Archer-Daniels-Midland Co (ADM) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Archer Daniels Midland third quarter 2004 results.

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 and then zero on your touchtone telephone.

And as a reminder, this conference call is being recorded.

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

Good morning, ladies and gentlemen, welcome to ADM's third quarter ending March 31st earnings conference call.

I'm joined here today by Doug Schmalz, our Chief Financial Officer, who will begin with an overview of the financial results that you've probably already seen in our press release, and then following his analysis of those numbers and a little overview of our financial situation, we will have Brian Peterson bring you up to date on the various operating segments of the company.

With that, Doug, do you want to start please?

Thanks Allen.

First, I would just like to make an obligatory statement Some of today's comments reflect managements' current views and estimates of future economic circumstances, industry conditions, company performance and financial results.

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

As reported our net earnings for the quarter ended March 31, 2004, were $226,769,000, or 35 cents a share.

That compared to net earnings last year of $116,805,000 or 18 cents a share.

This year's third quarter includes a loss on asset impairments of $12 million, 48 million after tax or one cent a share, a gain from an insurance related lawsuit pertaining to the fall of 1993 of $21 million, or $13 million after tax, two cents a share, and a gain from the sale of equity securities of $11 million, $7 million after tax, or one cent a share.

Our last year's third quarter included a gain from partial settlement of vitamin antitrust litigation of $3 million, which was $2 million after tax.

Gains on sales of fixed assets of $15 million, or $10 million after tax, two cents a share, and a loss provision related to a global EPA settlement of $11 million, $7 million after tax, or a penny a share.

In addition, rising commodity prices on LIFO inventory valuations resulted in a pretax charge of $99 million in the current year's third quarter, compared to $4 million last year.

Our effective tax rate for the third quarter of fiscal 2004 was 33%, and that compares to 24% in last year's third quarter.

I would now like to discuss the changes quarter over quarter in the line items of our consolidated statements of earnings, and we'll discuss changes in segment operating results a little later Our fiscal 2004 third quarter net sales and other operating income increased 18% to $9.3 billion, due primarily to higher commodity values, stronger foreign currencies, and $207 million of sales attributable to recently acquired businesses.

To a lesser extent, higher corn products, special feed ingredients and cocoa sale volumes also contributed to the increase.

Our gross profits increased 42% to $587 million due to improved operating profits in all major operating segments.

These gross profit improvements were partially offset by the $99 million charge to cost of sales, reflecting the effect of the higher corn and soy bean oil prices on LIFO inventory valuations.

Our companywide selling, general, and administrative expenses increased $20 million to $252 million for the quarter.

Cost of recently acquired businesses contributed about $8 million to that increase, and last year's third quarter, if you recall, included the $11 million loss provision for the EPA settlement.

Excluding that loss provision and the effect of the acquisitions, the remaining increase of $24 million was primarily due to increased employee-related costs, including pension costs and additional provisions for [INAUDIBLE] accounts.

Our interest expense declined $6 million to $87 million for the quarter due primarily to lower interest rates.

Investment income increased $6 million to $36 million for the quarter, primarily due to $4 million of interest received from the insurance-related lawsuit pertaining to the flood of 1993.

The $9 million [INAUDIBLE] on security transactions reflects the gain realized upon the sale of a portion of our equity investment in overseas ship holdings.

Equity and earnings of unconsolidated affiliates for the quarter increased to $45 million from $19 million last year primarily due to a $15 million improvement in valuations of the company's private equity fund investments.

Earnings from those private equity investments were $13 million this year, compared to a loss of $2 million last year.

In addition, improvements in our Asian oil seed and our domestic peanut joint venture operations also contributed to the increase.

Decrease in other net results from the fact that last year's amount included the gain on property disposals of $15 million.

Our effective tax rate for the third quarter of fiscal 2004 is 33%, compares to 24% last year's third quarter.

The increase in the third quarter effective rate to 33% due to the increased pretax earnings in fiscal 2004 and to a shift in our pretax earnings mix within tax jurisdictions.

Our effective rate for the the second quarter of fiscal 2004 was 31%.

Last year's third quarter effective rate of 24% reflected a reduction in that quarter for the annualized effective rate to 28.5%.

Turning now to the results of our operating segments, our total operating segment profit for the quarter more than doubled to $502 million from $242 million last year as operating profit improvements were realized in all major segments.

Our oilseed prices in the third quarter profit of $117 million in fiscal '04 increased $42 million from $75 million last year, reflecting improved operating results in North America and Asia.

Results of South American and European operations declined from prior year levels.

This year's quarter also includes a $3 million asset impairment charge.

Our corn processing third quarter profits of $160 million increased $71 million from the prior year levels of $89 million.

Improved results are primarily attributable to increased alcohol selling prices and volumes, combined with lower net corn costs due to improved byproduct values.

In addition, higher sweetener volumes also contributed to the increase.

This year's third quarter also includes $15 million received from the insurance-related lawsuit pertaining to the flood of 1993, and a $1 million asset impairment charge.

Our wheat processing results increased to $10 million in the third quarter from $6 million last year, as improved crop conditions in North America resulted in improved margins over prior year.

Our agricultural services third quarter profits increased to $56 million in fiscal '04, from $4 million last year, due to the strong performance of our balance global grain origination and marketing systems.

This year's quarter also includes $2 million received from the insurance related lawsuit pertaining to the flood.

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

With this year's improved North American crop conditions, and with solid worldwide demand for grains and feed stuffs partially attributable to the poor crop and drought conditions in the EU, our global marketing operations has performed very well, as it efficiently moved crops from areas of surplus to areas of deficit.

In addition, strong transportation demand contributed to the improved results.

Our third quarter results of the other segment increased to $159 million from $68 million last year.

This year's quarter includes an $8 million asset impairment charge, and last year's quarter included income of $3 million from vitamin litigation settlement.

Excluding the impairment charge and the vitamin settlements, the other segment operating results increase of $102 million to $167 million was due primarily to improved results of the company's specialty feed ingredients operations.

Also improvements in cocoa and specialty food ingredient operations and the $15 million improvement in valuations of our private equity fund investment contributed to the increase.

Specialty feed ingredients results improved over prior year levels as increased [INAUDIBLE] demand resulted in higher selling prices and volumes.

Our cocoa processing results improved over prior year levels of solid powder and butter demand resulted in improved press margins.

Specialty food ingredient operations also improved due to improved citric acid selling prices and volumes.

However, due to the continued industry overcapacity situation, our citric acid is still not performing at acceptable levels.

Corporate expenses and segment summary increased $75 million to $163 million from $89 million a year ago, principally due to the $99 million of LIFO valuation inventory charges.

This charge was partially offset by gains in the security transactions of $11 million and interest received of $4 million from the insurance related lawsuit pertaining to the flood of '93.

I'll now discuss some of the more significant factors which affected our financial condition and cash flows.

During the first nine months of fiscal '04 our trade working capital increased $2.4 billion to $6.9 billion at March 31. $1.6 billion of that increase relates to increases in readily marketable inventories.

Readily marketable inventories have a carrying value at March 31 of approximately $3.9 billion.

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

The increase is financed primarily with cash flow from operations and short term borrowings of $1.5 billion, resulting in outstanding short term debt of approximately $2.8 billion at March 31.

Our total interest-bearing debt short term and long term as a percent of invested capital was 42% at March '04.

That's an increase of 3.2% from June '03 levels which were 38.8%, but a decline of about 0.2% from our March '03 levels of 42.2%.

Our cash flow from operations for the nine months ended March 31 equaled to net earnings of $598 million, plus depreciation, amortization and asset impairment charges of $553 million,was $1.150 million.

This cash flow was used to support increased working capital mentioned previously, in addition to capital expenditures of $366 million, acquisitions of $54 million, repurchases of company stock of $4 million, and dividends of $127 million.

I will now turn the discussion over to Brian Peterson, who will review the business fundamentals of our operating segment.

Thank you, Doug.

Good morning.

I would like to start this morning by talking about our oilseed segment.

In this segment operating profit was $118 million, or up 56% over the quarter a year ago.

Results in North America and Asia showed solid increases this quarter.

Results in South America and Europe were weaker than a year ago. [INAUDIBLE] Margins were reduced in South America.

Increased meal exports from South America continue to pressure margins in Europe.

Much has been said about the shortage of the U.S. soybean crop, and concerns about resulting crush volumes and prospects for margins.

One year ago, the North American oilseed industry crushed 415 million bushels in the Jan, Feb, March quarter.

This year the industry crushed 406 million bushels in the quarter.

Industry projections are that the processing rate will drop to the low 300 range for each of the next two quarters as the industry rationalizes the remaining old crop soybean supplies in the U.S.

The oilseed processing industry situation today is as follows: The U.S. soybean supply remains tight.

South American new crop estimates have been gradually reduced from the estimates we discussed last quarter.

Brazil crop is now projected to be around 50 million tons, which is below last year's production.

Argentina is now projected to be 33 million tons, slightly below their previous year's production.

Soybean supply will remain tight until the North American harvest and beyond.

Tight soybean supplies will create both challenges and opportunities for our oilseeds group, but we have delivered solid results in these conditions for the last two quarters and are well prepared for the challenge ahead.

Demand for protein meal remains strong despite today's high protein meal prices.

Animal numbers are steady to rising, indicating that this protein meal demand will continue at these strong levels.

U.S. vegetable oil supplies are projected to be tight for some months as demand remains strong, and prices continue at historically high levels.

With the strong demand for protein meal and oil, we would expect acceptable crush margins in North America.

Current capacity utilization is around 75% in North America, with good crush margins.

As indicated, our U.S. soybean plants should be running at lower rates this summer.

Margins in our North American cotton seed and soft seed crushing businesses are good.

Brazil crush margins continue to be unsatisfactory.

Capacity utilization is, however, increasing as the new crop is delivered.

Europe is battling meal imports from South America, causing a weak crush margin environment.

Capacity utilization in Europe is now around 78%, down from the 85% range we reported last quarter.

We are encouraged by the strength of the bio diesel market in Europe and are expanding our capacity in that business.

Our Asian operations are currently running at reduced rates as inventories are reduced.

Chinese demand, however, will continue to grow as the markets revenue from the Avian flu, or from the influence of the Avian flu.

Recent expansions will continue to put pressure on older, inefficient plants.

Our food industry customers continue to show strong interest in our NovaLipid zero/low trans-fat product portfolio, which provides a superior solution to many alternatives.

New trans-fat labeling requirements for food, which is effective in 2006, has resulted in wide spread interest in this healthier oil product line.

ADM's broad product line of refined and specialty oils can meet the demands of each of our food customers as they keep a wide variety of the vegetable oils for their product needs and as they respond to the trans-fat issue.

We know we will face a challenging environment with soybean prices high and in relatively short supply, but we also know that historically in industry processing margins can be higher during these times.

Turning to our corn processing segment, profits were $160 million or up 80% versus a year ago.

In sweeteners, we had increased profits due to higher sweetener selling prices and slightly higher volumes.

Also we continue to make efficiency improvements in our corn processing operations.

Prices are up for this contract year for high fructose corn syrup.

We continue to expand production of our higher value portfolio as a way to improve our overall corn processing margins.

In fact, our recently announced joint venture with Lesaffre will actually use corn syrup as a starting point for the manufacture of yeast.

We continue to grow our bio products production as we use increasing amounts of starch to expand our higher value products.

Our fermentation capacities are now fully utilized.

Turning to the ethanol side of the business.

Profits were up on improved year-over-year pricing.

Ethanol prices continue to improve over last quarter.

Additionally, volumes were up as we reduced excess inventory in the quarter to complete start-up requirements of the New York and Connecticut markets.

As you will recall, we had built inventories last year in order to facilitate a smooth transition to these new markets.

Ethanol spot prices are in the range of $1.65 to $1.75, and demand is strong.

Ethanol pricing remains strong due to the high gasoline prices and the very good balance of supply and demand in the ethanol market.

The ethanol industry will continue to grow as states move to ban MTBE due to ground water contamination issues and oxygenate standard continues.

Additionally, ethanol demand will grow as blenders add ethanol due to its attractive economics.

Roughly 25% of the ethanol sold today goes into markets in 18 different states where is it does not replace MTBE as an oxygenate, but completes on the economics of gasoline and octane boosters.

Some of the potential for growth in the ethanol market is as follows: Baton Rouge, Louisiana, is a potential 40-million gallon market.

It's a new RFG market starting in next month.

Atlanta, Georgia, has the potential for a 225-million gallon market starting in 2005.

This is also a new RFG market.

In Pennsylvania, there is ultimately a 250-million gallon potential, where they are in early discussions over a three-year MTBE phase out.

New Jersey is also considering phasing out MTBE, and there there is the potential for 150-million gallon market.

Also longer term the Boston market has another 200-million gallon potential and is in early discussions on ethanol.

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

A resolution would benefit both the U.S. farm economy and corn sweeter products.

Turning to wheat, profits of $10 million, up 50% from the levels of a year ago.

Earnings were up versus last year on improved wheat quality and flour yields, compared to the processing difficulties we had with last year's crop.

Industry capacity utilization was over 80% for the quarter, up slightly versus last year.

Even in this low carb media environment, though, flour demand is showing signs of plateauing.

Industry figures show an increase of 4/10 of a percent in flour production in the fourth quarter of 2003 versus the fourth quarter of 2004.

The industry belief is that low carb products are bringing ex-consumers back to consuming the new low carb breads.

We of course are working with our baking customers to provide the wide range of products that they seek.

In the UK the integration of flour mills we acquired from ABF is now complete.

In agricultural services, operating profits were $56 million, up very substantially from the depressed levels of a year ago.

Last quarter, we saw regional production and balances that created the opportunity to fully utilize our grain infrastructure and merchandising capabilities.

The diversity of our operations across product lines in varying markets around the world and our strength in transportation led to a strong gain again in profits last quarter.

We had growth and profits from our broad origination, transportation, and marketing capabilities in both North and South America and in Europe.

Our barge and truck shipping business also had improved results in the quarter.

Market conditions the last two quarters were more favorable to our Ag services business than they will be going forward.

At this point, inventories from last year's crop are running low, and there are smaller quantities to sell going forward.

This will adversely affect our barge business.

The other category profits were $159 million, or up 132%.

This sector delivered improved results primarily from cocoa, specialty feed ingredients, which is formerly known as bio products, and our private equity funds.

Year-over-year gains were reported in virtually all of the businesses in the other category, including the food additives, protein specialties, natural health and nutrition, edible beans, ADM feed, malting, ADM investor services, the Hickory Point Bank operations.

Our cocoa operations continue to show strong results with solid product demand and the positive effects of industry consolidation.

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

The outsourcing trends continue, and we have the potential of growing our chocolate production through new product supply agreements.

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

Specialty feed ingredients, profits improved last year to the strong demand and higher selling prices and increased quantities.

Lysine prices were very strong.

The price ratio of protein meal to corn at today's prices makes lysine more valuable to the animal producer, resulting in increased product demand.

Lysine is is used to supplement corn when poultry and pork producers feed corn instead of soybean meal to their animals. [INAUDIBLE] demand is also growing as the op-op ethanol plants come on line and sell increased volumes of distillers grains which requires supplementation with lysine to enhance the nutritional value.

A few comments on our specialty ingredients area.

In citric acid, results are improving based on higher volume and prices; however, as we indicated, the results still are unsatisfactory to us. [INAUDIBLE] our plant expansion is complete.

Results have improved on higher volumes.

Year-over-year pricing is up about 15%.

That concludes my comments.

We'd now like to answer your questions.

Thank you.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone.

If your question has been answered, or wish to remove yourself from the queue, please press the pound key.

If you are using a speakerphone, please lift the handset before asking the question.

Our first question comes from Robert Moscow of Credit Suisse First Boston.

Good morning.

A question about high fructose corn syrup.

Do you expect in the margins to be down in the second half of the year like you said at Cagney?

Yeah, I think that margins in the corn processing business, of course, have to deal with the rising corn prices, and so I think that, you know, we've got good demand, very good demand for ethanol, I think that the margins going forward will be not quite as good as they have been.

However, I think that really depends on two things going forward.

Obviously the price, and secondly the continued strength in ethanol.

Thank you.

And also, what was your realized price for lysine in the last quarter.

Did you mention that?

No, I did haven't mention that.

We did have very strong pricing.

Shadow prices were in a range, depending upon the application, feeding application, in the range of about $1.80 to $2.20.

Depending on market conditions, we got some percentage of that shadow price, and I would like to say that the strong demand, we had a fairly good percentage of that shadow price during the quarter.

And lastly, you know, cocoa results were so excellent, is there anything that could derail that going forward?

What could possibly derail it going forward?

At the present time, we don't see anything that will derail that.

I think, you know, continuation of the conditions that we currently have.

That's great.

Thank you very much.

Thank you.

Our next question comes from Christine McCracken of Midwest Research.

Good morning.

Good morning, Christine.

You know, we're in the middle of planting right now, and it's looking like the corn crop is going to be exceptionally strong this year, but by default that would imply probably a slightly smaller soybean crop.

Are you at all concerned given the very low levels of stocks that we have today that a disruption on the soybean side could lead to an extraordinarily tough commodity environment going forward?

I think we've indicated that we expect challenging times, but I think we also pointed out that we have had challenging times for several months now, and I think we've had very good results in those challenging times, so although, yes, we fully realize the tight situation on soybeans going forward, which will be alleviated to some degree by the U.S. harvest, we still continue to see that we're going to have a challenging -- a challenge to deal properly with a relatively tight supplies, but again we think that we could have very good margins during this period.

Sure.

As you roll out of current contracts that essentially were locked in probably at much lower prices, going forward, it's going to be, I would assume, given the current environment, you're going to constantly have a higher -- a higher cost, essentially, in those businesses.

Is that fair to say?

And that kind of plays off the earlier question.

A higher cost of soybeans?

Well, or corn as these contracts kind of roll off.

I mean the market is right now at very high levels.

Whether it's going to be able to sustain these levels I guess is anyone's guess.

But I think we're focused on the margin, not the price.

I think we've seen that the soybean business, on the margins regardless of the price of the soybeans stays pretty healthy.

Gotcha Just in lysine, obviously that's been a very strong business for you.

I've heard recently of new capacity coming on-line in China.

Is there any truth to that and what would that mean for your expansion plans in that business and then pricing going forward?

Well, our expansion in that business which we talked, I think, maybe a quarter or two ago is complete.

We've finished that expansion.

I don't know specifically what you're referring to in China, Christine, but we have seen from time to time some small plants start there in lysine, but I can't comment further on that.

I'm just not aware of what you're referring to

Just and then on the recent announcements by Coke and Pepsi that they're going to lunch launch a mid-calorie product that certainly would have a lower percentage of high fructose in it, and their expectations for that to cannibalize I guess their core business to some extent, you know we've seen this kind of in the past, but I'm interested in your perspective on what that would mean given the current diet trends and demand for next year, for high fructose, sorry.

Well, I think that when new products are launched, like this, remains to be seen what the effect is going to be.

I think that one can make arguments that it would take away from the -- from the current market, or could be -- could add, as people move up the diet drinks to this, but I don't think we know at the present time, just have to wait to see what the effect will be.

Is fair to say you could convert some of your high fructose capacity to ethanol.

You said in the past you weren't really interested in expanding your ethanol production, but --

Definitely we can do that, and we are also looking at other higher value added products that utilize our starch stream.

Great.

Thanks.

Thank you.

Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your on your touch-tone telephone.

Our next question comes from David Driscoll of Smith Barney.

Hi, David Driscoll with Smith Barney.

Good morning, David.

Good morning.

So just wanted to talk about bit more about the oilseed pricing environment.

Certainly the pricing environment that we're in in the June quarter and September quarter, I think it's quite unusual.

Do you -- you know, if I understand your comments right, you trying to tell us that the margin improvement in the -- you know, expected in those quarters would offset the volume decline, or does the volume decline, you know dominate the equation in net net even with margin improvement on the North American crush products you're going to see lower profits?

Do you have any sense of that

Well, I guess I could just say that we see demand for the products very steady.

I mean the animal numbers are increasing slightly, the economics of eating animals is very good.

We wouldn't expect to see any reduction in the demand.

Obviously, the animals are going to have to be fed, so they will have to find some substitute for soybeans as the production declines.

However, I would -- I can't really project what the margins are going to be, but we're going to to have a very healthy demand environment, so as the crush rate is reduced, is forced to reduce because of reduced soybean supplies, I would expect it would have a complementary effect on margins.

Are you then saying that other areas of Archer Daniels, i.e., I guess it would be the dry distillers grain segment would have to be the beneficiary.

I guess it could be some other coarse green products, but where -- this actually is an interesting question, because it doesn't seem like the infrastructure is really out there to important large quantities of soy meal into the United States from South America, so what do the animals eat when you have this big reduction?

Well, I mean the feeding industry is obviously in the process of making adjustments, but one factor or one item to consider is that there's significantly more canola meal available in Canada, which is moving into the United States.

Of course, there's still barriers to the export of the meat and bone meal in the U.S., compared to -- so there's a higher availability of meat and bone meal for the domestic market compared to a year ago.

We will see some imports most probably from Brazil; however, I think your comment that the infrastructure is -- is to some degree a bottleneck for substantial imports from Brazil is correct.

But also corn glutton feed, corn glutton meal, distilled dried grains, there's a whole range of things that are available, and most of them require supplementation with lysine, so, you know, the industry will get through.

All right.

Fair enough.

On one other question, this is really for Allen.

Is the question on your global oilseed position in terms of where the assets are based.

You know, you've made a substantial investment in China, but the Chinese market is -- it's certainly going to be some time as that market rationalizes some of the smaller plants, you know, that would seemingly have impacts on profitability there, as well as kind of your capacity situation in the United States is perhaps some of that capacity, you know, I think in the past you've rationalized some of those plants, really because I think you said you built plants in China and it's kind of a swap, but the question is largely, where do you really see the North American -- your North American crushing assets going?

Are we going to see more plant closures over time, and then also kind of very much related to that, are you going to get bigger in South America, and can you give me a priority of really where you want to see the capital investments go related to oilseed processing?

Yeah, David.

We are in a very, very good position right now with our overall global network.

As you know, we've got about 43, 44% of our total crushing capacity in North America, and about 10% down in South America, with now more than 25% in the Asia Pacific region, and a little over 20% in Europe.

That balance works very well for us, and we could be larger in South America if that were available at the right prices, but there is not currently a need for us to to do anything significant in South America.

South American production is continuing to go up despite the problems this last year with rust and with weather, and so we did see some reduction from expected almost 62 million tons in Brazil down to about 50, but we've got the infrastructure in place there to feed our European businesses and our Asia Pacific businesses.

China is currently in a period of less supply and demand appropriate balance, primarily started by the Asian influenza there, and the reduction of their numbers of chickens, and so the feed demand went down, and so we've got a temporary situation with surplus capacity there, but we've built what the think is appropriate for the China region for the coming needs, and the economy is still good there with more than 9% growth.

We see a continuing shift in population in China to the urban areas and jobs being created, higher incomes, higher standards of living and improved demand for meal and oil.

With the high shipping rates, we've been very -- enjoying very good earnings capacity out of our palm plantations in Sumatra, so there's a balance out there that has shifted away from the soybean production to other commodities and to other feed and food ingredients, but we don't have any dramatic need to add to China.

We've got China at the levels we want them now, if we look forward for the next couple of years, we think those plants will be back up to full production levels, and there will be good margins in that environment.

In North America, we have consistently reduced our crush, total crush here, but we have increased our strength in the origination side, and we're well positioned in North America to provide the raw materials for the growing interest of the Asia Pacific region.

Europe is currently under margin pressure because of a lot of exports from South America, but that also will come into better balance as we move forward, and we're looking at a number of alternatives for ourselves in Europe that would increase our production of bio diesel and other commodities, and utilize our capacity at a better level there.

We don't see running out of soybeans in the United States this year.

We have adequate infrastructure to import some meal as is necessary to keep the animals fed, and we've got a good balance in our businesses all across the world.

As I switch over to the Ag services operation.

That business is certainly it's a tough business for to us forecast.

Last quarter's profits were almost double I think what we saw this quarter.

Can you give us some thoughts on where you think kind of the normalized level.

Is this quarter a better example of a normalized level for that particular business, or can we not even make those statements because it's all from one quarter to the next, this thing is just that volatile.

Well, you have to look at our global strength in both of these categories, what we've done is balanced our overall operations across the globe, and we'll have temporary periods of reduced operating profitability, and as Brian pointed out here in the last quarter we were able to enjoy some fairly strong results from the overall complex, but we're rapidly running out of materials to store in our grain elevators in the United States, and that will have an adverse impact on our transportation in the U.S., as well as our operating assets here, but you need really to look across the globe for Ag services, and this past quarter was boosted by our situation with respect to broad offices across the globe through our tougher network in Hamburg, as well as the United States and South America, and we fed that system and took some good advantages to make some solid profits there.

I think Ag services as a generalization is likely with weather conditions to be more vulnerable to changes in the crop cycles, and so it's very difficult in Ag services to really be strong to -- to say that there's a normal operating way for this to demonstrate bottom line results, so you need to look at more than one crop cycle in order to understand how the Ag services business works, but for us we're basic core processors, and we're in that industry, and we need to have origination, we need to have control over our transportation, and we need to have a solid network that continues to provide the world with its nutritional needs, so when you bring that all together, sometimes the profits might fall out into Ag services.

This next quarter will undoubtably be not as strong in Ag services as the last quarter was, but we still look for good opportunities, and we might continue to have some solid results when we look at our overall global trading net work.

Just one last question, really almost comment.

I was just curious if you guys would ever consider giving us a little bit more detail on the other division, you know, in terms of actual segment disclosure, given that I think this quarter it was the second most profitable business within the company, I don't know if you guys have considered breaking out more components, but certainly I would be very interested in that, if possible.

Yeah, David.

Your point is very well taken.

If you'll look at our operating segments this last quarter, we've got almost 30% in the other category, and we've had numerous discussions internally about the fact that that is beginning to -- to demonstrate that these smaller businesses, and some of these lines of businesses that we established initially as -- as adjuncts to our basic core processing industries have now become real contributors to the bottom line, and we need to take a hard look at the way we're reporting this to the public.

So we haven't come to a conclusion yet, but studying this.

We're well aware of the problem, and it's been continuing to show that if we're going to be transparent with the industry, and give you guys the information you need, that we can't continue to to have the other category grow at the rate it has, so I'm certain we will come up with some conclusions as to how to deal with that issue.

We need to be very mindful of our requirements with the S.E.C. and everyone as to how we report these numbers, so we are trying to find a consistent basis that will demonstrate to the investment community and to all of you who are so kind as to follow our company that we will be transparent to a much larger degree as these other categories begin to contribute more substantially to our overall results, and I thank you for recognizing it.

No problem, and thanks for the comments.

Have a great weekend, guys

Thank you very much, David.

Thank you.

Our next question comes from Kenneth Zeplow of Morgan Stanley.

We would also second that with the other category by the way.

A further breakdown would definitely be helpful on our side also.

We appreciate that.

Thanks, Kenneth.

I guess the first place I would like to start is how have your Asian soy crush margins stay so strong in light of the overcapacity and the avian influenza.

You did say that's stronger year-over-year.

What's your secret there, what's happen something

It was stronger work but if you look currently at operating margins, they're not good in the Asian region.

We continue to have in our pipeline.

It's quite a long pipeline to bring the raw materials from either North America or South America into that market place, and so we continue to have sales on the books, but our crushing utilization is down in Asia, margins are down, and we continue to have very strong results in the -- in the palm plantation side of our business, and not the kinds of returns that we would like to see in Asia, but we're there for the long term.

We've got a very solid position, and we're mindful of the fact that we've had some difficulties, dislocations, and disruptions in a variety of different components that impinged on the Asian market, and we need to let those work their way through the system.

It's not going to happen immediately, but our inventories are being worked off, and we're -- the numbers of chickens are coming back, and so we're beginning to see a better balance over there.

We're hopeful that over the next coming months that we'll see back the strength to our bottom line from the Asia Pacific region.

I guess let me go back and make sure.

Currently you're saying that the Asian markets margins were better, but yet you're still over supply, and over capacity.

How did the margins get better on an year-over-year basis?

Is it the palm oil?

No, the margins are not better there currently.

The results from this past quarter were strong, because we're look back even before the avian influenza, and the results are coming in from that process.

So from an accounting viewpoint, there's delay in the reporting system, so you will see the results back several months on Asia in this quarter, rather than the spot markets in today's current circumstance.

Today the margins are not favorable in Asia, but we believe our position there is sound and appropriate, and it will meet the demands of the coming people.

We've got 1,300 million people there out of a total population of 6 billion, and you've got the economy growing at 9, almost 10%, so we're not uncomfortable with our position, despite the fact that we're seeing much poorer results on a current basis in the spot markets today

The other question that I have is on the -- you mentioned through the comments that readily marketable inventories created -- I didn't get the number, but a certain amount of money that would change, I guess, operating -- just looking at the operating profit, it was down, I think, maybe $900 million.

If I eliminate the higher commodity costs would your cash flow be positive?

It sounded like it might be.

You're saying of our cash flow from operations is negative 9?

Yeah, without all the effects from higher commodity prices, because that's not -- eventually that will work waits it's way through.

Right, what it was saying, Ken, if you take our earnings, and our depreciation amortization and impairment we're a cash flow of about a billion 150 positive so what we've done is we've soaked up about a billion of that in working capital, and then we've -- you know, we've also had to borrow short term debt of about $1.5 billion of increase, and those readily marketable inventories have increased to almost $4 billion that are sitting in our balance sheet.

So there's very high liquidity in excess of our short term debt outstanding.

We continue to be very positive about the strengthening financial condition of the company.

Our balance sheet is really solid.

We do -- we have been unsuccessful at least in this point in time, in convincing the rating agencies that their negative outlook should reflect our strong cash flows, and they should pay more close attention to the readily marketable inventories, and they are continuing to look at that scenario, but from a viewpoint internally of the way we consider our financials, we're very pleased with our cash flows during this past period of time.

As you can see, our CapEx is running right in line with she approximately $400 million that we had envisioned this year.

We already have a billion, 150 million of positive cash flow during this past nine month period.

We continue to build a balance sheet, we continue to build shareholders equity, we ask think we're well position to meat the higher demands of these higher inventory levels, and if they're reduceable, we'll have substantial liquidity available.

So if I was to adjust $900 million from the readily marketable inventory, what would I come up with?

Well, readily marketable inventory itself increased about $1.6 billion, but some of that has been -- fits over on the payable side, also, you have can't just say that's a gross.

That's a gross amount that inventory is in.

Our nets that we used of working capital was about $1.2 billion, and we also have increases in receivables due to the same reasons.

I mean commodity values are up on average maybe 50% from June 30th.

That's exactly my theory, that there's a better level of what your operating cash flow would be, if you adjust for the readily marketable inventories.

Exactly.

We agree.

Let me ask you one other question.

The ethanol buildup and now the pass through going forward should we start to see now more normalized operating profit, you know, granted it's been good that you're up, you know, all these, you know, 93% in '04, in Q2 '04, and then 30% in Q3 '04, but are we we going to start seeing more normalized year-over-year comparisons again?

I think we are very optimistic about the situation with respect to our grind and our capacity to produce ethanol and the market demand.

We had a market last year of about 3 billion gallons.

We expect it to be almost 3.7 billion this year, and to grow coming into 2006.

As you know, we've not passed the energy bill in Washington, and so as a result, we've still got the same situation with respect to renewable fuels that we had before, but we see good demand for ethanol, our inventory levels are back down to normal levels, and I would say although we did have some boost to our earnings in that segment over the past couple of quarters, as those inventories came down, we put those inventories away because we knew New York and Connecticut both the east and the west coasts were going to place demands on the system, and we wanted to have adequate supplies to meet the needs as new plants came on stream, but we're now down to very good balance in supply and demand.

We've got our inventories back down to levels that reflect a more meaningful ongoing requirement for the company, and we have increased corn costs, net corn costs in the last short period of time as a result of the higher prices for corn, but at the same time, we've seen a very strong demand for gasoline, and improved volumes from our production, and so across the boards, I would say that we still have very strong market for ethanol, and solid pricing for gasoline, and we're selling most of the our production now into areas on an economic basis that we're competing effectively with gasoline prices, so so the future bodes quite well for this industry, and as more cooperative plants come on stream, that's going to offset the need that we have to be able to reduce inventories.

So I'd say we're in good balance right now.

So what you're saying is that this level of operating profit should be more consistent going forward, rather than this is not a step up from the last two quarters then?

If we at any time to enjoy the kinds of relationships between net corn costs and the gasoline markets and the crude oil markets, we will continue to enjoy solid profitability out of this part of our business.

Great.

Thank you very much.

Yes, you're welcome.

Our next question comes from William Leach of Newburg Berman.

Good morning.

Good morning.

Doug, I just wanted to ask you have, you said the LIFO charge was in corporate; is that correct?

That's correct.

And do you have any guess at today's commodity levels where you would have a similar LIFO charge in the June or fourth quarter?

Well, prices have come off from March levels.

They're down somewhat.

There isn't much change in price.

Related to change in price, is what drives the LIFO charge.

You wouldn't anticipate such a charge in the June quarter?

No.

And another question, what should we model for the tax rate going forward?

We increased it to 33% this quarter.

We were running at 31 through the first six months of the year.

We anticipate that to be the rate again for the fourth quarter, say average out at around 32 or so for the year, and I would say that's a pretty good rate, if you keep these levels of earnings.

A lot of it is driven by where our earnings go, of course, because a lot of the our permanent [INAUDIBLE] our ETI and so forth are more fixed in nature, so as your top profit before taxes rises, those don't rise at the same level.

The rate goes up.

And what's the latest prediction for capital spending this year?

Well, we're at 366 now, we'll be somewhere closer to 450, between 400 and 450 by the end of the year.

I would anticipate those kind of levels going into next year, around the $400 million level.

Okay.

Thank you very much.

Thank you.

Once again, ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone.

Our next question comes from Leonard Teitelbaum of Merrill Lynch.

Good morning, Lenny, how are you?

Don't ask, I'll tell you.

Let me try and get something straight here.

Did you say net corn costs were down year-over-year?

Yes.

Okay.

Number 2, I guess it's been a long time since I've seen this farm economy run out of stuff to feed animals, but then maybe somebody is seeing something I don't, but I think we'll be good on that score, but I think what I was intrigued with was that you says that your South American crush margins were below, were weaker than last year, but what did you say about margins in South America?

They were weaker than last year.

Are you attributing that to -- and what do you attribute that to, in your case, because obviously not everybody is experiencing that?

Well, we saw obviously a very strong demand from China, very strong exports for soybeans from China, so that had an adverse effect on our margins.

Right.

The rumor being that China may start to pull in its horns a little bit, do you see that happening or not

At the present time, no.

Okay.

I mean, we're aware of talk about tight credit, and that sort of thing in China, but, no, demand at the present time is still good.

I think in Bill Leach's question that since you're using a quarterly adjustment for LIFO, you're not expecting that next quarter?

Like I say, Lenny, I mean it would kind of depend on where prices go.

If they go -- if bean prices go to $12 a bushel, you would have a charge, if they stay at the same level as they were in March, we would not anticipate that.

Same with corn and oil.

I know farmers planted especially down in cotton land, they planted soybeans very early, trying to get that dollar a bushel premium.

Are you seeing early indications that that crop got in in good shape?

I mean we're seeing it as you guys are.

Yes, it's very encouraging we've had excellent weather conditions across this part of the country, right in the heart of Illinois, and generally across the United States, Lenny, we've got good conditions.

The corn crop in this area is well advanced from where it normally would be this time of the year.

We are already starting with some bean plantings, and have very good positive indications of what the crop will be in the coming year, if we continue to have these kinds of benefits in our weather conditions.

And if we start to get beans in early, then we should be able to see that before the end of first quarter next year, right?

I think that's probably right.

We'll get early beans, particularly the south where they're planting them very early because of the high prices, and we'll make this transition from old crop to new crop without any serious disruptions, and if necessary we'll bring in a little meal on the east coast, and in particular animal feeding situations that are needed in order to make world.

So we agree with your analysis that we're not likely to run out of animal feed in this country.

The network that we use is certainly trumpeting that sad story.

Now what is your front end grind now.

Are you guys maxed out?

Are you talking on oilseeds or corn.

I beg your pardon, on corn.

On corn.

Yeah, we're running front end grind at full levels of capacity.

We've got good demand for ethanol, and we've got increased volumes in sweeteners, and so we're running our grind as much as we can every day.

That's higher -- percentage wise, that's up over last year, I think.

That's correct.

And we've reached some record levels of production here in some of the plants just in the last quarter, and we've seen some very good results because we've spent some considerable efforts bringing these all together in a way that they -- that they matched with our new MCP plants in Nebraska and Minnesota, and so we've got a very efficient high running corn division this year compared with periods in the past when the we've been bringing those things together in order to enjoy the synergies, so that's bringing down our overall operating costs to more competitive, very, very olid levels for the future.

Now, presuming you guys have been in this business longer than a year, and you've seen this eons before, my guess is you're hedged in in pretty good shape.

I mean, that's what the number says to me.

Well, we're generally hedged as well as we can.

As you know, there is always some differences of when the all of our byproducts sell, so we do have exposures from time to time, so we're generally hedged, and in a good position right now with respect to the coming crop year, as well as we believe the remainder of this year.

Okay, Allen, we're not going to run you a benefit.

Corn is hitting records, beans are hitting records, and you guys are coming up with great margins, so somebody -- you guys ran your business and you're hedged in, the way I look at it.

We had very volatile prices over the last quarter, and we never can project these businesses with total certainty, but our people have done a very nice job of managing these businesses over the past quarter, and we've coped with some very, very significant changes in valuation, and some of that is reflected in our LIFO charges, but we're very pleased with the way it has turned out, and we think our management has done a very nice job.

If we assume that -- and this is my assumption, that we gentle up from here, rather than spike up in raw beans and corn, so that the 99, that the LIFO charge is reduced next quarter, and even with the increase in tax rates, I don't see how the hell you can do less in the June quarter than you did the March quarter, because the industry conditions are just working for you here.

Well, we've got a lot of things that are going to change in the coming quarter, and one of which is certainly agricultural services where we're going to have a lot less volumes in our elevators, so we're going to have challenges but we are optimistic that this year will be a very positive year for the company.

Okay, I'll follow up offline.

Thank you very much.

Thanks Lenny.

Thank you.

Our next question comes from Greer Tobin of Prudential Equity.

It's actually John McMillin.

Hello, everybody.

I had to sneak in one way or the other, Al.

Congratulations.

Thank you.

And I guess Lenny and Bill and I kind of remember when you didn't have any segments, so if you want to break up the other segment, I remember when you didn't give an income statement.

Thank you, John.

We've made a real effort to be friendlier.

I guess no matter how good things are I have to have some comments.

One, I would get another insurance company if it takes you 11 years to get your money, and then least, and maybe get an operator that can pronounce your name right.

The flood of '93 was actually a whole series of litigation, and probably reflects more concern on the part of American business about tort reform than it does the efficiencies of the insurance companies, but your point is well taken.

Just in terms of the doomsayers that see higher costs, and I understand how LIFO works below the line, but the bottom line here is you've got this LIFO trust fund almost built up that should flow back into earnings, I mean you've absorbed 15 cents, so when you talk about higher corn costs and other things in the next couple of quarters, you're talking on a segment basis, not on a total company basis, correct?

Correct.

Yes, that's right.

Because I think that's --

And your assumption is correct.

I mean the LIFO is there.

We've had it impact the last two quarter, or actually the last three quarters, so coming into this nine month period, we had very low LIFO inventory levels, and now they have increased to become quite significant, and as volumes and prices change over the coming months, those values and that LIFO charge will be either brought back into income or will continue to build.

Now, on the ethanol side, some people were concerned that California, New York might be able to kind of work their way out, or even on a short term basis from the Clean Air Bill, do you have any comment on that?

Well, we don't have any reason to believe that the administration is thinking in terms of relaxing requirements on air pollution, so we're hopeful that they will continue to support the Clean Air Act and its requirements, and we know that we're in a position to produce ethanol to meet these demands of this in market.

I think we've demonstrated that over this period of time.

There is more capacity coming onstream, so we do not expect that there will be any waivers granted in Washington, and if there are, we -- as was pointed out, we do currently have significant economic reasons why the gasoline companies are using our products, and we continue to believe it's an excellent way to clean up the air, maximize our utilization of agricultural renewable resources, and that there's a real good future for this business despite the actions in Washington with respect to the ethanol business.

And just my final question, you know, as soybean bushel production drops from this 400 million to 300 million, or the low threes, which isn't as great a drop as I think as some feared, but still it's going to result in lower capacity utilization rates, do you think that spreads into lower crush margins?

We don't have reason to believe that, based on on the current markets, nor on the way these situations have usually developed in the past, but there's capacity utilization, you end up using your factories that have better positions in the market and we do have very efficient units, and we expect that we will have still acceptable margins, and we are now in a global environment, and so we may see some changes in various parts of the world in that analysis.

But typically, in more volatile markets, we have not necessarily seen a shrinkage of soybean processing margin.

Thanks a lot.

Yes, you're welcome.

Thank you.

Once again, if you have a question at this time, please press the 1 key on your touch-tone telephone.

There appear to be no further questions at this time.

Okay.

Thank you very much, Adam, and thank all of you for joining us on this conference call today, and we appreciate your continued interest and support.

Look forward to seeing you in the next quarter, year-end, fiscal June 30th.

Ladies and gentlemen, thank you for participating in today's program.

This concludes the call.

You may now disconnect.