Archer-Daniels-Midland Co (ADM) 2005 Q1 法說會逐字稿

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  • Operator

  • Please stand by for a realtime transcript.

  • Good morning.

  • My name is Amanda and I will be your conference facilitator today.

  • At this time I would like to welcome everyone to the first quarter 2005 earning conference call.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers' remarks there will be a question and answer period.

  • If you would like to ask a question during this time press star 1 on your telephone keypad.

  • If you want to withdraw your question press star then the number 2 on your telephone keypad.

  • I would like to introduce Mr. Allen Andreas, Chairman and Chief Executive Officer.

  • Sir, you may begin your conference.

  • - Chairman, CEO

  • Thank you, Amanda and good morning everyone.

  • Welcome to ADM's first quarter conference call for the fiscal year ending June 30, 2005.

  • I'm joined this morning by Doug Schmatz, our Chief Financial Officer who will give you an overview of the financials of the Company, and the numbers for this quarter as to how they were finalized.

  • And, also, he will be followed then by Brian Peterson, who is our Senior Vice President in charge of corporate affairs, who will bring you up to date on the general overview of the Company's business and the results for the quarter.

  • Doug.

  • - CFO, SVP

  • Thank you, Al.

  • First I'd just like to the obligatory statements, some of today's comments reflect the managements current views and estimates of future economic circumstances, industry conditions, company performance, and financial results.

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

  • As reported, our results for the quarter ended September 30, 2004 were 266 million 297 thousand, that was 41 cents a share compared to net earnings last year of 150 million 181 thousand, or 23 cents a share.

  • Declining commodity prices on LIFO inventory valuations resulted in an after tax income of 73 million or 11 cents a share in the current year's first quarter.

  • Last year increasing commodity prices resulted in an after tax charge of 5 million, or 1 cent a share.

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

  • Our fiscal 2005 first quarter net sales and other operating income increased 13% to $9 billion, that was primarily due to higher commodity values.

  • Our gross profits increased 46% to 663 million, due primarily to improved operating profits of oil seed processing, corn processing bioproducts, agricultural services and other food and feed ingredient operations.

  • In addition, commodity price level changes on LIFO inventory valuations during the quarter resulted in pretax LIFO income of 116 million, compared to pretax charge of 8 million in last year's first quarter.

  • Company wide selling, general and administrative expenses increased 20 million to 252 million for the quarter, that was due, primarily, to increased employee wages and benefits including pension costs.

  • Interest expense declined 4 million to 79 million, due primarily to reductions in interest incurred on litigation and tax accruals.

  • Investment income increased 2 million to 31 million for the quarter, primarily due to higher interest rates, higher levels of invested funds and increased dividends from our equity portfolio.

  • Our equity of earnings of unconsolidated affiliates for the quarter decreases to 21 million from 43 million last year, primarily due to a 23 million decline in valuations of the Company's private equity fund investments.

  • Increased earnings of the Gruma Corn Flour venture were offset by decline in our Asia oil seed ventures.

  • Our effective tax rate for the first quarter of fiscal 2005 has remained at 31% comparable to last year's first quarter.

  • Turning now to results of our operating segments.

  • Our total operating segment profit for the quarter ended September 30th increased 42 million to 339 million from 297 million last year.

  • Our oilseed processing operating profits increased to 91 million from 68 million last year as improved crop conditions in the U.S. and Europe resulted in improved operating results.

  • In addition, good biodiesel demand in Europe contributed to improvements in the European operations.

  • These were partially offset by the impact of the Chinese contract defaults in the fourth quarter of fiscal 2004, which carried over to the first part of this quarter in our Asian operations.

  • Corn processing operating profits of 103 million decreased slightly from 107 million last year.

  • Our operating profits of corn processings bioproducts increased 29 million to 48 million for the quarter, due primarily to increased ethanol selling prices, partially offset by higher net corn and energy costs.

  • Operating profits of sweetener and starch products declined 34 million to 55 million in the quarter as increased net corn and energy costs more than offset improved selling prices.

  • Agricultural services operating profits improved to 51 million from $43 million last year, due to the improved North American origination and transportation results, partially offsetting these improvements was a decline in our global merchandising operating results from the strong performance of last year.

  • Operating profit of the other segment increased to $93 million from 79 million last year.

  • The operating profit of food and feed ingredients increased 29 million to $89 million for the quarter, due primarily to improved operating results of the cocoa processing operations, and improved earnings of the Gruma corn flour venture.

  • Operating profits of the financial operations decreased 15 million to 4 million for the quarter, due principally to the decline in the Private Equity Investment Fund results.

  • Corporate improved 126 million to earnings of 47 million in the first quarter of fiscal '05, compared to expense of 79 million last year, due principally to the impact of commodity price level changes on LIFO inventory valuations.

  • I 'd now like to just review some of the more significant factors effecting our financial condition and cash flows.

  • During the quarter ended September 30th 2004, trade working capital decreased 648 million to 4.9 billion at September 30th, as readily marketable inventory levels decreased 847 million from the June 30th 2004 levels.

  • Our readily marketable inventories have a carrying value as of September 30th of approximately 2.4 billion dollars.

  • This decrease reflects the impact of the decreased commodity price levels and reductions in physical quantities.

  • The working capital decreased and positive cash flow from operations we used to reduce short term debt by 811 million to 952 million at September 30, 2004.

  • Our total interest bearing debt short term and long term, as a percent of our invested capital, was 35% at September 30th, a decline from June 30, 2004 levels of 39%.

  • Cash flow from operations for the quarter ended September 30th, equals the net earnings of 266 million, plus depreciation and amortization of 167 million, was 433 million for the quarter.

  • This cash flow was used principally for capital expenditures of 142 million, dividends of 49 million, and the remainder to reduce debt level.

  • With that, I'd like to turn the discussion over to Brian Peterson, who will review the business fundamentals of our operating segments.

  • - SVP Corporate Affairs

  • Thank you.

  • Doug. and good morning everyone.

  • In the oilseed processings segment, the operating profit for the first quarter was 91 million versus 68 million for the first quarter of 2004.

  • We had improvements in oilseed processing in the U.S. and Europe.

  • Our joint venture operations in China had a small loss for the quarter, but have had a strong rebound from the difficulties of last quarter.

  • Results from crushing in Brazil were steady, compared to the first quarter of 2004.

  • The record soybean crop in the U.S., and increased planting intentions in South America give us optimism that we will have an ample supply of soybeans for our global operations and to meet the growing demand for products.

  • Regionally, we see the following, North American operations improved in crushing and in oil refining and packaging.

  • The pasture utilization was around 75% for the last quarter, but has currently picked up to an 85% plus level, due to an improved supply of soybeans and good demand for both meal and oil.

  • Export demand for meal should improve with the weaker U.S. dollar.

  • Plus margins for the quarter showed a slight improvement versus last year.

  • South American operations improved in both grain origination and fertilizer.

  • Crushing capacity utilization for the quarter was around 80%, but should be falling as processing margins in this area currently are weak.

  • The announced planting intentions in Brazil show an increase of roughly 5% to 21.5 million hectors(ph) for the comming year, and our grain origination system is well positioned to handel this crop.

  • ADM continues to focus on growth in South America on oilseed origination.

  • European crushing operations improved and capacity utilization is high, at around 95%.

  • In fact, the lower crush margins in South America have benefited European operations, as we experience reduced meal exports from South America to Europe.

  • Meal and oil demand in Europe are strong, and we see growing profits from our biodiesel operations.

  • A large European rapeseed crop assures an ample supply of renewable oils for our biodiesel plants, and the high price of crude oil assures solid profitability.

  • This market continues to grow, particularly in Germany, as recent legislation allows biodiesel to be blended at any ratio into diesel fuel.

  • Today 50% of the rapeseed oil we process on the continent is used to make biodiesel.

  • Asian operations declined, due to the lingering impact of last quarters soybean contract defaults in China.

  • However, the outlook today is much brighter.

  • Our capacity utilization is running in excess of 80%.

  • Our joint venture plants have a good supply of soybeans and are seeing strong demand for both meal and oil.

  • ADM honored it's contracts through the recent debacle in China, and we're able to get soybeans in process effectively in today's market.

  • This recent quarter demonstrates the value of the balance global manufacturing network of ADM.

  • The profit opportunities in oilseed shift around the world in very short order.

  • The best way to capture these opportunities is to have a well balanced, and globally coordinated network of origination, processing, and distribution to serve the destination markets.

  • Turning now to corn processing segment.

  • Profits were 103 million versus 107 million in the year ago period.

  • In the sweeteners and starches component, profits were 55 million versus 89 million a year ago.

  • In bioproducts, profits were 48 million versus 18 million a year ago.

  • USDA currently estimates the current crop to be 11.6 billion bushels.

  • This record U.S. corn crop assures ample supply for industry needs.

  • In the sweeteners and starches portion of this segment.

  • Although pricing was up, versus last year, sweetener profits were down due to higher net corn and energy costs.

  • Starch profits were also down on higher net corn energy costs, however, we are seeing strong demand going forward in starch, due to growing demand from the paper industry.

  • Prices on our starch product line were recently raised by approximately 10%.

  • In bioproducts, ethanol profits were up last year on strong pricing, as the ethanol prices reflected a strong ethanol, excuse me, strong gasoline prices.

  • The year-over-year price increases were more than enough to offset the increase in net corn costs and energy costs.

  • The demand for ethanol continues to grow, due to a combination of factors.

  • Refining capacity is tight, MTVE bands continue, and gasoline prices are high, making ethanol an attractive economic alternative.

  • We are prepared to ship ethanol to the Atlanta market, but at this time implementation of an oxygenate standard in Atlanta is still on hold.

  • Even with this delay there is strong demand for ethanol in the marketplace.

  • In a specialty feed ingredients portion of this sector, lyseeng(ph) profits were down slightly year-over-year, lyseen(ph) prices are down also slightly from last year, however, demand is very strong, and improving rates in sales volumes are high.

  • Citric acid continues to be a challenge, but demand for citric acid is growing with recent price increases in the 12 to 13% range.

  • Our bioproducts group continues to develop new products to use in our fermentation complex -- to use our fermentation expertise to expand the value of our [starch stream].

  • In sum, we are in a period of strong demand for products made from the starch stream.

  • This stong demand should lead to solid returns from our corn wet-milling operations.

  • In the agricultural services segment, profits were 51 million versus 43 million the year ago period.

  • Results improved from last year due to the strength of the U.S. grain origination and merchandising operations.

  • This quarter is typically a soft quarter for ag services, as it comes just before the harvest of U.S. crops, but we are very pleased with these strong results.

  • The record U.S. corn and soybean crop in the U.S. means our storage income should improve over the coming quarters and generate good returns on our assets in this segment.

  • The barge shipping business has also improved due to strong demand for the movement of commodity products up and down the U.S. river system.

  • We see today, the availability of transportation is becoming a bigger and bigger challenge.

  • ADM transportation network becomes more valuable in these times.

  • As transportation capacities are stretched, we have an unparalleled ability to deliver products to our customers in a timely way.

  • We expect this transportation asset base to generate good returns and improve the value of ADM to our customers.

  • In these times of transportation challenges ADM physical assets prove to be very value.

  • In the other segments, profits were 93 million versus 79 million in the year ago period.

  • Specifically, in the food and feed ingredient sector, excuse me, in the food and feed ingredients part of this segment, profits were 89 million versus 60 million a year ago.

  • As Doug has previously mentioned, the financial part of this segment had a gain of 4 million versus 19 million in the year ago periods.

  • Wheat results were flat with last year.

  • Industry capacity utilization for the quarter was around 90%, but as we enter the peak flour demand season, due to Thanksgiving and the holiday -- Christmas baking season, capacity utilization today is 95% or higher.

  • European operations have been improving however, the hurricanes negatively impacted our Caribbean operations this quarter.

  • Cocoa operations delivered strong results for the quarter.

  • Processing results improved, as did profits from the chocolate business.

  • We continue to expand our production of finished and semi-finished products for our customers.

  • Enabling us to improve our returns while meeting our customers requirements.

  • At this point we are willing to entertain your questions.

  • Amanda?

  • Operator

  • At this time I with like to remind everyone if you would like to ask a question please press star then the number 1 on your telephone keypad, we'll pause to compile the Q&A roster.

  • Your first question comes from John McMillin with Prudential Equity Group.

  • - Analyst

  • Hello everybody.

  • - Chairman, CEO

  • Good morning, John.

  • - Analyst

  • It's evening in China.

  • Just in terms of, Al, people are going to kind of rain on this parade by pointing out the gain was largely due to LIFO, even though we all know that's how you keep score, that that's your accounting.

  • To what extent, and I know you don't give earning guidance, but to what extent is this low double digit operating income before LIFO kind of doable in this postcrop period, as you look at the next couple of quarters and see the crop come in, if you could point out the variables to continuing this low double digit real operating gain.

  • - Chairman, CEO

  • Yeah, John, thanks for calling in from China, we appreciate your interest, and are delighted to have you join us.

  • I think you need to always keep in prospective the impact of LIFO, but we had very solid results this quarter without regard to LIFO.

  • And, I think going forward, there's no reason to believe that if our market conditions don't change dramatically that we're not begin to see that the Company has a great teal of earning capacity and we're building off a huge base of assets all across the world.

  • These are not an aberration, these results, they are somewhat impacted, and I made that perfectly clear in my comment on the news release when it was made, that declining prices did have a positive impact on the LIFO situation and on our total earnings for the quarter.

  • But, I think, it's also quite clear that declining prices have some very favorable impacts on all of our businesses.

  • If you're selling ethanol in comparison to your net corn costs, we're seeing the declining net corn cost coming in the next few quarters.

  • Corn has moved all the way from $3 back to $2, and we're buying it less than that in some of the interior locations.

  • Energy prices have remained firm, although oil is down somewhat from its peek record highs recently, but we still see good solid business in our bioproducts division.

  • We've got solid operations in oilseeds, and we've got big crops with some 11.5 billion bushels of corn in the fields coming into the elevators, and 3 billion bushels of soybeans, we've got some real opportunities here to maximize profits and agricultural services and bring our businesses together in a more affective way.

  • So, I think this quarter is continuing to reflect the strength of the asset base that we have around the world in the geographic distribution and the places in which we've invested our monies in the past few years.

  • On a replacement cost basis you couldn't begun to replicate what ADM has in its portfolio, and I think all of those have come together in this quarter to demonstrate some good solid results.

  • - Analyst

  • Great if I would just follow up.

  • In some respects a little like Pepsi Co, which discloses a lot, while Coke doesn't disclose much.

  • I mean, you're disclosing a lot in your segment data while your major competitor just has an agra business sector.

  • And, just to look at one area of the sweetener and starches, and I guess, you're kind of alluding to that it might get better when net corn costs get better, but I was a little surprised to see your sweetener and starch earnings down as much as they were, another competitive corn product seem to have better numbers in that area.

  • And, I thought your plants were largely co-gen plants where you weren't really hurt by energy.

  • If you could just go into a little more detail on the decline in that area?

  • And I guess your suggesting that it gets better.

  • If you just kind of reiterate that or give more details.

  • - Chairman, CEO

  • I think we're all in agreement that the prospect going forward for the next few quarters on the bioproducts side is very positive, because we do have those sales coming on stream that are reflected in the lower corn cost coming right to the bottom line.

  • In sweeteners, of course, the impact is your selling your materials on almost an annual basis to a large extent, and then to, in the course of having the substantial decline in your total corn costs you get an extremely significant amount of pressure on your net corn costs, because your bioproduct values all come down.

  • But, I think, going forward, we would see that the opportunities are there to make nice returns in sweeteners and starches as well.

  • The starch market has tightened up, as Brian pointed out, so, we're making better returns there.

  • And, I think the decline just simply shows that we're working through our higher inventories that came from the back periods.

  • We basically have an operating method of buying the corn somewhat in alignment with our selling of our products in order to hedge our exposures there, but in a declining market the impact will be different for corn products than it will be for ADM, but I think most of us are looking forward to some improvement in pricing in the coming season, and hopefully, better results as a consequence of our position in the energy markets.

  • We have 24 co-gen plants across our variety of businesses, and the big corn mills are all complimented by coal fired boilers that are operating with lower cost than what the natural gas prices have been.

  • But, in the last few months we have seen some significant increases in coal prices as well.

  • So, the energy will have an impact on our business all the way around.

  • We all need to see stronger pricing of our products in order to get the kinds of returns we should be making from the asset base that we have.

  • - Analyst

  • Thanks, Alan.

  • - Chairman, CEO

  • Your welcome, John.

  • Operator

  • Your next question comes from Todd [Lubrick] of Bank of America Securities.

  • - Analyst

  • Yes, good morning.

  • A couple of questions.

  • You were put on review for a possible downgrade by Moody's in June.

  • And a couple of the things they mentioned in there were, your debt protection measures were weak, this was just after you had the $400 million settlement on the price fixing case. and as I look at it. your debt protection measures. based on this strong performance. have improved dramatically. and I think you have told me in the past. that litigation risks going forward is much more limited and you're probably not going have a repeat of the settlement. although there's no way to really tell on that.

  • I'm wondering. first of all. what discussions you've had recently with Moody's specifically, if I'm correct on my remembering on the litigation risk going forward, and how you're credit rating, if at all, really affects your appetite for acquisitions in the near term.

  • - Chairman, CEO

  • Yes.

  • I'd like to comment briefly on that, and then, Doug, if you would like to comment on what meetings have been with S&P.

  • But, we have been to (indiscernible) through these NS&P's(ph) very recently, and we have an on going dialog with them.

  • They have had us on negative credit watch for some period of time.

  • And, we're hopeful that, perhaps, they'll see that our cash flows are strengthening, our businesses are in better condition, and they will review that rating.

  • We're expecting a review in the near future because both of them indicated they'd like to see how the results were on the September 30th quarter before they passed judgment on our ratings.

  • But, just to briefly comment on the litigation expense, we took those charges back in fiscal year 2004, and so they are finished.

  • And you'll find a dramatic change in the paper involved in the production of our 10-K's and 10-Q's in the future, because, the final settlement of that high (indiscernible) corn syrup case, at a cost of some 400 million pre-tax, and 252 million after-tax to ADM, really has really dramatically shifted our contingent liabilities in the legal area.

  • We no longer have any significant litigation exposures, those are finished and finalized, the judge has accepted in early September, the review and the settlement agreement that we reached, and that matter has been revolved entirely.

  • So, we not longer have substantial litigation lists.

  • We do have ongoing matters relating to Environmental Protection Agency issues, and those kind of events that occur on an ongoing basis when you have 250 plants on a worldwide scale.

  • But, from a litigation prospective, this is a new world for ADM.

  • And, there's a new feeling around here of entrepreneurialship and being freed up from the potential consequences of very adverse judgment coming out of the judicial system.

  • And so, I think it puts an entirely new focus from a management view point an how we can look at the free cash regenerating and how we invest it back in our businesses.

  • So, your point is very well taken, we're expecting to have some positive reviews from Moody's and Standard and Poor's soon.

  • And, with that, Doug, do you have comments you'd like to add?

  • - CFO, SVP

  • I don't really have anything to add.

  • I think what Al said is correct.

  • We've met with both agencies this past quarter, and definitely, our debt coverages have improved this quarter over June 30th, and we continue to work with them closely, and wait for their response.

  • - Analyst

  • Okay, thank you very much.

  • - Chairman, CEO

  • Your welcome.

  • Operator

  • Your next question comes from David Nelson with Credit Suisse.

  • - Analyst

  • I noted you said China was still negative in the quarter, could you say how much?

  • - CFO, SVP

  • I think we just characterized it as small or negligible, but it wasn't a lot.

  • - Analyst

  • Cocoa seems to be continually improving, could you comment on what's going on there, is it just industry rationalization and people aren't, well, acting irrational anymore, it if you could elaborate on that, please?

  • - Chairman, CEO

  • I think that, certainly, is part of it, David, and we continue to move up the value chain in this business, move closer to our customers, and are therefore able to capture more of the value that's generated through the whole chain.

  • You know, there's been -- we've worked hard at rationalizing our business, improving the efficiencies, coordinating our world wide operations, and I think we're just seeing the results of all of those efforts.

  • - Analyst

  • Congress passed a tax law, I think it was last week, and there were a couple things in there that may effect you.

  • One was shifting some of the tax benefits from exporters to manufacturers, if you could comment on what the net effect might be of that on you, please?

  • And, then, also there were new incentives for biodiesel in that.

  • Could you comment on that, please?

  • - CFO, SVP

  • I'll comment on that.

  • David, this is Doug.

  • Of course, that was passed by the President.

  • We continue to review that bill and will be monitoring the related regulations with more (inaudible) ultimately be issued by IRS, establishing rules and interpretations of the bill, with respect to the manufacturers credit, and related allocation of cost factor.

  • Our best guesstimates at this time is that the new law with the phase out of ETI, and phasing in of the manufacturers credit over the next 5-7 years, will result in an increase in our affective rate.

  • However, this is phased in from calendar '05 to 2010.

  • We feel, right now, that the impact on calendar year 2005 will be fairly (indiscernible), maybe in the half percent range on our effective rates.

  • Also in that law, of course you recall, there's a repaid creation of foreign earning, that I pointed also, we're looking at that jurisdiction by jurisdiction but we don't see a huge benefit right now for us in that area because we've got a pretty good system in place for moving our cash on a global basis.

  • With that I'll let Brian, maybe, speak to the biodiesel part.

  • - SVP Corporate Affairs

  • Yes, the recently passed energy legislation that was signed by the President, as you pointed out, did contain some biodiesel provisions.

  • And, this will supplement some state provisions, some states in the midwest that have, already, biodiesel programs.

  • So, I think we see some businesses developing in certain midwestern states, where the states also are supporting the production of biodiesel.

  • These states are basically in the midwest.

  • This certainly should improve significantly the demand for soybean oil in the U.S.

  • And we're looking forward to it, we think it will help margins.

  • - Chairman, CEO

  • David, this is Al.

  • If I just may comment on biodiesel.

  • The high energy prices have really created a most interesting opportunity for ADM.

  • We have very very large corn mills, and very low cost production of starches, and all across the board we're looking at a lot of alternatives.

  • And we're very optimistic about the possibilities for ADMs growth over the coming years as we move from a very highly dependent hydro-carbon environment to one where carbohydrates might be used for a number of different applications.

  • Biodiesel has really shifted the base, as Brian pointed out, it's 50% of our production now of our rapeseed crop in our factories in Europe, and it really has great potential.

  • If we can get the right kind of support from local governments, and from state governments, to get this commodity off the ground.

  • We have a joint-venture with Volkswagen, in which we attempting to find ways to implement a movement towards the use of more diesel fuel in the car and automobile population in the United States.

  • And so, there are a number of very exciting alternatives for us there, so, I just wanted to comment it.

  • - Analyst

  • So, you would expect to take your biodiesel manufacturing, or processing technology from Germany and doing that processing in the states as well now?

  • - Chairman, CEO

  • Yes.

  • We have all of the technology we need to do this business, and we have a lot of experience, we're the largest producer in Europe of this commodity, and it's used there in a very effective way.

  • There's legislation in place in Europe to increase the use of biodiesel.

  • It's a clean burning fuel, and it's a low cost fuel that really has great opportunities, if it's not burdened with the same kinds of tax legislation that, typically, would be applicable to the kinds of energy sources that are being used.

  • That's the way in which it has been effectively implemented in Europe, and we're look for some similar kinds of incentives here in the United States.

  • - Analyst

  • Thank you very much.

  • - Chairman, CEO

  • Thank you David.

  • Operator

  • Your next question comes from Christine McCracken with FTN Midwest Research.

  • - Analyst

  • Just wanted to follow up on John's questions relative to the (indiscernible) outlook, you mentioned that you were look for pricing this year, and yet you're looking at a pretty favorable net corn environment moving forward, is it still your expect that you get pricing?

  • You said that.

  • I'd be a bit surprised if you got significant pricing.

  • Is it something that you expect to kind of incremental, but not too significant.

  • Could you comment on that?

  • - Chairman, CEO

  • Well let me just make a comment about this whole area, Christine, because there's always considerable question about ADM's situation and the asset base that we have.

  • I just wanted to point out, if you look at your corn processing segment, we're making returns of somewhere around 20% on your depreciated fixed investments in this business.

  • And, then we've got charges to cover our unallocated corporate costs, so, our returns are down, maybe down to around 15%.

  • And then on an after tax basis you're looking at returns not much excess of 10%, so, on a replacement cost basis, as we continue to find needs for the starch from our wet corn mills, and the need for more wet corn milling capacity, and as we move to a carbohydrate driven environment for amino acids and for fuels and for other uses, there's no incentive for anyone to build a wet corn mill.

  • It's the kinds of returns we're getting in this business.

  • So, if your in the low single digit returns, people don't invest capital, and, so, from that view point I think we're in a very fortunate position, we've got a lot of technology coming on board and we're very optimistic about the future of the wet corn milling business.

  • But, if you just take specifically the fructose industry, we're not making the kind of the returns that we would expect to make on investment of our capital and we would not add to our grind in order to increase our fructose production where it's needed, because there's plenty of capacity, and not a good enough return at the kind of price you were able to generate.

  • - Analyst

  • Well, given that your somewhat, it seems like, disappointed with the results in that business, could you take the (inaudible) to possibly shutter some capacity?

  • - Chairman, CEO

  • We're not planning to shutter any capacity right now.

  • What we're trying to do is develop the businesses that will allow us to maximize the grind to utilize our capacity.

  • And currently with the demand the way it is for ethanol we're in a very strong position to run our mills at high rates of capacity.

  • - Analyst

  • Fair enough.

  • And secondly on Dave's question relative to the cocoa outlook, there's been a lot of disruption in the past couple months in this region, and it's seems like it's always in a state of disarray, and yet you continue to put up really strong results in your cocoa business, is it your expectation, given the economic importance of that operation, that, in fact ,despite this disruption you won't see any real impact on your bottom line.

  • - Chairman, CEO

  • Are you referring to the Ivory Coast?

  • - Analyst

  • Sure.

  • - Chairman, CEO

  • Well you are correct.

  • There have been periodic disruptions in the supply there.

  • I think there was recently a strike by the farmers in delivering cocoa, but that was quickly resolved.

  • I guess all we can say is that we don't expect it will.

  • So far we've been able to manage our business very well, in spite of these challenges in the ivory coast, and we continue to have adequate supplies, we haven't had any disruptions in our availability of raw materials, and our operations have performed well.

  • I can't predict, obviously, what's going to happen there, but, so far I think we've been able to manage it very well.

  • - SVP Corporate Affairs

  • Christine, the cocoa business in the Ivory Coast, in that region of west Africa, about 60% of the crop is produced and the 40% is processed Ivory Coast alone.

  • So, if those individuals of people who are there in the political process, and in the economic process, want to continue to generate the cash flows that really stimulate their economy and create jobs, they have to allow the free flow of those beans from the Ivory Coast.

  • So, there are many reasons why we've been able to continue our businesses on a relatively sound basis, despite the fact that there are some political and social conditions over there that needs to probably be looked at very closely.

  • But, so far we're optimistic, everyone seems to be interested in not destroying the economy of the region and having job losses, and stopping the flow of economic investment, in that region ,so that's operated to our favor.

  • And our broad diversification across the world in the cocoa business means that we're looking for other areas for better origination all at the same time to reduce our dependents there, and we've got factories from South America to North America, into Europe and China, and in Africa itself, and so we're very geographically diversified and able to take advantage of raw material wherever we can find them in the world.

  • - Analyst

  • And, then briefly, just on the decline of private equity funds, earnings from private equity, is this something kind of a sustainable level that you see going forward, or is it hard to predict?

  • - SVP Corporate Affairs

  • I'd say it's impossible to predict.

  • I think we initially put in a little over a billion dollars into those investments to get ourselves postured properly across the world.

  • Since that time, almost 10 years has past since the original investments and most of them have a 10 year life.

  • Our investment now is down to approximately 400 million, and we expect that to continue to go down, over the coming next year or two it should come down quite significantly as those funds come back in, and we do have optimism as they finalize their funds and work themselves into either IPOs or sales of their businesses, to either ourselves or other parties on the outside, that we may see some contribution from that area of our investments.

  • We've been as conservative as we could be because there have been a lot of problems with the economies around the world, and we're not pessimistic about the results that we see coming out of the last 400.

  • - Analyst

  • Thank you.

  • - SVP Corporate Affairs

  • Your welcome.

  • Operator

  • Your next question comes from Eric Katzman with Deutsche Bank Securities.

  • - Analyst

  • Good morning.

  • A few questions.

  • Al, you kind of answered one of the main questions I was going to ask, which was about the operating margin that you put out regarding the corn processing business, and I guess, you know, I understand your explanation as to why an after tax return of 10% or so is not sufficient, but that brings into the question, why then in other divisions could you be anywhere even close to contankers(ph).

  • If you do the same math across the rest of the business and you allocate the corporate costs accordingly, you not -- you're nowhere close in the others.

  • Do you understand what I'm saying?

  • - Chairman, CEO

  • I understand what you're saying, but I don't think the facts will bear that out.

  • The truth is we have very low cost basis in oilseeds, and wheat processing, and also in cocoa our costs are not so high, and I think if you run the numbers across the rest of the businesses, you'll find that your statement is really not factually correct, and we do have better runs on invested capital in some of the businesses other than corn sweeteners.

  • - CFO, SVP

  • Doug.

  • - Analyst

  • I mean --

  • - Chairman, CEO

  • Doug, do you want --

  • - CFO, SVP

  • Eric ,I'll just comment.

  • If you look down the road, whether you look at oilseeds, Ag services, et cetera, they're running at an operating profit return rate right now.

  • A little higher, prehaps, than the corn.

  • - Analyst

  • But according to what documents?

  • Certainly not if you look in the annual.

  • If you look in the annual pre-corporate expense, the corn processing division is earning mid teens.

  • - CFO, SVP

  • That is last year.

  • - Analyst

  • Right.

  • And, if you compare that to any of the other divisions, I mean, it's well above any of the other divisions.

  • - CFO, SVP

  • When you say mid teens you're not talking return off of our fixed investments?

  • - Analyst

  • No.

  • I'm just talking on an operating margin basis.

  • Maybe, that's just completely the wrong way to look at it, but then again, that's the only way we, on the outside, have a modeling of the Company, to the extent we even try.

  • - CFO, SVP

  • Well, to look at off of sales you've got a couple of factors that affect you a lot, and that's just a price value of crops.

  • The return off the $3 bushel of corn is a heck of a lot different than the $2 bushel of corn.

  • I don't think you can really go on that, you have to look at your fixed investment base, which we provide that information in the meetings that we've had here.

  • - Chairman, CEO

  • We've got, for example, in oilseed processing and in corn processing, about similar kinds of investments, and of course, the sales are entirely different because we're crushing 100,000 tons a day of oilseed, and only 50,000 of corn, and the price of corn is $2 and the price of soybeans is $5 you just can't look at it that way, you need to look at the investment of our capital, how we put it to work, what our costs are and fixed assets, and then what we do is we charge each of the divisions for their working capital needs, as they use them, and then they have to operate based on margins and trying to find returns on the invested capital.

  • So, that's the way we look at it, and that's why we have put so much emphasize over the past several years on understanding the fact that we've got about 5.2 billion of asset on our balance sheet, but the replacement cost would be substantially greater than that.

  • And what we see in the shareholder equity value is a very conservative estimate of what that base is here.

  • And so, we think we have substantial earnings capacity, which has begun to be reflected in the last couple of years's result.

  • - Analyst

  • When you go to the Coke and Pepsi's of the world to negotiate HFCS(ph) pricing you don't lead with this, you lead with the calculation off of fixed assets or something like that?

  • - Chairman, CEO

  • They know all of our costs from top to bottom, they start at the top line, they understand what it would cost to construct a factory, they have extensive knowledge of our business because it's such an important factor in the production of Pepsi and Coca-Cola.

  • We don't have any doubt, but they have a very good idea of our volumes, of our costs, of our plant costs on our books, and how we operate, and then when we come together we try to achieve some kind of a price for the coming year that would reflect a fair evaluation of those assets in the marketplace, so that we continue to operate them and produce the products that they need.

  • - Analyst

  • Just a few more questions.

  • One, Doug can you give us, I think I ask this every quarter, but just a few like some of the data points that we can kind of get a fix on capital expenditures for the full year,interest expense, share count, I think you already told the tax rate might move up a little bit?

  • - CFO, SVP

  • We would expect the tax rate will move up more like in the second half, because we're still on full ETI for this calendar year.

  • Our interest expense, assuming our commodity price declines stick for the whole fiscal year, we would expect those to reduce over the year, our interest costs, as far as share, you know ,we shouldn't see a lot of movement unless there's any share repurchase along the way, we do issue some shares every quarter in relation to benefit plans, so there's some that go out in that fashion.

  • - Analyst

  • Cap ex,?

  • - CFO, SVP

  • CapEx we still are in the 5 -- 550 range on just our norm.

  • We have some projects that we're looking at that could easily move that up this year, so we would expect that might move up over that level into the 6-650 range, possibly.

  • - Analyst

  • This last point and then I'll pass it on.

  • There's a lot of speculation out there about the economy in China, I don't think I'm going to get John's report, but maybe you could give us a heads up about what you see with that economy, is that, you know, are they slowing it down, is it picking up, is it stable, and how is that generally affecting the demand for your bi-products, and for I guess, protein -- meat based protein as well?

  • - Chairman, CEO

  • There's solid demand in China.

  • The growth continues, as you know, from economic numbers at around the 9% level this last year, and we went through aberrations in terms of our own industry and how it was affected in China from a couple of different view points.

  • One was the dramatic increase in prices of oilseed in the world market last year, and the consequent impact on demand there as a result of high prices of both oilseeds and freight to transport the beans there to make the products.

  • So, the economic side was under some pressure last year, and that was complemented by the outbreak of Avian Influenza, among some of the poultry heards.

  • And, so, we lost demand last year and production levels went down to low levels.

  • But I think going forward, and what we see right now, as a result of the defaults, which were caused by all of these economic events, there have been some rationalizations, there is less ability on the part of our competitors to function in that marketplace, but with prices down around half of where they were last year for oilseeds, and the freight market somewhat moderating, there is business being done again, demand it picking up, as Brian pointed out ,our factories are running in excess of 80% of capacity now there, which is volumes greater than we did last year, and, therefore, they're functioning at very strong levels.

  • We built those plants to look forward a few years, and we're using them at a level that we really thought would not be likely this early in our careers.

  • So, we're happy to see the results there.

  • We have strong operating margins currently because of the lack of local clusters who went into default on their contracts, to be able to come up with the financial resources to continue their operations.

  • So, we're seeing growing market, growing demand for meal in the region, and oil is always strong in -- the vegetable oil markets are always strong in China, because they're net importers of vegetable oils, and so, we're very enthusiastic and optimistic about China as an on going part of our global origination, transportation and property systems in order to meet the demand of the growing numbers of people in China that are moving off the farms into the cities, and including some meat in their diets for their protein.

  • - Analyst

  • Thank you,.

  • Operator

  • Your next question comes from Ken Zaslow with Harris Nesbitt.

  • - Analyst

  • Good morning, guys.

  • - Chairman, CEO

  • Good morning.

  • - Analyst

  • Just to add onto Eric's question on China.

  • To what extent will your JV benefit from the lower prices of soybeans from last quarter in China?

  • I'm assuming they will probably be buying from you guys who incurred a little bit of loss in your pricing in China beans, is that not the case?

  • - Chairman, CEO

  • We, last year had some losses from the defaults in the Chinese marketplace, and the reduced prices will certainly create better demand in China now for poultry and pork than there was previously , so this is quite an encouraging development.

  • But we sell a substantial portion of the oilseeds, and deliver them to China and to our factories but we also buy from the outside world as well.

  • So, we're a substantial part of their delivery systems, and they did not default on their contract, our joint-venture operations there did not default on their contracts to us, so we worked through all of this period, and that's why the results are still about break even, although, there's a slight loss in Asia this past quarter.

  • The results are very close to break even, and we expect them to return to more profitability, and to be contributing strongly to our overall global network in the coming quarters, in the next quarter, and the following quarter.

  • - Analyst

  • Okay.

  • Another question.

  • What is your ability to pass on higher cocoa prices when there are production disruptions?

  • I'm under the impression that you can do a fair amount of tacking on, is that not the case?

  • - CFO, SVP

  • I'm sorry, could you repeat the question?

  • - Analyst

  • What is your ability to pass on high cocoa prices when there are production disruptions in the Ivory Coast?

  • - SVP Corporate Affairs

  • I guess, all I can say about that is it's butter.

  • Cocoa butter tends to attract bean prices, bean prices go up we can pass on those higher prices in Cocoa butter prices pretty directly.

  • - Chairman, CEO

  • So, the actual pricing of cocoa and disruptions in Ivory Coast are not a significant factor to you, as you can pass on that pricing?

  • Is what I'm trying to get at.

  • The disruptions in the Ivory Coast, and any resulting higher prices have not had an adverse affect on our operations.

  • - CFO, SVP

  • We have had substantial fluctuations in cocoa bean prices, but margins have remained relatively strong, and relatively solid, without great variation over the past year or so.

  • And I think that's probably the important thing, Ken to recognize.

  • And that means that we do have considerable ability to pass on the additional costs to the chocolate manufacturers as -- or to benefit to them from lower costs.

  • So both ways they're in the same business that we're in, looking for effective, efficient operations that's can deliver the ingredients they need for their chocolate operations at good prices on a global base.

  • - Analyst

  • Okay.

  • My last question is, you generated substantial net free cash flow, and you said ADM is free from the high fructose litigation risk.

  • What are your plans for your free cash flow and why not institute a repurchase plan?

  • - Chairman, CEO

  • We've had a purchase plan for a number of years, and we've bought back very few shares in the last 6-8 months, primarily because we're nearing the trial dates on the high fructose litigation, and we are interested in keeping our liquidity strong.

  • Also, we had very high oilseed prices and very high inventory costs, and so our short term debt was very strong.

  • So, we have not, in the last short period of time been repurchasing, but we have a plan in place that still authorizes us to repurchase shares, we're reviewing that situation on a daily basis, and we certainly have much greater degree of freedom to make that decision, and to decide where we go with our cash flows, given the relief from the litigation challenges that we faced over the last 10 years.

  • The answer to the question is that we are reviewing it, we're considering it and we're looking at it in the prospective of what is the best utilization of our cash?

  • We have a very strong balance sheet, and we have to evaluate all of the investment opportunities might be, including repurchase of shares, repurchase of debt, mergers and acquisitions, and investments in our existing facilities, and so, over the last five years or so, we have consistently kept about a 10% growth rate to our cash dividend, and so that will be the case again this year, we'll review cash dividend on a quarterly basis with our board of directors.

  • So, all of these alternatives are open, and we do have, clearly, more freedom than we had previously.

  • - Analyst

  • From that can I assume you will be more actively repurchasing your shares going forward, although, you haven't?

  • Is that how I should reed what you just said?

  • - SVP Corporate Affairs

  • We have more freedom to do that, but, if we find good opportunities to reinvest our capital we would rather do that than we would buying our stock, because we need a lot of capital in this business, and we need to continue to our growth.

  • And so it's only a question of where it can be most effectively applied.

  • - Analyst

  • Thank you,.

  • Operator

  • Your next question comes from Leonard Tietelbaum with Merrill Lynch.

  • - Analyst

  • Good morning, get the word to John, tell him he can come home, all is forgiven.

  • By the time he does the food will be cold anyway.

  • Let me check out a couple of things here.n Number one, as we start to go forward for this year, I can't believe your corn costs aren't going to be better this year than they were last year, is that a fair assumption?

  • - Chairman, CEO

  • Yes, it is.

  • Given this current circumstances, our corn cost are coming down on a daily basis, and they'll be less going forward than they are today.

  • - Analyst

  • You're also going to enter the period of time where you're going to start to contract for ethanol, I'm guessing it will 50% contracted 4 for '05 and 50% float somewhere around in there.

  • Given where gas is today, and even if it were to start to come off here.

  • Those that you contract with, why wouldn't we have significantly higher contracted prices in ethanol in '05 than we did in '04?

  • - SVP Corporate Affairs

  • Well, I think we should.

  • And if the look at where the gasoline price and the projections for oil, and so forth, I think that we should.

  • But looking forward, we've had over the next few quarters, we've had a very active contracting period of time for ethanol and I think that saying 50% contracted, if you look forward that's really quite low, Lenny.

  • - Analyst

  • My next question are you booking more than 50%?

  • I think you said yes.

  • - SVP Corporate Affairs

  • Yes.

  • - Analyst

  • And I'm trying to -- obviously, leading to comparisons, I'm leaving the LIFO charge for last, but if we get the highway built through before the end of the year, does that impact you, or I can't see where it impacts you earning wise all that much, via vie ethanol because you ought to be contacted for, or through, by the time that gets passed, isn't that correct?

  • - SVP Corporate Affairs

  • Yes, Lenny, that is correct.

  • The highway bill was the shift in taking the cost of the ethenol provisions off of the highway"s load, has already been accomplished and it's law.

  • And, so that's in place, the thing that's really effecting the ethanol market is the question of supply and demand, and we've got increasing number of plants coming on stream, and we've got capacity utilization at very good levels now, but we're building some inventories, in anticipation of new markets that are opening up, and so it's always a question of how much of the advantage is passed to the oil companies, or how much we're able to retain in the pricing of the ethanol going forward.

  • But, your basic premise is absolutely correct.

  • The highway bill provision will not have a great deal of impact on us, but the higher costs of our contracts going forward should benefit the Company in the coming quarters as a result of lower net corn costs to deliver against those contracts.

  • - Analyst

  • I'm also going to suspect that barge tariffs have moved up, which ought to accrue to your benefit also, right?

  • - CFO, SVP

  • That's correct.

  • - Analyst

  • Your storage income has got to be up because we've got more things to store is it about as simple as that?

  • - CFO, SVP

  • That's it, Lenny.

  • - Analyst

  • Keep it simple for me, anyway.

  • I guess the point I'm trying to get, obviously, and also now let me switch to LIFO charges for a moment.

  • If the bulk of the commodity differential has already been recognized, and assume that we, work with me on this.

  • Maybe we see prices down on a market basis, maybe another 5% or so, and if it is more it's more, but let's say around 5%, but most of the LIFO charges, or the LIFO swing, should already have been accomplished at this level.

  • Is that right?

  • - CFO, SVP

  • That is correct, Lenny.

  • - Analyst

  • I guess what I'm trying to do is, I start to go through, I can't remember who asked it whether it was David or John.

  • But, it would seem to me, as we start to go through it, from an operating income point of view, we should do better in the succeeding quarters.

  • Let's take out the corporate charge first.

  • We should be doing better just from what you've told me, as we start to get into the second, third, and fourth quarter, that would seem to be the math. (indiscernible) got to be up because tariffs are up, we've gotta get better corn, because my net corn costs are coming down, wheat is what wheat is, but oilseeds, even if they're only the same I still have to have better operating income.

  • What have a missed in here?

  • - CFO, SVP

  • Couple of things, Lenny.

  • Let me just mention, on the LIFO we've got about 18 million left of reserve, on LIFO, if it comes all the way down that would still come in over some period.

  • - Analyst

  • $18 million isn't going to move.

  • - CFO, SVP

  • No it's not.

  • The other thing, on Ag services, you recall last year second and third quarter were extremely strong in our global merchandising group.

  • So, whether that is repeated is questionable, given the market conditions today, hopefully, it will, but we can't predict that.

  • So, that might be when you say that's got to be up year-over-year, not necessarily.

  • - Analyst

  • You're only up $8 million in the first quarter.

  • I mean even if it runs around 5 to 6 million, you're not going to change the 50 million a quarter all that much.

  • Was my understanding.

  • - CFO, SVP

  • Yes, I hear what you're saying.

  • - Analyst

  • All right, so I guess when we come down to it then, if they annualize this on an operating basis, again, we're not talking about LIFO or anything else like that, add it back in, we ought to get some kind, directionally, and magnitude as to what we should expect this year, right?

  • I am just trying to figure out where the soft spots are, and, frankly, I think you've got it locked down pretty good for this year.

  • I'm looking at this in a broad brush, but that's what it looks like to me.

  • Have I overestimated anything here?

  • - Chairman, CEO

  • I think you're looking at it correctly, Lenny.

  • We're optimistic that there is good promise for solid performance in the coming quarters, and our profits will come from perhaps different areas than they came from last year, and that's the nature of our business, we always have shifts in supply and demand, and shifts in the operating margin environment, which we're putting our assets to use, but we're quite optimistic in a number of areas in our business, going forward has real promise if we don't see a substantial shift in either the prices of raw materials, as a result of some kind of a problem with the weather in South America, which currently does not appear to be the case, or some dramatic changes in the energy area.

  • And, in those cases, they could have a shift and a change in our business, but our outlook is quite strong today for the next coming couple of quarters, based on the economics of our businesses.

  • - Analyst

  • One final thing, excuse me, and you just remind me I forgot to ask this, on the HFCS, if prices, even if prices were to stay flat versus last year, wouldn't the drop in corn cost have a tendency to expanded the margins rather noticeably.

  • - Chairman, CEO

  • I don't know about rather noticeably, but, it is true, that the lower net corn cost will impact more favorably if you look at the business from that view point.

  • We do have higher energy costs, and there are some customers that we have who are buying on a basis of us manufacturing for them on toll, and so it will have certain impacts, but your general overall assumptions are correct.

  • - Analyst

  • Thank you very much.

  • I have a couple more, but I'll follow up while I'm flying.

  • Just a hell of a good quarter.

  • Thank you very kindly.

  • Thanks, Lenny, for your comments, we appreciate it.

  • Operator

  • Next questions come from David Driscoll with Smith Barney Citigroup.

  • - Analyst

  • Congratulations on a nice quarter.

  • Wanted to ask a few questions to Doug, on the LIFO inventory.

  • I know it's been asked a number of times, but just to make sure I'm really clear on this.

  • Doug, should we consider the 116 million as a one time item for modelling purposes?

  • I know for accounting purposes that would not be true, or for first call, but, just for modelling purposes, if we go forward, should we consider the 116 that happened this quarter is the issue of what commodity prices did, and, that's it, it just happens here?

  • - CFO, SVP

  • You've got to model it how you want to model it, but you've got to really look at it.

  • What came in last year as a charge came back out this year as income as prices move up and down.

  • I mean, it's a relatively simple calculation when the prices move like that, because the quantities don't move that significantly, it's more or less the price.

  • - Analyst

  • I'm referring to going forward rather than looking backward.

  • I agree with you that you could take the 116 and add it back to fiscal '04, and say that that was truly operations.

  • But, if I look at 1Q '06, there is no particular reason why I would want to use this number in my thinking for that quarter, because, it would all depend on what prices do at that time?

  • - CFO, SVP

  • That is correct you'd have to be able to produce -- you'd have to actually predict what those prices are going to be.

  • - Chairman, CEO

  • There is no way to model the LIFO going forward.

  • - Analyst

  • Fair enough, I wanted to be clear on how to think about the quarter and going forward.

  • Also, kind of related to this very topic, in the past, Doug, when you and I have talked, I thought one of the things you've always tried to tell me was that, profits can move around on the segment disclosure line.

  • That you can have oilseed profits down like they were in the fourth quarter, and then you can have offsets in other places, but it's related, it's hard to draw the line where the business ends, but although we do, because we have specific segments.

  • Is that first statement correct?

  • - CFO, SVP

  • I guess what I said was, it's more likely that segment profits move around that's what the whole reason in the way our business is built because we have strengths in various components across all those segments.

  • Sometimes, some of the segments aren't operating as well, and the others pick up and make the difference and come through.

  • So, I think, I mean that's what I'm really what I was saying.

  • - Analyst

  • Let me try and clarify.

  • I suppose what I mean here is that in oilseeds, for instance, when you're crushing business, you showed in a fourth quarter a negative result, that is when, when we looked at Bungees results guidance, we don't get the same comparisons, it doesn't look at all similar it's difficult to interpret what's going on between the two companies, because, generally I consider both businesses have global franchises.

  • So, it's not intuitive to me that I should see vastly different results at the two companies.

  • So then the fourth quarter results from last year, were very difficult because you showed effectively almost minus $15 million, but your corporate was only minus 25 million.

  • So, what I'm trying to say here, Doug, is I'm not trying to go to completely different business lines, yet the integration between your oilseed, your Ag services, and corporate your expense and how those are reflected on the accounting statements.

  • - CFO, SVP

  • One thing I think you have to look if you're comparing to anybody, you have to look at our Ag business, our Ag service group, along with our oilseeds group to put it in an Ag business group.

  • - Analyst

  • Right because you're saying thats the way the Bungee guys do it because the profits can bounce around some places, and this is my entire point, the whole question here is, that Ag services can show profits that are almost a function of, you know, it's the black box model, you guys make money wherever you can, and the profits move from, sometimes into crushing and sometimes in logistics.

  • - CFO, SVP

  • I think we all do that.

  • It's just how you combine, and how your report them.

  • We report the Ag services group separately.

  • - Chairman, CEO

  • David, the last quarter, the end of 2004, on a comparable basis, I think that you might have seen the same kind of results from Bungee, as you did from us, if you included all of the appropriate categories into the same calculation.

  • Bungee has food oil, vegetable oils divisions, and then they have an Ag business division, and our vegetable oils and refineries are part of our entire operation, and we have significant transportation assets and agricultural services assets that are complimentary to, and an integral part of the operations of our Agra business group.

  • We used to, many years ago, report as an Agra business, but we thought the clarity would be useful, not only to the industry, but also useful to the marketplace and to our investors if we gave you a little more detail to break out our businesses in different segments. so, that's why we have done this and more recently with the move in corn, we have really attempted to clarify your job of being able to look independently at various parts of our business, for example, ethanol and bioproducts, as opposed to sweeteners and starches and perhaps make better models as to what you see going forward.

  • - Analyst

  • I, of course, would never want to send the message that more disclosure is bad, the key, to me, is trying to model it out, the oilseed processing line has been all over the place.

  • You know, one quarter to $120 million, the next quarter it's minus 15 million, you know, that volatility presents a great deal of modelling challenges.

  • - Chairman, CEO

  • We actually have had fairly consistent results in oilseeds, over a period of years, with the exception of the fact that we have Chinese default, that did radically impact our results globally in the last quarter of last year, but that's an explainable event that you can understand when you're modelling.

  • So we think more disclosure, obviously, will give you a view of more volatility, but the best of realities are the kinds of businesses we're in and, we're broadly diversified across the entire agricultural spectrum and we're broadly diversified geographically, and that gives us some real strength in this business that other competitors, who are in smaller lines of businesses would not necessarily enjoy.

  • - Analyst

  • If I moved over to ethanol for a moment, this business of course, I think it's been just a great business for you at this time, but, I believe that you've really not added any significant capacity.

  • So, Alan, I would ask you just to give us a little color around that, if the markets for ethanol are very good in growing, why doesn't ADM participate in the growth by adding new capacity?

  • - Chairman, CEO

  • We have a balance in our factories that matches up with our investment in the front end grind, so that we can produce products that our customers need, and there's no need, in today's current environment, for additional wet corn milling capacity, so we're not building any more wet corn mill.

  • If you want to be in the dry milling business, which we have small investment in, but some investment in, you can build mills that will not produce the same product varieties.

  • But it's really not the business that we're in, the farm Co-ops are doing that, and they're building lots of capacity to meet the additional demands, and we have some small investments in dry mills but it's a very limited amount compared to our investment in the wet corn milling business.

  • So, the decision would be made, do you really want to commit a lot of capital to a business that is totally different than the ones you are in?

  • We're in the food business, we're satisfying our customers needs, we're maximizing the are grind, and efficiencies of our operations by balancing out ethanol capacity with the rest of our starch utilization.

  • - Analyst

  • One, final question, kind of going back to Eric Katzman's question.

  • He, and I've done the same calculations, I think Eric was trying to get at when he was look can at the operating income margins of the different businesses using the new disclosure, and I think I understand, Eric was coming at it from the perspective that the corn division, and specifically your sweetener business, would look like in fiscal '03 as well as fiscal '04, it was posting some pretty good operating margin, and again, I'm just trying to make sure I understood your answer, your answer was that that business is still not earnings it's cost of capital, even with double digit operating margins, and the reason being is, because of exactly what?

  • Because, generally realize when we look at other food companies, when we see those double digit operating margins, you generally do, in fact, have returns that are above the cost of capital, That's not the case here, which I think is the source of my confusion and likely Eric's, as well.

  • - Chairman, CEO

  • I think you have to keep it all in prospective as to what you're looking for returns on invested capital.

  • If you're just going to look at gross margins on selling prices that's not the way to analyze our business.

  • You need to look at the investment in our asset base what businesses we're in and what kind of margins we're able to enjoy and what we're returning on our investment in those businesses.

  • The fact that gross sales and revenue figures do not translate on a percentage basis to the bottom line, is not key to operating our businesses.

  • - Analyst

  • Now, correct me if I'm wrong but segment operating income is not a gross profit measure, it is a measure of profits after SG&A and working capital charges have been allocated, which is why, I thought it was actually a good measure to use.

  • - CFO, SVP

  • It all boils back once again, it's a margin business, the margin that you make on a raw material product that's value at $2 a bushel, verses when you make the value of the $6 a bushel, the same margin can be made on both but the percentages are extremely different.

  • - Analyst

  • That's a fair point.

  • Okay.

  • Thanks.

  • - Chairman, CEO

  • Our finished product value what we're doing is running through our business operations 30 some billion dollars worth of revenues in order to bring a very small percentage to the bottom line, and that revenue figure, and the operating profit figures, will all reflect what's going on in the basic commodity values, because we passed through most of our original costs of raw material into the finished product.

  • - Analyst

  • Thanks a lot, I'll follow up offline.

  • Thanks everyone.

  • Operator

  • Question comes from Dave Nelson with Credit Suisse.

  • - Analyst

  • Hi, hate to extend this call any longer, but on your CapEx guidance for the full year, I thought I had remembered it was 500-550, then I heard 6-650.

  • Could you talk about why it's going up, are there any specific projects you could refer to, please?

  • - SVP Corporate Affairs

  • I think what I said, Dan, is, we still think that base is in that 5-550 level, we're looking at projects, so we could see that move up if some of those come to fruition.

  • I'm not saying that they will, but there are possibilities.

  • - Analyst

  • Could you disclose where you think you are expanding?

  • - SVP Corporate Affairs

  • We're continually expanding around the globe.

  • We're trying to keep up with the growth in the business, etc.

  • We're looking at logistics, procurement areas, we're looking at different things in the use of starch stream.

  • And some of those could come to fruition.

  • - Analyst

  • Thank you,.

  • Operator

  • At this time this are no further questions gentleman are there no closes remarks.

  • - Chairman, CEO

  • No thank you.

  • We're greatly appreciative for all of your interest.

  • Sorry to keep you so long today, but we're delighted to have your shareholder views on where the Company is headed, and what our prospects are for the future, and we thank you and look forward to see you at the termination of the next quarter.

  • Thank you.

  • Operator

  • This concludes today's conference you may now disconnect.