Archer-Daniels-Midland Co (ADM) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the Archer Daniels Midland Company fourth quarter 2004 earnings conference call.

We would like to introduce you to our host Allen Andreas, Chairman and Chief Executive Officer, of Archer Daniels Midland.

Please go ahead, sir.

Thank you, Wes.

Good morning, ladies and gentlemen.

Before I turn to the formal presentations of Doug Schmalz our Chief Financial Officer, and Brian Peterson, Senior Vice President for a review of our operations, I wanted to make a view observations about this past year.

Our fiscal year which ended June 30, marked a very challenging period for the Agricultural Industry.

We faced unprecedented conditions in oilseeds.

And the Company's earnings were significantly impacted by a $400 million charge to settle litigation remaining from allegations of a price-fixing conspiracy in the high-fructose corn industry more than 10 years ago.

Despite these events ADM delivered record operating profits of 1.56 billion during the 2004, an increase of 56% for the year.

Excluding the litigation charge, we also produced record earnings for the year of 1.15 per share, a 64% increase over last year's results.

We began the year with an acute shortage of soybeans in the United States due to diverse weather expectations.

A failure to meet expectations for increased production in South America, and continued growth and demand for protein and vegetable oil in China, drove increased prices for soybeans and shortages of shipping capacity.

To assure our ability to meet the demands of a growing global customer base, ADM filled our origination, storage, and transportation pipeline from both North and South America to the Asian Pacific Region.

China's subsequent refusal to accept the industry's shipments of oilseeds created radical volatility and brought significant regional losses to our oilseed network.

I highlight the Chinese defaults only to clarify that ADM has a continued commitment to our long-term global strategies.

During the past 7 years we have invested substantial capital in a global network founded on a balance system of origination in the producer regions and production in the consumer regions.

We continue to believe that this model is correct for our businesses.

We trust that China is fundamentally committed to the integrity of its commercial agreements and will in the future honor its obligations in the World's Trading System.

We believe ADM is today in an excellent position to deliver value to our customers and to our shareholders, and therefore, we plan to continue to build our businesses on this base.

With our litigation exposures minimized, and a growing demand for natural products, and renewable sources of energy the future promises solid results from ADM's Global Franchise.

I also wanted to highlight that we have attempted this year to broaden the disclosure of operating information about our businesses by providing additional transparency into the financials of our business units.

I hope you find that our new classification of business segments adds meaningful information to improve your ability to understand our Company and evaluate its future prospects.

Doug, would you please review the financials?

Sure, thank you, Al.

First, I'd just like to say that some of today's comments reflects Management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results.

Any changes and such assumptions or factors, such as oilseed crush margins, ethanol prices, crop values, or such other information could produce significantly different results.

We assume no obligation to update any forward-looking statements and as a result of new information or future events.

As reported the results for the quarter ended June 30, 2004 where a loss of 103,061,000 or a loss of 16 cents a share, that compared to net earnings last year of 95,020,000 or 15 cents a share.

This year's fourth quarter includes the fructose litigation settlement expense of 400 million, that's 252 million after-tax, equal to 39 cents a share.

It also had a loss of asset impairments of 10 million, 6 million after-tax or a penny a share.

And gains from sales equity securities of 12 million or 8 million after-tax also a penny a share.

Last year's fourth quarter include a loss on fixed asset impairments of 13 million, which is 8 million after-tax, a penny a share.

And gains from security transactions of 2 million, which is 1 million after-tax.

In addition, commodity pricing on all our inventory evaluations resulted in pre-tax income of $42 million in the current year fourth quarter.

Our effective tax rate for the fourth quarter of Fiscal 2004 was 35% compared to 29% in last year's fourth quarter.

Our net earnings for the full-year ended June 30, 2004 were 495 million or 76 cents per share, that compared to net earnings last year of 451 million or 70 cents per share.

Our fiscal year 2004 results included the fructose litigation settlement expense in the fourth quarter of 400 million, 252 million after-tax, equal to 39 cents a share.

We also had losses on fixed asset impairments of 51 million, which is 32 million after-tax, equal the 5 cents a share.

We recorded a flood gains litigation settlement to which is received 21 million, and that's 13 million after-tax equal the 2 cents a share.

And we had security gains of 24 million, 15 million after-tax equal the 2 cents a share.

The Fiscal 2003 results included losses on fixed asset impairments of 13 million, which is 8 million after-tax, equal the penny a share.

A gain on partial settlements received from vitamin anti-trust litigations of 28 million, which is 17 million after-tax, equal the 3 cents a share.

And $11 million, 7 million after-tax, equal to 1 cent a share charge, which related to the Company's global settlement with the EPA.

In addition, for the year rising commodity prices on Lifo inventory evaluations resulted in a pre-tax charge of 119 million in Fiscal 2004, and 14 million in Fiscal 2003.

Now, I'd like to discuss the changes quarter-over-quarter in the line items of our consolidated statements of earnings, and we'll discuss the changes in our segment operating results later.

Our fiscal 2004 fourth quarter net sales and other operating income increased 20% to 9.7 billion primarily due to the higher commodity values.

To a lesser extent increase sweetener and bioproduct sales volumes contributed to the increase.

These increases were partially offset by lower oilseed processing volumes.

Our gross profits increased 25% to 503 million due primarily to improved operating profits of bioproducts, agricultural services, and other food ingredient operations.

Earnings gains in these operations were partially offset by the loss reported in the oilseed processing operations.

In addition, declining commodity prices on Lifo inventory evaluations during the quarter resulted in Lifo income for the quarter of $42 million.

Company-wide Selling and General Administrative expenses increased 399 million to 653 million for the quarter due to the fructose litigation settlement expense of 400 million, which was included in SG&A.

Excluding the fructose litigation settlement or provision our SG&A costs for the quarter declined about $1 million.

Interest expense declined 5 million to 82 million, and interest investment income declined from 3 million to 27 million for the quarter primarily due to lower interest rates. $12 million gain on security transactions primarily reflects the gain realized upon the acquisition of International Multi-foods by J.M.

Smuckers Company this past quarter.

Equity and earnings of our consolidated affiliates for the quarter increased to $39 million from 36 million last year primarily due to an $18 million improvement in evaluations of the Company's private Equity Fund Investments.

Earnings from these private equity investments were $17 million this year that compared to a loss of 1 million last year.

In addition, improvements in our, [GRUMA], CIP, and agricultural joint-ventures contributed to the increase.

And those increases were partially offset by losses of our Asian oilseed joint-ventures.

As I mentioned earlier our effective tax rate for the fourth quarter Fiscal 2004 is 35% compared to 29% in last year's fourth quarter.

The increase in the fourth quarter's effective tax rate primarily to a shift in pre-tax earnings mix within taxing jurisdictions.

For the full-year our effective rate was 31% and that compared to 29% last year.

That increase also due to the pre-tax earnings shift within tax jurisdictions.

Turning now to results of our operating -- segments as you have noticed, and have disclosed in our release, we have revised our segments.

Our chief operating decision-maker, CEO, Allen Andreas, has changed the way he views the results of our operations and therefore, the changes made are designed to align the disclosure of the Company's operations on the same basis as they are managed by the Company's chief operating decision-maker.

We have provided you with restated segment operating profits by quarter for Fiscal 2004 and 2003 to assist you in your analysis of these segments.

Under the new reporting format, the segments are, as follows; the oilseed processing segment, this segment is really no change from previously, and includes those activities related to processing oilseeds into vegetable oils and meals principle for the food and feed industries.

Our corn processing segment includes the activities related to production, the products for use in food-feed, and industrial industry, and both now in 2 product categories; sweetener and starches, and bioproducts.

Sweetener and starches includes the corn processing fine and grind operations, and starch and sweetener productions, it also includes the East-starch joint-venture in Eastern Europe.

Bioproducts includes products produced from the process of starch fermentation, such as alcohol; fuel [impotable;] feed ingredients, such as lysine and threonine; and certain food ingredients, including citric acid, xantham gum, lactic acid, and GDLs.

These products are sold for the food-feed or industrial industries.

Starch produced by the sweetener and starch operations is transferred to the bioproducts at a value equal to market.

Our agricultural services segment utilizes the Company's extensive grain elevator transportation networks to buy, store, clean and transport commodities and resell such commodities as feed ingredients or as raw materials for the agricultural processing industry.

This also includes A.C.

Toepfer a global merchandiser of agricultural commodities and processed products.

The segment is unchanged from our previously reported.

Our other segment includes the remaining operation which we have split into 2 categories, those being food and feed; ingredients and financial.

Our food and feed ingredients group includes wheat processing, cocoa processing, GRUMA, ADM feeds, our natural health and nutrition, protein specialties, and other food and feed products.

The financial group includes the Company's bank, insurance company, futures commission merchant and clearing operations, and its investment in private equity funds.

Looking now to the operating results of these segments for the quarter operating profit increased 38 million to 268 million from 230 million last year.

Oilseed processing reported a loss of 15 million for the quarter as Chinese contract defaults, which occurred in the fourth quarter, had a significant impact on global oilseed markets and a negative impact on our oilseed operations.

North American crushing and refining operating results were good; however, the difficult market conditions resulted in losses in Asia, South America and European operations.

Brian Peterson will address these events in more detail during his remarks.

Our corn processing fourth quarter operating profits of 150 million in Fiscal '04, increased 61 million from the prior-year levels of 89 million.

Operating profits of sweetener and starch products declined 9 million to 62 million for the quarter as increased net corn costs more than offset improved selling prices and volumes.

Our operating profits of bioproducts increased 69 million to 88 million for the quarter due to increased alcohol and lysine selling prices and volumes.

These increases were partially offset by higher net corn costs.

Agricultural services third quarter operating profits improved to 45 million in '04 from 14 million last year due to the strong performance of our balance global grain origination and marketing systems.

As you 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 stuff, partially attributable to the poor crop and drought conditions in the EU, our global marketing operation has performed very well as it efficiently moved crops from areas of surplus to areas of deficits.

Fourth quarter results of our other segment increased 88 million in '04 from 45 million last year.

Operating profit of food and feed ingredient component increased 30 million to 58 million for the quarter as weak knowing results increased due primarily to the improved crop conditions and resulting margins in North America.

In addition, cocoa operating results improved to solid butter and power demand resulted in improved press margins.

In addition, our chocolate volumes increased contributing to the earnings improvement.

Operating profits with the financial operations increased 13 million to 30 million for the quarter due principally to the $18 million improvement and private equity investment funds.

Our corporate allocated expense in the segment summery increased 328 million to 426 million from 97 million last year.

Due principally to the 400 million fructose litigation settlement expensed in the fourth quarter, which was offset by 42 million of Lifo inventory evaluation income, gains on security transactions of 9 million, and increased investment income.

I'll now discuss in more -- some of the more significant factors effecting our financial condition and cash flows.

During the year ended June 30th, '04 our trade working capital increased to 935 million to 5.5 billion at June 30th, as readily marketable inventories increased 945 million from June 30th, '03 levels.

Readily marketable inventories have a carrying value at June 30th, '04 of approximately 3.2 billion.

This increase primarily reflects the impact of increased commodity price levels.

The working capital increase was financed primarily with cash flow from operations.

Our short-term borrowings did increase 491 million resulting in outstanding short-term debt of 1.8 billion at June 30th.

Our total interest bearing debt short- and long-term as a percent of invested capital was 39% at June 30th, '04, that's a slight increase from June 30th of 38.8%.

Cash flow from operations for the year ended June 30, 2004, equal to the net earnings of 495 million plus depreciation, amortization and asset impairment charges of 736 million was a total of 1.2 billion.

This cash flow was used to support increased working capital, which I mentioned previously, in addition to capital expenditures of 509 million, acquisitions of 93 million, repurchases of company stock of 4 million, and dividends of 174 million.

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

Thank you, Doug.

Good morning.

I'll start this morning by making comments on our oilseed segment.

In oilseed processing the operating profit for the physical year was 290 million versus 337 million for Fiscal year 2003.

The result for the fourth quarter was a 15 million loss versus a profit of 83 million a year ago.

Our joint-ventures in China reported losses for the quarter.

The Chinese crushing industry in the aggregate overpurchased soybeans in anticipation of future shortages.

They had too many high price soybeans when meal demand in China collapsed due to price rationing, and the affects of the Avian flu.

Crushers were forced to sale soybean meal and oil at levels that realized negative margins against their soybean ownership.

Subsequently, the Chinese Government enforced quality standards that precluded the normal importation of soybeans from Brazil.

The result was that many Chinese crushers chose not to perform on high-priced contracts which contributed to a dramatic sell-off in both cash and future markets around the world.

Our joint-venture, however, had performed on their contractual obligations.

The defaults by Chinese soybean purchased by Chinese soybean purchasers caused problems in the Global Market and impacted our South American operations.

Our South American operation showed a loss for the quarter.

A weak processing environment was compounded by extreme volatility in the markets.

European crushing operations were weaker than the comparable quarter.

The results were affected by unusually tight supplies of rapeseed at the end of the crop year, and heavy imports of soy meal from South America.

The operating environment in North America oilseed crushing and refining operations was solid and delivered improved results compared to last year's quarter.

The volatility resulting from the necessity to severely ration crops in both North America and South America, and from Chinese restrictions on imports, should be moderating as the market adjusts to a vastly improved new crop supply situation.

Today we have good crush margins in our Chinese operations and have increased our production levels to meet today's stronger demand.

Plant capacity utilization in China was below 50% last quarter, but today is significantly higher.

Our joint-ventures continue to operate without restrictions on imports.

Protein meal and oil demand will grow faster in Asia than in any other part of the world, and we are well-positioned for this growth.

Currently, North American capacity utilization is around 80%.

The USDA projects North American soybean crop to be around 2.9 billion bushels approximately 500 million more than last year.

This new crop supply will allow our plants to run at higher production rates and the crush margin outlook looks favorable.

South American capacity utilization is around 70% with a challenging outlook as new capacity continues to come into the market.

European capacity utilization is at 83%.

Looking forward we see good crush margins in rapeseed and growing profits from biodeisel.

Anticipated lower prices for soybean meal should regenerate demand in this market.

Globally animal production numbers are strong and we expect to see continued strong demand for meal and oil.

With total world production of soybeans for the 2004-2005 year currently projected to increase to 19%, the prospects for the industry are favorable.

Turning to the corn processing segment, here profits for the quarter were 150 million versus 89 million for the year-ago quarter.

First looking at the sweeteners and starch category where profits were 62 million for the quarter versus 71 million for the year-ago period.

In sweeteners we had higher prices and higher volumes versus last year, but had decreased profits due to higher net corn costs.

The new mid calorie colas were launched during the quarter.

Shipments of high fructose corn syrup to customers including the beverage category continued to show increases to the prior year.

In the bioproducts category, in ethanol profits were up for the year despite higher net corn costs, volumes increased relative to last year.

Current prices are very similar to last quarter.

That is the January/March quarter and remains steady and firm.

The demand for ethanol continues to grow with continuing bans on MTBE.

New demand is expected from Atlanta, New Jersey, and Philadelphia markets in the months ahead totaling approximately 300 million additional gallons.

Crude oil prices are at record levels which leads to good demand for ethanol and supports ethanol prices.

The growth in the ethanol industry capacity has kept pace with the growing demand and the industry appears to be well-balanced through at least the coming year.

In specialty feed ingredients profits improved versus last year on very strong demand in pricing for lysine.

Lysine prices have dropped since last quarter with spot prices currently around $1.10.

However, demand is very strong and inclusion rates are high.

While pricing is off the peak we continue to see very solid results from our lysine business.

In citric acid results are improving.

Industry pricing is strengthening its capacity utilization improves.

Our plants are now running at near full capacity.

In our bioproducts group, we will continue to evaluate projects that will use our fermentation capabilities and to expand our product lines and increase the value of our starch stream.

The current prospects for a large U.S. corn crop are excellent.

Given this large crop, a more favorable cost relationship is developing against next year's sell of products from our corn segment.

Normally the benefits from declining corn costs are realized after a time lag.

Turning to the agricultural services segment.

Profits here were 45 million versus 14 million in the year-ago quarter.

Results improved from last year's depressed levels.

Logistics made a significant contribution to this profitability.

We expect a very good corn crop and the soybean prospects are also very good.

Good crops will bode well for our elevator storage business this Fall.

With little left from old crop in North America, we have a smaller volumes material to move during the crop year transition period, which occurs during the current quarter.

The barge shipping business is starting to improve as evidenced by higher barge rates.

Our transportation assets should have good returns as new crops start to move.

The industry is expected to experience transportation shortages in the near future.

ADM has substantial assets in rail cars, barges, and trucks, and favorably positioned to deal with this developing situation, and give strong support to our processing assets, and to our customers.

Including with the other category, the other segment, profits here in the segment were 88 million versus 45 million year-ago quarter.

Specifically referring to the food and feed ingredient category, profits were 58 million versus 28 million a year-ago.

In wheat milling, results improved from last year.

However, volumes were down in the quarter on lower government purchases.

Last year as you recall the US Government had large purchases of flour for export to Iraq.

Capacity utilization was 81.5% for the quarter and 87.5% for the year.

In cocoa, operations here delivered strong results versus last year with strength in both the grinding and chocolate operations.

Our chocolate sales and profits were up and we continue to pursue opportunities to use our processing expertise to move closer to the consumers and to provide additional value to our chocolate customers.

Butter demand has been strong.

Powder demand is solid and the processing margins are good.

Concluding with our comment on our national health and nutrition category results here were significantly improved principally from our Vitamin E and isoflavone businesses.

We are also seeing good market interest for our innovative and [NOVA] oil, we plan to have the national launch in 2005.

At this point we will take your questions.

At this time, if you would like to ask a question, please press star, then the No. 1 on your telephone keypad.

If your question has been answered or you would like to withdraw your question, please press star, then the No. 2.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from John McMillin of Prudential Equity Group.

Good morning, everybody.

Good morning, John.

Al, to make this simple, you were basically positioned wrong in a tight soybean supply environment and were somewhat surprised by the sharp drop in prices caused, I guess in part by the Chinese faults.

Is that simply it?

No, that's not it, John.

I mean, what happens in our businesses is that because we're basically hedged in our overall complex, we don't carry significant long and short positions.

And we try to monitor that as long as we can.

But the facts in this case are that your hedges are really not effective when you have defaults on contracts.

And the impact of the Chinese actions to cut the contracts and leave the sellers in a position where they have very high-priced commodities in their pipeline and do not have a delivery point on the other side as a similar price, leaves you with a lot of pressure across the whole systems.

So as a result of this Chinese default situation, we suffered across the oilseed complex.

The price relationships to futures contracts and to hedges that we had changed very dramatically during this period of time.

And so it impacted not only our Chinese operations, but also South America, Europe, and the United States.

So it's not simply a matter of being long, it's a matter of having a very substantial disruption to the trade which changed the economics of our positions.

But did they default on your contracts?

I mean, you had facilities there so you're basically selling it to your joint-venture party, correct?

We're in kind of a unique position as contrasted with most of the international companies in the China markets.

And we have substantial businesses in China to process the beans and the raw materials that we originate from both North and South America.

So our pipeline runs from the interior of Brazil all the way through to the customer in China.

And so our partners to a large-degree and our customers to a large-degree performed on their contracts.

So it doesn't a direct relationship of our getting cancellations of our contracts.

The government came in and took certain actions.

And many of the other customers and some of our other customers, did default on contracts.

But that was a minor portion of the total reduction of our oilseed complex, as a result of the cancellations.

Because our partners lived up to their commitments in China.

And you're well aware that you're compared to your competitors and Bungee which reported earnings yesterday, had very good results in their oilseed segment?

And I know they don't have assets in China to the extent you have with your joint-venture party.

But all of this kind of begs to question because it's not the first quarter that they've kind outperformed you.

But, you know, you feel like you're lagging competitors in this area?

No.

We all have a different position in the industry and our position is quite different from Bungees.

And the way we report is also quite different from Bungees.

We, in the past, maintained that we were in one line of business and that was agri-business.

And if you'll note some of our competitors currently report on an agri-business basis.

So we wouldn't be having these specific conversations.

And for us to enable you to get a better --

Yep.

-- handle on our businesses, we have segmented our businesses into specific parts.

So if you go back and combine the overall picture for ADM, you will find that we have performed very well in the overall environment of oilseed processing as contrasted to our competitors.

And for doing that you need to take into account, not only the accounting differences attributable to LIFO and other factors, but also what happens in our agri-business segment which includes the ag-services.

Because the ag-services is part of that whole pipeline going over there.

So you really need to have a broader perspective.

But for the way we reported it to the industry, we are reporting as a segmented model that gives you transparency into the businesses.

So inside China, our joint-ventures ended up with high raw material cost, and less ability to pass that on to their customers, as a result of the defaults of the other people.

In South America we ended up with specific implications for our grain origination systems, and our oilseed systems that reflected a great deal of divergence amongst the values of soybeans in the futures markets, in the catch markets, and in our customers' evaluations.

And so when you take those all into account and you just isolate the oilseed sector, we had a loss for the quarter.

But that doesn't take into account the other factors that are involved.

And overall, which was the reason why I made the opening comments I did, is that you need to keep it all in perspective.

And when you look overall at our performance this year we had a record year --

Yep, solid performance.

-- solid performance and next year bodes well for our businesses.

And my last question on this matter, Allen, is it's basically behind you.

I mean, is that essentially correct?

That the hit from the falling price environment in China is essentially behind you?

We would say generally that that is the case.

It is still true that the impact of the Chinese demand and the shortages from last year's crop will continue for a few months in the future because of the fact that very high-priced commodities on our -- in our inventories will be worked off through the system.

So I really hesitate to say it's 100% behind us.

But in large part the impact of the default is realized in this current quarter and in this year's results.

And just my last question is to Doug, actually.

If I take the anti-trust charge pre-tax and after-tax, I don't get a 35 tax rate, I get over a 36 tax rate taking those 2 items.

Maybe you can call me off-line to try to get my numbers right.

Sure.

But I get a higher number than you do just maybe it's rounding.

But if you could give me the right numbers, I'd appreciate it?

And, again, congratulations on a good year.

I'll call you on that, John.

Thanks, John.

John?

Yeah.

Just remember that the litigation settlement is only U.S.

So it's U.S. tax effect.

Yeah, I was just taking the numbers out of the reported numbers and you were giving a total company tax.

So if you could just call me off-line.

Thank you.

Your next question comes from David Nelson of CSFB.

Good morning.

Good morning, David.

And thank you for the transparency.

You're very welcome.

I hope that you find it useful.

Absolutely.

Let's go into -- if I could just follow-up obviously the China oilseed situation.

Was that a bigger negative for your operations within China or for your operations in the Americas that couldn't transport on off-load beans?

I guess I could address that.

Brian would you be willing -- the impact of that default is really spread over all of our operations.

And by virtue of the fact that a lot of our ownership in China is only a 1/3 -- roughly 1/3 investment that had a smaller impact on the overall transactions in China than it really did in other areas.

Although, the default itself that occurred in China was material to our South American and North American operations as well.

Are there -- are you seeing signs yet of repercussions or shakeout from that?

Have facilities shut down or facilities being up for sale that might create opportunities for you to acquire things or shut them down?

What are you seeing post the default?

That's absolutely a correct observation, David.

There's a great deal of concern on the part of everyone in this industry as to how they deal with the Chinese in the coming years.

And we, of course, didn't have the same kind of problems because of the fact that our major customers, which are our own joint-ventures over there performed on their obligations.

And that enabled our own crushing operations there to purchase some of these -- this pipeline that was available at a much lower cost and to feed it into our factories which are now running at higher rates.

So we should enjoy some benefit over the coming period of time and there is clearly a lot of financial pressure on a number of smaller crushers in China and other customers of -- in the international area.

And some of those will be in financial difficulties and will no longer be in business in the future years.

So we kind of looked on this as being in some way a great deal of pressure to rationalize that market faster for the most efficient producers of which we are clearly the most efficient producer in that environment.

Okay.

And if I could move on to ag-services.

You had a very large increase in profitability there over the last year despite smaller crops in the U.S. and in Europe.

I guess one fallout from your greater transparency is questions by line item.

Would you expect, given bigger crops, even bigger profits from ag-services next year?

It's difficult to quantify that, but let me put it in perspective.

One aspect of this business this past year was a lack of availability of crops to fill our storage capacity.

And so clearly that impacted negatively our grain elevator systems, as well as our transportation network.

But in the middle of all of those numbers we did have a dramatic impact on the freight rates in the ocean shipping area, as a result of the Chinese demand and the shortages.

And so that pressure and also the extreme demand for all commodities in China brought the ocean freight markets to much higher levels.

So that pressure in China offered opportunities for us to capture more margins of profitability in the international side.

So coming into the future years, -- I mean I think this new crop coming in looks much, much more promising.

That means we'll have more revenues in our elevators.

We'll have better utilization of our transportation equipment.

And so we should have good storage income and good opportunities to make good solid profits in ag-services.

Whether those will be necessarily greater than what we enjoyed this year from the overall complex is still to be determined.

Mm-hmm.

I guess my other question was you raised in there.

I think Brian brought up the fact that there's railroad bottlenecks and so forth.

How much is that hurting you or perhaps hurting your competition more?

Is that going to be a problem for you over the coming year?

The railroad bottlenecks and lack of service out there.

Well, David it's projected to be a real, real problem for the industry.

However, I can see it hasn't had any effect on our operations and we don't expect that it will.

The railroads had some problems being short equipment, being short crews, and so forth, and in some instances they are having to ration service.

But we have plenty of equipment and we don't anticipate any resolve -- or any effect on our operations on our crushing plants, on our corn plants or to our customers where we deliver rail -- products by rail to our customers.

We don't expect any effect.

We're well-positioned to deal with this.

As you know, David, we -- many years ago began taking ownership and operating rights of our transportation fleet in order to assure us that we would be in a position to bring good service to our customers.

So we own more than 20,000 railroad cars, we have 2,000 barges on the river systems, we have at any one-time 100 ships under charters.

So we are in a good position to deal with the railroad problems.

And probably at least as good a position as any of our competitors to not anticipate that we'll have disruptions in our supply to our customers, as a result of those complexities.

Great.

Thank you very much.

You're welcome.

Your next question comes from Leonard Teitelbaum of Merrill Lynch.

Good morning.

Good morning, Lenny.

My congratulations to my colleagues out there who are certainly righter than I was.

So I'm taking this personally.

I understand the China situation better now than obviously I did before.

And if I look at it as a kind of a one-off transaction and presume the following that we're going to work-off some high-cost inventory as we get through August -- or through July, I mean.

And beginning in August we probably ought to see some of the results of what's in the market and that's my first point.

And that is, do we see prices -- if we assume the China impact on the commodity markets has waned.

Are we seeing prices now down around more if I look at the charts a more normal range than we had before or are you expecting a spike-up from here?

In terms of primarily soybeans, I'm talking about but corn you could put in as well.

It looked to me the price -- the markets got it right this time in terms of the crop size.

But I'd like your opinion on that?

Lenny, it appears that the crops -- I mean I think the predominating features that the market is focusing on is the size of the crops.

We seem to have very, prospects for very good crops in the U.S. both corn and soybeans.

It's raining here today.

And I think that people are optimistic about the yield potential.

And also it's a little bit early to be making projections about South America.

But if you look at what the USDA projections are for South America, we're seeing a significant projected increase there, too.

So I think that the prospects or the market will be focused on the supply, the big increase in supply.

Of course, we've got a strong demand base, but it looks like the supply will be sufficient.

Well, the way I look at it then is I would have to presume -- well, I know we're not going to get quarterly estimates, but we've got to look at this soy processing area -- China is one-off -- we've got to get it significantly better year-over-year comparison in soybeans.

I would have to think that's probably pretty well locked in, wouldn't you?

Comparison on what, Lenny?

On the --

-- the earnings.

I'm sorry.

On the earnings coming out of this division.

Well, I think the prospects are very good, yes, with the projections for the large crop, with the good demand base.

I mean the prospects for question margins would be good.

You know, I don't -- talking about what China is going to do is obviously an area where we don't really want to go.

But I think the effect has been very bad for China is what's happening in the market.

And I think that given the reliance on the global trading system I think it would be unlikely that we'll see this happen again.

I do want to point out, however, we are getting close to August and August is a close -- a very critical month for soybean development.

So I just want to throw that cautionary note in there.

Although, the prospects today look very good.

We still have a key month to go through.

I think this crop will get made by the middle of August, not the end.

So we're optimistic, that's for sure.

One other thing, Lenny in response to your question, of course.

Is I think that we have to factor in the increased discipline that we are seeing in the US crushing industry right now.

People have been adjusting their crush plant -- their closing plants in response to poor demand in some areas.

And I think that we have a more rational industry right now.

So I think that we need to factor that in going forward, also.

I thank you for that.

When I look at the corn side of the business, we have got to have -- corn prices have come down.

Net corn, while it has come down some.

We should still be in pretty good shape on that, especially as we get into the August period.

Now, I don't want to stretch this thing out too far and shoot myself in the foot.

But if would have to guess that if I look across the board, we would have to have a corn area, if you will or a corn division that certainly ought to be better than last year, I would think.

Unless I've done my numbers wrong domestically.

Is that a statement you can get beside or not?

I think, Lenny, if you look at the products coming out of that division, the pricing and demand prospects for them are firm.

Corn as we have indicated here, the corn prospects are very good for a good crop and one would conclude from that the prices ought to decline.

Of course, they have already declined quite a bit.

But I would like to point out that there's usually a somewhat of a time lag as the markets come down before that really shows up on our bottom line.

And the other thing I'd just like to point out, of course, is that we have been making forward sales of ethanol and other products and as Allen points out, we do hedge our operations.

So that we have purchased corn already to cover product sales that we've already made.

That was my answer.

Are you hedging corn beyond new crop on the inventory side?

On the raw material side?

I didn't catch that, Lenny, what?

Hedge beyond new crop in corn now by forward purchasing or have you covered only until September?

Lenny, we look at our sales, sales of products and we buy against our sales of product.

So it would be -- I can't put a month on it.

It's just that we were hedged against our product sales and I'd just leave it at that.

All right.

We do have product sales beyond new crops.

Yes, we do.

All the way into next year.

So we've got some cover there already for some of those sales.

Well, that's kind of what we're doing.

All right.

I mean, I'm looking at this again probably -- thinking it was going to be a little bit better than it was in the quarter.

But again I think I have come to the conclusion that I think John and Dave came to that this looks like it was an isolated reaction.

I know Bungee had it a couple of years ago.

It's awful hard to find a contract in default out there on the board, and if they renege on the contract, they renege.

But if I don't have another side I can't complete the transaction.

So I think we all appreciate that.

And I hope I'm right that this thing runs off in July and starting in August we get back into a more normal margins.

Now, if that's the wrong scenario I'd appreciate knowing about it.

If not thank you very much for your time and we'll go forth and multiple and divide.

Lenny, let me just comment that it's very difficult to hedge against defaults.

Yeah, it's awful hard to find a contract in that.

Isn't it?

Thank you.

Thanks for your patience, Lenny we appreciate it, and we hope to be able to meet your numbers in the future.

I know you've been pretty accurate a lot of times in the past.

Thank you very much.

I'm using $5 for next year.

We'll do our best.

Thank you.

Your next question comes from Eric Katzman from Deutsche Bank.

Good morning, everybody.

Good morning, Eric.

Well if it's an over or under I'll go with 501 versus Lenny.

How's that.

I guess a few questions on a longer term basis.

You know, Allen, CapEx after you kind of took over dropped as low as 276 million, and now it's up to over 500 million.

That's kind of surprised me a bit given your kind of comfort level with the global network.

So I'm kind of wondering I guess where do you see CapEx next year?

And also why has this crept up so much in the last 2 or 3 years?

Well, Eric, I think we really reached a very, very low unusual point at 276.

Because our CapEx generally runs in the 350 area for the last several years and we added a number of facilities.

We have improved the operations in a variety of different areas.

We have built more facilities in South America and Asia Pacific region.

We are expanding our businesses in Eastern Europe and so we continue to grow.

I think this year we will probably be somewhere in the neighborhood of 500 million, maybe even a little more than that.

As you know we reached a settlement with the EPA during this past year in which we made certain commitments to advance our pace of continuing to clean the environment around all of our facilities so that has resulted in some increase in CapEx as well.

But we have good solid investments on the agenda.

We are bringing our costs down, rationalizing our businesses across the world.

And I expect that we'll see results tomorrow to more than offset those increase costs.

And as you know with this litigation behind us, we've got a much better picture forward and a much more predictable picture with respect to cash flows, in order to reinvest those cash flows.

So we are very pleased with the way that's working out.

And then, Doug, I need a call on that tax rate as well because when I calculate it, I got something like excluding the obvious items, I came in at around 38%.

I don't understand how you got to 35.

But in any case where do you see the tax rate for next year, as well as some of the other items that you would normally give like, interest expense?

That kind of thing?

I think on interest expense I would say it would maybe somewhat comparable.

I think overall borrowings if commodity values come down, of course we'll be down.

But our rates are a little bit higher now so.

Our fixed debt will not change much during next year.

So that's pretty fixed so it's all in the short rate.

I would say maybe it's going to be comparable.

I think on the tax rate side we think, as of the present time anyway based on mix of earnings and so forth, we think the 31% rate still is pretty reasonable.

We'll, of course review that every quarter as we go forward as we have more information on where the earnings are coming from and what parts of the world they're coming from.

But we think the 31% rate is reasonable.

Okay.

And then Allen, can you -- I know we always demand a lot.

But in terms of the year-over-year swing in profit change in oilseed processing.

Is it fair to characterize how much of that, like 3/4 of it, 2/3 of it was due to the situation in China?

I mean you had been running like 120 million in operating profit the last few quarters.

You did something like 70+ million a year ago.

You had obviously been running it somewhere close to a 100 million.

Yes.

And now you report a 15 million loss.

I mean, is the vast bulk of that due to China?

I mean, is a 100 million due to China alone?

I hesitate to put a number on it.

But a very substantial portion of that would -- you could just directly attribute to what happened across our entire oilseed complex in South America and Asia very directly and indirectly, in North America and to a lesser extent.

But also had an impact in Eastern Europe and in Western Europe in our operations.

So I think that it would not be inappropriate to think in terms of that kind of a swing and that our possibilities for the coming year would clearly be to return to a solid basis for our profits in that division.

We actually continued to have a very good operating environment in the United States in both crushing and refining.

Nothing exceptional, but very solid results over this past quarter despite the fact that we ended up with an overall loss from the ROC sector.

Okay.

And then last question and then I'll pass it on.

You sound very optimistic about the outlook with the obvious caveats in a commodity-driven business.

But last year you spent $4 million on share repurchase, which is essentially zip.

And I'm kind of wondering given the outlook, given the improving working capital situation, the balance sheet, can we look for the Company to be more aggressive on share repurchases particularly given today's reaction?

Well, we are reviewing all of those possibilities.

We have a fairly good fix on our cash flows and what's coming into our operation.

And the question is, where can we most effectively, in the interest of building shareholder value and significant improvement in the earnings, to get back into the kinds of returns that we think are appropriate.

And so this past year and in the course of settling some of our contingent liabilities, we were less than aggressive.

And as you know [Moodies, Standard & Poors] have the entire industry and particularly ADM in the very negative mode in terms of thinking about meeting their credit ratios.

So we have been relatively conservative on stock repurchase for this past period of time.

But if it appears to be an appropriate expense of some of our cash flows, we are clearly prepared to do it.

We do have the authorization from our Board and we're reviewing that on a daily basis.

Okay.

Thank you.

Thank you.

You're welcome.

Your next question comes from Robert Lyon of Institutional Capital.

Hi.

A lot of the questions I had were already taken care of.

But just a couple more of these financial things.

On the non-cash side.

Any idea how the LIFO situation will work out over the next couple of quarters?

That's one.

Second question, if prices stay low, through the harvest and on into next year, will the cash flow release be mini, mini hundreds of millions of dollars?

That, two.

And one last one putting things together.

Any release of cash from divestures selling any kind of miscellaneous assets?

And on the private equity side, are there any new investments there and what's the balance of your portfolio at this point?

Okay.

On the private equity, our balance is around a 400 million [level-leer.] We have seen cash flow come in on those this last year.

And we would anticipate that to continue as these are coming closer to the end of their lives and they're starting to roll-out.

So we may see some there.

In general if price levels stay down, we should see and we have, in fact, since June 30th seen significant additional cash flows in this year.

So we should still see some there and that will all depend on where the prices go.

And on LIFO, that more than likely if the prices remain down through the end of this quarter, we have about 130 million, 34 million of LIFO reserve still left.

And a substantial portion of that could come in depending on where prices go by the end of September.

Okay.

And I guess I would just echo the comment from Eric I guess in terms of the share repurchase.

It seems like down around these levels it probably would be pretty good use of your resources.

Well, thanks, Robert.

We have got just a slight premium over book values down at this level.

And last year we increased our dividends slightly to about 200 million a year.

And so it certainly is an option that we are reviewing our periodic basis.

Yeah.

I take it for granted that you would want to increase the dividends.

Your next question comes from David Driscoll of Smith Barney.

Hi, good morning, everyone.

Good morning, David.

Well first off I'd like to say thanks for the increased disclosure.

I never would have thought my question last quarter would have been answered so quickly.

The next thing I'd like to do is kind of a little bit more on the China situation, if I understand your position in China correctly, you have about a quarter of the crushing capacity in that market; is that about right?

Yeah, it's at least that.

Okay.

So the situation seems to me that there's been a rapid buildout of world scale facilities and I kind of think that you guys have been the major part of that, so there's no doubt that your facilities there, or it's at least my exhortation that your facilities are significantly lower cost than the competitors.

And this is something that I think was your basic strategy all along.

Now, the questions that I think is being asked here, everyone's trying to get at is.

You know, everyone's trying to find out whether or not this was -- we've done this -- we had a tough quarter here and now its come and gone.

But the basic situation that I don't see being resolved, and I like to hear your thoughts on this is, is that we just basically have overcapacity of crushing facilities in China that depress the margins in this quarter, and we saw it in the P&L.

Now, a lot of other things happened, you know, there were customer defaults were related to the fact that those other customers had even worse crushing margins than what you had in the quarter because again, their facilities -- I think they're smaller and I think they're higher costs.

But when I look forward and try to think what's my vision going through the rest of this fiscal year or this calendar year and into next year.

Why do crush margins necessarily improve substantially until the overcapacity situation within China is addressed?

Well, I think your basic premises are all correct, David.

We have very efficient operations there.

There are new modern plants primarily located in the deepwater ports and very efficient at accepting vessels from any place in the world.

So they can originate at very low costs and be very competitive in their markets.

The soybean production in China is about 17 million tons internally and a lot of these smaller factories are located in the interior crushing local beans.

And about half of those beans are actually consumed directly by the consumers rather than crushed.

So we're really with our factories in a very strong position in the overall marketplace and the question is;

How long will it take for consolidation; and secondly what is happening with the demand, supply and demand situation internally?

Now we've had from time to time a slight dislocation between meal and oil there.

The marketplace takes all of the oil but doesn't always have the same capacity to take the meal primarily because of some problems in the poultry population.

So we have from time to time been exporters actually to other parts of the Asia/Pacific region not of our businesses.

We have not only a very low cost operation on the manufacturing side, but we also have substantial credit availability because of the fact that it's the Government Costco as our partner along with the Willmart Group and ourselves.

And so when you put that in context not only to support the interior requirement for financing, but when you look at the long pipeline from South America and North America to China, there are substantial risks and exposures having by being -- having such a long pipeline for your raw materials.

This will be a real challenge now that we've seen some of the smaller crushers don't have the financial capabilities to perform on their contracts, and that puts us in an excellent position, and result in an accelerated pace of consolidation over there.

So we are very optimistic.

And I can tell you as a matter of fact, now that we're past this period of time, we do have nice operating margins there currently in the marketplace.

And our capacities are coming back up to levels that allow us to enjoy more profitability from operations.

One comment that I think Brian said this in his prepared remarks, was that during the quarter, and I wrote this as a quote.

A collapse in demand for soy meal within China.

Is -- again just kind of going back to understanding the markets.

I've always thought that the number one kind of indication that this business was going to see lower margins, lower profits would be if demand fell short.

It doesn't make sense to me that demand will suddenly fall and then suddenly come back because this is basic food stuff feeding animals.

Do you guys really mean that demand disappeared for the quarter or is it more that it again goes back to this overcapacity of crushing facilities.

So it's the middle guy that who doesn't do well when there's a lot of facilities.

But end market ie. basic demand for soy and soy products is still strong in China?

And is it your exhortation that it will remain strong going into 2005?

David, on the oil side, as prices get high, we do see some reduction in demand, but demand stays relatively constant.

On the meal side, you have to out put this in the context of prices extremely high in China for soybean meal.

I mean they were worldwide.

We had soybeans over $10 and meal at correspondingly high-levels.

You reached a point in China where the market reacted and China just seems to have a unique -- and the feeding industry has a unique ability to pull in their horns.

Now, I think you have to look at this in the context of soybean processors anticipating shortages and probably overbuying.

And probably also the meal customers developing inventories and anticipating shortages.

But eventually you reach a point where the prices are just astronomically high and China just pulled in their horns and just stopped buying.

I mean there wa a period of time there where you couldn't find a buyer for soybean meal.

They were using obviously, they were using their inventory.

They were using what was in the pipeline.

The fact that market started coming down even compounded the problem of people willing to step-up to buy, and they also shifted to other ingredients in China.

So although feeding probably became less efficient, they just avoided high priced soybean meal.

They -- also I think we should point out or I should point out that the -- there probably was some reduction in animal numbers.

Feeding probably became somewhat profitable and became limited.

But I would like to point out that the poultry cycle is very short and can be turned around very quickly.

The other thing we should point out of course,is that shipping costs which were extremely high have come down.

That will help the situation, too.

But basically I think that you can say there was a period of time there where say demand evaporated is perhaps being too dramatic.

But the buyers just stopped buying and it just started a sort of a downhill role of pricing.

And the crushers -- the crushing industry had lots of high priced soybeans.

Very good.

Thank you for that caller.

One question, Doug.

You mentioned -- well actually, you I think you just talked about private equities now embedded in your financial line, could you tell me what the gain/loss was on your private equity positions in the quarter?

Yeah, it was 17 million this year compared to 1 million lost last year.

That's pre-tax?

Pre-tax.

Yes.

Maybe one final question for you, I see we are a little bit over your normal hour.

I apologize.

Just a quick question on sweeteners.

Your competitors yesterday reported basically a doubling in profits in their North American business.

Now their geographies are a little bit different then yours, et cetera.

I see your numbers are down year-over-year.

Is this mostly a corn cost issue that just went into the P&L there?

Because the numbers just look a little different than what I had heard yesterday and just hoping if you could give us a little color.

Well, I think there's no doubt.

I mean our net corn costs were up this quarter so that was an impact.

Our volumes in sweeteners were up slightly and so were our prices on average.

And your basic outlook going into '05 on sweeteners.

We've go low corn prices right now, I think that my analysis here is that kind of hurts you on your bioproduct credits for the next cup of quarters.

But then going into '05 you should be positioned well because we reset every January when you go into contracting, but yet having low corn costs I think is generally a good position.

Would you agree with that analysis?

Yes.

If the crop is big and the low corn costs come through, it's going to be a positive going forward there's no doubt.

Very good.

Well, thanks a lot I appreciate all the information.

You're welcome, David.

At this time I would like to remind everyone in order to ask a question please press star, then the No. 1 on your telephone keypad.

At this time I'm showing no further questions.

Gentleman, please continue with your presentation or any closing remarks.

Thank you very much for joining us all of you and we look forward to a strong Fiscal 2005.

Look forward to hearing from you again in another quarter.

That includes the Archer Daniels Midland Company fourth quarter 2004 earnings conference call.

You may now disconnect.