Archer-Daniels-Midland Co (ADM) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2006 Archer Daniels Midland Company earnings Conference Call.

My name is Angela, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] And now, I would like to turn the presentation over to your initial host for today's call, Mr. Allen Andreas, Chairman and Chief Executive.

Please proceed sir.

Thank you.

Good morning everyone; welcome to our second quarter 2006 earnings Conference Call.

I'm joined this morning here by Doug Schmalz, our Chief Financial Officer and Brian Peterson vice--exec--Vice president in charge of Corporate Affairs.

We're going to first review the financials for the last quarter and for the six month period, and then Brian will bring you up to date on the latest developments in our respective businesses.

And then we'll be pleased to entertain any questions you might have.

Thank you.

Doug?

Thank you Al.

Just like to say that some of today's comments will 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 oil seed crush margins, ethanol prices, or crop values could produce significantly different results and we assume no obligation to update any forward-looking statements as a result of new information or future events.

As reported, the results for the quarter ended December 31, 2005 were 367.677 million or $0.56 a share, compared to net earnings of $313.509 million or $0.48 a share last year.

This year's quarter includes a tax credit of 36 million or $0.05 a share for adjustments of various state and federal tax accruals.

In addition, this year's second quarter includes asset impairment charges of 31 million, which is 19 million after tax or $0.03 a share.

Severance costs related to a plant shutdown of 15 million, $0.02 a share.

Security gains of 23 million, 14 million after tax, $0.02 a share.

And the reversal of a $19 million Brazilian transactional tax provision, which was 12 million after tax or $0.02 a share.

That occurred upon the positive resolution in the Brazilian Supreme Courts of a case that was put there.

Last year's second quarter included a $45 million after-tax gain, which was $0.07 a share, representing the Company's share of its gain reported by its unconsolidated affiliate CIP upon the sale of its interest in Tate & Lyle.

Declining commodity prices on LIFO inventory valuations resulted in after tax LIFO income of $2 million in the current year second quarter and that compared to 12 million or $0.02 a share last year.

I would now like to discuss changes quarter-over-quarter in the various line items of our consolidated statements of earnings.

Our fiscal 2006 second quarter net sales and other operating income increased 3% to 9.3 billion due principally to increased volumes and sales values.

Our gross profits increased 17% to 783 million due primarily to the improved operating results of the corn processing segment.

Lower net corn costs, combined with solid sweetener and ethanol selling prices, were the primary factors in the improved operating results of the corn segment.

These improvements were partially offset by lower lysine selling prices and higher energy costs.

In addition, improved oil seed segment results and improved transportation results of the agricultural services segment also contributed to gross profit improvement.

Our Company-wide selling, general, and administrative expenses increased 24 million to 294 million for the quarter, due primarily to increased employee benefit plan cost increases, including the severance costs associated with the plant shutdown.

Our interest expense increased $4 million to 87 million for the quarter, due primarily to increased interest rates.

Interest income increased 36 million to 60 million due to increased levels of Brazil prefinancing, the positive impact of the Brazilian transactional tax recoveries on financial transactions, and to general increases in investment levels and investment returns.

Equity and earnings of unconsolidated affiliates decreased $93 million to 23 million for the quarter from 116 million last year.

Last year's results included the $45 million gain reported by CIP on the sale of their Tate and Lyle interest.

In addition, current year's results of the Company's private equity fund investments were about breakeven which was a decline of 46 million from last year's levels.

Excluding the tax adjustment of $36 million in the current year and the impact of no taxes being provided last year on the $45 million gain from CIP on the sale of their Tate and Lyle interest, our effective tax rate for the first half of fiscal 2006 was 33.6%, compared to 32.8% last year.

The increase reflects higher pre-tax earnings levels and changes in geographic mix of our pre-tax earnings.

We anticipate our effective rate for the third and fourth quarters to be in the 33 to 34% range.

I'll now turn it over to Brian who will cover results of our various operating segments.

Good morning.

In oil seed processing, the operating profit for the second quarter 2006 was 128 million versus 119 million for the second quarter 2005.

We showed improvements in processing results in North America, Europe and South America.

Asian results were positive but down from last year's second quarter.

Crop projections in South America, and the early indication of planting intentions in North America, give us confidence of a continuing ample supply of soy beans for our global operations.

Current projections are for a record crop in both Brazil and Argentina.

Regionally we see the following.

North America's operations benefited from improved margins and the ability to buy soy beans at unusually attractive basis levels.

Capacity utilization was in the high 80's, which was in line with last year.

Spot crush margins today are slightly better than last quarter, and as we noted previously higher margins are needed to compensate for the higher energy costs we are incurring in our processing operations.

The biodiesel market which is already well established in Europe is being developed in the U.S.

There are currently 41 current biodiesel producers with a combined total capacity of 300 million gallons per year.

Four of these plants are expanding, and an additional 21 facilities are under construction.

When these projects are completed total biodiesel capacity will be around 630 million gallons per year.

The biodiesel market in the U.S. should have a similar beneficial impact on our oil seed business as we have experienced in Europe.

South America's operations improved in grain origination, transportation, port operations and soy bean processing but declined in fertilizer.

We continue to see challenges in soy bean processing in South America.

Capacity utilization was around 75% in Brazil for the quarter as processing margins remain unsatisfactory in this geographic region.

Our grain origination system in South America continues to be well positioned to handle the projected large crop and supply our processing needs in China and in Europe.

European processing operations improved due to solid -- due to a solid performance in our rapeseed processing and biodiesel operations.

We are running our soft seed crusher and biodiesel operations at full capacity.

Soy bean processing capacity utilization is around 85%.

Going forward, we expect continued strength in our soft seed and biodiesel operations.

But may see continued pressure on soybean crushing operations if real values are pressured from importing from Argentina.

We are expecting higher energy costs in most of our European operations.

Asian operations were down from last year as margins remain weak.

Return on investment on these joint venture plants remains unsatisfactory.

We expect however that results from these Chinese joint venture plants will improve as capacity utilization improves.

Our joint venture plants operated around 70% utilization for the quarter, up from 65% range we reported last quarter.

Here we are well positioned for the long-term growth of the oil seeds business in China.

Turning to corn processing, profits in this segment were 234 million---or 237 million, excuse me, versus 132 million a year ago.

The large U.S. corn crop allowed us to buy corn at attractive prices in the quarter.

The resulting lower net corn costs benefited all of our corn processing operations.

While we may see additional benefits from this low corn cost next quarter, future earnings could be impacted by corn prices returning to more historic levels.

In the sweeteners and starches portion of the segment, profits were 114 million versus 45 million last year.

Profits improved on higher volumes and lower net corn costs.

Energy costs are going up, but the total impact will be mitigated to some extent by more modest cost increases in coal fired, coal generation facilities at our larger complexes.

Price increases were announced for our entire sweeteners sand starches product line last October.

Prices effective January 1st, 2006 are up for all products, and here I'm talking about corn syrup, HFCS and starches, and total arrangements in this sector.

The net weighted average price increase realized in this sector was in the high teens.

We will see the benefit of these higher prices starting in our third quarter.

In the bioproducts portion of this segment, profits were 122 million versus 87 million last quarter last year.

In ethanol, profits were up versus last year on increased prices and lower net corn costs.

The demand for ethanol continues to grow as petroleum companies replace MTBE with ethanol.

Recent communications from Ford and GM demonstrate the commitment of the U.S. auto industry to ethanol.

Ford and GM today are promoting the growing use of ethanol in the U.S. fuel supply as they market their E85 flex fuel vehicles.

Today's ample corn supply gives the ethanol producer an excellent cost basis to make ethanol while current energy economics result in attractive values for the buyer.

Looking at specialty feed ingredients, year profits were down primarily due to lower year-over-year lysine prices.

We have seen some evidence of modest improvement in lysine prices but do not expect pricing to improve materially in the short-term.

In citric acid, the global citric acid market continues to be challenging.

We concluded the closure of our citric acid plant in Ringaskiddy, Ireland in our first quarter and had a one time $15 million charge for severance and pension in the second quarter.

Our biodiesel-- excuse me our bioproducts group continues to explore opportunities to use our fermentation expertise to expand the value of our corn wet milling operations by making renewable starch derived products to replace petroleum based products.

Several of the corn processing projects we've been discussing will be reviewed by our board later this week.

Final cost estimates are being prepared.

We'll have more to say about investment plans at our CAGNY presentation in Phoenix on February 21st.

For those of you not going to CAGNY, our presentation there will be webcast.

Bottom line: We believe we're in a period of strong demand for products made from our corn wet milling starch stream, supported in part by high petroleum prices.

This strong demand should lead to improved long-term returns from our corn processing operations.

Turning to the agricultural services sector; profits here were 94 million versus 88 million a year ago.

Improved profits from elevator and barge operations were partially offset by a decline in our global merchandising operations.

The large U.S. corn and soy bean crops resulted in improved storage income.

The barge shipping business continues to enjoy strong demand.

ADM's transportation network continues to perform well in light of challenges with the availability of all forms of transportation: rail, truck, and barge.

We expect next quarter's results in this segment may be adversely impacted by lower grain export volumes.

Turning to the other segment, profits in this segment were 66 million versus 146 million a year ago.

I will comment on the food and feed ingredients segment here, and Doug will resume his comments picking up on the financial sector.

In the food and feed ingredients portion of the other segment profits were 35 million versus 71 million a year ago.

These profits declined primarily due to one time charges associated with a $31 million asset write down.

Our joint venture to produce yeast at our Cedar Rapids facility started up in December.

This joint venture offers the opportunity to add value to the output stream of our corn wet milling plant and provides a viable alternative market for some of our HFCS capacity.

In wheat milling, wheat improved from last year despite modestly lower volumes.

Capacity utilization for the quarter was in the high 80's compared to the low 90% last year.

The decline came primarily from reduced U.S. government purchases.

Cocoa operations--cocoa operations processing margins are solid, and we have a very good balance of butter and powder demand with current production levels.

I will now turn it back to Doug who will resume his financial comments.

Thanks, Brian.

As you see, the results of our financial operations in the other segment did decline 44 million to 31 million for the quarter.

As I mentioned previously that was due primarily to the $46 million decline in the results of our private equity fund investment.

Our corporate results improved to 13 million -- or improved $13 million to 17 million for the quarter.

The current year's quarter included security gains of 23 million and the Brazilian transactional tax reversal of 19 million.

Last year's results included the $45 million gain reported by CIP on the sale of its Tate and Lyle interest.

And LIFO inventory valuations resulted in profits for the current year's quarter of 3 million compared to profits of 19 million last year.

Turning now to the summary of our financial condition and cash flows: Our working capital increased 648 million during the 6 months to 5.6 billion and includes readily marketable inventories which have a carrying value of approximately 2.8 billion at December 31.

The increase reflects cash received from the $600 million 30-year bond issued in the first quarter of fiscal year 2006.

The positive cash flow from operations was adequate to fund capital expenditures, acquisitions, cash dividends, as well as long-term debt repayments.

Our total interest bearing debt, both short-term and long-term, as a percent of invested capital was 31% at December 31 compared to 30% at June 30, 2005.

This increase reflects the additional long-term debt which was issued during the first quarter.

Our cash flow from operations for the 6 months ended December 31 of 881 million equal to our net earnings of 554 million, plus depreciation and amortization of 327 million, was used principally for capital expenditures of 318 million, acquisitions of 92 million, dividends of 111 million, and debt repayments of 149 million.

That concludes our formal remarks and we'll now open it up to questions.

[OPERATOR INSTRUCTIONS] We'll take the first question from the line of John McMillin with Prudential.

Please proceed, sir.

Congratulations everybody.

Thank you John.

A little like Exxon Mobil here. [Laughter] You'll have to start explaining yourself.

You know, these tax benefits, I'm just trying to understand what period they came from.

Did they relate, Doug, to prior periods if you go to the Brazil one and the 36 million in the other one.

Yes.

Let's take the Brazil one first.

That occurred back in the earlier 2000's when we were--there was a change in laws down there in what they call [Ps] and COFINs taxes, and it had to do with a transactional tax really on interest earnings, and so we were providing based on that and then that was overturned in the Supreme Court so that really came back in from those periods.

And the other one, we go through a process every year.

We're on a calendar basis for tax purposes, and when we file our returns we go through a very extensive process, return to provision--book provision analysis and so forth, because, as you know, there is a lot of fluid items in taxes, with tax credits and whatnot as they come through, so we true that up every year.

Part of that adjustment this year had to do with that true up and it was about 21 million on our federal state tax adjustments which required really the true up of book provisions to the tax returns as filed.

And then, in addition we were able to recognize additional foreign tax credits and some various state tax credits in amounts of about 14 million and had a little bit of adjustment on our deferred provisions of about 1 million.

So, that makes up that.

We really set that out separately although it's all really a part in a way of our overall total tax effective rates but set it out to give a little better picture of what our actual effective tax rates are running at, and we expect those, as I mentioned, to be in that 33 to 34% level.

If I strip out the tax gains which totaled $0.07 and the charges which totaled $0.05 you could take a minor $0.02 off your reported number and if you wanted to get even more complicated, you could take the securities off but still it's a startling level of operating earnings growth and I guess, it's happening really before the higher ethanol and high fructose corn syrup prices really go into effect, which is more of a calendar 2006 story.

Just, I guess I'm taken back, how sustainable these earnings levels are or whether we should take this base and started adding higher prices to it.

Are your costs going up materially looking forward?

Well energy costs are going up, John, as you well know.

Our net corn costs have been good.

I can't tell you what the crop's going to bring us this next year.

So, I don't know exactly where the net corn costs are going to go.

I wish I did.

But it's almost impossible other than I think the situation is good for good plantings and so forth, but weather conditions can affect that and there a lot of things around the world that can affect it.

Well, congratulations.

I have no other questions.

Thanks.

Gentlemen, you're next question comes from the line of David Driscoll with Citigroup.

Please proceed.

Thank you good morning everyone.

Good morning David.

I would add my congratulations as well.

A sterling result this morning.

Thank you.

Can you talk to us a little bit about the corn business?

I've got a couple of questions here.

The first one is you've got a big contract that will roll off and then we'll see the new ones come on in April.

Are you seeing those contracts, or put it this way, how much have you signed so far?

If you could give us a rough percentage, and can you verify to us the cash market that we see on ethanol is very volatile, and I think, Allen, you said in the past it sometimes is not representative of the contracts that you've signed.

Are you signing these things above $2 per gallon for that April contract period?

David this is Brian.

As we have been indicating we sort of have been booking ethanol in 6 month increments; we had, I think, in our last conference call indicated that we had pretty much booked our capacity through March; however, it wasn't 100% booked, and we had some opportunity to take a little bit advantage of spot prices, but it wasn't terribly significant.

We have, as the past quarter transpired, we had opportunities to continue to sell April, September.

Even in some instances beyond April, September at prices that are higher.

We're not going to get into the specific levels at which we're contracting but I think that we can safely say that we expect our invoicing prices going forward as we get into the April, September period will be higher.

David, if I might just comment, we have to deal with the oil Companies on large volumes over significant periods of time, and so we never capture the peaks or the troughs is generally the way it works out but prices have been improving as you know.

We still have a substantial number of states and areas across the country that are using MTBE and everyone is trying to phase those out.

That makes the market very, very tight for the existing capacity, there's a lot of construction under -- a variety of projects underway, and we expect to see a better balance coming in 2007 and maybe 2008.

But in the meantime it's a very, very solid market for us.

Prices have been, as you know in the spot markets, well over $2 from time to time, and we're trying to manage our assets in a very competent fashion along with the large oil companies to make sure that we've got available in the right areas the quantities that are necessary to keep their systems working appropriately.

That's part of the reason why we have announced the addition of additional capacity for ethanol production, because we need to keep our position very strong in relationship to being a solid reliable supplier for those customers that we have.

On the last conference call, Allen, I believe you mentioned that your customers--your ethanol customers had switched over from their historic pattern of doing index based contracts to flat priced contracts; does that trend continue and do you have any thoughts here on what that means?

It's a fascinating statement you made last time.

That varies from time to time just depending on what the customer wants.

What we try to do is provide what a customer would like that fits into their overall operations.

From our viewpoint with the future's markets available to us, we're relatively able to provide whatever the customer wants and to put our positions in perspective for our own purchases of corn and our own production of our systems.

So as long as we've got the interest --- it's not material to us, as to whether they pick, choose a method of pricing which is related to a futures contract or a cash contract because we can fix that price our selves in relationship to our own hedging opportunities to manage our own affairs the way we want to.

I guess there are, from time to time, more interest on the part of oil Companies in flat pricing, because they see a very very significant movement up ward but they can do the same thing on their side as we can with ours.

They can lock in their costs with the futures contracts, and then we all have the management of our basis exposure on those contracts to deal with.

If I could just ask one more question and I will pass it on.

Certainly the quarter was helped and you mentioned this in your comments by the very low basis you were seeing across corn and beans.

I think one of the challenges we have on the outside is really understanding how much that contributed to earnings during the quarter.

Do you have any guidance that you can give us here, and what I'm trying to do here is to not take the current quarter numbers and just run with it going forward, because I think that's probably those net corn costs were maybe the lowest net corn costs in Archer Daniels history?

Well we had very significant improvement in net corn costs this past period of time.

And I think you need to look at it in the perspective of all of the events that have occurred in our agricultural markets here.

We not only have had substantial crops but we also had adverse weather conditions in the Gulf that really tied up our ability to be able to do export business.

On the one hand we missed out on a number of export sales, some of which we were able to fill out of our South American operations or other places in the world, but the back up of commodities into the central part of the United States caused by the adverse weather conditions and the problems on the river and the problems with the elevators due to the hurricanes really created a very short-term opportunity for us, but that's significantly behind us.

We're now back to more normalized operations both on the river and for export.

I think it's very difficult to project how those things occur.

But what we try to do is manage our affairs as prudently as we can with a view towards the kinds of risks and exposures we have, and when we saw the hurricanes coming, we brought our barges up the river and we took some steps to be able to reduce our basis exposure, and so as a result we were fortunate to have good results this past quarter, but the basis has improved somewhat and I think the quarter before, at our last conference call meeting, we indicated to you this wasn't a permanent situation.

It was just very temporary based on weather conditions.

We don't plant for those things.

We just anticipate that we might have difficulties and try and run our businesses as well as we can without being overexposed to risks that we might face.

Would it be fair to say we have one more quarter of benefit left to go before we see this unusual basis disappear and we revert back to normal, and then on the ag services side, I think you're trying to point out that there were problems in that business and that it could do better, so then frankly we would see that business actually improve as we go forward and as those issues that were effecting New Orleans are in the past?

Well we're looking at very positive favorable environment going forward.

We've got good demand for ethanol.

We've got increased pricing in the high teens as we mentioned across the board on our sweeteners and starch because our skew is fairly positive for our operations there, and then we've got our net corn cost to be concerned about, so we look forward to some good operating times going forward and we don't have any way of knowing particularly what events we'll be faced with in the future but the outlook is quite encouraging for the corn business at this point in our history.

David, just to comment on your question regarding ag services, what I was trying to indicate is that the outlook for U.S. grain exports is not robust and that we expect that our volumes going through our port elevators as we go forward beyond this quarter may start to decline a bit.

And I might add, as we move into the next quarter or two, we're looking at new crop.

So David then we've got to really assess what the weather conditions are like all around the world and what the demand is from China to South America to the United States.

And so those new crop anticipations will come into play.

Right now it looks fairly favorable with the exception of some dry conditions down in South America.

We've got a pretty favorable geographic spread across the world that promises some very solid crops for us this coming year.

The outlook sounds good and it was certainly a good quarter.

Thank you for the comments.

Thank you David.

Gentlemen your next question comes from the line of Bill Leach with Neuberger Berman.

Please proceed.

Good morning.

Doug, I just had a quick question.

Your investment income was 60 million versus 24 million.

You read off a lot of numbers, I don't know if you explained what was the reason for that big gain.

Well a number of things.

Our overall prefinancing in Brazil was up and therefore we had additional earnings there.

Of course, our investment levels, as we put up into debt issue last quarter that money went into investment so we had additional investment income there, and then rates in general are up and we also had--- that's where we reflected the--the Brazilian tax which had to do with---and the interest on that tax, which had to do with that reversal of the Supreme Court.

How big was that again, pretax?

That was 19 million.

So that's in the 60 million?

Okay that's all I need thanks.

Gentlemen your next question will come from the line of Christine McCracken with FTN Midwest.

Please proceed.

Good morning.

Good morning Christine.

You guys had talked about some, capacity utilization issues in South America.

Can you elaborate on what you're seeing there and how you might see it correcting over the, let's say, intermediate term or is this a temporary situation?

As we get into new crop in Brazil I think there is a potential for the capacity utilization going up, but we still are, there has been a lot of new capacity added in Argentina and the Argentines of course have the--- Argentine crushers have the benefit of a differential export tax so we think there will be a substantially more soybeans processed in Argentina this year.

And, of course, they have a larger crop there to support that.

So I think we put that into consideration when we made our comments about not being terribly optimistic about margins there.

Although I think we will see an improvement as we get into new crop.

You commented thatit is a bit dry there.

You guys have a lot of resources down there; do you have additional comment on what you're seeing in terms of the crop?

I know a lot of people may be overly concerned about the size of the crop this year.

Can you talk about that?

I think the crop is projected to be about 58 million tons in Brazil.

It is about 40 million tons in Argentina.

In northern Brazil the conditions seem to be very good.

In southern Brazil and Argentina there is some concern about dry conditions although the crop still is in good condition.

February will be a critical month for moisture for southern Brazil and for Argentina.

We'll have to see how it develops.

If they get good moisture during February, I think the crop will be realized.

Fair enough and in terms of export demand you mentioned that you do expect the demand for grain exports to drop.

Is that a function of exchange rates or are you seeing any impact from the bird flu?

What can you attribute that to?

I don't know that I can attribute it to any specific thing.

But we are seeing--- part of it was from the hurricanes.

We lost some export opportunities there, and I think that it may be difficult to recover these going forward so the projection for U.S. exports is not quite as robust as it once was.

I think that's all that I can say about it.

Just in terms of biodiesel we obviously have good indications on ethanol pricing in the markets there, but we may not have as much visibility around biodiesel and yet it seems to be doing very well, particularly in Europe.

Can you talk about pricing there and the supply demand balance in biodiesel?

The pricing I can't comment specifically on Christine, but I can say that the demand is extremely strong.

Right now there is just more interest in biodiesel coming from a number of sources in Europe, our plants are operating at 100% capacity.

We wish we had more we could sell right now.

We are expanding our capacity but it's just a very robust demand in Europe right now for biodiesel.

I assume at fairly good margins given where oil prices are---

[Overlapping speakers] we're pleased with the margins in biodiesel.

Christine as you know, this is Al.

We're one of the leaders in biodiesel in Europe and we started those operations several years ago, and more than 50% of the automobiles there are diesel engines and so that's really a different model from the existing model in the United States.

We're very optimistic about that business.

It looks very positive.

It's resulted in some shifts in the consumption of oils from palm oils out of the Asia Pacific region going into Europe to soy beans from South America, so it's made dramatic structural changes to our businesses and, I think holds some great promise for the United States as we continue tolook at the new diesel engines that have very good gas mileage and can provide lots of power.

And so biodiesel has a very interesting future as we take the sulfur out, clean up our diesel fuels here in the United States.

That began this year.

So then you need more lubricity agents and that's caused there to be a lot more interest in looking at biodiesel as a possibility for that business.

So we're pretty optimistic and as you know we're building two new plants here in the United States.

One a joint venture of the farm co-ops in Missouri.

We're building a couple in Europe and we're also building on in the Asia Pacific region.

Sounds like a good opportunity longer term.

In terms of the U.S. market, I'm just looking at your expectation to build plants.

Is there anything that is delaying or slowing down your plants to expand particularly in ethanol; it seems like I think the plan was to bring that online in '07 or '08.

Is that a permitting issue?

I know right now you're probably not able to build over the winter, but I'm curious in terms of timing particularly in the new dry milling capacity what your plans are.

We've had very mild weather across the Midwest so we could be under construction but we need to get all the permits in line first and that takes some time.

There have been no delays; they're all on schedule.

We're still finalizing the numbers.

There will be some discussion of this at our Board meeting later on this week, but we're still very positive about those projects and they're going forward on schedule and we expect to be in the marketplace by 2008 with some additional dry milling capacity, and we continue to have discussions with others about joining forces with us in terms of marketing their products, because there's great demand for ethanol in today's marketplace.

So that whole business is on track and is producing some very very nice returns for our shareholders.

Good enough I will leave it there thanks.

You're welcome.

[OPERATOR INSTRUCTIONS] Gentlemen, your next question comes from the line of Kenneth Zaslow with Harris Nesbitt.

Please proceed.

Good morning everyone.

Good morning Ken how are you?

Good.

Just getting to a couple of issues, one is, is there a limit to the price increase that you can take on ethanol given Brazil or can this go to, I'm not saying today, but can it go to $2.50.

Can it go on, or is there a point in time that they -- a limit to the price?

I think right now, I think that what we're seeing right now is a replacement for MTBE as the interest in replacing MTBE is really one of the stronger factors in demand right now.

And that could move the market higher.

But I think in terms of Brazilian ethanol coming in we'll just have to see.

The demand in Brazil right now is extremely strong.

As you know they have a very robust flex field program in Brazil.

Brazil is becoming largely energy self-sufficient and demand, for ethanol in Brazil is just very strong, so in terms of having extra capacity to export I think at the present time it's limited.

Ken the Brazilian market is doesn't allow them to do a lot of exports right now but they would like very much to find large export markets all across the world.

They have been working in Japan and Thailand and a number of different places.

Our discussions in China.

And they also have pursued their discussions in the United States to gain access to this market.

From time to time, I think last year, we had about 100 million gallons of Brazilian ethanol that came into this marketplace.

For us it's a positive development right now.

Longer term you have to look at all of the markets but we do have a tariff on that ethanol when it comes into the United States, and for us if their production fits within that tariff and it can allow us to be able to meet certain key market opportunities, it's an interesting opportunity for all of us to find new markets and open up new markets.

We've always had a keen interest in seeing ethanol become a viable project across the world and with the increased number of countries that have accepted the Kyoto Protocol, the interest in reducing greenhouse gas emissions is global in scope.

So we see that as a long-term potential opportunity for all of us and the international world community would like to see a variety of different sources for ethanol so this is a promising development for not only the Brazilian sugar interest but also for the corn farmers and everyone else here in the United States.

In terms of the soy environment, in South America as well as in the U.S.: it sounds like you believe that it's sequentially getting better in South America.

Is there a reason for that?

That the farmers are letting their soy beans go.

It seems like the capacity is increasing.

I wanted to get an idea of what the more favorable environment is coming from.

I don't mean to suggest that we're expecting huge improvements in the Brazilian crushing margins but I do think that as we move into the new crop, this is the point I was try to make Ken, as we move into the new crop typically there is a greater movement to soy beans and it's easier to buy them and that facilitates better margins during that period of time.

So I think the point that I was trying to make is that as we move into new crop there is an opportunity for better margins in Brazil.

Ken, we're also coming off a very, very low margin environment, so as that market improves, it still has some ways to go before you see significant interest in additional capacity.

Other than in Argentina where those projects have all been announced, so the soy business in South America probably has some time to go before it's solid.

For us, with less than 10% of our total capacity there, what is really important to us is the production of soy down there as a raw material for our European and Asian operations, and we have a very, very formidable presence there in South America in the origination and transportation systems and through the ports to be able to meet our demands of our growing interest in China.

So our interest is less in the soy processing side although we do have a presence there.

In the U.S., it sounds like crushing is getting better.

There is no more capacity coming online.

Everything seems to be humming a little bit.

Is that the sense I'm getting also in the U.S.?

Yes, I think that's a correct assessment Ken.

And my last question is just to make sure I'm clear; are you at all trying to temper our expectations after such a good quarter in terms of you kind of listen to some of your comments or your prepared remarks the lower corn pricing is going to roll off this quarter, exports still remain somewhat challenging--are you at all trying to tell us don't use this as the number going forward?

I think we always try to be very very straight with you about our businesses.

And we frequently are told that all of the stars are aligned in our businesses, and I think we like to give you a fair overall picture.

This is a solid quarter for us and we're very pleased to have these results, but we've got lots of areas of potential improvement in our businesses so I don't think we're trying to temper your expectations, we only say we've got a varying degree of profitability of various parts of our business from time to time.

We're optimistic about some parts and less optimistic about others.

We like to give you the clearest picture with the most transparency as we can about what our future looks like and right now we're pretty optimistic here.

We're not really trying to temper your expectations we're trying to be very straight with you about the various businesses we're engaged in.

Great I appreciate it.

And gentlemen your next question comes from the line Christina McGlone with Deutsche Bank.

Please proceed.

Good morning.

Just turning to oil seed processing in China.

You talk about results being down year-over-year but it seems like nationalization may have really started there in earnest with [Fungi] making two acquisitions recently.

Would you say that it's starting to turn and we're at the trough in China?

We're very encouraged by the trends in China.

I think that we've indicated that our capacity utilization is, although still at unsatisfactory levels, is climbing and we think that the developments of the multinationals into China is a positive development.

I don't think I have more to say on that.

Do you think going forward we should start to see increases year-over-year or we're still--or maybe--flatness year-over-year or we're going to be in a downward trend for a while?

In terms of profits in that business.

I don't think we're in a downward trend.

I think that we've indicated--- going back over a number of conference calls we've indicated that the growth of capacity in that industry has really expanded quite significantly and of course, that has put some pressure on margins there but I think that right now we're not seeing more capacity being built; we're seeing a consolidation of the existing capacity and I think that will be positive for margins.

I think that the situation has every opportunity and we can be optimistic that it will improve.

Okay and then in terms of lysine, you had seemed sort of optimistic about it stabilizing the last quarter or two and this time maybe you seem a little more muted.

I don't know if I'm reading that wrong or if you are starting to see improvement or if it is just maybe conditions have worsened a bit recently.

No conditions have not worsened; they have improved very slightly.

We've had slight improvements in pricing in lysine, but I think what we're trying to indicate is that we think that the prices have bottomed out, but we're not expecting at least in the immediate future a rapid increase in prices.

So the outlook is favorable in that prices have stopped going down.

They have increased a little bit.

But I think that to project forward, or looking forward that we would see, not opportunities for big price increases in lysine in the immediate future.

Christine we do have, this is Al, we do have a changing environment in lysine.

There was a lot of capacity constructed in China and other places around the world.

Then we had the bird flu and other instances that impacted that business and so the overcapacity caused there to be a radical shift in the price levels of availability of lysine.

The future is I think quite different.

We still have very solid growth in that business with the exception of those areas of the world where we have had some problems with bird flu.

As that clears itself up and as we have a shift from the increased usage of lysine as a result of more ethanol capacity coming on stream, we have more distillers grains available and more growth in the lysine market.

So we're still very optimistic about this business even though from near term viewpoint we don't see substantial increases we do see a solid movement in the right direction for this business and we think its long-term promise is very attractive for our industry.

Okay and I guess Doug there has been a lot of announcements in terms of capital projects.

Could you give us any guidance as to what CapEx would be this year and next year.

And also shares outstanding were higher than we thought.

Should we expect them to trend higher throughout the year or will share repurchases continue?

I think on the shares, I mean we had shares issued earlier in the year which brought that up.

I don't see that continuing forward as any increases there.

On CapEx we're at about 300 and some million---little bit over 300 million year to date.

I would expect that to ratchet up a little bit over the next 6 months.

Maybe more in the 400 million range or so, so we'll maybe hit 7 or so by the end of the year.

And then the major of these projects are going to start coming on in the next fiscal year.

I think we'll have more to say about that when we get to CAGNY we're having some further discussion here.

In the past I think we have said and I think this is still reasonable once we get these projects on board we will be in the billion dollar range or over annually--on an annual basis.

Okay and just last question.

I know this has been asked a bunch of times but to make sure I'm clear.

Looking at the corn processing results I know there is a lot of give and takes.

You have higher pricing, you have potentially higher net corn costs, higher energy costs.

Would we look at these as just abnormally strong, I mean how can we look at the segment going forward?

Well I think going forward we have the benefits of the higher prices that we talked about earlier starting to come into effect the current quarter.

We have, as we go throughout the year, we have the benefit of increasing ethanol contracts, I think the net corn costs although it may be higher than it was this past quarter, I think will still compare favorably to year ago levels.

Against that we have higher energy costs we're going to have to deal with but I think if you put it altogether as Allen indicated we're very optimistic about the prospects for our corn milling division.

Okay thank you.

And gentlemen your next question will come from the line of Ann Gurkin with Davenport and Company.

Please proceed.

Good morning.

Good morning Ann.

Just one question left could you talk about capacity utilization for sweeteners for the industry and for you all in North America?

I think that on sweeteners I think right now the point that we need to make on sweeteners is that we're running our wet milling plants at capacity.

We're running as much corn as we can.

And the resulting starch production has to go various ways, and right now we're seeing very strong demand for that starch from products other than HFCS.

So I think to look at HFCS and what capacity utilization there is probably not the correct way to look at it.

You have to look at the allocation of starch across the broad range of products that we can make from starch.

So that demand for our starch is fully booked, so I think to focus on HFCS capacity in and by itself is really probably not a correct way to look at things.

How about ground capacity?

Are you 100% there or close to it?

Yes.

Okay great thanks.

[OPERATOR INSTRUCTIONS] Gentlemen you have a follow-up question from the line of David Driscoll with Citigroup.

Please proceed.

Thanks a lot.

Thanks for taking a follow-up.

Can you give us an update on your management search?

Not anything concrete.

It's moving along at a measured pace.

We have employed an executive search firm to make a number of inquiries with a number of individuals whom we feel are qualified to assume that position.

We have several candidates who have been identified and been interviewed by various members of our Board of Directors and we're accelerating the pace to try and find the correct person for this opportunity.

As you know we have the search open for the position of President and CEO; we've been very successful at identifying a number of people who not only have interest but have good qualifications.

As you know David, our business continues to move in the direction of industrial products, we've got a lot going on at this Company.

We've got very qualified candidates both outside and inside the Company that could possibly serve in these capacities and we have a lot of business on our platter because the business environment that we're operating in today, is very dynamic so no set backs yet.

We continue to move ahead but we've got in place, solid management at this Company that is doing an excellent job of running our day-to-day businesses and I think our strategies have been very successful of moving towards more starch related products that are industrial based and so we're very optimistic about the future and hope that we can find the appropriate person to put into that position in the not too distant future.

Al, when I thought about this and when I think about Archer Daniels Midland kind of going forward, you have a massive global business, the international growth aspects of agriculture are certainly significant, so it would seem that the position you're trying to fill you need somebody with significant international experience, but then when I think about what you just said about the starch side the industrial products is really a U.S. business.

So I'm not sure which of these qualities you would favor in a candidate.

Can you give us some insight on really what--I guess it really speaks to the direction of really where the capital investment is going to go and what does Archer Daniels grow to be in the coming years?

Yes.

I think your observations are very appropriate David.

We need a candidate who has not only a solid global background and understands the global environment, but can operate and function very well in the United States.

We're going to have continued expansion and growth in our businesses here and a lot of construction projects across the world but primarily focused in the United States for the time being.

As you know we've moving more into origination and, across the western hemisphere, and we're building our operations out in China and so great global challenges, and so we need someone that has all of those characteristics.

Our select committee that has been formed has a whole series of characteristics that they have identified as being very important, and it crosses the range of both of the areas that you indicated there.

So we're hopeful we can find a candidate and if not we have great people right here on board in this Company and it's just then a matter of shifting around titles and everything else to make certain we're covered for all of the opportunities that we see for our Company going forward.

Should we expect an announcement in the next 6 months?

I think that's very likely that we would have an announcement in the next 6 months.

We're focused on trying to get this job done as soon as we can just because we've got great demands on all of our times---all of our time here, and particularly with me now that they have given me all of these titles I have a lot of responsibilities and we need to get everyone focused appropriately on the jobs we need to do to carry this Company into the 21st century.

Alright.

Well, good luck with the search and, Allen, thanks for the comments.

Thank you, David.

And gentlemen your next question is a follow-up from the line of John McMillin with Prudential.

Please proceed.

I think last time you said that you were focused on the outside in terms of your successor, and now you're mentioning internal candidates.

Is my memory wrong?

No John, I think the committee themselves when they were formed, identified people inside the Company that had the potential characteristics to carry out these job functions and outside was wide open because we had never done a search.

It's really the job of this committee and of our board of directors to just look at the structure that we have and the people that we have in place today and to make the best judgement about the most qualified candidate for that position.

We have really not changed our focus, we just have a number of options in front of us.

Unless we find the appropriate candidate on the outside that we feel has characteristics that could add to what we have on the inside we'll just restructure on the inside.

I have had discussions with the select committee and our Chairman about this, about this matter and he is very sensitive to the fact, and the committee is as well, unless we find someone on the outside who really has exceptional characteristics to add to the portfolio of talent that we have here already that we will not go to the outside.

I would say the emphasis remains the same as it was at the beginning.

All we're trying to do is to get the right players in the right positions to make sure we have a process in place to handle issues of succession should they arise either today or several years in the future.

We're trying as a Board of Directors to act responsibly with respect to the succession and that has allowed us to move forward with this opportunity despite the fact that the Company is operating at historic record levels of earning, we think our businesses are on track, we have a strong management group in place today and the Company is doing a excellent job of delivering returns on invested capital compared to where we were a few years ago.

From that viewpoint we're all very sensitive to making sure we need to bring the right person into this position that can add to our ability to continue to deliver solid returns for our shareholders.

And just in terms of tempering or not tempering my enthusiasm.

Some people will take this base of earnings, which even if you take out security gains is about $0.50 or just over $0.50 and then they will play around with the prices that have already been implemented, the $0.02 for high fructose corn syrup and you can pick some kind of round numbers as David Driscoll tried to do with ethanol.

You can get that $0.50 base up to some kind of 65 quarters pretty easily with these higher prices.

I know your business has seasonal aspects but would you temper that enthusiasm?

I really don't have any way of knowing John what the future holds for this Company.

But we see a very positive series of developments in this industry.

And the business itself is going through a structural modification that we have not seen in all of the history of this Company.

The introduction of enormous demand for new industrial products that are from renewable sources that will clean up the environment and meet new expectations for reducing our dependence on OPEC oil and petroleum imports in the United States is very significant in today's political environment.

That is causing a great opportunity for agriculture.

In the United States we have only 5% of the world's population but we're consuming 25% of the world's oil, and most of that in the transportation sector.

So for us to have significant capability to manufacture cleaner, more resourceful new products out of agricultural based carbohydrates is a unique opportunity we have not seen before and that's shifting the demand for our processing capacity away from only the food and feed sector and over to the industrial side.

That's having a very positive impact on our Company and so we have a great deal of confidence in the future we see ahead of us.

We don't have any way of knowing precisely what kind of results that's going to bring to the bottom line but we certainly have every reason to believe we're on the right track with this Company.

This is good for agriculture, it's good for the industrial agribusiness side and it's a very very positive development for all of our shareholders.

I think you could write the President's speech tonight. [Laughter] Thanks a lot.

You're very welcome John.

And gentlemen at this time I would like to turn the call back over to management for the closing remarks.

Thank you very much.

We're delighted to have all of your interest.

Very interesting times for our Company.

We look forward to seeing you again at the end of next quarter.

Thank you.

We would like to thank you for your participation in today's conference.

This does conclude the presentation, and you may now disconnect.

Have a wonderful day.