Archer-Daniels-Midland Co (ADM) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2004 earnings 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 star, then zero on your touchtone telephone.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Allen Andreas, Chairman and Chief Executive Officer.

Mr. Andreas, you may begin.

Thank you.

Good morning.

Welcome to ADM's first quarterly earnings conference call for our fiscal year to be ending in June 30th, 2004.

So I'm here today with Doug Schmalz, our Chief Financial Officer; and Brian Peterson, Senior Vice President in charge of Corporate Affairs; and so they will cover the basic fundamentals of our business during the last quarter and then we will open it up to questions, whatever you would like.

Doug?

Good.

Thanks, Al.

First off, I would like just to say that some of today's comments reflect management's current views and estimates of future economic circumstances.

Industry conditions, company performance, and financial results.

Any changes in such assumptions or factors such as oilseed crush margins, ethanol prices, or crop values could produce significantly different results; and we assume no obligation to update any forward-looking statements as a result of the new information or future events.

As you've perhaps seen now, our net earnings for the quarter ended September 30th, 2003 were $150,181,000, or 23 cents a share, and that compared to net earnings last year of $108,075,000, or 17 cents a share.

Our average shares outstanding declined slightly to 645 million shares compared to 648 million average shares outstanding last year.

Fiscal '04 first quarter net sales and other operating income increased 19% to $8.3 billion, due primarily to higher selling price levels in our ag services origination operations and higher oilseed volumes.

To a lesser extent, sales of recently acquired businesses also contributed to the sales increase.

Our gross profits increased 8% to $454 million, due principally to improved operating results of cocoa processing, BioProducts processing, and wheat milling segments, partially offset by lower operating results of the oilseeds and food additives segments.

Our companywide selling, general, and administrative expenses increased $16 million to $232 million for the quarter.

That increase includes approximately $6 million of costs related to recently acquired businesses, plus general corporate cost increases.

Our interest expense of $83 million was comparable in total to prior year levels as the effect of lower interest rates, average interest rates was approximately offset by higher average long-term borrowing levels.

Our investment income declined $6 million to $28 million for the quarter, due primarily to the lower interest rates.

We did have a small gain on securities of $1million reported this quarter.

Our equity earnings of affiliates for the quarter increased to $43 million from $1million last year, primarily due to improved results of the company's private equity fund investments.

For the quarter, the fund investment had earnings of $15 million.

That compared to a loss last year of about $23 million.

This year after tax, that would be about a penny and a half and last year it was a loss of about two and a half cents a share.

Our effective tax rate for the first quarter of fiscal '04 is 31%, and that compares to 30 1/2% in the first quarter of last year.

The increase in the rate for the quarter and also in relation to our full fiscal year 2003 rate, which was 28 1/2%, can be attributed primarily to the improvement in our pre-tax earnings this year compared to last year and to the shift in the pre-tax earnings mix within different taxing jurisdictions.

Reviewing our segment operating profits reflects that our total segment operating profit for the quarter increased $57 million, or 24%, to $297 million from $240 million one year ago.

Our oilseed processing first quarter profit of $68 million in fiscal '04 declined from $76 million in fiscal '03 reflecting reduced North American European crush margins.

Results of South American and Asian operations improved over the prior year levels.

Our corn processing first quarter profits of $85 million in fiscal '04 compared favorably to the $84 million in '03.

Our wheat processing results improved to $26 million in fiscal '04 compared to $20 million in fiscal '03 as improved crop conditions in the United States resulted in improved U.S. operating volumes and margins over prior year levels.

Our ag services first quarter profits improved to $43 million in fiscal '04 from $40 million in fiscal '03 due to the balanced performance of our global grain origination and marketing systems.

However, last year's difficult crop conditions continued to negatively impact results of our North American origination system during the quarter.

We did get some relief with the larger wheat crop that we had in the latter part of the quarter.

It had some positive impact on the North American origination business this year.

Our first quarter results of the other segment increased to $76 million in fiscal '04 compared to $20 million last year.

That increase was due primarily to improvements in the company's cocoa and BioProducts processing operations, and to the increased earnings of our private equity fund investments which I mentioned earlier.

Those increases were partially offset by poor operating conditions in the food additives, citric acid product line.

Our cocoa processing results improved as good butter and powder demand resulted in increased volumes in pricing, leading to improved processing margins.

Bioproducts processing results also improved as continued good licensing demand resulted in improved selling prices and resulting margins.

These gains were partially offset by poor operating results in citric acid as our processing plant in Ireland was closed down for most of the quarter and sales volumes and selling prices continued at depressed levels due to the industry overcapacity situation.

Our corporate costs in the segment summary declined $5 million to $79 million from $84 million last year.

During the first quarter, trade working capital -- moving to the summary of financial conditions -- our first quarter trade working capital increased about $249 million.

That was financed primarily with cash flow from operations and cash received in the form of dividends and return of capital from our investments and affiliates.

At September 30th, our total debt as a percent of invested capital was about 37.8%.

That's a decrease of 1% from our June 30th levels of 38.9%.

Cash flow from operations for the fiscal year '04 was equal to the net earnings plus depreciation and amortization was $316 million.

The uses of our cash include principally our capital expenditures of $94 million, acquisitions of $53 million, repurchases of company stock of $4 million, and dividends of $39 million.

That concludes my comments, and I'll turn it over to Brian Peterson now who will review the various segments with you.

Thank you, Doug.

Good morning.

The oilseed sector is facing the most dynamic situation that we have seen in many years.

The dry conditions in the U.S. during the month of August were very damaging to the production of soybeans.

Oilseed production in some areas of Europe also declined due to drought.

Grain production in Europe was reduced because of the drought.

In the face of this situation, demand for soybeans is expected to increase in China.

This situation presents some significant challenges to the world's oilseed processing industry, along with some opportunities.

In this environment, profits were down for the quarter in North America as we continued to deal with the effect of a short crop.

Europe was also down, although we had strong results in Asia and improved results in our South American operations.

The oilseed processing industry faces the following situation going forward: The USDA currently projects a U.S. crop of 2.47 billion bushels, which means that the soybean supply will remain tight at least until the South American new crop is available to the market.

The Chinese demand for soybeans is growing which is causing higher bean prices.

Oil World reports that the Chinese demand is expected to grow from 18.6 million tons in 2002-2003 to 21.2 million tons in 2003-2004.

Soybean prices are now at their highest levels in six years.

With the weakest crush margins around the world today in Brazil, we have slowed production of our South American crushing plants.

Capacity utilization in Brazil is now around 70%.

Capacity utilization is around 80% in North America, and Europe and Asia are running with capacity utilization above 90%.

As a result of the current strong demand for meal and oil, we have good crush margins in our North American oilseeds processing business today, even with higher soybean prices.

The poor feed grain crop in Europe has increased demand for protein meals and improving demand and anticipated tighter global supply of vegetable oils is keeping soybean prices at a six-year high level.

Assuming South America produces a crop in the spring of 2004 as large as is currently projected, the world will not have a shortage of oilseeds, but we will have areas of deficit and surplus.

With ADM's excellent global origination capabilities for oilseeds, we are well positioned to meet our plant production needs.

Our global network of processing facilities is positioned to effectively participate in every major meal and oil market around the world.

Switching to corn processing, as Doug indicated, our corn processing results were flat compared to last quarter.

In sweeteners, we had increased profits due to higher sweetener selling prices and higher volumes related to our MCP acquisition.

Also the benefits of integrating MCP, their sweetener operations, into our network helped improve profits and efficiency improvements in our corn processing operations also helped.

The HFCS trade issue with Mexico remained open.

However, we still continue to explore ways to resolve this matter.

On ethanol, profits were consistent with the strong results of last year's quarter as prices were flat.

We are now entering the high-demand season for ethanol.

Current stock prices are up from last quarter, and we continue to see good profits in ethanol.

We recently started shipping ethanol to New York and Connecticut as customers in these states switched to ethanol and away from MTBE.

This market will consume an additional 475 million to 500 million gallons of ethanol.

The refiners will be out of MTBE by January 1st, 2004 and ethanol supply contracts have been signed for this market.

ADM is well positioned for the East Coast market with seven terminals on the East Coast, rail delivery capabilities, and a Gulf Coast shipping capability.

We will be shipping additional volumes of ethanol from inventory as we meet the start-up requirements of these markets.

In Washington the renewable fuels bill is in the House/Senate conference committee.

If this bill passes, there will be substantial growth in ethanol volumes over the next seven years, with most of the new production built by farm co-ops.

If the bill is delayed, we will continue under the current set of circumstances with an oxygenate standard and states moving to ban MTBE due to groundwater contamination issues.

Either way, the current economics are such that refiners improve their margins by blending ethanol.

We expect that the ethanol -- that ethanol will be a good business for ADM for the foreseeable future.

We continue to review opportunities to use our fermentation capabilities to expand our product line and increase the value of our start stream.

As we mentioned in our most recent analyst presentation, we are prudently adding capacity for lysine, xanthium gum, triamine, sorbitol, astozanthan, and crystalline fructose.

We are also adding incremental ethanol capacity to our Columbus, Nebraska plant as a way to render corn grind at full capacity and improve their stark utilization flexibility.

In our wheat business, or in our wheat flour business, earnings have improved as we process the new wheat crop.

Wheat quality and flour yields have returned to more normal levels.

The U.S. food program purchases of flour are winding down, but we have good capacity utilization as we head into the holiday season, which is our busiest time of the year.

Our capacity utilization was around 90% for the quarter compared to 85% last quarter.

Currently we are operating at full capacity.

We are well positioned to deal with conditions in the industry.

The integration of the flour mills that we acquired from ABF in the U.K. is on schedule.

We are already realizing synergies in administration, manufacturing, and distribution costs.

In ag services, the diversity of our operations in varying markets around the world led to our improved profits.

However, last quarter, we continued to suffer from the effects of last year's short harvest in North America.

As mentioned for the last three quarters, 2002-2003 short crops negatively impacted both transportation and grain origination results.

North American storage and shipping volumes were still weak in the quarter.

However, we are seeing an improvement in the barge shipping business, which is improving as barge freights are moving up.

While we expected 2.5 billion bushels, the U.S. soybean crop is smaller than in previous years, the projected 10.2 billion bushel corn crop which could be a record crop, and a large 2.3 billion bushel wheat crop should give us opportunities for solid storage, transportation, origination, and marketing income as we go forward.

In the other category, as Doug mentioned, we saw improved results primarily from cocoa and BioProducts in our private equity funds.

Our cocoa operations had a strong improvement over last year due to strong product demand and the positive effects of industry consolidation.

We continue to pursue opportunities to use our processing expertise to move closer to the customer and provide additional value to our chocolate customers.

Processing margins are solid and we continue to look for steady results from our cocoa operations.

In BioProducts, profits improved significantly versus last year due to strong demand and higher selling prices.

As you know, lysine is increasingly used to supplement diets when poultry and pork producers increase the ratio of corn-to-soybean meal in the animals rations.

The high price of meal relative to corn make lysine more valuable to the producer and result in increased product demand.

Of course, demand is also growing as cooperative ethanol plants come on line and sell increased volumes of distilled grains which require additional supplementation with lysine to enhance nutritional value.

Citric acid results are still unacceptable.

We reported last quarter that industry spot prices are going up, and this trend continues.

We are just starting to enter our contract season, and future prospects appear to be improving for this industry.

Thank you.

That concludes my comments.

We now invite your questions.

Thank you.

If you have a question at this time, please press the 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.

Again, if you have a question at this time, please press the 1 key.

Our first question is from John McMillin of Prudential Equity.

Please go ahead.

Good morning, everybody.

Good morning, John.

This was a strong operating quarter, but I just wanted to go through these equity fund investments, Doug.

I mean, basically what you have here is a fund of emerging market positions in private companies, correct?

That's correct.

And what -- you know, what is your cost base?

How much do you have in this fund?

About $400 million right now is what we have.

As I think we've said previously, we have commitments up to a total of about $1 billion.

We maybe put in $800 million, we've taken cash back out of about 4 and we sit right at 4 right now.

Okay.

So it's $400 million roughly and that's near your cost base.

Yes.

And how do you go about setting the values of these investments every quarter?

Each of them are reported generally every quarter by outsiders, and they do evaluations of those as investment bankers value properties like that in the private sector, and we base it off of those.

You know, and again, it only added a penny and a half to this quarter.

Right.

It's just the swing here from year to year, and I'm just kind of wondering, what was going on a year ago that you had to take these things down two and a half cents and kind of what went on this year where you had to take it up a penny and a half?

Is it just that China's getting better and the emerging markets are getting better?

We had some eastern European type, in eastern Europe, we have it in Asia, we have it in Latin America and it was in the eastern Europe sector that had some -- they had maybe churned out about five or six different companies during this quarter, either through IPOs or private transactions which created those.

Okay.

So you've been able to see transactions?

Yeah.

And I think as I've mentioned, I mean, our cash flows this year also included cash coming back in, in excess really of that.

And just the comment about the current --

I may --

Okay, go ahead.

John, I might add, too, as a sideline, those funds are all audited and, you know, they report back to us what the audited statements, and their auditors really provide quarterly type reports generally.

Not on an audited basis but once a year audited.

And just in terms of the statement that the current state of soybean crush margins in the U.S. was favorable, I mean, I guess basically the demand for meal and oil has more than kept up with the soybean price.

What changed because, you know, you just reported a quarter where North American margins were down.

What's kind of changed to make the margin structure better?

Well, as we said, John, we've seen good demand, really increasing demand for the products.

So in spite of -- I think that, you know, as the quarter went on, demand proved itself to be very good, and particularly since the end of the quarter, we're seeing very good demand on a worldwide basis for meal and oil, and so I think that's probably the recognition by the product markets that, you know, there is some concern about the supply of North American soybeans and therefore I think we probably have seen some more aggressive buying.

So you would hope that this lower North American oilseed processing earnings would not continue into the December quarter, Al?

John, I think we've got some pretty good prospects for good operating margins coming into the second quarter in the oilseed complex.

There's good meal and oil demand out of Asia-Pacific region, there's a relatively still strong market in the United States for the pricing of pork and cattle and poultry as you know, and so demand has been strong and margins look pretty attractive for us despite the higher prices at the Board of Trade.

We've got soybeans at about $7.85 or something this morning.

They are down slightly from where they were -- or $7.45, excuse me, and they have been close to $8 the last few days trading, and so there has been a substantial swing in the cost of soybeans from maybe $5 in July to $7.50 now; but it still looks as if there's good operating profitability ahead of us for the coming quarter in oilseeds in North America.

Well, because if you get that and ethanol moving, I mean, if you can earn 23 cents even with a penny and a half, I mean, if you can earn this kind of level without your two big businesses kind of humming and those kind of comeback it, you know, could get better.

Anyway, congratulations.

Thank you very much, John.

Thank you.

Our next question is from David Nelson of CSFB.

Please go ahead.

Good morning.

Good morning, David.

I would like to pursue the big increase in other operating income first, please.

Where are lysine prices now?

Let's start there, if you would, please.

Well, David, lysine prices are, right now, a moving target frankly because they have been moving up quite rapidly.

The shadow prices right now calculate in the neighborhood of $1.50 a pound.

I think you are familiar with the shadow price.

Yeah.

Are you on allocation now?

The situation is really quite tight right now.

The spot demand for lysine is strong.

As we've mentioned, we're increasing our capacity, which should be available, you know, as we get into next year.

That was my next question.

Yeah.

When does that come on.

But, no, the pricing for lysine right now is strong, and I think that the industry is, you know, as demand is very strong.

The industry is able to realize really prices quite close to shadow prices.

And the new -- the capacity expansion, that will take you from -- well, too, about 400 million pounds from currently, about 300 million pounds; is that right?

Correct.

I might add to that, David.

Please.

This is Al.

Is that there has been a real demand increase as a result of the substantial increase in production of ethanol in the United States by the farm co-ops, and when you produce distillers grains, either wet or dry, you need to have lysine and other amino acids in order to balance the formulation out to make an effective feed and so that really has been driving the increased demand for lysine, and we're looking forward to have our increased production come on stream next year to meet that demand.

$250 a ton soybean meal doesn't hurt, either.

No, that's right.

David, this is Brian again.

I mean, I just don't want to give the impression that the spot situation on lysine will carry on, you know, for a long period of time here.

I mean, our focus really is on cutting costs and improving our yields in our operation here so that we've got a viable business for the long term, and I think we've been successful at that.

We are seeing very strong spot prices, but, you know, this -- the industry, feed industry is adjusting to a very dynamic situation here, and I don't think that we should get too friendly about what we're seeing, based on what we're seeing in the spot market.

Okay.

Demand will remain strong, but I wouldn't get carried away with these spot prices that we're hearing about, $1.50 and so forth.

Fair enough thank you.

On soybeans maybe to pursue John's line of questioning a bit further, while margins do look better now certainly than they did last quarter, will that be a shorter term time horizon in that, you know, with strong demand, we're going to run out of product.

So would you expect margins to continue at a high level not just for this quarter but I guess more importantly, my question really is into the March and June quarters, would you expect to run out of product and just not have anything to process or just a whole lot less to process in the spring?

Well, at the current rates of usage, I mean, the projections are that supplies of soybeans would theoretically we would run out of them next summer.

So, of course, we never run out of them.

So the market will have to adjust.

I mean, it's a very dynamic situation, and we've got good margins at the present time.

Okay.

David?

Yeah?

David, I would just like to add, you need to look at our oilseed complex on a global scale, and we have substantial strengths in the Asia-Pacific region with our Chinese processing plants and we've built a very, very solid origination capacity out of Brazil, Argentina, Bolivia, Paraguay and so you have to put it all into context.

When you're talking about a short crop in the United States, that only will impact our U.S. businesses.

So if we have strong demand for our meal and oil in the United States, we could still continue to have good margins here, but I think more importantly is our diversified base of operations on a global scale, and because we have -- although we don't have a large amount of processing capacity, only about 10% of our capacity is in South America, our origination is very strong there, and our margins are solid in China.

And so when you put it all into context, you see that there is a good chance for us to have some fairly good results from oilseed over the coming quarter or two because of the fact that we've built a diverse base of businesses that can originate raw materials and process them in the areas of the world where there are better margins.

Well, then just if I could add a question to that, then, you know, we'll have the South American crop coming in next March and April and hopefully the supplies will last out to some degree until then and you'll ship them to China.

What's the order of magnitude of your processing assets in China relative to the U.S. in terms of, you know, bushels per day of capacity perhaps?

We currently have about 25%.

If you look at -- we only own one third of the Chinese ventures, but if you look at our global oilseed processing capacity, it's about 10% in South America, 25% in Asia-Pacific and then about 44% in the United States and maybe 22% in Europe.

And this year we have produced about 51 million tons down in Brazil, and there's a good prospect that that will be 58, 59 million, it could even be 60 million in the coming year because of the fact that there are strong soybean prices.

And so our origination capabilities in South America will allow us to have a significant stream of raw materials going into Asia-Pacific if those margins remain.

And then the North American industry kind of stands on its own.

So despite the fact that we currently have relatively weak margin structure in Brazil itself, it's not likely to have as big an impact on our bottom line as might otherwise be envisioned.

So if I could just belabor this one more time.

The 25% you mentioned in the Asia-Pacific where you have one third ownership, is that 25% at the one third ownership level or at the --

25% at the gross and 100% level.

Okay, gotcha.

And so then we only own one third: But I think you need to view it -- what it means is that we will only have one third of the contribution that's made from those facilities, but I think you need to view it in terms of the efficiencies of our entire global network, from the origination in South America through the shipping businesses and into that marketplace, and as you know, that's all handled on a consistently concentrated basis between North America and our trading group in Hamburg that originates and transports those soybeans into that marketplace.

Great.

I'm sorry.

If I could pursue one other area is ethanol.

Stack levels are up, I guess about 10% according to the Energy Information Administration.

Are you holding those?

I remember when we talked, I guess a year ago last summer on your conference call, you had been building up some stacks.

Are you holding those stack levels?

Is it the blenders in New York and Connecticut?

And what should we expect there going forward?

Well, David, we built stocks in anticipation of the growth of the market and so that was -- it was the right thing to do.

The market has grown.

There's strong demand for it.

So yes, we are, have built stocks, but it was to be prepared for this big increase in demand in the marketplace.

So to facilitate, you know, a smooth transition in these markets away from MTBE to ethanol.

So the short answer is, yes, we have been building stocks.

David, as the carrying of those stocks is, of course, not a positive contribution to the profit and loss of our corn division, but we thought it was just critical that we be in a very strong position to serve our customer base and so we built those stocks in anticipation of more cooperative production coming on stream, and we'll have about 3 billion gallons a year of capacity at the end of 2003, and that will move up to 3 1/2 billion sometime during 2004 based on the current construction projects.

There are about 13 ethanol businesses being constructed out of a total -- there are 73 operating and 13 being constructed, and so that balance should work quite favorably, and we're looking forward to seeing our stocks reduced over the coming several months as we meet that demand while these new facilities come on stream.

Fantastic.

Thank you very much.

You're welcome.

Thank you.

And our next question comes from Leonard Teitelbaum.

Please go ahead.

Good morning.

Good morning, Lenny.

Just a couple of things, and I want to pick up a little bit where David left off.

My question concerning the stocks, the presumption at least that I've been working on is that you built these stocks with significantly lower input costs than exist if you were to do it today; isn't that correct?

Corn was down?

No.

No, I don't think that is correct.

It is.

It is not.

It is not.

No, I said not.

Okay.

Now, if price is going to ration supply here, how far out -- have you sold forward product, meal and oil on the soybean side into next year?

Well, it depends, it depends on the markets.

Different markets trade differently.

Particularly soybean oil.

Well, I mean, as I said, it applies to soybean oil, too.

So I guess --

My question concerns soybean oil.

It's a balanced approach.

We have some sold and we have some to sell.

So I'm not quite sure how to answer your question, Lenny, but it's a mixed bag.

All right.

I'll follow up off line with that.

How many of the plants have dual capacity now between fructose and ethanol?

Four, four of them do.

Yeah.

And what is the capacity of the ethanol and the fructose coming out of those plants?

We've got about 10 billion total capacity in fructose and the syrups, and we have about a billion 200 million gallons of capacity in the ethanol industry.

And then we swing between there.

We've got maybe about 10% capacity to shift around with that start stream and so since we've had strong demand for ethanol and we've been anticipating all of these increased markets opening up on the West and the East Coast, we have been running our grind at very full capacity and diverting as much as we can to the ethanol complex.

Does Grassley have the votes to make this thing happen on the bill?

Well, I hope that he does, but as Brian pointed out in his presentation, you know, we've got a very solid position as a company no matter what happens with all these events.

Now, Grassley has been very outspoken about the Mexican high-fructose corn syrup issue, and sweeteners going into Mexico is an issue that would be very favorable for us if it were resolved, and there are substantial discussions going.

On the energy bill, I think it's a 50/50 kind of proposition.

There is a lot of strength behind the support for the new energy bill, and we look forward to it being implemented but, on the other hand, if it does not, oxygenate is still required in the fuel supply, and MTBE is a very, very expensive thing for the oil companies to continue to produce.

So state by state, 18 states now have banned it and more are looking forward to banning it.

So we're in a good position in both of those commodities and our mills are very, very technologically advanced in their construction and they are in good positions and so we've got a good geographic as well as product line diversity and so that should be a good contribution to our earnings over the next couple of months.

I agree.

Al, if we take a look as you had suggested of how your assets are allocated in the soybean area, or let's say the oilseed area, how would your profits allocate right now between the various venues?

Well, it's a very, very broad subject, and it changes all the time, but Brian, do you want to comment about what --

What did you say, 44% in the U.S.

How does your operating income focus around your assets is obviously the point I'm trying to ask.

Yeah.

Well that's, I guess, a little bit tough question to answer right here.

You know, I think we've -- yeah, I mean, looking at changes, as the business changes, we're getting more of a contribution from outside North America, but I guess beyond that -- and there are comments already that Asia is good.

South America was actually up this past year.

But North America is leading.

And North America is leading.

Would it be a 60/40 split, Doug, or something like that between U.S. and non-U.S.?

It really varies by quarter and by year, Lenny, as to what's happening in those markets and where your origination is coming from and where your products are being processed at.

So it really, it really does.

But in general if you look at the 44, 22, whatever those percentages.

Yes, sir.

I mean, we tend to float around that over some period of time.

Okay.

What it is quarter to quarter, I can't sit and tell you.

All right.

Last two questions.

Has there been any movement to negotiate early on fructose, or is it still going to be January, December type of time period?

I think the discussions really will happen as they have in the past, a little bit later on this year.

Okay.

So there's been no change in the pattern?

It's a pretty good -- there's been a lot of interest because of this volatility in the marketplace.

There's been a lot of interest on the part of our customers, and we have already concluded a number of our negotiations for contracts for the coming year.

So it's accelerated a little more than it has in the past, but generally we still are looking forward to the next month or two as to when we'll --

Because that's kind of what I had heard, Al, but is it only preliminary talks?

Have you actually con -- did I hear you say you contracted for '04?

Yes, we have.

Yes, we have.

We've contracted for '04 from a number of our customers already, and as anticipated, we have relatively good confidence that we're going to see some upward movement in the value of those sweeteners in the coming year.

I think that's exactly what I wanted to know and I thank you very much and don't stop at producing 25 cents a quart.

You can feel free to go higher.

Thank you, Lenny.

Thank you for your time.

Thank you.

And our next question comes from Christine McCracken of Midwest Research.

Please go ahead.

Good morning.

Good morning, Christine.

I'm just following on Lenny's line of questioning there.

Is it your expectation on high-fructose pricing because of the drop in corn prices that you come in at a lower, you know, top line pricing or lower -- sorry.

Lower --

That's really not --

It's early, you know?

No, we've got higher corn prices.

We've got some pretty good offsets right now because of the strength in some of our byproducts, but as you know, Christine, we have gotten a very inadequate return on our investment in these businesses for a number of years; and we're not confident that there will always be these kinds of contributions to our net corn costs and so we're looking at higher energy costs and a lot of other factors coming into this year, and we expect to be able to generate higher prices in the sweeteners complex in the coming year, 2004.

Great.

Good to hear.

We need it in order to get the returns and the amounts we have invested in these businesses.

And it's fair to say that there's no capacity coming online in high-fructose over the coming year?

We have no information to believe that capacity is being added, and as you well know, there's plenty of capacity to meet any needs, and we continue to have some optimism about Mexico, but if that doesn't materialize, we're going to have lots of capacity to satisfy our customers' requirements.

The domestic markets are pretty flat in growth and so we'll have lots of capacity.

And just on capacity looking at the U.S. soybean market, obviously you are facing a tough environment over the next 12 months there, but we've heard of some new capacity coming online which seems somewhat out of sync with where the market is.

Could you comment on if you expect -- one, if you expect that new capacity to eventually come on and, two, if you would expect in the current environment to have to take down some capacity given lower expected volumes?

Do you want to comment on that, Brian?

Well, I think some of the new capacity already is online and in spite of that or in view of that, we still have, at the present time, pretty good spot margins.

It is a very dynamic situation as the prices really quite violently gyrate from day to day here as the market tries to accommodate to this tight situation in the U.S.

But, no, I think that, you know, we as we said, the U.S. industry will have some challenges to face because there's no question about it.

In the U.S., we do have a tight supply, but I think if you look at our overall worldwide balance of interests, I think that we feel quite comfortable about it.

Great.

In terms of China, because you have put a lot of focus on that market in the past few years, and as I understand it, getting a lot of beans from the U.S. now at much higher prices, how does that translate?

Are you able to pass through the higher prices to your customers there in China?

What does the demand look like in China?

Certainly it's growing.

And then it looks like the internal prices of soybeans in China are at least $3 above what they are in the U.S.

So maybe you could just comment on, you know, what your mix or your input costs look like into that crushing mix.

I would say that China demand is very strong.

We have good demand for both meal and oil.

We had a little surplus at some of our plants out there in China and so we've been employing our systems to export a little of that capacity into Korea and Japan.

So there is new competitive elements in the Asia-Pacific markets, but China always has a very, very substantial interest in maintaining higher prices for their commodities.

They have some 800 -- more than 800 million people in their rural economy that are dependent on farm prices and so this is a very sensitive area for them, and our cooperation and joint ventures with them have been very successful.

We have all of our oil moving right into the marketplace there under our labels.

We refine it and bottle it and sell it through the grocery stores, and the meal demand is solid.

So we have fairly good operating margins in Asia and in China, and we continue to work together with the Government.

The Government has from time to time put some restrictions on imports of beans in order to maintain a higher market so that their farmers would have adequate incomes, and so that presents some challenges for us from time to time, but because we are in a good venture with solid partners and have a significant capacity compared to what the import of beans is for China, we're in an excellent position there and we continue to enjoy good profitability from those operations.

Would a change in the currency policy affect your operations there, or are you expecting any change in that?

Well, that's one of the reasons why when you just take the price of internal soybeans in China, you would be led to believe that they are higher than the world marketplaces, that their currency is very strong in relationship to other currencies; but we have no reason to believe that China is going to respond to the significant pressure that has been brought by the world community on China and particularly by the United States to try and get them to revalue their currency.

I think that's an internal question that they need to deal with.

It has massive implications for their farmers and for their people in the cities, and their economy is very strong, growing at more than 8% this coming year and so we're looking forward to a good contribution from that side of our business.

We continue to expand and grow our capacities there, and the demand seems to be very adequate for all of our products.

So I don't think China is likely to, strictly by virtue of its pressure from the external community, revalue their currency.

In either event, we're in an excellent position to capitalize on that opportunity.

Great.

One final question then on foreign sales tax credits.

Have you seen any benefit from that in this quarter and then going forward with any change there, how would that impact your operations into the next fiscal year?

I assume you are talking about the ATI situation?

Yeah.

I mean, that continues as we have it in the past and it's still out there for potential change.

We're not sure exactly where that will go, but we'll just continue to monitor that on a quarterly basis.

Okay.

Any impact from that this quarter?

We have an impact from it every quarter.

I mean, it hasn't really changed from previous years.

All right.

Good enough.

Thanks.

Thanks, Christine.

Thank you.

And our next question is from David Driscoll of Smith Barney and please go ahead.

Thank you, and good morning, everyone.

Good morning, David.

I wanted to go on and talk about ag services for a minute.

The division had a surprisingly strong quarter in my opinion, especially following two very weak quarters in fiscal Q4 and fiscal Q3.

I know the year-over-year change looks reasonably on par, but I really don't understand what's going on in that division.

You had $14 million in profits in the fourth quarter, $4 million in profits in the fiscal third quarter last year and this was all related to weaker, you know, weaker results because of the poor harvest in the United States.

Now, in your comments you said that the division was more balanced.

Why would that not have been true in the two prior quarters?

How does it all of a sudden get true?

And then, was there a real contribution here due to the trading operations?

Toepfer is in there and it's somewhat, you know, from our perspective, being outside, it's very difficult to know how to think about this division.

So consequently, I'm looking for somewhat of an explanation as to what happened in the quarter.

And then very importantly, how should we think about it going forward?

Well, as you know, we've got substantial global operations that are involved in the origination and marketing of our raw materials and of our products and so as those results are realized in ag services, it's a very global business.

North America is still plagued by the drought.

I mean, we're just now coming into the period of time when the harvest is coming in.

So we still are adversely impacted during this past quarter from the drought in North America.

We have also had a substantial problem with the weather in eastern Europe and so as a result, with our strong origination capabilities across North America as well as South America, we were able in the Toepfer group to have very favorable results over this past period of time as they were able to meet those new demands in eastern Europe and in Europe itself from the drought conditions that they are suffering from.

So we've had good results there.

They have had solid business positions in those markets.

Our barge division is now beginning to come back with a little better water levels from the drought of last year.

In our international freight positions, in moving commodities around the world, we're solid coming into this period of time and so we've been able to make good contributions from ag services despite the fact that in North America, we're still suffering from the impacts during this past quarter of the drought.

Well, Allen, can you explain, though, what was the differential between the fourth quarter, the fiscal fourth quarter and then this quarter?

Because essentially, if I understand what you are saying, is that we basically had a step-up in the profitability in those international operations in eastern Europe and in your international freight operations.

Is that simply the explanation as to kind of what happens and it's really this dynamic where from one quarter to the next, we can get these significant moves?

I think that is a fair assessment of the situation.

We have a lot of strength all the way down through Latin America, through Mexico, Colombia, down into Bolivia, Brazil, Argentina; we have strong operations in Argentina and so that whole complex can contribute quite significantly to the ag services group over time, and so I think your statement is very fair and accurate and they have been able to enjoy strong results despite the weather conditions because of their unique position in being able to arbitrize one market against another in terms of finding the best place to originate and dispose of the materials that they have in their book of business.

Then would you guys say it's fair to say that, I think two years ago we saw about $170 million in operating profits from that segment.

Would it be fair to say that we should be north of that number, somewhere around $200 million for fiscal '04?

I really don't know the answer to that, David.

We're running our businesses on a day-to-day basis trying to maximize our profits and it's very difficult to be precise as to what the future looks like.

Allen, I have that problem every day.

Thank you.

On the other segment, I would like to talk just a moment here.

Again, even backing out the private equity gains of $15 million, and I believe I'm correct in doing that, we take $76 million, drop the $15 million.

We're at $61 million.

That's still a very good result in that division versus the prior year.

Now, again it's probably not a good comparison because in Q2, 3, and 4 of fiscal '03, we saw significant step-ups in that division, I think largely due to cocoa, but what I really want to get to here is, can you give us a better understanding as, if I think about the $61 million in operating profit, was, you know, two thirds of it due to cocoa and one third of it due to lysine, or can you just focus, you know, focus me in a little bit here on the split?

Well, really we don't break that out.

So unless we -- you know, unless we choose to have a different information reporting system, it's a little hard to be specific about those details; but we do have very strong results from both BioProducts and cocoa during this past quarter, and then when you add that together with the shift in the investment funds as Doug pointed out, it does result in a substantial improvement in that area of strength.

What I'm getting at there is that the cocoa margins are certainly something I think we would expect to continue over time.

However, as Brian's comments went, you know, I believe you said that the shadow price on lysine is something that maybe you don't want to estimate as something that's going to happen going forward.

So obviously then what you have is a challenge in trying to forecast those operating profits because you've got one segment that may be stable and another segment that might be quite volatile.

We always have a certain degree of volatility in our businesses because we're dealing with global prices in futures markets and all that.

So it's not always crystal ball capable to be able to predict how it's going to work.

But we are generally not operating on the flat price basis of most of our businesses anyway and so it's more of a working capital challenge than it is anything else because we're operating on the margin, looking always at our production cost versus our sales ability.

Okay.

If I could try a different segment.

Let's see how we do here.

On equity and affiliates, you know, again a nice strong number, I believe in this division also where on this particular line we have to take out our $15 million of private equity gains to try to look at the basic, you know, your investments in other operations.

So I think it was somewhere around $28 million in the quarter.

Again, what looks to be a pretty good number.

Can you guys list your three top affiliate investments?

I think Grooma is in there.

Well, our largest affiliates are the Chinese ventures, we've got the Grooma, we've got peanut operations in there plus the funds, CIP.

Agricore United.

The peanut, is that Golden Peanut?

Who?

Yes, Golden Peanut.

And can you give us the relative scale here on these investments?

You know, we've talked about our Chinese investments as to what that represents in relation to our total overall capacities.

Grooma, that's a public company and we own about 30%.

So you can get the relative values there.

Where have we seen the strength?

I mean, you guys understand where I'm going with this.

I'm just trying to understand that this division again is pretty volatile, we're seeing a lot of good contribution here.

It's potentially an exciting segment but it's -- I think it's difficult for those of us on the outside to really grasp where we're looking for some substantial kind of gains going forward.

When you say -- I mean, they are split among the segments.

You know, the Chinese and Asian oilseeds ventures are in oilseeds.

Right, I understand that.

Okay.

And then Golden Peanut is also in oilseed.

That's correct.

Agricore is in agricultural services.

That's correct.

And Grooma is in where?

Other.

Okay.

Any -- can you give us any guidance on interest expense for the year?

Well, I think a lot will depend on, you know, where inventory levels and working capital levels go to given the current situation but on the other side, short-term rates are fairly low, we're generating a lot of free cash right now and we're paying down debt if we can, I mean, but your values are going up on inventories and so we're carrying a lot more inventory value.

So it would be fair to say you are looking for a lower, but net net, you are looking for a lower interest expense number through the year?

I can't say that if you are going to continue to have beans where they are today and so forth.

Okay.

Because of the higher inventory?

Yeah, the balance, it gets blown up.

Now, short rates are fairly low.

So if you add $100 million, you are maybe talking a couple million dollars of interest costs.

Very good.

In many cases we are hedged against those commodities and so they have got a forward cost of carry that offsets the increased interest obligation that we would have.

So readily marketable securities are frequently have an impact on the total interest cost, but by the same token, we would be getting that money back on the other side.

Great.

Okay.

Thanks a lot, everyone.

Yes, you're welcome, David.

Thank you.

Our next question is from Eric Katzman of Deutsche Bank.

Please go ahead.

Hey, good morning, everybody.

Good morning, Eric.

I mean, I had 1,000 questions but I think they have all been answered.

Good.

All right.

I guess just kind of focusing on the free cash flow, Doug, if I use your definition, you had $130 million of free cash flow this year excluding the repurchases versus a negative $264 million and, Allen, you know, the company only bought back $4 million versus $54 million a year ago.

I'm kind of wondering what's kind of -- what's going on with where you are going to deploy the free cash flow?

Well, if I just may comment very briefly on that.

As you know, this past year we he spent more than a billion -- right at $1,245,000,000 on property, plant, and equipment, and increases and additions to our property, plant, and equipment.

And so last year with the acquisitions of the two new corn mills in Minnesota and Nebraska from the Minnesota corn processors group and together with additions in Europe to the flour milling businesses and to our oilseeds businesses there, we were put on a negative outlook basis with Standard & Poor's and Moody's.

So at that time we cut back and reduced our stock repurchase program and so there aren't that many shares that have been repurchased during this period of time and we're replenishing the balance sheet in order to strengthen our credit rating.

We've got very high prices and a lot of demand for capital due to this shortage situation in soybeans and so our inventory requirements, we just thought the capital would be better employed the way it is.

Our net costs and short-term money in this past period of time are a little over 1.2%, and in the last quarter, and so we're continuing to build, strengthen our balance sheet.

But we're evaluating all of those options from time to time, and it just happens to be -- we do still have a stock repurchase program in place.

It just so happens that this last quarter we didn't put a lot of money into that.

Yeah, I mean, Allen, you can see where I'm going here.

I mean, if things keep going as well as they are going, you are not going to have too much of an issue in terms of paying down the debt and having flexibility.

So you are basically saying this kind of moves in the dividend or the moves in share repurchases are kind of just, you know, tune in.

That's exactly correct.

We review those policies in the dividend on a quarterly basis and we will be doing that again in the next week and in the coming week as we have our next shareholders meeting and board meeting.

Okay.

And then I guess I was a little bit surprised at your comments about wheat milling being so good because I thought with the -- I don't know the Atkins diet and other stuff that nobody was eating bread anymore, pasta, and that the last time we talked about that business, you know, capacity utilization was kind of weak and nobody was taking out capacity.

So what's happening there?

Well, we started moving into new crop, number one, Eric, which gave us better yields, better quality.

That had an effect on the operations.

I think the -- you know, we had some increased demand from government purchases for flour.

That made it a little bit better.

And also, of course, now at the present time we're moving into our strong seasonal time, or seasonal demand for flour.

So the capacity utilization right now is very high.

All right.

And then I guess, Doug, any changes in terms of, I guess last guidance you gave for the fiscal year on things like capex, DNA, any significant changes we should assume?

No, I think the only change we've seen is in our rate on taxes.

As I mentioned, we're using about 31%, and we continue to look at that every quarter, but I think right now you could use that.

Okay.

And last question.

And then I guess the Brazilian crush margins in oilseeds have been kind of weak.

Do you expect those to improve with the new crop?

With the new crop, yes, we would expect that those would improve.

Okay.

All right.

Thank you.

You're welcome.

Thank you.

And our next question comes from Bill Leach of Newburger.

Please go ahead.

Good morning.

Good morning, Bill.

Doug, I just wanted to ask you again on this private equity funding, last year in the second quarter, it was a loss, I believe, of $27 million.

Right.

What would you suggest we plug in this year?

I mean, such a big swing factor year to year this quarter.

Do you expect it to be profitable this quarter, too?

I mean, we don't know until we get all those reports in, but, you know, we don't anticipate any significant differences from where we were this quarter.

So it should be, like, $10 million positive?

Or nothing.

I mean, you also have fees coming in during this time period which offset some of the remaining profits you may have in there.

But it should be a positive year to year then in the second quarter as well?

It should be positive.

I can't tell you the magnitude, but it should be positive.

And the tax rate, you said the guidance now is 31%?

Well, I'm just -- I mean, we look at that every quarter because as our mix of earnings, as you well know, shift very rapidly around and we get different taxing jurisdictions and different tax rates.

So -- and as our earnings have increased, of course, then the effect of our ETI and some of those are fairly fixed.

So they tend to lower -- or increase the effective rate.

So we'll just continue to monitor the 31% at this time as our best estimate.

Okay.

And lastly on the corn division being flat surprised me a bit.

I just thought that would probably do better with ethanol pricing being good and corn costs being reasonable.

Do you feel more optimistic about that going forward?

Most definitely.

I think that one of the things that was happening is this past quarter, of course, is that we were building stocks in anticipation of preparing for the movement of ethanol to the East Coast.

So that, you know, building inventories over the quarter where there were some fairly high corn costs in that.

But, yes, looking forward, yeah, I think we've got good solid demand for both products.

Okay, great.

Thanks a lot.

Thank you.

Our next question is from [Karen LaMarque] of Merrill Lynch.

Please go ahead.

Hi.

On the net sales and other operating income, what is in the other operating income?

Is that only the private equity gains?

No, there's no private equity in net sales and other operating income.

Private equity is down in our equity and earnings of affiliates.

Okay, what's in the other operating income that's on --

Oh, the barge revenue -- I mean, a lot of different things.

Barge revenue, storage revenues, you know, a lot coming out of the ag services group.

Okay.

It's miscellaneous revenues.

Is there any trading profits or losses in that?

No, because we -- all of our trading operations are gross.

It's gross sales, less cost of sales, so that the sale is recorded and the cost of sale is.

Okay.

Within gross profit.

It's not in "Other."

You mentioned a few acquisitions that you had made.

How much did that contribute to sales and operating income?

Oh, we're around I think $300 million maybe is approximately the change as a result of those.

On the sales line?

Yes.

Okay.

And how about operating income?

We don't disclose that separately.

Okay.

The corn processing side of things, is it fair to assume that you are going to continue to relatively speaking, favor the ethanol side of things versus high-fructose corn syrup in terms of your capacity allocation?

We have a complex -- a corn processing complex and we're going to try to run our mills 100% full out on grind and then we move our product stream into any of a number of items, whether it be the BioProducts area or whether it be the ethanol area or whether it be the high-fructose corn sweetener area and we will try to move that production to where it produces the best returns.

Okay.

Unless I misunderstood, but you, at least this last quarter, that 10% sort of swing capacity did go to ethanol; is that true?

That is true.

Okay.

And so it may again?

Is that a fair statement?

Yes.

Okay.

In terms of the ag services, did you imply that because of the current crop conditions that you are not expecting, for example, a year-over-year gain next quarter in operating income?

I think we are expecting an ag services, an improvement from the bad situation -- speaking of North America here, that the bad situation we saw over this past year, you know, we expect to see, apart from the fact that soybean crop is substantially lower.

The other crops that we move are higher volumes and we're seeing good, good demand and so, you know, we expect to see a more normal -- a return to more normal conditions in that area.

Can those other crops make up for the soybean volumes?

Oh, yes.

Okay.

Is there any way that you can break down that other "Other" operating income into cocoa, BioProducts and then the private equity fund?

No, we do not do that.

Okay.

You know, we retain all those.

There's a lot of other ones in there, as you well know.

There's Grooma, there's our feed businesses.

So when you have some movement around in there, it's not just those three, but those are the most significant.

Right.

I was just trying to get a gauge on the trend of those big ones.

Okay.

And as far as oilseed processing is concerned, should we expect the same sort of level decline year over year in operating profit in that, when you throw -- for, say, the next -- I don't know -- one to three quarters as the crop comes in in the spring?

No, I don't think you can just put in the same percentages.

How does your -- .

If you look at last year, second quarter last year, we had a relatively strong, at $103 million, if I recall.

I'm just trying -- I'm sorry.

I was just trying to get a gauge of how extraordinary the decline in oilseed processing this quarter was versus what we should expect over the coming quarters.

It changes every day, and we're in a market that's rapidly changing, as you well know, every day.

So to try to predict that is very difficult.

Okay.

All right.

I think that's it.

Thanks very much.

Thanks.

Thank you.

Again, ladies and gentlemen, if you do have a question at this time, please press the 1 key on your touchtone telephone.

Our next question is from [Robert Back] of SNC Capital Management Corporation.

Please go ahead.

Yes, I was fascinated by the support that the China government has for their own soybean.

Are there any other major markets where soybeans are supported above the market price of $8?

No, I don't think so.

Right now you've got a very, very strong and tight bean supply.

If we have good production down in South America, we may return to levels at which support prices begin to impact valuations and what farmers do with their crops, but I think under the current circumstances- every country starts with an agricultural base and as they become more and more interdependent across the world, there's less need for that kind of activity, and I think in today's environment with $8 oilseeds, you don't have a lot of government intervention to try and improve the returns to your farmers.

So as a result, you are getting good margins on your sales of soy products in China under your own brands?

That is correct.

We're enjoying good solid profitability and reinvesting all of that money right directly into those businesses as they grow and expand, but there is significant demand for both meal and oil in the region and so our margins are favorable in the Asia-Pacific complex, and that has made a very good positive contribution to our investment there.

Are there any other profit contributors from China?

We don't have any other major investments there.

We do have a flour milling business and we do have contribution from our general activity in originating grain for the other markets in that area and so there is some contribution, but most of our contribution in the Asia-Pacific region is coming either into our oilseed complex through the Chinese ventures, or would be involved in the origination and the improvement in capacity utilization of our origination in other parts of the world.

For example, in South America.

So in other words, China is a pretty well integrated entity into your global marketing?

It's very well integrated.

One of the real efficiencies of our coming together with our Chinese partners, the Kwok family and with Coffco, the government organization, was to bring all of our strengths together to bear on being able to deliver effective products at very competitive prices in China to meet their nutrition demands.

So it is integrated quite significantly.

A large portion of their raw materials are originated through the AC Toepfer origination group and our freight positions are all centralized there in Hamburg, Germany with the co-ops in our joint venture.

And then in the United States, it's a solid portion of our export operations.

So it's utilizing our barge facilities.

We have about 100 ships under charter at any one time.

So freight positions become very important, and the South American origination system is not only designed to take care of our factories in South America, which is a relatively small part of our small total crushing capacity but also to serve that system and so we generate a lot of oilseeds in South America that are going to our Chinese ventures.

So you are a major beneficiary of this great Chinese trade surplus against the United States?

This is very true, and in contrast to what many companies are doing, which is looking for low-cost labor there to produce their products, it's the reverse for us because we have a huge consumer market to fill and so our bottles of vegetable oil are going right onto the grocery store shelf.

So we are in China not for the same reasons that most people are.

We're there because it's a solid business that fits into our global complex in a very effective way.

And China because of their growth and their massive significance with a billion 300 million people; they are having a very substantial impact on commodity values all the way from soybeans to crude oil.

And then the Korean and Japanese markets are the marginal markets for any surplus capacity?

Yes.

When we have a lack of ability to really move at effective prices all of our meal production into China, then we will move it into the export markets in Korea and Japan and other places across that region.

Thank you for the discussion.

Yes, you're welcome.

Thank you.

And our last question is from [Karen LaMarque] of Merrill Lynch.

Please go ahead.

Hi, sorry.

I've got a couple of balance sheet questions.

Can you give us the year-over-year inventory and Accounts Receivable numbers?

They will be out in the Q next week.

Okay.

Thank you.

Thank you.

And that does end our Q&A session.

Thank you very much, and we appreciate all of your interest and contributions.

We look forward to seeing you again next month -- next quarter.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may disconnect and have a good day.