just, can you disclose how much of the, if Toepfer's going to be eliminated, how much of that equity from affiliateds is Toepfer?

Yeah, it'll be about, it's about 140, 180, 180 excuse me.

108 in sales.

$180 million of affiliate investment.

Of affiliate investment.

The sales, the sales, if you just took a very rough number, are somewhere around four to $5 billion.

What about in the latest quarter in earnings?

We don't really break that out in earnings, but they did make a good contribution this past year.

And in the trading business, as you know, margins are very narrow and it's a difficult business to really quantify because it's a very efficient network like Toepfer has, adds great value to the entire system that we have, and flexibility to our crushing plants, and our river transportation business, our trading and ships on the open seas, and brings a new ability to our capacity utilization. And so it's hard to quantify, even though they, on their own balance sheet the way we keep track of their own financials, did enjoy relatively attractive results this past year.

The key is the way that system is integrated into ADM's global network.

OK, thank you very much.

You're welcome.

Thank you David.

At this time there are no further questions.

OK, great.

We thank you all for joining us today, and look forward to our next conference call which will be at the close of our fiscal year, June 30th. So thank you very much.

Thank you for participating in today's teleconference. You may now all disconnect.