Archer-Daniels-Midland Co (ADM) 2006 Q4 法說會逐字稿

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  • Operator

  • Good day everyone and welcome to the second quarter 2006 Archer-Daniels-Midland Company earnings conference call. [OPERATOR INSTRUCTIONS] I would now like the turn the presentation over to your host for today's call, Ms. Patricia Woertz, CEO and President of ADM.

  • Pat Woertz - CEO, President, Director

  • Thank you and welcome everyone to ADM's fourth quarter conference call.

  • With me today are Doug Schmalz, Senior Vice President and Chief Financial Officer; and Brian Peterson, Senior Vice President of Corporate Affairs.

  • Our Company ended its fiscal 2006 with record earnings of 1.3 billion, which we announced this morning or $2 a share.

  • We believe this second consecutive year of record earnings reflects the strength of our strategy, our management team and our global portfolio of assets.

  • As you will hear on the call, our markets are strong and our assets are performing well.

  • We have strong momentum as we go forward in capitalizing on our opportunities for both performance and growth.

  • Our focus today is on the financial operating results for the fourth quarter.

  • Doug will first present the financial results and Brian will review our business operations within the markets we serve.

  • I would also like to open the Q&A with a few remarks on our plans for the next quarter's call, as well as some perspectives on our strategy going forward.

  • Over to you, Doug.

  • Doug Schmalz - SVP and CFO

  • Thank you, Pat.

  • As you know, some of today's comments 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.

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

  • As reported, results for the quarter ended June 30, 2006, were $410,259,000 or $0.62 a share, that compared to net earnings of $195,484,000 last year or $0.30 a share.

  • Included in the quarterly results are certain one-off or unusual items that I will discuss at this time.

  • The amounts I will refer to reflect the after-tax impact on net income of these items.

  • The pre-tax amounts are set forth in the press release.

  • This year's quarter results included asset impairment charges of $28 million, a charge related to conditional asset retirement obligations of 9 million, security gains of $8 million, a gain upon the sale of long lived assets of $11 million and Brazilian transactional tax recoveries of 18 million.

  • Last year's quarter included abandonment losses of $25 million.

  • I would now like to discuss changes in the components of our consolidated statements of earnings.

  • Our fiscal 2006 fourth quarter net sales and other operating income increased 1% to 9.5 billion.

  • Gross profits increased 58% to 829 million due to the improved operating results of major operating segments.

  • Oilseed processing results increased as improved market conditions resulted in increased operating profits in all geographic regions.

  • In addition, corn processing margins improved as increased sweetener, starch and ethanol selling prices and volumes resulted in improved operating results of the corn segment.

  • Improved transportation results contributed to the gross profit improvement of ag services.

  • Companywide general, selling and administrative expenses increased $17 million to $297 million for the quarter due primarily to increased employee related costs.

  • Our interest expense increased 17 million to 102 million, due primarily to higher levels of long-term debt and increased interest rates.

  • Investment income increased $14 million to 58 million for the quarter, due primarily to the increased interest rates and higher levels of invested funds.

  • Gains from sales of marketable securities were $12 million for the current year quarter.

  • The equity in earnings of our unconsolidated affiliates increased $5 million to 61 million for the quarter, due principally to improved earnings of Asian oilseeds joint ventures and earnings from private equity fund investments.

  • Our other income increased to $21 million, due primarily to gains on sales of long lived assets.

  • Excluding the tax credit of 36 million, which was recorded in the second quarter of fiscal 2006, and the impact of no taxes provided last year on the $45 million gain from CIP on the sale of its Tate & Lyle interest; our effective tax rate for fiscal 2006 declined to 31.2% from 32.1% last year.

  • The current effective rate reflects a more favorable geographic earnings mix and benefits of the new manufacturers credit.

  • I will now turn the presentation over to Brian Peterson who will cover results of our operating segments.

  • Brian.

  • Brian Peterson - SVP Corporate Affairs

  • Thank you, Doug.

  • Good morning, everyone.

  • Total operating profit for the quarter increased to $637 million from $351 million in the year ago quarter.

  • By segment we see the following.

  • In oilseed processing, the operating profit for the fourth quarter 2006 was 195 million versus 74 million for the fourth quarter 2005.

  • This quarter had a favorable impact of 27 million from the recovery of transactional taxes in Brazil and a $16 million charge for asset impairment.

  • Last year's results include a $13 million charges for asset impairment.

  • Oilseeds processing results improved in all regions of the world.

  • Regionally we see the following.

  • North American's operations benefited from improved crush margins and volumes.

  • Meal demand has been strong, although oil inventories continue to grow.

  • According to the National Oilseeds Processors Association, capacity utilization for the industry was between 80% and 85% for the quarter, up from approximately 80% last year.

  • [Board] crush margins for the fourth quarter were approximately $0.75 per bushel versus year ago levels of around $0.60 per bushel.

  • Board margins today remain in the mid-$0.70 per bushel range.

  • The developing U.S. biodiesel market is already enhancing vegetable oil values and should benefit the U.S. agricultural sector as it adds value to the farmers' crops.

  • Vegetable oil inventories have been building due to the size and the high oil content of last year's crop.

  • Even with this large inventory, however, oil values are firm as the market anticipates new demand from the developing U.S. biodiesel industry.

  • ADM's joint venture of biodiesel planted in Mexico, Missouri, is expected to be operational this October.

  • While our facility in Velva, North Dakota is projected to be complete in April 2007.

  • These two plants will have a combined annual capacity of 115 million gallons.

  • South America's results improved with strength in our grain origination and handling operations, which are primarily focused on originating soybeans to supply our processing plants in China and Europe.

  • We recently announced a biodiesel plant in Rondonopolis, which is expected to be operational within the next twelve months.

  • European results improved our strength in our rate seed processing and biodiesel operations.

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

  • Our year Europoort soybean crushing operation is being modified to be able to process both rapeseed and soybeans.

  • This project is on schedule and will be complete by February.

  • Parts of Europe have experienced extreme temperatures this summer, which may result in a smaller rapeseed crop.

  • Also, the German tax regime for biodiesel is changing this month.

  • This may have an impact on margins in the biodiesel business.

  • Asian joint venture operations delivered better results this quarter compared to a year ago, due to improved crush margins and improved palm operations.

  • Results, however, were down from our third quarter.

  • Here we are well positioned to originate and process oilseeds for this important growth market.

  • South America recently completed harvesting a very large soybean crop.

  • The USDA estimates the Brazilian crop at 55 million tons and the Argentine crop at 40.5 million tons.

  • Also, USDA estimates an increase in soybean acres planted in North America versus last year.

  • All indications today point to an excellent supply of soybeans for our global operations.

  • In our corn processing segment, the operating profit for the fourth quarter 2006 was 286 million versus 117 million for the fourth quarter 2005.

  • This quarter's results include a charge of 13 million for asset impairment, while last year's quarter had an asset impairment charge of 16 million.

  • Sweeteners and starches improved to 112 million from 92 million, while bioproducts improved to 174 million from 25 million.

  • Sweeteners and starches profits improved primarily due to higher selling prices.

  • We are seeing very solid demand for our sweetener and starch products and are benefiting from the ability to switch some of the starch stream to more profitable products.

  • Sweetener industry volumes are growing primarily due to the growth in sales of power and energy drinks.

  • In ethanol, profits were up last year on increased prices and higher volumes.

  • We are benefiting from the improved values of our April/September contracts.

  • We have started contracting for October through March and continue to work with our customers to assure their long-term ethanol supply.

  • Our announced ethanol expansions are in the permitting and early engineering stages.

  • We expect to break ground on the 275 million gallon ethanol plant in Columbus, Nebraska, later this month, and have it online in early 2008.

  • The 275 million gallon planted in Cedar Rapids is expected to be online in mid-2008.

  • In agricultural services, the operating profit for the fourth quarter was 83 million versus 68 million for the fourth quarter 2005.

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

  • ADM's transportation network continues to deliver strong performance, as the industry faces the challenges associated with the availability of all forms of transportation.

  • We continue to find ways to use the ADM network to add value to our operations.

  • In our other segment, the operating profit for the fourth quarter 2006 was 73 million versus 92 million for the fourth quarter 2005.

  • Food and feed Ingredients declined to 20 million from 60 million.

  • This year's results include a net charge of 13 million from the combination of a gain on the sale of assets and charges for asset impairment.

  • Last year's quarter included an asset impairment charge of $11 million.

  • The decline in food and feed ingredients was mainly due to poor results in the specialty food ingredient segment.

  • Wheat milling operating profits declined slightly as the industry capacity utilization was similar to last year.

  • Cocoa processing profits declined from year ago levels, although we continue to enjoy good returns in this business.

  • We are in the permitting process for our Hazelton, Pennsylvania, cocoa plant and expect to break ground later this month.

  • I will now ask Doug to comment on the financial operations.

  • Doug Schmalz - SVP and CFO

  • Thanks, Brian.

  • The results of our financial operations increased $21 million to 53 million from 32 million last year, primarily due to 12 million of gains recorded on sales of securities.

  • In addition, improved operating results of ADM investor services, insurance operations and our private equity fund investment also contributed to the increase.

  • Our corporate results were a charge of $55 million for the quarter, compared to a charge of $84 million last year.

  • The current year quarter included a $1 million charge from LIFO inventory valuations, compared to a $21 million charge last year.

  • The current year's quarter was positively impacted by increased interest rates and higher levels of invested funds.

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

  • Our working capital increased 1.3 billion during the year to 6.3 billion at June 30 and includes readily marketable inventories, which have a carrying value of approximately 3.2 billion at June 30.

  • The increase reflects cash generated by our strong cash flow from operations of $2 billion, which is equal to net earnings of 1.3 billion plus depreciation, amortization, and impairment charges of 728 million.

  • In addition, in the first quarter of fiscal year 2006 the Company issued a 600 million 30 year bond.

  • These cash sources were more than adequate to fund capital expenditures of 762 million, acquisitions of 182 million, cash dividends of 242 million, and long-term debt repayments of 266 million.

  • In addition, the Company's underfunded pension liabilities declined approximately 300 million during the fiscal year 2006 to a level of 240 million at June 30.

  • Our total interest-bearing debt, both short-term and long-term, as a percentage of invested capital declined to 29.7% at June 30, 2006, from 30.1% at June 30, 2005.

  • That concludes my remarks and I would now turn it back to Pat.

  • Pat Woertz - CEO, President, Director

  • Thank you, Doug and Brian.

  • Before we begin our Q&A, let me just recap for you some of our significant strategic progress this quarter.

  • In keeping with our strategy for food, fuel and industrial products expansion, we did announce two locations for the ethanol capacity expansion.

  • Brian talked about those earlier.

  • We announced plans to build our first biodiesel plant in Brazil.

  • Hazelton, Pennsylvania, is the site for our new cocoa plant construction.

  • We've announced expansion on the Hamburg, Germany oil refinery.

  • We acquired Groupe Lysac, which is gaining technological assets to create biodegradable products from both natural and renewable sources.

  • And I have reviewed our top 15 projects.

  • We tweaked some, we've accelerated some, we've even cut some and I visited some.

  • We do have approved capital investment of 2.4 billion over the next 24 to 30 months for new projects.

  • And coming up in the future, we plan to have a Webcast of our conference call, which will include some slides so that we can follow along both visually as well as orally.

  • We will also be hosting an analysts day on November 8 in Chicago.

  • And at that time we can present a broader strategic picture and introduce you to some of our senior leaders as well as provide some targets going forward.

  • So, with that as a bit of introduction, we'll open it for questions for our fourth quarter.

  • Operator

  • [OPERATOR INSTRUCTIONS] Your first question is from the line of John McMillian of Prudential Equity Group.

  • John Mcmillin - Analyst

  • Good morning, everybody.

  • Congratulations.

  • Did this quarter benefit at all from spot ethanol prices or had you sold all the ethanol forward?

  • Pat Woertz - CEO, President, Director

  • I will start with that, John.

  • We sell most of our ethanol, as you know, on a contract basis and we negotiate with our customers for those six-month periods that we've talked about, so we actually sell very little on the spot basis, some but very little.

  • John Mcmillin - Analyst

  • A lot of investors pay a lot of attention to spot market.

  • Do you feel like any real business gets done there?

  • Pat Woertz - CEO, President, Director

  • Well, you probably certainly have to ask those that do the business on that more specifically.

  • A cargo here and there, and you hear quotes of it, and you read it in the papers, but not, certainly from our perspective.

  • Ours is done more with our customers on a contracted basis.

  • John Mcmillin - Analyst

  • I think in the past you've kind of cited how far out some of your ethanol business.

  • Could you give us an update on how much of your business is contracted through let's say April 1 of next year?

  • Because I think that's the data base given in the past.

  • Pat Woertz - CEO, President, Director

  • We're probably not going to tell you the percentage that we've completed any longer.

  • And let me give you a little reason as to why.

  • We're talking to a lot of our customers now about in-fill and infrastructure changes.

  • Because of the change out of MTBE, some of our customers have gone to ethanol at some of their major terminals.

  • But the opportunity to fill in the infrastructure between those major terminals is still there.

  • So, it is a little bit not a good comparison on what percentage is contracted now versus last because of some of these longer-term changes.

  • So, more of us stay tuned as the next quarter progresses.

  • And we'll obviously be in a better place to talk about the following six months.

  • John Mcmillin - Analyst

  • Where I was most surprised or pleased in this quarter was just the level of oilseeds processing earnings even if you strip out the gain.

  • They were kind of a continuation of the March quarter when usually you get some kind of seasonal drop in this quarter.

  • And I think there was a statement given in the March quarter that you didn't think that type of rate is sustainable.

  • Basically, why was it sustainable in this quarter?

  • And then let me ask the question again.

  • Are these kind of numbers sustainable out of oilseeds processing as the biodiesel business starts to develop?

  • Pat Woertz - CEO, President, Director

  • Well obviously, we're very pleased with our results in oilseeds processing.

  • I think it does reflect the strength of our global strategy.

  • It was strong in North America.

  • Crushing margins were strong in Europe.

  • Full utilization there, certainly our origination in Brazil.

  • And we did have -- we talked about a bit of headwind in Asia ast quarter and we actually saw that decline quarter to quarter.

  • So, there can be small interruptions to supply in Brazil, for example, but we were able to weather those.

  • And of course, you always have those supply disruptions as a possibility down the road sometime in the future.

  • Do you want to add to that, Brian?

  • Brian Peterson - SVP Corporate Affairs

  • John, let me say that in areas where we're strong, the market structure was pretty healthy.

  • In North America we had good margins.

  • And I want to point out in North America that not only do we have significant soybean processing assets but also we have in North America we have canola as well as cottonseed crushing assets.

  • And those, other than soybean, those -- the change in margins in those have been really pretty good.

  • If you look at Europe where we have a good soft seed crushing operation and biodiesel operation, margins in both of those operations were very strong.

  • Is that going to continue?

  • We don't make projections like that, but right now today we continue to see good margins on a spot basis in those margins -- or in those markets.

  • John Mcmillin - Analyst

  • And Pat, I don't want to preempt what you say on November 8, but to the extent -- are you looking at setting financial objectives beyond this double digit return on equity that your predecessor had?

  • Or can you just tell us kind of what parameters you're looking for to kind of measure performance?

  • Pat Woertz - CEO, President, Director

  • Well, John, thanks for the question and you started it by saying you don't want to preempt November.

  • Let me start by saying the answer is yes.

  • What ranges, what timeframes, how many metrics, et cetera, we'll have more internally than we have externally but I think that's kind of a fair overview.

  • It needs to be taken in context.

  • So, that's why I would like to reserve the time in November to spend kind of in the total context of things, as opposed to just blurting out some numbers, a set of numbers in talking about our strong close here to this quarter.

  • So, the answer is yes but we'll talk about it in November.

  • John Mcmillin - Analyst

  • Thanks a lot.

  • Pat Woertz - CEO, President, Director

  • Thank you.

  • Operator

  • Your next question will come from the line of David Driscoll of Citigroup.

  • David Driscoll - Analyst

  • Thanks a lot.

  • Good morning, everyone.

  • Congratulations on the excellent results.

  • I would like to follow up on John's question on the contracted ethanol volumes.

  • Patricia, I did not really understand your answer.

  • You have certain amounts of volumes.

  • You contract them on a six month basis.

  • What were you trying to explain to us about this infrastructure filling out?

  • I just don't understand the how that's relevant to whether or not contracts were signed for October.

  • Pat Woertz - CEO, President, Director

  • Sure.

  • I was just explaining that our discussion with our customers is starting to be a different type of discussion than it was in the past quarters or the past years.

  • There is an opportunity to grow this market, to grow volumes and to grow volumes with certain customers perhaps that were not there before because they didn't have the ability to take the ethanol.

  • Today, they have the ability in their major terminals.

  • And in some infrastructure, for example, between a Florida and a mid-Atlantic state, there may be the opportunity to in-fill customer demand in that area.

  • And because those discussions take a bit longer to have and happen, I don't think -- it is just the nature of the discussions have changed.

  • So the fact that we're working through that to provide long-term supply to our customers, hopefully even opening new markets, we have a couple of new marketing contracts to market ethanol for others.

  • All of that is good going forward.

  • I was just trying to explain that some of those are new.

  • David Driscoll - Analyst

  • Suffice it to say, you don't see any lack of demand for the ethanol that ADM is producing at.

  • And you are -- can you confirm that you should continue to run those assets at 100%?

  • Pat Woertz - CEO, President, Director

  • Well, I can say demand is strong.

  • We're running our assets optimally and yes, that's true.

  • David Driscoll - Analyst

  • You mentioned on the call that laws in Germany on biodiesel were changing but you didn't actually say what the change was.

  • Can you tell us what's happening there?

  • Brian Peterson - SVP Corporate Affairs

  • David, it is quite complicated but let me just try to summarize by saying that the government there is instituting a tax on biodiesel, which hithertofore has not been taxed at all.

  • Starting this month, they have various programs depending upon whether it is used as 100% biodiesel or used as a blend.

  • But the tax rates on biodiesel start off at fairly modest levels but they have an escalator clause in them where they do move up over a period of time.

  • And then when we get into 2007 on a blend in Germany, there is going to be a mandated level of biodiesel usage, so it would take a long time to explain the whole thing.

  • But there are some taxes that up until now haven't been applied to biodiesel that will be starting to be applied to biodiesel this month.

  • David Driscoll - Analyst

  • Back again to just the point that John was trying to get at, what we're all trying to get at here is understanding the sustainability of these results.

  • If these taxes are -- and I think you're telling me they are enacted, so as they start to flow through results, is this a significant negative to operating profit within your oilseed segment for next year, for fiscal '07?

  • Doug Schmalz - SVP and CFO

  • David, as we move into next year, we move into what's -- to an area that's being -- regulations that are being proposed by the German government, which I think they're very close to enacting, which will mandate a certain blend of biodiesel in mineral biodiesel.

  • Exactly how the taxes are going to work on that and exactly what the effect on our margins will be remains to be seen.

  • David Driscoll - Analyst

  • You can't tell whether it is generally positive or generally negative?

  • Doug Schmalz - SVP and CFO

  • Well, I don't think we like to see taxes.

  • Generally taxes are not positive for us.

  • David Driscoll - Analyst

  • But --

  • Doug Schmalz - SVP and CFO

  • But how the market will react and whether there will be an opportunity to recover that, I think remains to be seen.

  • David Driscoll - Analyst

  • And then overall, this biodiesel story is so interesting.

  • And I think that it is still a bit murky, though.

  • Patricia or Brian, can you guys just comment a little about what you really expect to see in terms of demand for biodiesel in Europe, United States and in South America in the next fiscal year?

  • Pat Woertz - CEO, President, Director

  • Well, I might start and then Brian can add to it, of course.

  • And he's spent time -- we've spent time in Europe these last couple of weeks as well.

  • We've been involved in Europe for a long time, and I think there is still -- it is a bit paving the way in terms of what the demand might be.

  • And when you think about the United States, of course there is a lot more diesel vehicles in Europe.

  • And what the auto manufacturers, at least the European auto manufacturers, talk about is starting to do 100% diesel manufacturing for South America, for example.

  • Some of them are already a huge percentage in Europe and would like to see their percentage of U.S. cars going that way.

  • So, one of the things I think about is U.S. becoming a more of a diesel market for vehicles, as well as of course the commercial market that already exists today.

  • Is getting our standards right in terms of biodiesel standards and getting warranties to be able to, and the auto manufacturers, being able to blend -- to use blended diesel up to the 2% or 5% range.

  • Brian, you may want to add something with respect to the European side.

  • Brian Peterson - SVP Corporate Affairs

  • Well, the Europeans, as we mentioned earlier, are moving towards mandates on biodiesel usage.

  • Right now their total usage is about 3 million tons expected with the mandate that's to be phased in by 2010 of I think it's 5.75% of transportation fuels are supposed to be from renewable resources.

  • If you look at the potential from that, I would say that the biodiesel market has the potential for growing, probably by a factor of 3 in Europe.

  • In South America, in Brazil starting next in [2007] there is going to be a mandated 2% inclusion rate for biodiesel that after a couple of years will move up to 5%.

  • So, I think there is really significant potential for growth.

  • In this country, of course, we're just getting started.

  • Various states have various plans to encourage biodiesel usage.

  • Some mandating, some tax incentives and so forth.

  • So, it is a little bit more difficult to say how the demand will grow in the U.S.

  • However, we're starting from a very, very low base, so there is significant potential here also.

  • David Driscoll - Analyst

  • And if I could just ask housekeeping question, can you tell us about capital spending for 2007 and interest expense for 2007?

  • Pat Woertz - CEO, President, Director

  • Well, on the capital side, I mentioned that 2.4 billion over the next two years or so.

  • And I probably can't exactly quantify '07, again, we'll do that in November, but it is in the range of 1.5 billion, 1.4 or 1.6 billion.

  • David Driscoll - Analyst

  • And Doug, do you have an interest expense number for us?

  • Doug Schmalz - SVP and CFO

  • I would say on the interest expense side, assuming rates stay about where they're at, we're going to be in the 95 to 100 million range.

  • But you have to also remember that our interest earnings on our invested asset side will also be up.

  • David Driscoll - Analyst

  • Very good.

  • I will pass the call along.

  • Thanks a lot, everyone.

  • Pat Woertz - CEO, President, Director

  • Thanks, David.

  • Operator

  • Your next question is from the line of Eric Katzman of Deutsche Bank.

  • Eric Katzman - Analyst

  • Good morning, everybody.

  • First question is a housekeeping item.

  • Do you have the after-tax impact of the charge on the asset write-downs, that included citric?

  • You listed the after-tax value for every other item but not that one.

  • Doug Schmalz - SVP and CFO

  • That's included in there for the full year.

  • Eric Katzman - Analyst

  • Yes, but -- either way do you have the after-tax value or is it there is no tax on that or something?

  • Doug Schmalz - SVP and CFO

  • Well, on -- you're correct.

  • In Ireland, it is not tax affected because of the situation we're in.

  • There's a loss carry-forward position that we're in in Ireland.

  • So, it is not tax effective.

  • I am sorry.

  • Yes.

  • Eric Katzman - Analyst

  • Okay.

  • All right.

  • And then we covered the German tax thing.

  • Can you talk a little bit about the situation in China and the -- I think in the past, Brian, you've given us kind of capacity utilization numbers and kind of maybe a little bit more color as to what's happening there?

  • Brian Peterson - SVP Corporate Affairs

  • Well, yes, the capacity utilization is about -- again from an industry standpoint, it is hard to come by numbers.

  • But we have been running for the last quarter at about a 65% rate, Eric.

  • Margins, as we indicated, in our third quarter margins there were reasonably good.

  • We anticipated that it would be -- they would be coming off a bit.

  • They did.

  • The results for our fourth quarter were down a bit from the third quarter.

  • Also capacity utilization was off slightly.

  • However, as we go forward right now, we see things hopefully picking up a bit.

  • Eric Katzman - Analyst

  • Okay.

  • And then kind of heard some things out of Washington as to potential kind of rise or increase in the ethanol mandate from what is already out there with the last energy bill.

  • Can you talk a little bit about that?

  • Does that -- are those reasonable rumors?

  • And how do you see that affecting -- if that is true, how do you see that affecting pricing because the ethanol market has been a bit weaker than it was when the MTB switch was at its height?

  • Pat Woertz - CEO, President, Director

  • Well Eric, If you can tell me how to take rumors out of Washington, we would be better people at the end of the day.

  • I think whether or not there is any increase in the mandate, there is certainly a strong demand for ethanol.

  • And as you may have heard me at least talk a little bit before, as long as there is an economic incentive for blenders to take ethanol, it will continue, I believe, to grow even beyond the current mandate of 7.5 billion gallons.

  • It looks like it has room to grow to 14 billion or even 15 billion, which is a full 10% blend in the gasoline pool in the United States.

  • So, with or without a mandate, I think there is room to grow.

  • Of course, Washington discussion is always supportive of things that are good for the economy, good for the agricultural sector, good for renewable resources and so forth.

  • So, it may very well be an increase, but I think there is room to move even without it.

  • Eric Katzman - Analyst

  • Okay.

  • All right.

  • I think that does it for me.

  • Thank you.

  • Congrats.

  • Operator

  • And your next question is from the line of Christine Mccracken of Cleveland Research.

  • Please proceed.

  • Christine McCracken - Analyst

  • Good morning.

  • I just wanted to talk a little bit, you've touched on the U.S. and the EU Markets for biodiesel.

  • There have been some announcements in the past couple weeks relative to the Asian markets and the commitment of Indonesia and Malaysia to supply, I think, 40% or so of their palm oil to biodiesel, which is, I think, an interesting development.

  • Can you talk about how that might affect the global oilseeds supplies and how you look at the balance of food versus fuel for some of these oils?

  • Brian Peterson - SVP Corporate Affairs

  • Well, yes, I think the governments around the world are all looking at the potential for renewable fuels.

  • In Asia as well as North America, South America and Europe.

  • I think that -- we've announced a plant in Europe and with our joint venture partner there -- I am sorry, announced a plant in Asia with our joint venture partner there.

  • And I think the industry, there is a lot of potential to produce vegetable oils.

  • The home oil business in Southeast Asia is still growing.

  • I think right now there is certainly adequate supplies of vegetable oil in the world to produce a substantial portion of or use a substantial portion of it as biofuel before we run into any food versus fuel questions.

  • So, no, I think -- let me just say just quicker shortly, I think there is just a great opportunity to grow this business for biodiesel around the world.

  • And at some point, there will be some issues regarding supplies but I think we've got a long way to go before we get there.

  • Christine McCracken - Analyst

  • It seems, though, like 40% is a fairly large number in terms of percentage of the oil that's committed to any one new market.

  • You don't think that will be disruptive?

  • Brian Peterson - SVP Corporate Affairs

  • Well, I think if you look in Europe right now, I think that about 50% of the canola or of the rapeseed crop there is going into biodiesel or has the potential for going through biodiesel.

  • And that obviously, there has been price adjustments but in terms of creating shortages for the food market, it certainly hasn't happened.

  • Christine McCracken - Analyst

  • Fair enough.

  • And in the U.S. you committed to I think two new plants here.

  • From your perspective, how is the U.S. farmer going to adjust acreage from a corn versus oilseed kind of mix?

  • And when you look at different oils and the oil contents, obviously they vary quite a bit.

  • Rapeseed, obviously, and canola has a much higher oil content.

  • How do you look at where you put your plants relative to the available oil supplies?

  • Brian Peterson - SVP Corporate Affairs

  • Well, I think that's a very interesting question, Christine.

  • Of course as the biodiesel industry develops in the U.S. and demand for oil grows, there will be a propensity to -- and incentives for the farmers to shift to higher oilseed bearing crops.

  • I think that various sectors of the U.S. in its South and other areas would have the potential for growing canola, so I think we will just have to see what develops.

  • But I think you touch on a very interesting point and the growth of biodiesel probably will create some structural changes in the U.S. oilseed industry.

  • Christine McCracken - Analyst

  • All right.

  • You had mentioned that meal demand is kind of back up to normal levels.

  • Is that in Europe, globally or specific sectors?

  • Is there any area of weakness relative to the lingering effects of bird flu?

  • Brian Peterson - SVP Corporate Affairs

  • We're not seeing any at the present time, Christine, no.

  • We're not seeing any effects from bird flu at the present time.

  • Christine McCracken - Analyst

  • And then just finally, on the distillers market, obviously out of the dry milling sector, that's a big piece of the value, I think of the dry mill.

  • I am wondering, as you move forward, is that going to be -- how do you view your role in developing the distillers market?

  • Because I think it has been very successful in the cattle side of the industry, livestock industry.

  • I just am wondering are you working with some of the beef partners or milling partners to develop kind of incremental usage for distillers?

  • Brian Peterson - SVP Corporate Affairs

  • Absolutely.

  • As you know, we are in the feed business.

  • We have a feed Company.

  • We are also major suppliers of ingredients to the feed industry, so we have a lot of collaborative efforts.

  • Research going onto try to broaden the use of distillers, dried grains, in feed formulations.

  • In addition, we're doing some interesting work at universities to try to enhance the feed value of distillers grains, so yes, the answer to your question is yes.

  • We are working quite diligently in that area.

  • Christine McCracken - Analyst

  • Are you hitting roadblocks there?

  • Are you kind of in the initial innings or do you feel like you're making a lot of progress?

  • Brian Peterson - SVP Corporate Affairs

  • I think, not being a nutritionist, I can't comment really comment authoritatively on that but I do know we are making progress.

  • Christine McCracken - Analyst

  • I will leave it there.

  • Thanks.

  • Pat Woertz - CEO, President, Director

  • Thanks, Christine.

  • Operator

  • And your next question will come from the line of David Edwards of ThinkEquity.

  • David Edwards - Analyst

  • Good morning.

  • A couple questions here.

  • One is I understand that you don't want to break out the direct impact to biodiesel in the oilseeds business.

  • But I am wondering if there is any that way you can sort of characterize it, your profits are obviously up significantly there in that segment.

  • I'm just wondering if you can characterize the impact the biodiesel market has had on that segment.

  • Brian Peterson - SVP Corporate Affairs

  • You're talking in Europe?

  • David Edwards - Analyst

  • Yes.

  • Doug Schmalz - SVP and CFO

  • Well, we are at integrated supplier of biodiesel to the European market.

  • All of our biodiesel plants are at our crush locations in Europe and so we're fully integrated in that.

  • It is a little bit difficult to tell which side of the equation, where the profits are but let me just say that certainly, the biodiesel has significantly improved the demand for oil in Europe.

  • And with the good supplies we've had oilseeds in Europe, particularly the indigenous rapeseed crop, a good portion of that increased demand has accrued to our crush to market.

  • David Edwards - Analyst

  • Fair enough.

  • One other question is, with all of the new announcements for plant expansion, both yours and others, I keep hearing about constraint in terms of engineering and construction capacity.

  • Is that something that's sort of fair from your point of view?

  • It seems like there could be some issues in everyone getting the plants built that they've announced based on not having enough available bodies to get them done?

  • Pat Woertz - CEO, President, Director

  • Are you talking, David in the U.S.?

  • David Edwards - Analyst

  • Yes, in the U.S.

  • Pat Woertz - CEO, President, Director

  • Actually part of our review of our new projects and was that very item.

  • And I think actually somebody of the size and scope of ours, as well as the engineering, we have our own ADM mechanical, which also helps in terms of major vessel construction.

  • So I think we're in good shape.

  • But it is difficult as there is a lot of buying going on and a lot of building but I think we're in an advantage state there.

  • David Driscoll - Analyst

  • Great.

  • Thanks a lot.

  • Pat Woertz - CEO, President, Director

  • Thanks, David.

  • Operator

  • Your next question will come from the line of Ken Zaslow of BMO Capital Markets.

  • Ken Zaslow - Analyst

  • Good morning, everyone.

  • A couple questions.

  • In terms of the crushing from soy to rapeseed in Europe, can you talk about how much has shifted, what is your before picture and what's your after picture in terms of 1 million metric tons?

  • Brian Peterson - SVP Corporate Affairs

  • Oh, boy what, we're working on right now is our Europoort plant.

  • Europoort has a nominal capacity of about 6,000 tons a day.

  • We are converting half of it to the capability of crushing rapeseed.

  • Ken Zaslow - Analyst

  • And how much of your total capacity in Europe will be rapeseed, and how much will be soybeans?

  • Brian Peterson - SVP Corporate Affairs

  • I have to do the math, and --

  • Pat Woertz - CEO, President, Director

  • I think it is about half.

  • Brian Peterson - SVP Corporate Affairs

  • Yes, about half.

  • Ken Zaslow - Analyst

  • That's fine.

  • And so if you're doing it, I am assuming you're not too worried about this biodiesel tax issue in Germany.

  • If you're moving to rapeseed, which is going to be more your biodiesel, you can't be overly worried about it.

  • Brian Peterson - SVP Corporate Affairs

  • The Europeans are moving towards mandated biodiesel usage or mandated biofuel usage, of which biodiesel will play a very important role in that.

  • Exactly how the parameters of the program aren't totally clear yet.

  • But it is clear that the demand will be there, Ken.

  • Ken Zaslow - Analyst

  • Okay.

  • We have confidence that it will be a business with good returns.

  • Pat Woertz - CEO, President, Director

  • So, not overly worried does equal confidence.

  • Ken Zaslow - Analyst

  • Okay.

  • In terms of the capital projects, which projects have you accelerated and which ones have you delayed?

  • Pat Woertz - CEO, President, Director

  • Well, we've looked at some of the permitting issues here in the U.S., and have worked towards acceleration, I would say, on all four of the biofuels projects; the two biodiesel and the two ethanol.

  • That doesn't mean the completion date will be any sooner but we've been working hard on the front end engineering and the permitting.

  • And tried to remove some roadblocks and offer some opportunities to move some resources around to accelerate those as best we can.

  • We took off the table a nitrogen fertilizer opportunity in South America that didn't make sense to us in looking at the current markets.

  • We've tweaked some others in terms of continuing to look at, again, the right way to apply our resources going forward.

  • So, those would be a couple of examples.

  • Ken Zaslow - Analyst

  • And in terms of the Brazil -- it sounds like Brazil fertilizer, is that what you said?

  • Pat Woertz - CEO, President, Director

  • Yes.

  • Ken Zaslow - Analyst

  • And because your predecessor did say that they will -- that ADM would be looking into fertilizer.

  • Is that completely off the table?

  • Pat Woertz - CEO, President, Director

  • Well, we looked into an opportunity and that opportunity progressed a ways but we killed it.

  • So, it doesn't mean nothing ever ever but that's a particular one that stopped.

  • Ken Zaslow - Analyst

  • I think that's a good development.

  • Okay.

  • And then in terms of your distribution in the U.S. in terms of ethanol, are you broadly across the entire U.S., is there certain regions you're stronger or weaker in, in terms of your distribution?

  • Pat Woertz - CEO, President, Director

  • Well, I am going to kind of take a shot here because I am continually impressed at our integrated distribution system with ethanol.

  • Production in a lot of places but the far reaching opportunities to distribute that.

  • And of course back to the West Coast where I am familiar with, we've got a 99-car train that does a back and forth trip constantly to southern California.

  • So, that's an example of getting to a market that has had a need for awhile for ethanol and that continues to grow.

  • Certainly, the Mississippi River and everything that it provides.

  • We have barges.

  • We do backhauls.

  • We have good storage capacity.

  • I think the distribution system is unsurpassed.

  • Ken Zaslow - Analyst

  • Is there any pockets in the U.S. that you're particularly strong in that you have a lot more distribution?

  • And other side is there a pocket that you don't have as much distribution that you would want to go?

  • Pat Woertz - CEO, President, Director

  • Well, I would say we've been where the demand has been in the past, and of course the Midwest is there and always has been.

  • Every -- I mentioned earlier that there are market opportunities to grow, and sometimes you need to do this along with your customers.

  • They need to build out some infrastructure and we may build along with them in terms of additional rail cars or the like.

  • So, it is an opportunity to do it together.

  • Ken Zaslow - Analyst

  • And my last question is on high-fructose corn syrup, how do you see it unfolding over the next six or so months in terms of pricing?

  • Is the capacity tight enough to get price increases?

  • What about the Mexico situation?

  • If you could talk broadly and as specifically as you can get on that.

  • Pat Woertz - CEO, President, Director

  • Yes.

  • We're still very early in the planning cycle for that.

  • And we've had some contact and certainly with customers actually earlier than perhaps was normal.

  • So, that's probably a perceived response to the market conditions.

  • But we're not counting anything on the table while we're still in the process.

  • So, when the cycle finishes, and usually we provide some information around that early in the new calendar year in January or February.

  • Ken Zaslow - Analyst

  • Great.

  • Thank you.

  • Operator

  • And your next question will come from the Ann Gurkin of Davenport.

  • Ann Gurkin - Analyst

  • Good morning.

  • Just wondering if we can spend a little time on how your plans for work on microorganisms?

  • And I know you're starting production of a non-petroleum based plastics, kind of just an update on that whole area.

  • Pat Woertz - CEO, President, Director

  • You're right.

  • The PHA, which is a bioplastic or made from renewable and natural sources, we have a joint venture with Metabolics.

  • We've kind of announced going forward with that construction of that plant after a pilot operation has been successful.

  • The plant will be in Ohio -- I think -- I am sorry, Iowa, and we continue to have the work with Metabolics underway.

  • I don't know, Brian, if you have any more on the organism background?

  • I do not.

  • Brian Peterson - SVP Corporate Affairs

  • No, I don't have anything on that.

  • Pat Woertz - CEO, President, Director

  • But I don't see any roadblocks.

  • Actually, we've moved forward with our next milestone with our Company there.

  • Ann Gurkin - Analyst

  • As you look out a couple years, can you help me with where you see the size of the U.S. biodiesel market?

  • Brian Peterson - SVP Corporate Affairs

  • The biodiesel market right now I think is really difficult to predict in the U.S.

  • Frankly, because there is a lot of discussion going on in various states.

  • Some states have incentives.

  • Some states have mandates.

  • A lot of states are discussing them.

  • I think that it just -- from the standpoint that across virtually all the whole political spectrum in the U.S., there seems to be a tremendous interest in renewable fuels, both at the federal level and at state levels.

  • So, I think we're going to have opportunities, really good opportunities.

  • But at the present time, until all this all settles out, Ann, to say what the size of the market is going to be I think is really pretty difficult.

  • Ann Gurkin - Analyst

  • And one last thing, what tax rate should we use for next year?

  • Doug Schmalz - SVP and CFO

  • We think we will number the 31% to 32% range.

  • Ann Gurkin - Analyst

  • That's great.

  • Thanks.

  • Pat Woertz - CEO, President, Director

  • Thank you, Ann.

  • Operator

  • Your next question is from Diane Geissler of Merrill Lynch.

  • Diane Geissler - Analyst

  • Good morning.

  • A question on the capital spending number you have given.

  • Did that reflect only projects that you've publicly announced, or is there something -- I know you had been looking at ethanol biodiesel and bioplastics.

  • Is there something built in there for that third piece?

  • Pat Woertz - CEO, President, Director

  • I think there is -- the only thing not in that 2.4 I mentioned, Diane, is sort of the underlying maintenance capital.

  • So, you might think about that as being the new projects.

  • And as far as; some we announced, some we're working on, so it is a combination of those larger ones, which you already heard about, and some smaller ones.

  • Diane Geissler - Analyst

  • Okay.

  • But primarily your incremental capital spending will be focused on biofuels and bioplastics?

  • Pat Woertz - CEO, President, Director

  • The word primarily is accurate, yes.

  • We have cocoa plant and so forth, we've talked about some de-bottlenecking in certain places and wet corn mills and so forth, but yes, primarily.

  • Diane Geissler - Analyst

  • Just on the biodiesel in Brazil, the 2% mandate in either 2007 or 2008, can you give me an idea about how much quantity that would be in terms of pounds or gallons or however it is going to be quoted?

  • Brian Peterson - SVP Corporate Affairs

  • I don't know that I have any information, Diane, on the size of the market there.

  • It is 2% -- I am sorry.

  • It is 2% in 2008.

  • I said 2007 before.

  • It is 2008.

  • And 5% by 2013.

  • But I don't have information with me on the total size of that market.

  • Diane Geissler - Analyst

  • Okay.

  • Well, maybe I will check back with you offline.

  • And then just on the fructose, the comments -- and maybe I didn't hear this right.

  • But your comments sounded that you've seen industry volume pick up in because of the continued growth in the energy drink segment, is that -- did I hear you right?

  • Brian Peterson - SVP Corporate Affairs

  • Yes.

  • Diane Geissler - Analyst

  • How has that impacted volume?

  • Is it a --can you quantify that at all in terms of what kind of demand that shift has driven?

  • Brian Peterson - SVP Corporate Affairs

  • Well, it has generated, how should I put it, a small single digit increase in total consumption of HFCS.

  • Diane Geissler - Analyst

  • Very well.

  • It is interesting because I know over the last however however five or 10 years where we've talked about this shrinkage in the carbonated soft drinks, this has to be one of the first times that we've seen a volume pick-up in recent memory.

  • Is that accurate?

  • Brian Peterson - SVP Corporate Affairs

  • Yes.

  • This is shipments to the U.S.

  • Diane Geissler - Analyst

  • Right.

  • Brian Peterson - SVP Corporate Affairs

  • Yes.

  • It has been pretty flat up until now, yes.

  • Actually, there were some declines.

  • So, the growth in the energy drinks is really -- is generating some demand, and enough demand to cause the whole sector to increase in the low single digits.

  • Diane Geissler - Analyst

  • Okay.

  • Well, I think that's it for now.

  • Thank you.

  • Operator

  • Your next question is a follow-up from David Driscoll.

  • Pat Woertz - CEO, President, Director

  • David, you get two today.

  • David Driscoll - Analyst

  • I appreciate that.

  • Well, I got out of the queue and back in for everyone else.

  • I have a number of questions here.

  • The U.S. crushing margins, Brian as you mentioned on your prepared remarks, have escalated -- or that's not wrong word, have increased very nicely over the last three months.

  • Are the current margins indicative of your results in the quarter?

  • Or it is always hard for us to tell on the outside whether or not you've locked in those margins in previous periods.

  • Are your results indicative of the board margins right now that are around $0.80?

  • Brian Peterson - SVP Corporate Affairs

  • You're talking about our results for the fourth quarter?

  • David Driscoll - Analyst

  • In North America, yes.

  • Brian Peterson - SVP Corporate Affairs

  • Our results in North America for the fourth quarter reflected increased board margins.

  • David Driscoll - Analyst

  • But to the extent, again, at $0.80 of crushing margins, that would put it at its roughly close to its historical high.

  • Would you say that these results are indicative of the current margins or is it just simply an increase year-on-year?

  • Brian Peterson - SVP Corporate Affairs

  • Well, I think we indicated the margins in the fourth quarter were in the neighborhood of $0.75.

  • The board margin average was in the neighborhood of $0.75.

  • And currently, it is about in that same level.

  • But that is an increase from a year ago, yes.

  • Okay.

  • David Driscoll - Analyst

  • Not quite sure you answered my question but I understand.

  • Second question that I had for you was, Pat, do you have any concerns about the ethanol volumes coming on line right now?

  • Is there any danger to the fact that this new volume doesn't really have a home and that we see temporary disruptions as infrastructure is built out?

  • Pat Woertz - CEO, President, Director

  • I love your adjectives of danger and concern.

  • I think any short-term disruptions due to plants coming on are kind of natural in many arenas.

  • You have a plant come on, it is not a smooth item.

  • It can be a little bit of a lump.

  • So, lumpiness or some volatility here I think can be expected.

  • One of the things that's helpful is we look out again in working with our fuel customers here is smooth transition, is smooth movement of those new volumes, in terms of both their building out their infrastructure as well as what we're able to bring on.

  • So, I think we kind of worry about our own business and our own markets coming on smoothly.

  • And that's of primary importance to us.

  • David Driscoll - Analyst

  • On the high-fructose side, just picking up on a line of logic from some of the other questioners.

  • We've gotten this nice agreement, this substantial agreement with Mexico.

  • But in past conference calls you've indicated that your front end grind in corn was operating at 100%.

  • If there is new volume demand for high-fructose corn syrup, can ADM participate, i.e. do you have the starts you can feed those fructose operations to produce more volumes?

  • Brian Peterson - SVP Corporate Affairs

  • David, in my prepared remarks I talked about our flexibility built into our system and our ability to shift the start stream to products tha have higher profitability.

  • As you know, we produce probably 25 different products from the start stream.

  • Yes, we're looking at the flexibility we have in the system, some products generate more profitability than others.

  • And those are the ones where we'll focus on sending the start stream.

  • So, we do have -- it is not -- we don't have the flexibility to shift the total start stream from product to product but there is a margin there, a marginal amount that we can move and we'll be doing that.

  • We'll be looking at doing that as we review the profit margins in these various products.

  • Pat Woertz - CEO, President, Director

  • David, and I might add to that, that some of our de-bottlenecking projects give you what I call inexpensive creep or creep in terms of volume adjustments there that could go to the start stream.

  • David Driscoll - Analyst

  • And then if I can and I appreciate all of these questions.

  • Just two more previous ones in ag services, you mentioned in your prepared comments -- I am sorry in the press release, that transportation was notable in its improvements year-on-year.

  • When you guys talk about transportation in ag services, are you talking about the margins that you make on the physical rates you charge for barging grains, et cetera?

  • Or is this something that's more in the financial markets, i.e. on the London freight market where you made trades and you're seeing substantial gains?

  • Pat Woertz - CEO, President, Director

  • No, no, it is the former.

  • It is the former.

  • It is the actual rates on physical transportation, David.

  • David Driscoll - Analyst

  • So, would it be fair to say that these rates are -- at present there is no particular reason to think aren't sustainable?

  • Pat Woertz - CEO, President, Director

  • Well, they're high.

  • They're high relative to history.

  • They're not necessarily all-time highs in all areas.

  • But there is a -- even with fuel prices where they are, the rates have seemed to stay up there and they're kind of related to that in some way.

  • David Driscoll - Analyst

  • Last question is for Doug is on your financial line embedded in the other segment.

  • Doug, I don't have much perspective here on the ADM Bank and the ADM Insurance Company and so forth.

  • Can you talk to us a little bit about the results in the quarter and then, again, sustainability of those results?

  • Doug Schmalz - SVP and CFO

  • Well, I think if you look at the insurance, the bank, our ADM IS and investor services group, they're relatively steady in earnings power.

  • As markets heat up and there's more activity, ADM IS will improve as they add more seg funds and so forth.

  • And they do make a lot of earnings off of interest off of those seg funds, so they're relatively steady, though.

  • The biggest swing item in there is our private equity funds.

  • And as you well know we're on a wind down of those.

  • As they wind out we've had gains in some quarters, others have been relatively flat or even small losses.

  • I think if you look for the full year this year we're maybe down -- 60 million of the swing down is due to the equity funds.

  • This year our profits are only around 16 million total.

  • Last year there was 70 some million.

  • Those are winding out.

  • But once those are out of the there, the other earnings are relatively consistent.

  • David Driscoll - Analyst

  • Did private equity affect the quarter?

  • Doug Schmalz - SVP and CFO

  • It was up slightly, I think 12 from 9.

  • David Driscoll - Analyst

  • Okay.

  • Very good.

  • Thanks for all the questions, everyone.

  • Operator

  • [OPERATOR INSTRUCTIONS]

  • Pat Woertz - CEO, President, Director

  • Okay.

  • Do we have any more?

  • Operator

  • There are no further questions at this time, ma'am.

  • Pat Woertz - CEO, President, Director

  • Let me wrap up by thanking everyone again for their interest, their questions, their confidence in us going forward.

  • As I did mention earlier, we'll try to do this as not only a live Webcast but one with graphics next quarter.

  • And mark your date of November 8 in Chicago and maybe with an additional optional side trip the second day for those that would care to do that on analysts day.

  • We're pleased with our performance this quarter.

  • And as we close the fiscal year, we're pleased with where we sit in the balance sheet, good strength, flexibility, momentum and so forth.

  • So, we continue to try to earn your confidence as we move forward.

  • Thank you, everyone, and good morning to you.

  • Operator

  • Ladies and gentlemen, thank you for your participation in today's conference.

  • This concludes the presentation and you may now disconnect.

  • Have a wonderful day.