Archer-Daniels-Midland Co (ADM) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Archer Daniels Midland Company's Fourth Quarter 2005 Earnings Conference Call.

My name is Stephen and I will be your coordinator for today.

[Operator Instructions].

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Allen Andreas, Chairman and Chief Executive.

Please proceed sir.

Thank you Stephen.

Good morning everyone, welcome.

I am joined this morning by Doug Schmalz, our Chief Financial Officer, and Brian Peterson, Senior Vice President of Corporate Affairs.

We are going to give you first, financial overview of the numbers for the quarter and fiscal year.

And then, Brian will give you comments about our businesses and how they appeared over the last quarter and fiscal year.

With that I will turn it over to you, Doug.

Okay, thanks Al.

I just like to state that today's some of the comments that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results.

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

As reported, our results for the quarter ended June 30, 2005, were 195,484,000 or $0.30 a share that compared to a loss last year of 103,061,000 or $0.16 a share.

This year's quarter includes a loss on asset abandonments of 40 million that is 25 million after tax, $0.04 a share.

Last year's fourth quarter included fructose litigation settlement of $400 million to 252 million after tax or $0.39 per share and the loss on abandonment of various assets of 10 million or 6 million after tax equal to $0.01 per share.

We also had gains from sales of securities of 12 million, 8million after tax or $0.01 per share.

Our LIFO inventory valuations did result in a $21million, which is up 30 million after tax, $0.02 per share charge in the current year quarter that compared to income of 42 million, a 26 million after taxes equal to $0.04 a share last year.

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

Fiscal 2005 fourth quarter net sales and other operating income declined 3% to 9.4 billion, primarily due to the lower commodity values.

Our gross profits increased 4% to 524 million, due primarily to the improved operating profit of the oilseeds processing segment, partially offset by a decline in corn processing results due to declining lysine prices and increased energy costs.

In addition, the current year fourth quarter included a charge of 21 million from changes in commodity price levels on LIFO inventory valuations and the impairment charges of 40 million, while last year's quarter included the LIFO income of 42 million and impairment charges of 10 million.

Company wide selling, general and administrative expenses decreased 374 million to 279 million for the quarter, as last year's fourth quarter included the $400 million fructose litigation settlement.

Excluding that settlement, our SG&A expenses increased $26 million due primarily to the increased employee wage and benefit costs and increased accounting and auditing fees.

Our other income increased to income of $22 million from expense of $9 million a year ago.

Our interest expense was up slightly to $2 million to 85 million for the quarter, and our investment income increased 17 million to 44 million for the quarter.

There were no gains on marketable security transactions for the current year, compared to a gain last year for the quarter of 12 million, realized principally upon the acquisition of the our Steak and International Multifoods by the JM Smuckers Company.

Equity and earnings of unconsolidated affiliates increased 16 million to 55 million from 39 million last year due primarily to the increase in results of our Asian Oilseed joint ventures partially offset by reduced earnings of the private equity fund investments.

Our effective tax rate for the quarter is 27% compared to 35% last year.

For our full fiscal year 2005, our effective rate is 31% and is comparable to last year's effective rate.

The decline in the current quarter's rate results from the true-up to our annual effective tax rate and resulted from an increase in the geographic mix of earnings from lower tax jurisdictions, as well as larger than anticipated benefits from our extraterritorial income ETI exclusion.

Turning now to results of our operating segments, our total operating profit for the quarter increased 83 million to 351 million, from 268 million last year.

Our oilseed processing operating profits increased 89 million to 74 million for the quarter from a loss of 15 million, last year.

As you recall, Chinese contract defaults had a significant negative impact on global markets and on our oilseed operations last year.

This year's Asian operations have improved over prior-year level, and in Europe improved crop conditions and good bio diesel demand that resulted in improved operating results.

In addition, improved results in South America principally from origination operation, also contributed to the improved earnings for the quarter.

The current year quarter also reflects asset impairment charges of 13 million, compared to 1 million last year.

Our corn processing operating profits of $117 million for the quarter declined 33 million from $150 million last year, due primarily to lower lysine selling prices and increased energy costs partially offset by the positive impact of lower net corn costs.

Our operating profits of sweetener and starch products increased to 30 million to 92 million for the quarter, due primarily to increase sweetener and starch volumes and lower net corn costs partially offset by higher energy costs.

Our operating profits of bio-products decreased 63 million to 25 million for the quarter as increased energy costs and lower lysine selling prices more than offset the lower net corn costs.

In addition, the current year quarter for bio-products includes an impairment charge of $16 million.

The well-balanced nature of our agricultural services business resulted in operating profits of 68 million compared to 45 million last year, due to improved grain operations and transportation results.

Operating profit of the other segment increased 4 million to 92 million from 88 million last year due to improved results in both our food and feed ingredient and financial services operations.

Operating profit of food and feed ingredients increased $2 million to 60 million from 58 million last year as improved wheat milling and cocoa results were partially offset by reduced results of the natural health and nutrition operations, due to lower operating results of vitamin E and to marketing costs related to the rollout of Enova Oil by our joint venture.

Operating profits of the financial operations increased $2 million to 32 million as the improved results of our captive insurance operations in ADMIS were partially offset by a decrease in private equity fund valuations.

Corporate report us a charge of 84 million compared to a charge of 426 million last year, last year's fourth quarter included the $400 million fructose litigation settlement charge and LIFO income of 42 million compared to a LIFO charge of 21 million this year.

Last year's results also included a gain on sales of securities of 9 million.

Excluding these items, corporate results of 63 million this year were comparable to a $77 million charge last year.

I will now discuss more significant factors affecting our financial condition and cash flows.

During year ended June 30, 2005, our trade working capital declined 527 million to 5 billion at June 30, as readily marketable inventory levels decreased approximately $600 million from June 30, 2004 levels.

This decrease primarily reflects the impact of decreased commodity price levels.

Our readily marketable inventories have a carrying value at June 30 of approximately $2.6 billion.

The working capital decrease and positive cash flow from operations were used to reduce short-term debt by 1.3 billion to 426 million at June 30th of '05.

The Company's total interest bearing debt, short-term and long-term, as a percent of invested capital is 30% at June 30, 2005, that is a decline from June 30, 2004 levels of 39%.

Our cash flow from operations for the year ended June 30, 2005 equal to net earnings of 1,044,000 000 million plus depreciation and amortization of 665 million with a total of 1.7 billion.

This cash flow was used principally for capital expenditures of approximately 624 million, dividends of 209 million, stock repurchases of a 139 million, and to reduce debt levels.

Shares outstanding at June 30, 2005 were 150.4 million shares.

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

Good morning.

Starting with oilseeds, we had profits of $74 million for the fourth quarter 2005, versus a loss of 15 million for the fourth quarter of 2004.These results include a charge of 13 million on the write-down of closed North American crushing assets.

Operating results improved in South America, Europe, and Asia.

Regionally, we see the following.

In North America, crush margins were lethargic for most of the quarter.

We have however recently seen an improvement in crush market.

US industry, capacity utilization was approximately 80% in the fourth quarter, down from 87% in the third quarter.

Current projections are for US crop of approximately 2.9 billion bushels, compared to 3.1 billion bushels in 2004.

However, Soybean carryout from the 2004 crop is projected to be 290 million bushels.

In South America, our Brazilian operations improved versus last year.

However crushing margins continue to be unsatisfactory due to excess capacity in Brazil and Argentina.

Fertilizer sales are down compared to the year-ago period.

Current soybean planting intentions are similar to last year in South America.

Europe delivered solid results on the strength of soft seed crushing and refining as well as bio diesel operations.

The rapeseed crop is projected to be 15 million tons, providing good supplies for our operations.

Biodiesel demand continues to grow, and we're running our soft seed crushing plants at full capacity.

In Poland our crushing and refining operations enjoyed record results.

Our new crush plant in the Ukraine is up and running.

Currently the margin outlook for Ukrainian son seeds is very good.

Asia improved dramatically from last year although processing margins are still challenging.

Our capacity utilization remained slightly over 60% as capacity in China exceeds current demand levels.

Our plants are well positioned for the long-term growth of this important market, and we note that our global competitors are now acquiring processing assets in this region as well.

An effectively positioned Chinese asset base is critical to any long-term oilseed processing strategy.

Looking at refined and packaged oils, our global refining and packaging operations delivered solid earnings and we continue to expand this higher value piece of our business.

Our vegetable oil portfolio, including our Enova Lipid Enzymatic interesterification technology, is the most viable in the industry in meeting the needs of food manufacturers as they reformulate to meet the changing demands for more healthy products without trans or saturated fats.

Also, we're very proud of the EPA Green Chemistry award that were won by two of our innovative technologies, Archer RC and Noble Lipids.

Turning to the corn-processing segment, profits for the quarter were 117 million versus 150 million in the year-ago quarter.

Looking at the sweeteners and starch business, profits were 92 million, versus 62 million a year-ago.

In the bioproducts business, profits were 25 million versus 88 million a year ago.

These results include a 16 million impairment charge on technology and various fermentation assets in the bioproducts segment.

Current expectations are for a corn crop of 10.8 billion bushels, compared to 11.8 billion bushels last year.

This should still provide an ample supply when added to the 2.1 billion bushel corn carry out from 2004.

Looking at the sweeteners and starch business, despite higher freight and energy costs, year-over-year profits improved on higher sweetener and starch volumes, higher starch prices, and lower net corn costs.

Sweetener and starch profits were aided by a tightening industry supply.

In bioproducts, year-over-year profits were down primarily to lower lysine selling products.

We remain optimistic about the long-term opportunities for lysine, as increasing volumes will be needed to provide amino acid supplementation to the growing production of distillers grains produced by the dry mill Ethanol production.

Ethanol profits were up in the quarter on comparable volumes.

A few comments on the ethanol market.

Spot prices of Ethanol last quarter were as low at our $1.15 per gallon, although the current spot prices in the $1.75 per gallon range.

Although we sell very little volume at spot prices, as they do give a sense of the market environment.

A number of distributors responded to the low market prices for Ethanol last quarter, by installing equipment necessary to blend ethanol into their formulations.

But this expanded infrastructure in place, we see no reason why ethanol demand should not continue to grow.

Even at $1.75 per gallon, the net cost of ethanol to a blender is very attractive relative to today's gasoline prices.

Our ethanol contracts typically run 6 months, starting in April and October, and we are contracted through September.

As the spot ethanol market rose last quarter, we had interest from several of our large customers to contract for the October-April period and have already booked a significant volume of our capacity at prices comparable to our current contracts.

In light of strong dynamics for ethanol, the prospects for the continued high petroleum prices and expectations of a renewable fuel bill, we're continuing to evaluate potential opportunities to invest in dry milling ethanol capacity.

We're also partnering with select existing dry milling operations through marketing agreements in order to provide better service to our customer base.

We continue to develop projects that can improve the profitability of our wet corn milling assets.

Today high prices of oil causes economics of starch-derived products to be very attractive relative to petroleum based products.

One of these opportunities is our joint venture with Metabolix to produce biodegradable plastics.

Development of this project is on schedule and results to date are very promising.

Turning to the agricultural services sector.

Profits were 68 million versus 45 million in the year-ago period.

Ag services improved this quarter as we saw solid performances in grain origination, destination business, port facilities, storage and transportation across our global network.

The tight rail, truck, and barge markets continue to give us challenges and opportunities.

We have the challenges of meeting our customers' delivery requirements, but we also opportunities to create value from our unsurpassed logistics infrastructure.

As our last 2 years demonstrate, with short-crop supplies and ample crop supplies, ADM's diverse operations are positioned to capture value across our balance origination, storage transportation and worldwide merchandising operations.

Commenting on the other segment, profits year were 99 million, versus 88 million in the year-ago period.

The food ingredients businesses were 60 million versus 58million and financial was 32 million, versus 30 million.

These results in the other sector include write down of 11 million on asset impairment.

Looking at the wheat business, wheat results improved versus last year and slightly higher volumes.

Industry capacity utilization is approximately 82%, which is typical for this time of year.

Current wheat crop is at comparable quality, with the winter wheat better quality than last year, which should bode well for plant efficiencies as we start at seasonal demand peak.

In the cocoa business, cocoa results improved in the quarter and this business continues to generate solid returns.

We anticipate continued strong results from cocoa as we expand our finished and semi-finished chocolate production to meet the growing demands of our customers.

In the other food and feed ingredient operations, earnings here also improved from last year based on improved performance of our special improved ingredients operations.

Stephen we are now prepared to take questions from the listeners.

[Operator Instructions].

Our first question comes from Leonard Teitelbaum of Merrill Lynch.

Good morning.

I don't know if you can hear me, I am on a cell phone.

It was my impression that you had contracted your ethanol currently somewhere less than $1.50 a gallon.

Brian, if I am not mistaken, you said you contracted for it at the same prices.

Number one, am I wrong in my estimation?

I know you get incurred I know you said you're not doing spot, but could you give us some feel at what level you're looking at for your ethanol contracts going forward?

I don't recall what we said that our contracts for the current quarter were under $1.50.

I think that we were commenting that our prices for the quarter for the 6-month period that we're in right now, we're much better than the spot prices that we were talking about or looking at in our last conference call.

So, I don't recall that we said there we were below $1.50.

That isn't correct.

But I think, all that I would be prepared to say is that for the -- we have done a substantial amount of business now for the October-March 6-month period.

At prices that are very comparable to the prices that we're delivering at now.

Okay.

You are at capacity now.

Unless you add capacity, we are indicating that we are looking at quarter in ethanol, but if we annualize those rates we would not be that far off?

Well, we are not -- As I said, we contracted a substantial amount.

We're not finished contracting yet.

We have to see the results of that.

And also, obviously, we have to see what happens with corn prices.

Okay.

Corn prices have been moving up.

I know you guys are pretty active.

What I'm trying to figure out are to get some kind of a feel, you said you'd lower corn cost this year.

But, with corn starting to move up, should we be looking at higher net corn costs as we start to get into the current '06 year?

Or is it too early to tell yet?

Well, I think it is too early to tell.

I think -- the corn crop is still growing.

There has been a lot of concern about the effects of the drought.

Yes, but I know HSCF prices were flat, you'd indicated that in February.

Right.

But I think that we see that market is tightening.

It is far too early to begin commenting about HSCF contracting.

But that market appears to us to be better positioned in terms of supply versus demand at the present time.

Have you been able to quantify what higher energy costs have met to you in terms of its impact on operating income?

You are saying what the energy costs, have ...

...Yes, the higher energy costs what the impact has been on that kind of that across the board, what it has cost you?

So if we would try and take a look at your operating income, ex the higher energy cost what it would be?

And then, go forward if there is plus or minus of the energy costs of what I am trying to get to here?

Yes I am trying to -- it is over 50 million net, quarter-over-quarter.

50 million quarter-over-quarter.

All right.

Okay, would have an annual number?

I do not have that right here, Lenny.

Maybe we can follow-up offline.

Diane do you have any questions?

No, I am set.

Thank you very much guys.

I appreciate it.

Our next question comes from David Driscoll of Smith Barney.

Hi good morning everyone.

A couple of quick details on the quarter and then aboard bigger picture question.

Doug, can you tell me a little bit here in terms of what was the private equity gain in the quarter?

It was like maybe 9 million or 10 million.

Your equity in affiliates was $55 million and only $9 million of that number is private equity?

Correct.

So the rest of it is -- I think you said in the prepared remarks that the large variants on that side was the Asian oilseed operation?

Correct.

If you recall last year, Asia was sort of, in the tank at last year in this quarter.

This is the strongest, I think, affiliate line we had seen the Company produce.

I don't think we have a number stronger than that.

Is that right?

If you look on an annualized basis, it is 229.

So, at 55 even that's approximate that rate.

And our second quarter was about 115 million.

Do you think - does this feel like a reasonable level to kind of go at Lenny's logic here?

Does this look like a reasonable level to proceed going forward into next year?

What is Asia going to do?

We have a lot of different components in that.

A long list of items so can I predict it exactly, no.

On your investment income line, again this is a very positive result in the quarter.

Why was this line so strong?

The $43 million or $44 million?

It's a lot of different issues.

We had increased pre-financing income.

Our investor services group interest was up as seg funds increased in that business.

The bank interest was up a little bit quarter-over-quarter.

So, it's a bunch of different things that really accumulated to that.

Would you feel like this number is at good level to look at going into fiscal '06?

I do not think that is a bad number.

It should roll forward as long as interest rates hold and everything.

I mean our cash flows are still strong.

All right.

You made a comment on the other line in your corporate line.

I think it was 63 million in the quarter versus 77 million in the fourth quarter a year ago.

correct.

I think that is a decline of 18% now the full-year numbers of 308 versus 331 a year ago that is only a decline of 7%.

The question here is I think, the biggest component of that is your corporate overhead.

And I'm trying to get a sense here as, are these numbers declining?

And what rate do you assume, or do you expect this to continue to decline or does it rise as you - ?

There are 2 components in that.

It's a corporate unallocated costs and also our unallocated interest.

As you recall in our segments we allocate to our segment based on working rate which is really short rates and so, as well as rates have improved a little bit, we get some pickup in the corporate line, because we're matching that off against some fixed rate debts.

All right.

Then overall, Allen this question is for you.

When you look at fiscal 2006 and you are thinking about your big corn processing and oilseed processing operations, are you generally just simply more optimistic in terms of where these businesses are going?

Oilseed seems to have had -- it has been fairly turbulent, and I would say last quarter we had - it would seem to be relatively disappointing.

This quarter was the opposite.

It seems like we have started to see a rebound.

I think your comments in the prepared section were that crush margins deal can be better.

What is your outlooks been for those 2 businesses in 2006?

Well, as you know David, we have got a period of time right now that is very critical in terms of the rain we received here in the Midwest for our crops.

So, it is premature to try and make any projections for next year.

But I do think that the Company, as far as the way we are postured in the way our factories are now working -- we have got very good prospects for improved earnings in Asia because last year we had all our problems there.

Europe continues to be strong.

The Biodiesel market is strong there.

Our rapeseed production is doing very well.

I think Eastern Europe is particularly interesting where a Polish plant and our Ukrainian interests are now beginning to contribute to the bottom line in a significant way.

I am optimistic that we will have a satisfactory oilseed crop here in the United States and be able to generate the margins.

We do have some pressure because there is such an increase in the production of ethanol and the distillers grains are continued to put pressure on those mill markets.

But distillers grains also are increasing our volumes of lysine and lysine production as you know, dropped off materially this past year, due to overproduction in the industry.

And so, the probability of that segment was substantially less.

So, we've got a lot of very, very interesting prospects on the horizon.

I have no reason to be concerned particularly about next year.

We have a lot of good solid businesses.

We're well postured across the world with our network of businesses.

And we have a strong balance sheet and we're prepared for the coming year no matter what happens in the crops here in the United States.

So, even though it is too early to predict what is going to happen, we do have a lot of optimism and the next year might be a solid year for many of our businesses.

One final question on LIFO charges Doug, if I may.

I believe that in the September quarter a year ago, the Company booked a $0.12 LIFO benefit.

You had a LIFO charge this quarter.

Do you expect to see another LIFO charge in the September quarter?

We will just have to follow that through.

I mean right now, with prices where they are at, we don't see much.

But if they should increase by the end of September, you could have some LIFO charge.

We will just have to see where that carries out.

Okay very good thank you.

Our next question comes from John McMillin of Prudential Equity Group.

Congratulations.

Brian I like your South American fertilizer update.

My guess, now nobody in this conference call is going to ask you why ADM cannot keep up with your publicly traded competitors.

Thank you, John.

On ethanol and following up on Lenny's question, the spot market as you are indicating is 170 plus.

I think what you're trying to tell us is don't book those kinds of numbers into the next 6 months or 9 months projected numbers.

Thankfully you didn't book much business at $1.20, but you are suggesting to us that you did not get $1.70.

Is that a reasonable statement?

John as you know, the spot market is not very important to us --and we are very small participants in the stock market.

And those prices really are not reflected in our results.

I think what we're saying is that the ethanol prices, which we're booking, are virtually unchanged from what we have been enjoying at the present time during the quarter that just passed, the current quarter that we're in right now.

As we go forward, we are not seeing in our effective ethanol prices much of a change.

Okay.

So, let me use a $1.40 number something like that.

And we look forward on the corn costs number of course, if you look at year go, comparison that we are going to be going into we had extremely high net corn costs.

Can you give me the lysine price now versus the year ago?

I don't track this closer.

The lysine price at the present time in North American market is in the neighborhood of $0.70.

I don't recall off the top of my head what it was a year ago, except that was much higher than that.

If you get a soybean crop that is much, much lower than the, to get the 2.9 billion estimate that you gave.

The good news is that lysine probably would go up.

I know Al, you are pointing to the crop uncertainty and the need for visibility before grasping your number, but let's just take the worst-case scenario is it stays dry.

And these numbers-- the crop estimates could down and down and crop prices go up and up.

Other than LIFO charges, the operating trends -- the capacity utilization would go down a little bit.

But that clearly would not be a good scenario for anybody.

Is that how you view it?

I think that is true, John.

High oilseed prices are not good for anyone.

That will encourage more production down in South America.

We do have a position there that is strong.

We have very substantial processing facilities outside of the United States.

The majority of our processing capacity in oilseeds outside of the US and so, we have got a diversified operation.

And if we do have a short crop here, we should still be able to generate good earnings with our global position in this industry.

I am not pessimistic about it.

We do have some areas here in the United States that have had excellent rains and good coverage and the crop is -- we're talking about a small reduction.

And some of that meal demand will be picked up by distillers anyway.

Doug, do you have a cap spending number for this year, and a rough -- I mean for 2005, an exact number and a rough estimate of what it might be in fiscal '06 year?

I do not have an exact number, but we are at about a little over 620 for the year in 2005.

I would envision that being in that range to upward a little bit that next year.

No big increase.

Not at this time.

And then the lower tax rate in the quarter, what was that driven by?

Is it a sustaining rate?

Our rate going forward, John we're going to be looking in the 32to 33.

We will firm that up during this next quarter as we go through.

But, I expect it will be in that rate.

We were at 31 this year.

The fourth quarter was a really coming out of the couple of things.

We have got a little more benefit out of our ETI than we had anticipated.

And also, we had a shift in earnings between -- into some lower tax jurisdictions from higher tax.

If you look at that total impact of about $10 million on a full-year provision of about 500 to 470 million.

In the fourth quarter we had a true up our total tax bill for the year in order to make our fiscal numbers to come up appropriately.

So, that's why the quarter is a little lower in the tax side.

Got it.

I'll add to, to the Lenny's question little while ago on the energy it would appear it's a little bit over 150 million full impact for the year-over- year.

Okay, thank you and I will hope for a little rain in your neck of the woods.

Our next question comes from David Nelson of Credit Suisse.

Good morning.

I guess we could pursue energy a little bit.

First of all, this is the first time I've heard you indicated interest in dry milling.

If you could maybe expand upon that?

Are you looking at building some of the small plants like some of the farmers co-ups or have done or are you looking at buying?

And then, also in the energy area on Biodiesel, there were some provisions that had short expiration dates previously.

Is there anything in the new energy bill that passed this past week, that would actually incentivize you to make some construction?

If I could just comment on that.

The dry milling side, ADM has long head technology and knowledge about dry milling.

We have got some dry milling in our own complexes.

When we acquired the western Corn Mills that we have, we picked up some interest and other dry corn milling facilities.

So, we have got the technology and the understanding of dry milling.

Our major production in our facilities comes from wet corn milling.

What we have consistently observed in the wet corn milling industry is that the need for capacity is well met by the existing competitors in the industry so, without having Mexico really opened up, we still have a situation where we have plenty of capacity in wet milling.

To the extent that we had any interest in expanding our capacities, as we went forward.

We would only consider the dry milling side.

And we don't have any immediate plans, but we keep a close eye on this market.

The distillers' market is a very positive thing for us for lysine.

All we really wanted to indicate here is that, we continue to monitor that business we continue to work with existing facilities that are growing up.

We have got some arrangements with people to deliver their ethanol to our systems.

We have a very substantial infrastructure in the ethanol business from one coast to the other as you well know.

So, we continue to look very closely at that marketplace.

On the Biodiesel side, the new legislation in the energy bill will extend the total amount of Biodiesel incentives out to 2008 from 2006.

We really expect that is likely to be extended beyond that level anyway because there is a great deal of interest in Washington in getting renewable fuels and clean fuels into this marketplace.

We have discussions going with some farm co-ops about building a plant down in Missouri, and those are moving forward at a very good pace.

We continue to look at the Biodiesel market, which forces a substantial contributor to our overall businesses in Europe with a lot of our rapeseed production they're going into Biodiesel.

Across the world and across the country, from a variety of different vegetable oils, these high-energy costs of petroleum prices are driving a lot of interest in Biodiesel as well as in ethanol.

Great.

If I could move to another part of the energy area, which is ethanol.

As Brian commenting on some new distribution by blenders that has helped, will this spot price of ethanol which may be a relevant, but the spot price of ethanol back up, could you comment on who is building what we're?

It looks to me like Ethanol is really primarily just follow the price of MTBE up.

And the discrepancy I guess as you noted with wholesale gas remains.

We have seen a shift in the pricing somewhat, but it is economically very advantageous for the oil companies to use ethanol.

Our markets are continuing to grow.

As you know, David the new energy legislation provides for a requirement of 7.5 billion gallons in 2012, escalating at about 700 million gallons a year.

And so, if that bill passes, which we expect to know very shortly and are very quite optimistic about, we should have a continued growth and demand for ethanol here.

The world marketplace is opening up.

There is continual interest expressed in a number of different areas and having cleaner fuels because of the Kyodo treaty and lots of other economic reasons and so that is driving the prices of ethanol.

And they are where they are despite the fact that we have currently plenty of production to meet the demand.

We see there is going to be quite substantial increase in the need even in the next year or 2.

There is about 4 billion gallons at the end of last year of capacity and the markets are expanding a level that might increase that by as much as 50% in the next couple of years.

It's a very interesting market for us.

We continue to monitor our volumes in relationship to the needs of our customers as this product grows in interest across the country.

We want to be a major supplier to that significant gasoline distributors and so that's the portion of our business that we consider to be very important.

I would like to point out that the various price discrepancy to gasoline that you point out to David is really what has been driving the demand that we have seen over the last quarter.

We've seen as substantial increase in the interest from people who previously didn't have much interest in ethanol.

Clearly looking at the economics that they can pick up now on the spread, there has been substantial demand.

Thank you.

If I could ask one last question On sort of the such a broken record but on share repurchase, your share count was down about 3 million shares from -- sequentially but it is up from a year ago, your share price to get down to 18 in the last quarter.

Is there a point of what should be more aggressive and do the 20 million a year that you talked about last fall?

We put the share repurchase program in based on what we have historically looked that as possibly of interest.

We do not have any requirement by our board to repurchase any particular number of shares.

But the number that is always released as an average number of shares outstanding because that is the way we calculate our earnings.

We actually will have, at the end of this fiscal year a slight reduction in total number of shares outstanding as compared with last year.

That average will be moving down as we move forward.

We are always faced with a very keen interest in what is the best utilization of our capital for shareholders' interest.

When it moved down into the levels of 18, as you pointed out, we were aggressively purchasing, repurchasing shares and we continue to monitor capital requirements around here.

We have a lot of very interesting projects for reinvestment of our capital.

That is really the alternative and the choices we have.

Our dividends have been growing at 10, 11% per year for the shareholders.

We have substantial free cash flows to reinvest.

With these higher energy costs -- high energy values maintaining their levels, it does open up a number of very interesting opportunities for investment for us.

We will continue to review our repurchase program in light of those investment opportunities.

We're pleased to be able to acquire 139 million I think, in this last fiscal year for repurchase our shares, and we will continue to look for opportunities to do so.

Great thank you.

Our next question comes from Christine McCracken from FTN Midwest Research.

Good morning.

I just wanted to pursue a little bit more on the ethanol policy, the renewable fuel standard that you referenced and your expectations for demand.

You have seen an increase in recent demand and you've mentioned a need to increase capacity as much as 50%.

And yet, if you look at that current announced capacity expansions, we're already looking at roughly 6 billion gallons of capacity that is destined to come on.

I am wondering, how you look at your plans to -- it sounds like expand into dry milling in light of where we are in terms of announced capacity?

We have not made the decision to expand our dry milling capacity yet.

Brian was just pointing out that we continue to evaluate those opportunities.

If this bill passes, we will take another look at it.

Our demand is growing very strongly in ethanol.

At these levels of economic advantage to the distributors of gasoline, there's good reason to believe that those markets will continue to grow.

As you know, currently, the floor under the energy legislation is really only that.

If it does pass, it starts in 2005 at 4 billion gallons.

So clearly, there's going to be more production and more capacity in this industry than what the legislation will require very soon.

But we do not think that is necessarily the determining factor as to what the demand and supply relationship is going to be in this industry.

And we have a strong infrastructure that allows us to let other people make investments as well.

We were pleased to see the farm cooperative interest and the farmers indicate such interest in these markets.

We're continuing to assist them and any way we can to make those markets more efficient to enable the use of ethanol to expanded United States.

Looking at the economics, it is pretty clear it is a good deal to use ethanol in blending.

Looking at the economics from a producer's standpoint, assuming there is any increasing corn costs, let's say there's more damage to the corn crop than we expect, at what point does it become economically in feasible -- what is the breaking point for the producer in terms of pride-- profitability for dry mill?

Are we looking at an increasing corn environment, some of these smaller dry mills possibly being under pressure?

We don't have a situation currently.

We have -- today a very interesting market for both dry milling and wet milling and the profits that are being generated by those factories are very nice returns on invested capital.

That is the real issue.

We continue to look at net corn costs.

The dry milling is certainly a less expensive way to enter that market.

There is no need for additional wet milling capacity.

If there is going to be capacity added to the industry that will be in the dry area.

As you know, that cost of construction are less and the efficiency of those plants are quite good in today's marketplace with the new technology.

The yields are very good.

The returns from an energy viewpoint are very positive.

So, there are many reasons why from the federal government on through the farm and agricultural interests, everyone is paying such close attention to this business.

We continue to look at our position in the industry and in the global marketplace in the ethanol industry with a view towards returns on invested capital for our shareholders.

To be clear, in a higher cost corn environment or a higher corn cost environment margins would look much worse or some of these small - ?

If you've high corn costs, then the question is what happens to feed and to bi-products.

You are always looking at the net corn cost of the starch, portion of the corn kernel going into the ethanol production.

You have to compare net corn costs in your analysis for what petroleum prices are for gasoline and refining cost.

That ratio does not change at the same rate at the flat prices of both corn and petroleum do.

All of us have closely watched those events evolved over time and we continue to have confidence that this is a good business.

Of course for us, we have 2 aspects still we do have some dry milling capacity, but we're principally in the wet milling business.

And the demand for our starches from high fructose and other starch uses is increasing and improving.

That has improved as you can see from our numbers, the sweeteners and starch portion of our business.

And of course, places are more strained on the ethanol side, but still continue to enjoy good profitability and we are running at ethanol at full levels of production because the demand is there for our profit

And just switching gears briefly on China you had it sounds like really nice recovery there, and yet you are only at 60% utilization it sounds like.

Could we see -- I guess, referencing from earlier comments an even bigger improvement going forward?

Yes, I think we're just beginning to see the contributions from the Asian area.

We have a very substantial position in those marketplaces with our investments together what the Willmar group and the Costco group.

As you know there's a lot of capacity there.

Much of it is very inefficient small factories and it will take time for those to go away.

But over a period of time China will become more modern, more efficient in their vegetable oil production and will have lots of opportunities ahead of us to enjoy better probability out of the division.

One of the reasons why this quarter look favorable compared to last quarter reflects some of the impact of the defaults -- the China defaults last year which did not all fall into the Asia P&L because they also work their way back into the origination points in the Western hemisphere.

We're enjoying better results at 60% and we expect that we will soon be at much higher levels of production and we will have great opportunities to enjoy good returns on our invested capital on that region.

We have got 1 billion, 300 million people with a growing appetite for more foods that will include in the necessity for cooking oils and more demand for proteins there.

It is a very exciting market for us.

Are you seeing any capacity closures now?

Very small amount of capacity closures most of the plants that defaulted on their contracts are having much more difficulty getting new contracts.

There are ways in which the local small producers have advantages that major global companies do not.

But overtime, there's no question there will be increased utilization of the modern, efficient, new plants.

And the total capacity of the industry, when you look at those numbers, you get a picture that some of these small plants are running the way below the 60% capacity level that we are, even down to the ranges of 30% to 50%.

That changes the economics of their factories as well.

Overtime, they will go by the wayside to make room for the more efficient modern plants.

That is the reason why both of our major global competitors are also interested in the market because we do have the size, significance, the global transportation system, and the networks to make very efficient profitable operations in the Asia-Pacific region.

Does the change this week in the China currency situation help those operations at all and what's your outlook there?

It is certainly a positive for us because we were able to construct these factories at earlier exchange rates.

The shift in the value of the Renminbi there has benefited us but it is relatively small, it's only 2% so far and really has a very small impact on occurrences in the margins to date.

Thanks a lot.

Good quarter.

You're welcome Christine, thanks.

Our next question comes from Ken Zaslow of Harris Nesbitt.

Good morning everybody.

More of your comment I am just hearing that your answers from the Q&A, it sounds like you believe are your expectations are that fiscal '06 operating profit will be up relatively solidly next year.

Is that fair?

Well, we do not try and project what our earnings are going to be in the coming year.

What we have just announced today is the close of last year.

We have a lot of time ahead of us.

We have got the weather conditions to cope with.

We're optimistic that we're well positioned to be able to take advantage of the agricultural and growing interest in energy products that can come from carbohydrate driven economies.

We are optimistic about the coming year, but it is way too early for us to make any kind of determinations about how our profits will compare next year with this year.

You made a plenty of management changes over the last couple of weeks.

Can you go through what the intent was there?

Was it retirements, a shift in philosophy?

Is there anything that we should know about with all the management changes?

We have not had significant management changes at the top recently.

We've continued to advance our policy.

I think the major shifts recently have involved a better integration of our overall global operations.

We've brought people from Americas into our international groups in Hamburg and in the Asia Pacific region and then South America.

We have shifted people from there back here.

We are crossed fertilizing our talent and energies of our people in order to develop a better and stronger management group.

And most of the changes are -- they're not retirements there not people leaving, they are moving people around to get experience and knowledge and to broaden their depth of understanding of our business.

So, we're really prepared to meet the global needs of our businesses going forward.

That also hold true for North American oilseeds?

I just want to make sure I think there is an impression that we are going to be heading that.

Here we go, difficulty in operating, that difficulty that needed to resolve that you wanted they get a new management in there?

That's not the case we have very, very narrow margins in the United States and very tough operating conditions.

All of our management personnel that were there were broadened in their scope or shifted around because of reasons other than the processing margin environment here.

We continue to have good management here in North America.

Our global operations are focused here.

So, we continue to move people in and out of Decatur.

We have a good management group and oilseeds and have lots of management challenges ahead of us.

We continue to broaden and deepen our management strengths there mostly with internal development as opposed to people from the outside.

And my last line of questioning -- are you still benefiting from lower corn costs currently?

Yes, we are.

There's always some lag to that.

So, our net corn costs continue to decline this last quarter and the entire year.

And we are continuing to benefit from it.

That is where I was going.

How long does it take to work its way through the system?

On some things it is around a quarter.

I would think if you took a quarter lag, you are maybe not that far off.

I do not know exactly, but that would be close.

We really have not yet seen a significant increase in net corn costs.

So, there's not going to be a big shift.

I think we're going to plateau and maybe have some slight increases going forward.

If we do not get good weather conditions over the next month or 2 of course expect to a change but right now, even though there has been a slight increase in the price of corn our net corn costs are not dramatically higher than what they were last year.

I would thought it would have been lower than last year.

They are actually lower on a year-to-year basis.

They have come down to a level and they are not increasing dramatically yet.

This quarter you still get last year's corn costs if I were to calculate it?

That's correct.

Great.

Thank you very much.

Yes, your welcome Ken.

[Operator Instructions].

We have a question from David Driscoll.

Please proceed

I want to follow-up with you guys on the cocoa operations, last quarter that business did not do as well as what we're seeing this quarter.

I'm speaking of food and feed ingredients, assuming cocoa was a deciding factor last quarter and this quarter.

Can you talk to me a little bit about that and what is going on within that business and make some direct comments on cocoa?

David, you're asking from third and fourth quarter?

Yes.

I'm just going to have to check and see what last quarter was, but my recollection is that it's very, very consistent.

The business continues to grow, the profitability continues to increase, we continue to drive closer to our customers.

I do not think the premise of your question is correct based on my recollection of third quarter's results.

Third quarter results were $43 million.

Your quarterly results in food, feed and ingredients today were 71 million.

That is a fairly significant -- just shy of $30 million operating profit improvement.

Perhaps it was not in cocoa.

Maybe could tell us where it was?

There is like 9 operations in that other category.

Wheat processing was down last quarter compared to this quarter as were a number of others.

It is spread out across the map.

Cocoa was very comparable quarter-over-quarter.

And natural health and nutrition you mentioned in your report, and there we have the Enova costs ...

...the results were a little less in the last quarter.

So, it's over a series of business and it does not show weakness in the cocoa sector.

It performed strongly this quarter and for the fiscal year.

It was very solid results

Okay.

Thank you very much.

Your welcome David.

Our next question comes from Christine McCracken.

Just a quick follow-up.

Referring back to the comments last quarter you made on over capacity in the US soybean crushing industry.

And have you seen any change in that?

Or is this still an issue going forward?

We continue to demand improved Christine, the demand growth and in our demand for meal have been very good.

Demand for oil is good.

We are optimistic that margins will be better as we go forward.

We're seeing some evidence of that right at the end of our fourth quarter here we are seeing some evidence of that, and increasingly so as we move into the first quarter.

I think that things look right now like they are on a pretty good track.

Is there still over capacity?

Yes.

There are still capacity concerns.

But they don't seem to be as strong concern as we were expressing last quarter

On lysine, how much of the weakness in lysine as a function of the new capacity that has come on from other parts of the world, and how much of that is the softness in competing protein sources?

I think it is directly related to the new capacity that has come on in China.

That has been pressing on the market in China and in Europe and of course at the US.

I think that prices of lysine right now are significantly below the true value or the shadow values.

We continue to see very strong demand growth in lysine, but we have a little period of time before the demand catches up with the current supply.

Or current capacity

Some of the growth we're seeing in the livestock industry should help that?

We're seeing good demand growth from lysine.

The industry goes recycles where the capacity to build up sometimes in excess of demand growth curve and it takes a little bit of time for it to catch up.

Lysine margins are very good when it does.

The other thing I would just quickly like to point out in terms of your question on soybean over capacity is typically as we get into this period of the year, as we get into the transition between crop years plants to take some downtime for maintenance -- preventive maintenance.

That may have the effect of tightening margins a bit also -- improving the margins, I should say.

Thank you.

There are no further questions, sir.

Okay, great thank you very much.

We appreciate all of your interest and look forward to seeing you again at the end of next quarter.

Ladies and gentlemen this concludes the conference.

You may now disconnect.

Have a good day.