Archer-Daniels-Midland Co (ADM) 2004 Q2 法說會逐字稿

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  • Operator

  • Good day ladies and gentlemen and welcome to the Archer Daniels Midland Company second quarter 2004 conference call. (Operator Instructions).

  • I would now like to introduce your host for today's conference Mr. Allen Andreas, Chairman and Chief Executive Officer.

  • Mr. Andreas you may begin.

  • Allen Andreas - Chairman and CEO

  • Thank you, Operator.

  • Welcome all of you to ADM's second quarter of fiscal year 2004 conference call.

  • I am joined here with Doug Schmalz, our Chief Financial Officer, and Brian Peterson, Senior Vice President in charge of Corporate Affairs.

  • So we will first review the financials with Doug and then move into a brief overview of our businesses and then we will be happy to entertain any questions you may have.

  • Doug, please.

  • Doug Schmalz - CFO

  • Thank you, Al.

  • Some of today's comments reflect management's current view 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 recently reported, our net earnings for the quarter ended December 31, 2003 were 220,821,000 or 34 cents a share compared to net earnings last year of 131,245,000 or 20 cents a share.

  • This year's quarter includes loss on abandonment of various assets of 29 million, that's 18 million after tax, three cents a share.

  • Last quarter's earnings included a gain from partial settlement of Vitamin Antitrust Litigation of $25 million or 15 million after tax or 2 cents a share, and a loss from security transactions of $3 million, 2 million after tax.

  • I would now like to discuss changes quarter-over-quarter in the line items of our consolidated statements of earnings and we'll discuss changes in the segment operating results a little later.

  • Our fiscal '04 second quarter net sales and other operating income increased 18% to 9.2 billion, due primarily to higher commodity values and increased sales volumes of our agricultural services marketing operations and to higher selling prices in volumes in oilseed and corn operations.

  • To a lesser extent, sales of recently acquired businesses contributed approximately $200 million to the sales increase.

  • Our gross profits increased 23% to 604 million, due principally to improved operating profits in all major operating segments.

  • In addition, the effect of rising corn, soybean and soybean oil prices on LIFO inventory evaluations resulted in a charge in the quarter of $53 million, which is 33 million after tax or 5 cents a share.

  • Our company-wide selling, general & administrative expenses increased $19 million to 265 million for the quarter.

  • The increase includes 8 million of costs related to recently acquired businesses.

  • Interest expense declined 5 million to 90 million for the quarter and investment income also declined 4 million to 25 million for the quarter, due principally to lower interest rates.

  • Our equity and earnings of affiliates for the quarter increased to 53 million from 9 million last year primarily due to a $47 million improvement in valuations of the company's private equity investments.

  • Earnings from those investments were 20 million this year compared to a loss of 27 million last year.

  • Our effective tax rate for the second quarter of fiscal '04 is 31%.

  • That's compared to 30.5% in last year's second quarter.

  • The increase in rate for the quarter and in relation also to the full fiscal 2003 year rate of 28.5% last year can be attributed primarily to the increase in pretax earnings and a shift in the pretax earnings mix within different tax jurisdictions.

  • Turning now to the results of our operating segments.

  • Our total operating profit for the quarter increased 198 million, or 66%, to 495 million from 297 million last year, as operating profit improvements were realized in all major segments.

  • Our oilseed processing second quarter profit of 121 million in fiscal '04 increased 18 million from 103 million last year, reflecting improved operating results in North America and Asia.

  • Results in South America and European operations declined from prior year levels.

  • Our corn processing second quarter profits of 138 million in fiscal '04 increased 66 million from prior year levels of 71 million.

  • The improved results are attributable to increased selling prices of alcohol and sweetener products, increased ethanol volumes and lower net corn cost due to lower gross corn cost and improved byproduct values.

  • Our wheat processing results increased to 24 million in fiscal '04 from 19 million last year, as improved crop conditions in North America resulted in improved operating volumes and margins over prior year levels.

  • Agricultural Services' second quarter profits improved to 106 million in fiscal '04 from 35 million last year due to the strong performance of our balanced global grain origination and marketing systems.

  • This year's quarter included a $5 million asset abandonment charge.

  • As you perhaps recall, last year's results were negatively impacted by the poor North American crop conditions.

  • With the much-improved North American crop conditions this year, and with solid worldwide demand for grains and feed stuffs, which can be partially attributable to the poor crop, and drought conditions in the EU, our global marketing operations has performed well as it efficiently moves crops from areas of surplus to areas of deficits.

  • In addition strong demand for transportation also contributed to our improved earnings.

  • Second quarter results of the other segment increased to 106 million in fiscal '04 from 70 million last year.

  • This year's quarter includes a $10 million asset abandonment charge and last year's quarter included income of 25 million from vitamin litigation settlements.

  • Excluding the abandonment charge in the vitamin settlement, the other segment operating results increased 71 million to 116 million for the quarter.

  • The increase was due primarily to a $47 million improvement in valuations of our private equity fund investments and to improved results in the company's specialty feed ingredients and cocoa operations.

  • Specialty feed ingredient results improved over prior year levels as increased lysine demand resulted in higher selling prices and volumes for that product.

  • Cocoa processing results also improved over prior year levels as solid demand for butter and powder continued.

  • Our corporate expense category in the segment summary increased 67 million to 175 million from 108 million last year due to the LIFO Valuation charge of 53 million and an asset abandonment charge of 14 million.

  • I would now like to discuss some of the more significant factors affecting upon our financial condition and cash flows.

  • During the first six months of fiscal 2004 our trade working capital increased $1.3 billion to $5.9 billion at December 31.

  • This increase reflects the seasonal build-up of our working capital and effect of increased commodity price levels.

  • The increase was financed primarily with cash flow from operations, short-term borrowings and cash received from dividends and the return of capital from some of our investments in affiliates.

  • At December 31, our total debt as a percent of invested capital was 40.5%; an increase of 1.7% from June 30 levels of 38.8, but at the decline of 2% from comparable December 2002 levels of 42.5%.

  • Our cash flow from operations for fiscal 2004 equaled the net earnings of $371 million plus depreciation and amortization and asset abandonment charges of 370 million was a total of 741 million for the six months.

  • This cash flow was used to support increased working capital mentioned previously, in addition to capital expenditures of 226 million, acquisitions of 54 million repurchases of company's stock of 4 million and dividends of 78 million.

  • I'll now turn the discussion over to Brian Peterson who will review the business fundamentals of our operating segments.

  • Brian.

  • Brian Peterson - SVP, Corporate Affairs

  • Thank you, Doug.

  • Good morning everyone.

  • I'd like to start this morning talking about our oilseed sector.

  • Operating profits in this segment were 121 million versus 103 million in the year-ago quarter; this represents an increase of 17%.

  • We had strong results in North America and Asia this quarter, but earnings were down in South America and Europe.

  • Crushing margins were inadequate in South America.

  • Large imports of meal into Europe put pressure on margins there.

  • I would like to make comments now just by geographic region.

  • In the U.S. the soybean supply will remain tight until the new crop is available in the fall.

  • Strong demand for soybeans from China continues to put upward pressure on prices.

  • Product demand in North America remains steady.

  • Capacity utilization is approximately 85% in North America with acceptable crush margins.

  • We have recently slowed our North American operations for the purposes of extending bean supplies here.

  • The recent FDA Meat And Bone Meal ruling will eliminate blood meal and significant risk materials from ruminant feeds but should only have minimal impact on protein meal demand.

  • Vegetable oil demand remains strong and prices continue at historically high levels.

  • Customer interest in our NovaLipid product line is high.

  • Sales have started already.

  • As you will recall this is our zero/low trans-fat product that has wide applications in the food industry.

  • Trans fat labeling will be required in the U.S. starting in 2006.

  • Turning to South America.

  • Brazilian crush margins have been weak and we have recently slowed production at our plants.

  • The advent of new crop may improve the situation, however there is inefficient capacity there, which may need to close because it is not competitive.

  • Another record oilseed harvest is just getting under way.

  • Brazil is expected to harvest over 60 million tons and Argentina over 36 million tons.

  • ADM has excellent origination capabilities in South America as well as North America.

  • We are well positioned to originate the soybeans that our global processing system requires.

  • The expansion of capacity at Rondonopolis will be completed in our third quarter.

  • Turning to Europe, our soybean crushing plants are battling increased meal imports from South America resulting in a weak crush margin environment.

  • Capacity utilization in Europe is now around 85% down from the mid-90s last quarter.

  • Soft seed margins in Europe are steady, there is good demand for the mid-protein meals, also soft seed oil demand is strong due to upcoming EU GM labeling requirements and growing markets for bio diesel.

  • In Asia, Chinese demands for soybeans remain strong.

  • Our Chinese operations continue to process increasing amounts of soybeans.

  • The Avian flu was reported in a number of countries in Asia.

  • Recent reports stated that 24 million chickens have been destroyed in efforts to control the spread of the disease.

  • So far the effects of this on our business have been minimal.

  • Turning to the corn-processing segment.

  • Operating profits were $138 million versus 71 million in the year-ago period.

  • This represents an increase of 94%.

  • Looking at the sweetener side of this business, we had increased profits due to net corn costs, which were below the year earlier period, higher sweetener selling prices, the benefits of integrating the MCP operations into our network and we continue with efficiency in cost improvement in our corn processing operations.

  • We are nearly finished with sweetener negotiations but are unable to comment on exact pricing at this time.

  • We can say, however, that prices are up for the next contract year.

  • Our HFCS trade issues with Mexico are still not settled and we continue to explore ways to resolve this matter.

  • Looking at the ethanol side of the business profits were up substantially as we began liquidating inventories to meet start-up requirements of New York and Connecticut markets.

  • An inventory draw down will also occur in the third quarter.

  • We expect to be back to normal delivery conditions by the start of the fourth quarter.

  • Ethanol market prices are currently around $1.40 a gallon and demand is strong.

  • The energy bill has not passed, however even without an energy bill supply and demand look to be well balanced for the remainder of 2004.

  • Looking at the wheat sector.

  • Operating profits 24 million versus 19 million in the year-ago period, up 26%.

  • Earnings were up on improved wheat quality and flour yields as compared to the processing difficulties we encountered with last year's crop.

  • As you will recall, last year's crop was adversely affected by the drought both in terms of size and quality for milling.

  • Our US capacity utilization was over 90% for the quarter, up slightly versus last year.

  • We do expect a continuation of the challenging industry conditions as our bakery customers continue their slow consolidation process and consumers continue their search for low-carb foods.

  • Even in this environment though, our volumes were steady for the quarter and we did not see a significant decrease in flour demand.

  • We of course monitor this market situation and will respond with adjustments to our flour-milling network as needed to deliver acceptable margins from this business.

  • The integration of the flourmills we acquired from ABF in the UK is on schedule.

  • The synergies realized from this acquisition contributed to our improved results this quarter.

  • Turning to AG Services, operating profits were 106 million versus 35 million in the year-ago period.

  • Last quarter we were able to benefit from regional production imbalances, which created an opportunity to fully utilize our grain infrastructure and merchandising capabilities.

  • If you recall there was a drought in Europe, which -- throughout Europe, which adversely affected the supplies of grain there and in Southeast Europe even turned some former exporting countries into importing countries.

  • The global nature of our operations and our strength in transportation led to a strong gain in profits last quarter.

  • As mentioned last quarter, the record U.S. corn crop and large wheat crop gave us the opportunity for solid storage, transportation, origination and marketing profits.

  • Lastly in the Other category, profits were 106 million versus 70 million, a 52% increase.

  • This sector delivered improved results primarily from cocoa, specialty feed ingredients and our private equity funds.

  • Here I should mention for clarification, we are now referring to what was formerly called our Bio Products group, as specialty feed ingredients.

  • Here we have products such as Lysine, Threonine and Astaxanthin.

  • Our Cocoa operations improved over last year due to strong product demand.

  • We continue to see substantial improvements resulting from the restructuring of our cocoa business.

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

  • Processing margins are solid and we have good demand for both butter and powder.

  • The loss resulting from the fire at one of our cocoa facilities in the Netherlands has been fully reflected in second quarter operating results.

  • The warehouse, which was destroyed, will be rebuilt.

  • Looking at specialty feed ingredients, lysine profits improved substantially versus last year due to strong demand and higher selling prices.

  • Current shadow prices for lysine are around $1.70 per pound.

  • As we discussed last quarter, the high price of protein meal and the relatively low price of corn make lysine more valuable to the producer, resulting in increased product demand.

  • Lysine prices are at these high levels because of the high protein yield prices relative to the price of corn.

  • As you know, lysine is used to supplement corn when poultry and pork producers feed corn instead of soybean meal to their animals.

  • Of course demand is also growing as co-op ethanol plants come on line and sell increased volumes of distiller's grains, which require supplementation with lysine to enhance the nutritional value.

  • In the specialty food ingredient group, here citric acid results are still unacceptable, but new contract prices are up about 15%.

  • Future prospects are improving for this business.

  • On Sorbitol, the plant expansion should be completed by June.

  • This will further increase the percentage of starch going into higher value-added products.

  • That concludes my comments.

  • I guess we are open for questions.

  • Operator, Can we have questions, please?

  • Operator

  • (Operator Instructions) Our first question comes from David Driscoll with Smith Barney.

  • David Driscoll - Analyst

  • Thank you.

  • Good morning, everyone.

  • Allen Andreas - Chairman and CEO

  • Good morning, David.

  • David Driscoll - Analyst

  • First I'd say congratulations, certainly a very strong quarter.

  • Every business seemed to be doing quite well with the exception of wheat.

  • Allen, I would like to just ask you a kind of a just a high level question.

  • Certainly all morning the question I have been getting and I'd love to hear your response to it.

  • The question is, can ADM continue to repeat this performance and maybe if you could kind of give us some of your thoughts by division in terms of the outlook and the strength and is it really repeatable, what do you expect to see in the future would be I think helpful to a lot of people?

  • Allen Andreas - Chairman and CEO

  • Well, thank you, David.

  • We did show some pretty substantial improvements in most of our sectors this last quarter and I have no reason to believe that it doesn't reflect the long-term prospects for the company.

  • We have spent the last several years, as you know, building a global franchise and a global network of businesses from oilseeds through to wheat and agricultural services that really can compliment each other quite significantly in today's global environment.

  • So with the volatility in crop prices this past year and a lot of stresses on the system and in transporting and delivering grains to different parts of the world and products to different parts of the world, our people, I think brought together a lot of our synergies.

  • So we had very good results this past quarter.

  • I could go quarter-by-quarter or segment-by-segment, but I think that the overall picture is that our businesses are coming together in a very strong fashion.

  • We had some good opportunities this past quarter to enjoy better profitability in some of those divisions and we've taken a lot of necessary steps, difficult steps over the past couple of years to get this company in shape to meet the demands for coming years.

  • David Driscoll - Analyst

  • Maybe, Allen, if I could follow-up and ask in specifically say in the Agriculture Services segment profits were up tremendously in that particular business.

  • The difficulty is in really understanding how repeatable that particular number is going forward?

  • I would make the same comment on ethanol in terms of how long we can see that and if I understood the comments correctly that you guys just made perhaps in this quarter we just had and in next quarter, we are going to see somewhat higher volumes than the normal run rate would be as New York and Connecticut came on line and required an inventory build-up that is somewhat one-time in nature so i.e. the run rate would be lower going forward on volume basis?

  • Allen Andreas - Chairman and CEO

  • That's absolutely correct.

  • Let me address both of those areas very briefly.

  • AG Services was complimented not only with their position in terms of where they could originate grain and deliver it under their contractual arrangements in shipping and I think that those operations were created by some weather conditions around the world that gave them good opportunities to capitalize on their structures and on their systems.

  • We're always faced with changing circumstances in terms of weather conditions and other crop variables and so those things are not 100% within our control.

  • But I think this reflects that when there are good opportunities that we are in a strong position to be able to capitalize on those.

  • So, Ag Services could be very strong for the next few quarters, but no long-term results can be predictable.

  • We only know that we have put together a group that is well diversified and spread across the world in a way in which we can originate and market grains not only to our customers, but also to our own factories in a very profitable fashion based on the global franchise that we have put together over the past few years and that worked effectively during the past quarter.

  • Ethanol inventories clearly were drawn down this past quarter.

  • They will be drawn down again in the next quarter.

  • That did have positive impact on the results of the corn division in this past quarterly results and it will not be repeated if we go out I think by the end of next quarter we should be back to normal kind of operating inventory levels.

  • And as you know, David, this was a necessary thing to do in anticipation of the opening of the East Coast markets and also the building of the West Coast market for ethanol demand.

  • And so that is correct, it did contribute so perhaps we won't see the same kind of contributions from inventory draw down, but we do have reason to believe that there is very strong demand for ethanol across this country despite the fact we did not get an energy bill yet.

  • And we continue to service our customers in a very effective fashion with excellent transportation systems, 95-car trains running to both coasts and barge activity down the river and ships around to the refineries.

  • And so we are in a strong position in the ethanol business and as long as we see these kinds of relationships between corn costs and value of gasoline we should have some solid results from the ethanol division in the coming years.

  • David Driscoll - Analyst

  • And one last question.

  • Could you talk about what's going to happen in the United States as relates to soybeans and your decision to lower your utilization rates?

  • What I'm really getting at here is are we going to run out of soybeans in the United States?

  • What does that then do to all of your facilities in volumes that you process, et cetera?

  • Is the profitability number on the oilseed side is that going to be volatile over the next two or three quarters?

  • Allen Andreas - Chairman and CEO

  • Brian, do you want to comment on the crop conditions in the U.S. and on soybeans?

  • Brian Peterson - SVP, Corporate Affairs

  • Well, I think the answer is of course that we will not run out of soybeans in the US, the price will ration the supply.

  • No question about it we do have a very tight supply that we have to manage very carefully.

  • We have as we indicated, reduced our crush further about 10% to 12%.

  • This is in an effort to extend our soybean supply so we don't run into a situation where we don't have anything left at the end of the crop year.

  • So, I think the whole system from processors through to the consumers have to manage inventories very carefully and then just watch the situation very prudently.

  • So we think it's prudent at this point to try to extend our supply by reducing our run rates at the present time, which is what we've done.

  • Allen Andreas - Chairman and CEO

  • David, as you know, we have spent some considerable efforts and investment in making certain that our processing facilities are spread across the globe in a very effective fashion to meet the coming demands for the 21st century.

  • So, we have closed some factories in the United States.

  • We have increased capacity at others in order to compliment those businesses and we've spent considerable amount of efforts building solid relationships with our customers so to the extent that they need a continuing supply of beans we felt it was the prudent thing to do was slow down crushing capacity so we'd be in a position to be able to meet our customers' expected needs in the coming period of time.

  • Those poultry and pig operations have to be serviced with feed on a day-to-day basis.

  • And so we're continuing to build our efficiencies and our network in lysine and in soybean processing to compliment those activities and we continue to expand our businesses in places like China and South America where although the margins were not that attractive in the past quarter we have long-term reasons to believe they will be critical to meeting the nutritional needs for the coming years.

  • David Driscoll - Analyst

  • Great.

  • Thanks very much.

  • Allen Andreas - Chairman and CEO

  • Yes.

  • You're welcome, David.

  • Appreciate your comments.

  • Operator

  • Thank you.

  • Our next question comes from John McMillin.

  • John McMillin - Analyst

  • Good morning, everybody.

  • Allen Andreas - Chairman and CEO

  • Good morning, John.

  • John McMillin - Analyst

  • Congratulations, as well.

  • Al, what you are basically saying by my calculation that the return on equity in this quarter was about 12%.

  • And, you know as you spend less than depreciation were you basically saying this is not an aberration to the types of returns you expect down the road?

  • Allen Andreas - Chairman and CEO

  • John, we have been working very diligently here to try and get this company back into double-digit returns on invested capital, as you know and have been talking about it for several years and we've taken a number of very difficult steps in rationalizing our businesses across the world in order to build a company that has the prospects of making double-digit returns again.

  • This past quarter was stronger and we're very optimistic about what we see.

  • But I think our cash flows although we have a lot more demand for working capital and lot more demand for capital across our systems we have very strong cash flows and I see the opportunities for us to continue to build on this with the hopes that we can return to the kinds of double-digit returns we produced back in the '70s and '80s for our shareholders on a relatively consistent basis.

  • So we are optimistic, we're working hard at it and this past quarter we were able to show some significant returns on invested capital that are much better than we've enjoyed over the last couple of years.

  • John McMillin - Analyst

  • OK.

  • And my understanding you basically said in the fourth quarter HFCS costs were down a little bit.

  • And that shouldn't really change depending on where you locked in corn and you're basically saying your HFCS prices are up a little bit.

  • So am I reading that right in looking at calendar '04?

  • Allen Andreas - Chairman and CEO

  • Well, I think the past quarter was not reflective of what the replacement cost market would indicate today.

  • So you have to be a little cautious as to the optimism for the kinds of increases we're able to enjoy from pricing of our high fructose corn syrup.

  • We have very strong by-product credits this quarter primarily coming from a very tight market for oil, as well as good opportunities for the corn gluten feed and other segments to be in demand because of aberrations around the world in weather conditions.

  • So we actually had lower corn costs this past quarter, but on a replacement cost basis today you would not find that to be true.

  • Corn in the last short period of time has gone up considerably in price and there is less by-product credit strength to offset that so we'll have our challenges going forward in the corn segment.

  • John McMillin - Analyst

  • And that LIFO charge, Doug, was 6 cents per share?

  • Doug Schmalz - CFO

  • 5 cents.

  • John McMillin - Analyst

  • Just to work through the quarters corporate expense where you reported I guess $175 million versus $108, that's a $67 million increase of which I guess $14 million came from a charge.

  • Doug Schmalz - CFO

  • And 53 is the LIFO

  • John McMillin - Analyst

  • LIFO, is in there?

  • Doug Schmalz - CFO

  • LIFO is there.

  • John McMillin - Analyst

  • Thanks a lot.

  • Operator

  • Thank you.

  • Our next question comes from David Nelson.

  • David Nelson - Analyst

  • Congratulations.

  • Allen Andreas - Chairman and CEO

  • Thank you.

  • David Nelson - Analyst

  • How much was lysine profits up?

  • Can you break that out?

  • Allen Andreas - Chairman and CEO

  • We don't break that out.

  • It is in the middle of our other category.

  • It is not a number that we talk about, but it's been a very good demand quarter and prices and volumes are up.

  • Our factory did some very excellent production rates over the past quarter from time to time and so that business is strong.

  • Remains strong around the world.

  • David Nelson - Analyst

  • OK.

  • On freight rates they continue to rise.

  • How far out are you covered there?

  • Brian Peterson - SVP, Corporate Affairs

  • Well, we have of course time charters, which have worked well for us.

  • But in terms of talking about a position in freight you know we really utilize our freight connections and our time charters and so forth to maximize the movement of our products around the world.

  • So, to say how far we're covered is a difficult question to answer.

  • But I don't think at the immediate time we are seeing a negative effect from high freight rates on our business.

  • David Nelson - Analyst

  • OK.

  • With the outbreak of Avian influenza across Asia do you see much demand risk to your exports there?

  • Brian Peterson - SVP, Corporate Affairs

  • I think that so far we haven't seen much of an impact.

  • We have seen buyers perhaps getting a little bit more cautious going forward not knowing how this thing will play out.

  • So far as I indicated, reports indicate about 24 million birds have been killed.

  • Here we're talking about Thailand, Vietnam, China and Indonesia.

  • That is not terribly significant at the present time if.

  • It gets under control we really won't see much of an effect at all.

  • But you know, there is still obviously it is a situation that needs to be watched very carefully.

  • David Nelson - Analyst

  • OK.

  • Tate and Lyle had a profit warning just a few days ago mainly seen to be European wheat starch operations.

  • Do you see any implications for yourself?

  • Allen Andreas - Chairman and CEO

  • I think, David, this is Al again.

  • I think just as a broad generalization, they are faced with some unusual circumstances that would not necessarily be the same kind of factors for us.

  • I mean Tate & Lyle is a European based company, as you know the US dollar and euro relationship has put a little different context on their US-based earnings.

  • And so they are faced with those difficulties as well as the fact that they are substantially processing wheat into the kind of products that we make in the sweeteners area rather than corn and right now we have a lot of pressure on wheat and there seems to be adequate surplus or adequate supplies of the by-products, wheat Gluten.

  • So as result they have a number of pressures on their business that would not necessarily apply to ADM.

  • David Nelson - Analyst

  • OK.

  • If I could just ask one more, please.

  • You've got about $500 million of private equity, which has acted a lot better the last couple of quarters, valued up quite a bit the last couple of quarters.

  • Could you break those out geographically for us as we watch South America and Asia and Eastern Europe move up and down we'd have a better feel for what we might expect there, please?

  • Allen Andreas - Chairman and CEO

  • I guess we could come back to you.

  • Doug Schmalz - CFO

  • That's roughly maybe about a third in the Asia area.

  • A third in the eastern European -- I don't know if it is quite that high there.

  • Maybe a little less than that and then it goes to a lot of other countries, Israel and different areas around…

  • Allen Andreas - Chairman and CEO

  • And then down into Latin America also

  • Doug Schmalz - CFO

  • And India.

  • David Nelson - Analyst

  • OK.

  • Allen Andreas - Chairman and CEO

  • The total number there is approximately 400 million now David.

  • It's come down quite dramatically and the cash flows during this past quarter were very positive coming out of those ventures and we're not reinvesting that money back in as quickly as it is coming out.

  • So that number will continue to go down in coming years.

  • David Nelson - Analyst

  • I'm sorry, to follow-on to that last comment.

  • Why wouldn't you reinvest in developing part of the world?

  • Allen Andreas - Chairman and CEO

  • Well, we might.

  • In terms of private equity investments we did that 10 years ago really to get ourselves established in a number of different areas and to have a viable option for businesses that we didn't want to fit directly into our management complex at this time.

  • So we put considerable amount of investments into the Asia Pacific region, including India and China and then also into Eastern European countries and down into Latin America.

  • But now we have very substantial presence from our own operations there and so to the extent that we need to reinvest in those areas it will be direct as opposed to through private equity investments primarily.

  • David Nelson - Analyst

  • Got you.

  • Thank you.

  • Brian Peterson - SVP, Corporate Affairs

  • David, this is Brian again.

  • Just one more comment on Avian flu.

  • I think that one thing we need to watch is if it does become worse in Asia I think that the US and Brazil poultry producers can gear up very quickly.

  • I mean people still have to eat so I think any long-term -- I don't think there would be long-term or even medium-term effect on our business.

  • I think we might see demand for the poultry sector shift back to North and South America if this gets to be really serious.

  • David Nelson - Analyst

  • OK.

  • Thank you.

  • Allen Andreas - Chairman and CEO

  • You're welcome.

  • Operator

  • Thank you.

  • Our next question comes from Christine McCracken.

  • Christine McCracken - Analyst

  • Good morning.

  • Allen Andreas - Chairman and CEO

  • Good morning.

  • Christine McCracken - Analyst

  • Congratulations on such a fantastic quarter.

  • And Brian, just to follow-up on that last statement you made.

  • It's been at least our experience that in these situations when Avian influence actually there is outbreak of Avian influence is that in fact demand for poultry goes down in the infective regions.

  • Is it your expectation still that US producers would actually try to fill those markets?

  • Brian Peterson - SVP, Corporate Affairs

  • I think that those countries, principally Thailand, are major exporters of poultry all around the world.

  • So that's really what I was referring to.

  • Christine McCracken - Analyst

  • OK.

  • Most of that poultry would actually be coming from Brazil since the U.S. can't export into lot of those markets that Thailand accesses, is that correct?

  • Brian Peterson - SVP, Corporate Affairs

  • No, I think the U.S. can.

  • I certainly think that's been our experience the U.S. certainly can.

  • Maybe not to all areas, but certainly to quite a few areas.

  • So, I think any shift would be split between North and South America.

  • Christine McCracken - Analyst

  • OK.

  • Just on ethanol digging a little deeper there.

  • Clearly prices have come down since that end of the quarter pretty dramatically.

  • Some of that is seasonal, but how effective are your contracts in essentially I guess keeping a lot of that seasonality out of your business and maintaining margins in that side of your business?

  • Brian Peterson - SVP, Corporate Affairs

  • Well, I think that, I mean the demand is very strong right now.

  • I think that it's our view that pricing is strong.

  • There have been in the past some spot prices that were probably got reflected -- reported in the marketplace that were really quite high.

  • But I think if you look at where business is being done we would say the prices are still very strong.

  • Christine McCracken - Analyst

  • OK.

  • So all the spot market prices that are being reported and all the at least public sources of information that showed daily declines of 20% down plus in all the reports that are coming out over the press down 25% plus are inaccurate?

  • Brian Peterson - SVP, Corporate Affairs

  • Well, it doesn't reflect our experience.

  • Christine McCracken - Analyst

  • OK.

  • Is that tied to your contracts in the different relationships that you have, is that a better explanation?

  • Brian Peterson - SVP, Corporate Affairs

  • No, I don't think that is a better explanation.

  • We do have a mix of contracts and index sales and so forth but I think that what we're looking at when we say prices are strong, we're talking about where we can sell volumes of ethanol today if we were to go out and sell it.

  • So, there might -- if you look at the spot market it's really no volume there.

  • So when we're talking about pricing we're really not talking about the spot market.

  • Christine McCracken - Analyst

  • OK.

  • But, on the cost side you are essentially if I read your comments correctly on the high fructose side I think Al you were talking about higher net corn now after the USDA report you would see some cost pressures essentially on both ethanol and the high fructose side, is that accurate?

  • Allen Andreas - Chairman and CEO

  • Yes there is no question about that going forward.

  • Christine McCracken - Analyst

  • Fair enough.

  • Just on whole bean supplies here in the U.S., we're looking at a fairly short supply, as you know.

  • And I'm a little surprised that the industry actually didn't rationalize a little sooner or ration supplies.

  • Is it your expectation at this point that you're actually not going to be able to get supplies from South America largely because of the Asian flu issue ineffectively and do you expect some of your other competitors for shut down capacity so in fact things are a little bit more aligned in terms of supply and demand?

  • Brian Peterson - SVP, Corporate Affairs

  • I don't know what our competitors are going to do in terms of capacity utilization.

  • We are just looking at our situation and making the best judgments we can and what we have to do to behave responsibly to make sure there is supply here in the U.S., so I really don't have a comment beyond that Christine.

  • Christine McCracken - Analyst

  • But you wouldn't expect to import any whole beans from South America despite their very large crop?

  • Brian Peterson - SVP, Corporate Affairs

  • Well I think, we will just have to see what happens there.

  • I think there may be soybean meal imports in the U.S. because we are going to have a tight situation in the summer.

  • I think that's being looked at on a daily basis.

  • Christine McCracken - Analyst

  • Right.

  • To what degree are people essentially shifting demand from soybean meal given the prices to other, you talked about obviously the strength in your lysine markets and distillers dried grains?

  • To what degree are people able to shift?

  • Maybe you could talk a little bit about the relationship between the pricing now in soy meal versus some of these other protein meal alternatives?

  • Brian Peterson - SVP, Corporate Affairs

  • To quantify it I think we would have to do some calculations and get back to you.

  • I just don't have that information off the top of my head but clearly we do when we have high soy bean meal prices particularly in swine rations and poultry rations.

  • People are able to substitute more corn and lysine for soybean meal.

  • So this does result in lower demand for soybean meal than if there was no lysine available.

  • Christine McCracken - Analyst

  • And you are actually adding lysine capacity, is that correct?

  • Brian Peterson - SVP, Corporate Affairs

  • Yes.

  • Christine McCracken - Analyst

  • Have you given us an amount on that?

  • Brian Peterson - SVP, Corporate Affairs

  • We announced an increase to I believe it was 400 million pounds.

  • Christine McCracken - Analyst

  • OK.

  • Great.

  • Thanks so much.

  • Congratulations again.

  • Allen Andreas - Chairman and CEO

  • Thank you, Christine.

  • Operator

  • Our next question comes from Leonard Teitelbaum.

  • Leonard Teitelbaum - Analyst

  • Good morning.

  • I'll just try and ask these things quickly here.

  • What's your storage capacity now in your elevators?

  • I'm talking commercial storage now.

  • Leonard Teitelbaum - Analyst

  • Used to be about a million bushels.

  • Hello.

  • Doug Schmalz - CFO

  • A million?

  • Leonard Teitelbaum - Analyst

  • I'm asking how much, how big is it, what is your silo capacity now and how full are they?

  • Doug Schmalz - CFO

  • Just a second.

  • Leonard Teitelbaum - Analyst

  • While you're looking it up let me ask couple other questions here.

  • It takes about 10 million bucks pre tax to move your earnings a penny, and you've been talking about diesel oil for some time in Europe.

  • Can you tell me how close that is to being seen in the earnings stream?

  • In a meaningful way or is it still on a more experimental basis?

  • Brian Peterson - SVP, Corporate Affairs

  • I'm sorry, what was the question about, the product you were referring to?

  • Leonard Teitelbaum - Analyst

  • Diesel oil we have been talking about it for some time and you said today it was getting more and more popular in Europe.

  • I was just wondering whether or not it's going to have any meaningful impact on earnings this year?

  • Brian Peterson - SVP, Corporate Affairs

  • Well, the business is very good right now.

  • German and Europe in general, recently are trying to increase the usage of renewable fuels there.

  • Germany, for example, where we have our plants, have recently changed the laws or the tax regulations pertaining to ethanol so that it can now be no tax on it for blends up to 5%.

  • So, we're seeing very, very strong interest from the gas companies over there from the energy companies there, from the major ones who are blending this into diesel fuel.

  • As you know diesel fuel for light vehicles over there is much more heavily used than it is here in the U.S.

  • I guess that to quantify it right now I guess we don't quantify those sorts of things, but I do think it will be a growing factor.

  • Allen Andreas - Chairman and CEO

  • As you know, Lenny we recently entered into a research collaboration with Volkswagen to begin to look closely at the United States markets and the potentials for bio diesel in the U.S., so that could have some future good prospects for us.

  • We have the technology in Europe for the bio diesel business and the possibilities of including ethanol in the diesel side of the business would have good prospects for us in the long term.

  • But that's not a meaningful number today in terms of contributions to ADM's bottom line.

  • It is a research project that has long-term benefits for both Volkswagen and us.

  • So we are working to try and build that base for our business operations and the new energy bill does include a provision to incentivize the production of bio diesel, and that would be a very positive thing for us if that becomes a reality.

  • Leonard Teitelbaum - Analyst

  • All right.

  • Doug Schmalz - CFO

  • Lenny, I have your numbers.

  • In the Ag Services group it is going to be approximately 450 million bushels that does not include storage capacity that we do have at the processing plants.

  • We have additional storage there.

  • I don't have that number.

  • Leonard Teitelbaum - Analyst

  • OK.

  • I guess my point is that are they at capacity now, your 450 million?

  • Doug Schmalz - CFO

  • Well, I think you have to look at it two ways.

  • With the inverses in the markets we get a lot of selling the product in and therefore it is being stored for our own purposes and so forth, or we may be carrying some but I think in general that the elevators are relatively full.

  • Leonard Teitelbaum - Analyst

  • Is that what you're --- obviously we're trying to get some kind of a handle on whether or not we're going to get some kind of LIFO adjustments throughout the year.

  • All right.

  • One other subject quickly.

  • I know that you haven't signed with the big guys yet on HFCS unless I have been told incorrectly.

  • Do you have any idea when you will put that to bed?

  • Do you think it will be by mid-February or by the time you come to CAGNY?

  • Brian Peterson - SVP, Corporate Affairs

  • You know, it's not that much is left to be done.

  • But there is still some to be done.

  • How long it's going to take I guess is just a matter of our efforts with our customers and how the negotiations go.

  • So, it's really difficult to say when it would be done, but I think relatively soon.

  • Allen Andreas - Chairman and CEO

  • We'll bring an update to CAGNY.

  • Leonard Teitelbaum - Analyst

  • One final question on that.

  • Do you see -- let me hold that question.

  • I will follow-up off line on that.

  • The second half of the year used to be split on your normal patterns almost equally quarter to quarter.

  • Do you see any change in that pattern? 3 and 4 looked a lot alike in terms of EPS.

  • Allen Andreas - Chairman and CEO

  • It's a little difficult to know at this point in time how this will work out; precisely with the situation in the U.S. on the soybean side.

  • We could have changes not only in LIFO, but also in the results of the operations as we begin to reduce our capacities to stretch out the supplies of soybeans in the U.S., but we expect in that division that we will begin to see better operating opportunities in South America and perhaps in Asia if we don't have too big a problem out there with the flu.

  • So, there could be some good healthy contributions.

  • We don't have any reason to believe that the oilseed division is going to be substantially different in the current short period of time we're looking at.

  • Leonard Teitelbaum - Analyst

  • OK.

  • One final question.

  • Tax rate you know you were higher obviously in the first quarter by a little bit.

  • You were higher again in the second quarter by more than a little bit.

  • Doug, what are you looking at going forward for tax rate in third and fourth quarter?

  • Doug Schmalz - CFO

  • 31% and we see that as being the rate that we'll be using.

  • We monitor that every quarter but at this time that still looks good.

  • Leonard Teitelbaum - Analyst

  • In March, was it 24% tax rate?

  • Doug Schmalz - CFO

  • Last year?

  • Leonard Teitelbaum - Analyst

  • Yeah.

  • Doug Schmalz - CFO

  • I'd have to look for sure.

  • Leonard Teitelbaum - Analyst

  • That's what my numbers show.

  • Doug Schmalz - CFO

  • OK.

  • Leonard Teitelbaum - Analyst

  • OK, thank you very much guys.

  • Good quarter.

  • Thank you.

  • Allen Andreas - Chairman and CEO

  • Thanks, Lenny.

  • Operator

  • Thank you.

  • Our next question comes from Eric Katzman.

  • Eric Katzman - Analyst

  • Hi, good morning, everybody.

  • Allen Andreas - Chairman and CEO

  • Good morning, Eric.

  • Eric Katzman - Analyst

  • A few questions.

  • I guess, in terms of the operating profit line just looking at the division contributions.

  • I know that when we were out there last August you had kind of mentioned you had taken a lot of cost out of the business.

  • It was about a $230 million swing year to year.

  • Can you comment on how much of that you think is due to just improving - like industry conditions and how much is due to your cost reductions?

  • Doug Schmalz - CFO

  • Well, it's very difficult to cut those numbers.

  • We have costs that are up also as get into the energy areas and so forth.

  • As far as the actual breakdown between costs we definitely have got synergies out of the MCP acquisition.

  • We've done a lot of things in our corn operations around the exact number on that I don't have.

  • Eric Katzman - Analyst

  • OK.

  • And then Doug, I guess there was a restatement once again last quarter between sales and cost of goods and I thought that there was another one maybe half a year ago or a year ago.

  • I thought that that had been kind of cleaned up.

  • What was the last one tied to?

  • Doug Schmalz - CFO

  • That was between -- it wasn't -- it was in the Q as we were analyzing the Q. We go through a lot of analysis as we're going through this from the time we put the press release out until we do our Q and we found some inter company that wasn't eliminated that we did do by the time we filed Q.

  • Eric Katzman - Analyst

  • Al right, so there is basically change in your company?

  • Doug Schmalz - CFO

  • Yes.

  • Allen Andreas - Chairman and CEO

  • And no impact on the bottom-line.

  • Eric Katzman - Analyst

  • Right.

  • Right - I understand that.

  • Allen Andreas - Chairman and CEO

  • Yes.

  • Eric Katzman - Analyst

  • OK and then just Allen I have a bigger picture question.

  • Obviously we've seen our fair amount of consolidation in the last few years and it's showing up in better returns.

  • There are rumors about Dreyfus being on the block.

  • I know you can't comment specifically, but you are pretty free cash flow positive.

  • You've kind of in the last few years largely focused internally certainly versus the history of the company.

  • What's your view on consolidation at this point?

  • Allen Andreas - Chairman and CEO

  • Well, as you know Eric, there's been a lot of consolidation in most of our industries in the past few years.

  • We're down to a vast reduction in the number of players that have the kind of global presence that we have ourselves.

  • So, there still could be additional consolidations.

  • I think there will be.

  • There are particular companies that are not part of a global network that are still out there in both oilseeds and in corn.

  • Wheat flour milling, as you know, we picked up some businesses in the UK.

  • There is a lot of consolidation that could still be done in Europe in those businesses.

  • So, there are opportunities around for additional consolidation.

  • Our current situation is very strong from a balance sheet viewpoint.

  • We have got higher cost raw materials and receivables and inventories as result of the increase in prices of commodities.

  • But so we have plenty of utilization for the cash flow.

  • But those are all short-term kinds of obligations and they go from day-to-day.

  • Our real balance sheet is strengthening and we have good solid cash flows so we have room for consideration not only of growth and expansion, but also stock repurchase and dividends will be looked at in our next board meeting coming up.

  • The future bodes.

  • I think very well for this company.

  • Eric Katzman - Analyst

  • Excellent.

  • And the last question.

  • One of the questions I got was obviously you have a nice JV over in China with Cosco and others.

  • How exactly -- can you bring cash out of that JV back to the U.S.?

  • And second, what is your kind of view on China as either a rational or irrational kind of almost competitor when they add capacity within their own industry that might disturb global balances?

  • Allen Andreas - Chairman and CEO

  • In answer to the first question, we have no need to bring cash back out.

  • The answer is yes, we can.

  • We do have registered capital there and we could bring cash back out.

  • We occasionally pay dividends from one to another.

  • But it is actually in China, a series of joint ventures with our Chinese partners, the Willmar group, the Clock family and then also with Cosco, which is highly connected with the government in China.

  • So, those ventures themselves are generating good cash flows but they are expanding and growing and we are looking for new opportunities and buying more businesses across China to expand their capabilities and their network to meet the growing needs for nutrition.

  • We've got 9% growth in the Chinese economy still.

  • There is good demand for our oils and meal and so we continue to reinvest our cash there rather than bring it back out.

  • China itself is an opportunity for future business that is having a very radical impact on the world environment in our businesses.

  • I think their purchases of shipping capacity this past quarter in order to meet demands for the Chinese growing marketplace have had a real impact on our businesses and have created opportunities, as well as challenges for us.

  • But in the long term you've got a billion 300 million people there and they have elevated standards of living.

  • They are moving off the rural areas and into cities and they are being employed in jobs that increase their income.

  • So, they are shifting diets to more protein related diets with poultry and pork.

  • So that is having a major impact on the world's supply and demand features.

  • So, we continue to incorporate that forward thought process into our planning here as to what we're doing in South America and the western hemisphere which is really the basic production areas for the raw materials that will be needed to meet their protein demands in the coming years.

  • So, it is a very important part of our business despite the fact that it is a relatively small total investment because we only own about one third of those businesses.

  • The amount of capital it is requiring is somewhat limited.

  • But it does have a big impact on the rest of our global franchise.

  • Eric Katzman - Analyst

  • OK.

  • Thank you.

  • Allen Andreas - Chairman and CEO

  • You're welcome Eric.

  • Operator

  • Thank you.

  • Our next question is a follow up David Driscoll.

  • David Driscoll - Analyst

  • Hi, great.

  • Thanks a lot.

  • Just had a question on one of Brian's comments on Brazil.

  • I think that -- I'm just trying to clarify here what he actually said.

  • But it sounded like you said that you guys expect there to be additional plant closures within Brazil in their soybean crushing operations of competitors, did I hear that right?

  • Could you explain that a little bit?

  • Brian Peterson - SVP, Corporate Affairs

  • Well, I think that we have got a very competitive situation in Brazil and I think that certainly in the southern part of Brazil there are plants that are poorly located and inefficient.

  • I think some of them only run at 50% of capacity on annual basis.

  • And so I think that, I guess what I was referring to, we would expect the competitive pressures from the, resulting from where the movement of the soybean crop number one and secondly from the more efficient plants, would cause some difficulties for these things.

  • I think we expect there would have to be some rationalization in the southern part of Brazil.

  • David Driscoll - Analyst

  • And most of the southern part of Brazil if I'm correct here, in fact most of Brazil in general, is still its not either Archer Daniels, Bunge or Cargill, it is really very small you know "mom and pop" shops.

  • Is that right?

  • Brian Peterson - SVP, Corporate Affairs

  • It is a mix.

  • I wouldn't want to comment specifically on any operation there but it is a mix.

  • David Driscoll - Analyst

  • OK and then, if I could follow-on one question that was asked earlier about net corn costs.

  • So I think probably one of the most interesting things that have happened was the January 12 crop report and the major revisions that the USDA made causing corn price to move up materially you know, Allen, I know that Archer Daniels does not like to comment upon their forward position in as such.

  • But if I could maybe ask how the positions were if you had gone through much of your contracting already in high fructose corn syrup is it you know, can you just as least make the statement that it is your standard practice to hedge out the business that you had previously booked?

  • What I'm trying to get out here is January 12 seemed to be like a black and white day where corn prices just rocketed up.

  • So any business that had been booked, but not hedged would be seem to be problematic.

  • I wouldn't expect you guys to have that issue, but I would really like to hear it from you.

  • Allen Andreas - Chairman and CEO

  • Just as a generalization, the way we run our businesses.

  • We are an industrial company and we hedge our commodity exposures.

  • And so within the context of the fact that we have big volumes running through a massive number of facilities all around the world and so we need to deal with commodities that are not always 100% hedgable and byproducts that are not always hedgable.

  • We do have a basic consistent philosophy of hedging our sales with purchases of the materials that we think we will need.

  • So within the business kind of demands that we have we generally follow a position that would protect us from those kinds of movements.

  • Now, this current situation in the corn complex in particular is somewhat offset by byproduct values and so the flat price increase in corn is not necessarily all translated into net corn cost.

  • So as you have protein shortages, the gluten feed is worth more and then if you have oil shortages then the oil is worth more and so you get byproduct credit.

  • So we're looking at net corn cost.

  • But we are optimistic about our ability to be able to generate good profitability in the corn division in the coming year.

  • And as you know this last quarter was particularly positive and was also complimented quiet substantially by the ethanol side of our business.

  • So we continue to monitor those activities and dealing from a basic position of being hedged.

  • David Driscoll - Analyst

  • Over the next three or four years, you know, what's your thoughts on the high fructose business in the United States?

  • This is one we've had significant problems in because of Mexico.

  • Corn Products yesterday came out and said they had nothing to tell us about Mexico itself.

  • In the absence of a Mexican resolution where do you really see your fructose operations going?

  • I mean do you see consistent year over year improvement?

  • Is that how you can think you know can may be educate us on what is going to happen over the next several years or is it much more difficult than that?

  • Allen Andreas - Chairman and CEO

  • Well I think you have to put the wet corn milling business in context and the high fructose corn side of it is a portion of that equation.

  • But we're creating 36 different products out of the corn business.

  • And so Mexico is certainly a very important aspect of our profitability in that division and we did have an industry that expanded in anticipation of having an open market there when NAFTA became a reality.

  • And that market having been closed has created a surplus of production particularly in the high fructose corn syrup area.

  • We continue to build, as you know, strong capacities in other products that are taking those streams, particularly with regard to fermentation where we have alcohol and then all the feed ingredients and food ingredients.

  • And so we continue to build out our capacity to handle our available starch and we're operating at relatively high levels of production despite the fact that the high fructose corn syrup market is not strong.

  • We've had very little growth, as you know, in the soft drink industry.

  • Although some of the new drinks that are coming out that are health and nutrition oriented also contain high-fructose corn syrup.

  • So, it's not strictly looking at Coke and Pepsi sales of their primary product.

  • So, we are -- optimistic about the corn milling business.

  • Which I think is the critical thing.

  • And we are continuing to use all of our efforts to bring pressure on Mexico to open up their markets consistent with what their legal obligation are under the NAFTA agreement.

  • And as you know we have had considerable discussions in Washington about Mexico's position and violation of all of their trade agreements in the agricultural sector.

  • And those discussions continue.

  • There is legislation to take retaliatory action.

  • We have filed the appropriate papers to give us a position against Mexico on the damage that has been created as result of their violation of their international obligations and the US Congress continues to monitor that situation with grave concern.

  • USGR, the trade representatives, and the White House have been very clear in their statements that Mexico needs to seriously reconsider what they have done in the areas of high fructose corn syrup.

  • So, that discussion has not ended yet.

  • It has a lot of political overtones.

  • And so it's important part of our future calculations, but we continue to find other uses for the starch and to grow parts of our business that will allow us to be very effective at the wet corn milling industry in the coming years.

  • David Driscoll - Analyst

  • Super.

  • Thanks a lot for the very detailed answers.

  • Allen Andreas - Chairman and CEO

  • You're welcome.

  • David.

  • Operator

  • Thank you. (OPERATOR INSTRUCTIONS) I'm showing no further questions at this time.

  • Allen Andreas - Chairman and CEO

  • Thank you very much.

  • Operator, we appreciate your assistance and we appreciate everyone who tuned in for this conference call today and look forward to seeing you in 90 days.