Archer-Daniels-Midland Co (ADM) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Archer-Daniels-Midland Company second quarter 2007 earnings conference call.

My name is Onika, and I will be the operator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

At this time, I would now like to the turn the call over to Mr. Dwight Grimestad, Vice President, Investor Relations.

Please proceed.

Thank you, Onika.

Good morning, and welcome to ADM's second quarter earnings conference call.

Before we begin, I would like to remind that you we are Webcasting our call, and you can access it at ADM's website, www.admworld.com.

The replay will also be available at that address.

For those of you who would like to go to our website, the presentation for this call is posted in the Investor Relations section.

For those on the website, please turn to slide two, the Company's Safe Harbor statement, which says that some of today's comments constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, Company performance and financial results.

The statements are based on many assumptions and factors, including availability and prices of raw materials, market conditions, operating efficiencies, access to capital, and actions of government.

Any changes in such assumptions or factors could produce significantly different results.

To the extent permitted under applicable law, the Company assumes no obligation to update any forward-looking statements as a result of new information or future events.

I will now turn the call over to Pat Woertz, ADM's CEO and President.

Pat?

Thank you, Dwight.

And good morning, everyone.

In keeping with ADM's safety commitment, I would just like to start with a brief safety message.

Cell phone use while driving continues to be one of the top four causes of accidents here in the U.S., and growing, and also is a high accident rate cause outside of the U.S., particularly in developing countries.

We encourage all of our colleagues to not use a cell phone while driving, and if it is an emergency, to assure it is a hands-free phone or a very brief call.

So if anyone is listening to the call this morning while they're driving, we encourage you to call back and listen on the website.

Over to the earnings.

We're very pleased this morning to discuss with you our outstanding second quarter.

We did achieve record results, and we are particularly pleased that all operating segments delivered solid performance.

We did beat our stated metric.

If you recall, we stated two new metrics last quarter.

And we met or beat both of those for both costs and return.

And we'll have more to say about that in a moment.

I would like to personally thank all of our employees for the many excellent contributions made this quarter in making this possible.

Our work here truly is a team effort.

Our continued strong momentum underscores, I think, our ability to manage through challenging and changing market conditions for both, again, growth and returns.

We remain very confident about our strategic direction, and we continue to make progress along that strategic path.

I do believe our opportunities for the future are indeed great.

We made some changes, hopefully improvements this quarter, and our website has some slides.

It also has some additional new slides this quarter to provide some further information and hopefully enhance understanding as we review our results today.

Also participating on the call each quarter, our plan is to have myself and Doug Schmalz, our Senior Vice President and CFO.

And then we plan to have sort of a guest person participating in the Q&A each quarter, depending on the issues of the day.

So today we'll have our guest participant is Brian Peterson, who of course, you're familiar with on the call, our Senior Vice President of Corporate Affairs.

And in the future we might have John Rice as we get further along with crop and corn issues, Steve Mills as we talk more about our strategic plan, or Bill Camp on some projects, et cetera.

So a little change-up in format, and hopefully that will be helpful.

At the conclusion, of course, of Doug's remarks today, we all will be happy to answer your questions.

So over to you, Doug.

Okay.

Thank you, Pat.

And good morning to everybody.

It is great to be here, and I hope everybody is having a nice day, although it is early already.

Hope the day will be fine.

But anyway as Pat mentioned, our financial summary slide presentation is accessible to you all on our website.

And if you just follow the instructions set forth in our press release, you can get to that.

I will refer to the slide numbers as I go through my comments today so you can track with me as we proceed through.

On slide three is just a summary of our contents that we're going to cover today.

As Pat mentioned, we've added a number of slides which will hopefully help in analysis of our operating results.

And we hope they will be of assistance to you.

Moving onto slide four, our financial earnings highlights, our net sales and other operating income increased 18% to almost $11 billion.

That is a record quarterly sales number.

It's the first time we have exceeded $10 billion in sales.

Our gross profits were up 16% to $908 million from $783 million last year.

Oilseed Processing increased on improved market conditions and margins in all geographic regions.

In addition, the Corn Processing margins improved on increased sweeteners, starch and ethanol selling prices.

And Ag Services gross profits increased on improved global merchandising and transportation results.

These margin improvements were partially offset by increased manufacturing costs.

Our selling, general and administrative expenses remained relatively flat, about 1% increase to $298 million.

That increase is due principally to the effect of the stronger Euro on our currency translations.

Our financing costs are $46 million this year compared to $27 million last year, which is a $19 million increase.

If you look at last year if you recall, we had a Brazilian tax credit which came back to us after we had won that position in court, which were related to financing transactions.

So there was $19 million of a credit in last year.

So if you take that out, you'd look at it and you'd see it is approximately the same year-over-year in our financing cost area.

Our effective tax rate this year is 29.8% compared to 27.4% last year.

Last year's tax rate included a $36 million adjustment which we had made on our tax provisions upon the reconciliation of our various returns to our book provisions.

So if you remove that, we're actually down in effective rate, and that's principally the result of changes in geographic mix.

Our net earnings are a record of $441 million, up 20% over $368 million last year, resulting in a diluted earnings per share of $0.67 compared to $0.56 last year.

Moving onto page five is a summary of our earnings components.

Some of the items that are in there this year, as I said, we reported $441 million or $0.67 a share.

We had LIFO charges in there of $67 million after tax, and we had a gain on security transactions of $4 million after tax.

So excluding those, we would have been at about $504 million or $0.76 a share.

Last year we had a number of items, we reported $0.56 a share, $368 million.

We had gains on security transactions, all of these numbers are after tax, of $14 million, an abandonment charge of $19 million, plant closing costs of $15 million, the Brazilian transactional taxes of $13 million, the tax credit of $36 million, and LIFO income of $2 million.

Excluding those, we would have been about $337 million or $0.51 a share.

So on an excluded basis, we would have been up about 50% year-over-year on our earnings.

Moving onto page six, as we did put out in our November analyst meeting in Chicago, we established two performance objectives against which we will report on a quarterly basis.

First, we set a return on net assets as you recall, a RONA objective of 13%.

For the twelve months ended December 31, 2006, our return on net assets is 14.4%.

This RONA does reflect the strong earnings performance.

At the same time, higher commodity price levels have resulted in a higher working capital level and net asset values, which do have the effect of reducing our RONA returns.

This does exceed our approximate cost of capital of around 8%, so we're very pleased with these results.

Our cost per metric ton, which we targeted at $110 per metric ton for the fiscal year-to-date 2007, we're currently running at a rate of $109.89, slightly lower than our stated objective.

To continue to meet this objective, we're challenging all our costs and expenses and will establish benchmarks where comparable external data is available.

If you recall, I think we talked about this at the conference, every $1 change in this metric ton category translates into approximately a $50 million pre-tax amount on an annual basis.

So it is a large number.

We're very attentive to it, and we're watching our costs at all times.

There are details of those calculations of these performance metrics.

They can be found in the appendix to this presentation.

Moving onto slide seven, it is a summary of our operating profit by segment.

I would just like to comment on this page, anyway, that our overall segment operating profit is up 46% to $767 million from $524 million last year.

Our Corn Processing numbers and Ag Services numbers are record numbers for the quarter, up significantly over the previous year.

Oilseed Processing was almost a record number, it missed it by a few million dollars where we met that, or at least had that record about two quarters ago.

So overall our segment operating profit has improved very substantially.

I will go on now to page eight, and we'll go through each one of the segments, and sort of go through an operating profit analysis quarter over quarter.

In Oilseed Processing, our operating profits have increased from $128 million to $192 million.

That's primarily driven by the improved margin performance of approximately $94 million.

Our volumes were up slightly year-over-year and crush margins increased from prior year levels, as oil and meal demand improved.

The NOPA industry capacity utilization in North America was around 92% for the quarter.

That's up slightly from 91% last year.

Partially offsetting the gains were increased operating costs of $37 million related principally to increased energy, maintenance, and the effected of the strong Euro.

As you well know, we have a lot of Oilseed Processing assets in Europe, and so the Euro does impact that as we move through.

In addition, our earnings on non-consolidated affiliates increased $7 million.

As we look at the current market conditions in Oilseed segment the crop availability looks good.

United States has an adequate carryout of soybeans, and the current crop in South America appears to be adequate to meet our needs.

Moving onto page nine is a Corn Processing segment analysis.

Our earnings increased to $335 million from $236 million last year.

That's due principally to the improved margins of approximately $75 million, $33 million of which came from the sweetener and starch category, and $42 million from bioproducts.

The margin improvement was due principally to the increased sweetener, starch and ethanol selling prices, partially offset by higher corn costs.

Our volumes were comparable to the prior year, as we continue to see solid demand for our sweetener, starch and ethanol products.

Lower operating costs did add to the improved results by $5 million, and our equity affiliates contributed a $4 million increase.

Last year's results were negatively impacted by the $15 million severance costs which were associated with the closure of our citric acid plant.

As we look at the current market conditions in Corn Processing segment, we see corn crop expectations being the leading topic of discussion, as spot corn prices are well above the spot prices we saw last quarter.

On the product pricing side, as we had indicated last quarter, we have contracted a 20%-plus increase across our sweetener and starches product line for calendar 2007.

Selling prices will be up in calendar '07.

We expect our ethanol prices in the third quarter, Jan through March, to be similar to the prices received on our second quarter shipments.

With respect to the corn crop, which these days is receiving a lot of public attention, we see U.S. farmers evaluating their options as they make their planting decisions.

The economics for the farmer are very favorable for corn plantings relative to the soybean plantings.

These favorable economics for farmers are applicable to all geographic regions.

We don't know what size the global corn crop will be next year, but we believe the current crop prices give farmers incentive to plant additional corn acres.

Moving onto page 10, Agricultural Services profits increased to $123 million from $94 million last year, due principally to $41 million of improved transportation results and $7 million of global merchandise and handling results.

Those gains were partially offset by the operating cost increases of $23 million, reflecting higher transportation operating costs.

Our equity and earnings of affiliates increased $4 million.

We see continuing solid demand for storage and handling.

We also see regional imbalances in the global grain markets, where opportunities may present themselves to add value to our operating results going forward.

On page 11 is an operating profit analysis of our Other segment.

Our Other segment operating profits increased to $117 million from $66 million last year, due to the improved earnings of equity affiliates of $18 million, principally our managed fund investments, and a $14 million increase in operating results of our financial operations.

In addition, last year's food and feed ingredient results included a $31 million asset abandonment charge.

Our current year food, feed and industrial operating margins declined $8 million from the prior year levels, as cocoa processing margins declined from very strong levels last year, and wheat milling margins showed some improvement.

Our current market conditions show an improving cocoa and wheat processing margin outlook for our third quarter.

Slide 12 is a summary of our corporate results, cost results.

Corporate results were a charge this year of $138 million for the quarter.

That compared to a charge of $17 million last year.

Our investment income in the current year's quarter was positively impacted $34 million by increased rates and higher levels of invested funds.

The impact of LIFO inventory valuations was to decrease corporate results by $110 million, as the current year's quarter included a $107 million LIFO charge, compared to $3 million of LIFO income last year.

Last year's corporate results were favorably impacted by security gains of $22 million, and the $19 million credit resulting from reversal of previously assessed Brazilian transactional taxes, which were on financing costs when we resolved those in the tax courts.

Page 13 is a summary of our financial condition.

Working capital increased $1.7 billion due primarily to the effect of the higher commodity prices and commodity levels.

Our working capital includes readily marketable inventories, which have a carrying value of approximately $4.4 billion at December 31.

That increase in working capital was financed principally with cash generated in operations and from commercial paper borrowings.

As our capital spending has increased on recently announced projects, our property plant, and equipment has increased to $405 million.

On slide 14 we've given a schedule of current projects under construction, and some that are now operational.

Just to go through those in summary, we have three biodiesel plants.

The one in Mexico, Missouri is operational.

And the Velva and Rondonopolis plants are currently in construction.

We have a co-generation plant in Clinton, Iowa, ethanol plant in Columbus, Nebraska, a cocoa plant in Hazelton, Pennsylvania, our PHA plant in Clinton, Iowa, and co-generation plants in Columbus, Nebraska, are all in process of construction.

We have two plants, the Cedar Rapids ethanol plant and propylene, ethanol, glycol plant in Decatur, which are still in the permitting process.

Our new capital projects management program is underway.

Coordination of our purchasing of construction materials and equipment is the prime emphasis.

Purchasing leverage will allow to us improve delivery time in reducing our costs of materials.

And early indications are that we will improve on our original estimated project costs.

Page 15 is a cash flow highlight.

If we look at our cash flows that are generated principally from operations, and those funds were used in support of our working capital increases, as I mentioned earlier.

Our capital spending for the six months increased to $560 million, as construction on many of our recently announced projects are underway, and commercial paper borrowings were used to finance these and other cash needs.

During the first half of fiscal 2007 we acquired 4.1 million shares of the Company's stock against our publicly announced share repurchase program for $136 million, at an average cost of $32.80.

We also paid dividends of $131 million.

With that, that concludes my remarks, and I will now turn it back to Pat for questions.

Thank you, Doug.

Onika, operator, if you would open the lines for questions, Brian, Doug and I are here to respond.

[OPERATOR INSTRUCTIONS] John McMillin, Prudential.

Good morning, and congratulations, everybody.

Just the LIFO charge.

The LIFO charge in this quarter, I am calculating it at $0.10.

You seem to use a number less than that.

Doug, can you help me there?

I used 67 -- it's 67 after tax, which would be about $0.10. 650 million -- .

So it's a $0.10 LIFO charge?

Right.

It was $100 million pre-tax, before tax. [inaudible] pre-tax, 67 after.

That's a pretty good tax rate that you assign to LIFO.

Why is that?

Why would the LIFO tax rate -- maybe we can do this offline.

But why would the LIFO tax rate be so much higher?

We use our effective -- the effective federal and state rate combined.

We don't factor in, like when we have tax credits that come back for foreign tax credits and that type of thing.

It is a pure rate that we use when we calculate those.

Okay.

And just bigger things.

Pat, obviously there is a lot of turbulence, I think your word was at the conference, and you could even argue that turbulence has increased as corn has gone up.

And you certainly have kind of managed through it in this quarter.

Can you just talk about how sustainable these trends are?

I guess you're giving some guidance for the March quarter about ethanol.

But how sustainable these kind of numbers are, and what are the key variables?

I think as you see the markets as well as others, turbulence or volatility, so to speak, are both in regard to input and outputs.

But I do believe we are very effectively equipped to manage through these challenging times.

I kind of used the analogy of a pilot last time.

I think our pilots are better than ever, with great avionics and great metrics.

And we have the breadth and depth of the asset base to get through that.

So, I am confident for both -- we're always talking about the long-term, and we're not trying to give guidance in the short-term.

But I think we have confidence in the ability to manage through this.

I have always been wondering why I have not been able to get Dwight on his cell phone.

So I now know.

Hey, there you go. [laughter] Thank you for telling me that.

I had to get him.

Okay.

Thank you.

Eric Katzman, Deutsche Bank.

Congratulations.

I guess my question, maybe to follow-up on John's a little bit, is you mentioned that, I guess, pricing in ethanol will be kind of flattish sequentially.

But I assume it is -- is it fair to believe that corn costs are up, so the margin there will be hit?

And have there been any additional changes to the way that industry is pricing?

I think last call, you mentioned that the time frames on contracts was changing.

Eric, this is Brian.

As Doug mentioned, we have seen some increase in corn costs.

We're not making projections going forward as to what our corn costs are going to be.

But I think that we obviously are living with the fact that we've got a corn market which is showing higher corn prices.

That's necessary to attract the acres that we need to get the production up to meet the strong demand that we're seeing going forward.

On your -- what was the second part of your question there, on the -- ?

Eric?

Yes, well, I think that kind of answers it.

But it was about the change in the contracting.

Last quarter you had mentioned that it had normally been a six month rollover on contracts.

But then you said last quarter that that's changing.

Some are shorter term, some are longer term.

So maybe you could just kind of update on how that industry is evolving in terms of contracts.

We're continuing to see the change that we referred to last time.

That is a variation in the type of contracting that our customers want to do.

So what we described last time, that is some people looking more at a shorter-term, some people looking at longer than six months.

The mix that we referred to last time, we continue to see that's the sort of contracting our customers prefer at the present time.

And then as just a follow-up, and I will pass it on.

Pat, at the meeting you held in Chicago, you did kind of give us a RONA target.

Obviously, you exceeded that.

And I guess my question is kind of reflective of what was asked to you at the conference, is that the industry's capacity utilization is quite high, so I suppose it is expected that your RONA would be above your target at this part of the cycle.

But how do you see kind of 90% capacity utilization playing out as you get natural kind of volume growth, and you get tighter, are we going to -- do you think we will see more capacity come online from not just you, but other players over the next kind of year or two?

And I am not talking so much about ethanol, but I am talking more about the more kind of, let's say, core heritage parts of the business?

Yes, well, there is a couple questions in there, Eric.

First of all, our RONA target, we're trying to be particularly clear about that.

It is a target that we think is good.

It is above our cost of capital, as Doug referred to, and we think it is a valuable and a purposeful stretch for the organization to think that quarter after quarter, time after time, long-term average cycles, et cetera, that we're going to earn greater than a 13% rate of return -- or return on net assets.

And we think that's an important measure to kind of help the full organization look towards that extraordinary target.

Sure, there will be opportunities that will attract investment and we'll need to manage through that.

But I think it is -- it will be above our competitors, I believe, return.

And it will be not only above our cost of capital, but these new projects we're investing in as well should exceed the returns of our full portfolio as it is operating today.

We have a fair amount of what you argue is preproductive capital in the system right now with all of those projects that Doug referred to.

So when those projects come online, and they start to generate, we have this opportunity to continue to meet and exceed that rate of return.

Just a comment, and I will let it go.

The history of the industry, and granted it is more consolidated, is that as you get to 90%-plus utilization rates, and I am sure Cargill and Bunge and Dreyfus kind of share this, when it gets up there, you have to add capacity.

And is doesn't come in 2% or 3% increments.

And I guess that's just what I worry about as the utilization rates tighten.

But I will just pass it on.

Thank you.

Diane Geissler, Merrill Lynch.

Congratulations.

And thanks for the detailed slides, which I'm finding very helpful.

You're welcome.

Kind of longer term on ethanol and sort of on the back of this increased -- potential increased mandate for ethanol going forward, and kind of the capacity that's built around that, et cetera, I am just curious, how do you think that will play out?

I mean obviously, early stages here of an increase.

But do you see a point where ethanol pricing decouples from crude as the mandate increases over time?

Is that a possibility?

Let me start on this, Diane, and maybe Brian wants to build on it.

I think that there has already been somewhat decoupling that you referred to, between ethanol pricing and crude oil, petroleum crude oil.

It is more reflective of gasoline stocks and gasoline pricing in the U.S., which is, I think your question was related to the U.S., which follows sometimes crude leads, but have their own distinct regional markets, regional transportation issues, and weather-related issues, inventory, et cetera.

So I think ethanol will continue to kind of track with gasoline inventories and gasoline pricing, and be part of that pricing structure.

Brian, you may want to comment on, you mentioned the President's remarks.

So maybe on mandates, et cetera.

Right.

We see a lot of interest in Washington these days in promoting the growth of renewable fuels in this country as part of an energy policy, a national energy policy, that's trying to address energy, security, environmental issues, and also rural development.

We support these efforts.

We're very, very interested in making sure that we have rational growth in this industry.

So I think that it is important that these mandates, as they get discussed and eventually as they get implemented, that they're phased in so that they reflect the industry's ability to meet these mandates with proper raw material supplies.

We are -- we're committed at ADM here, to increasing supplies of renewable fuels to meet the country's challenges.

We're doing research on cellulosic ethanol.

We think that this is a very important component of the energy policy.

And so we are interested seeing the mandates and increases in renewable fuel standards be phased in to reflect the availability of raw materials.

Okay.

I appreciate those comments.

Can you just tell me the -- from your capital projects update slide, the -- are your -- both of your ethanol plants on schedule, in terms of what you said internally?

I think one is coming on line in the first quarter, and one is in the second quarter.

Is that still an appropriate time frame to think of for your new capacity?

Yes, if you look at that -- .

Calendar quarter of '08.

I think due to permitting, we might find Cedar Rapids on a six month push, six month delay from maybe our original comments.

What we're going to try to do as well on this chart, Diane, in the future, is kind of lay out a Gant follow type of -- so you can actually see when these plants will come on line all on one chart.

And if in fact, there is any advancement or delay, you're also able to see that, so thanks for the question.

I think the other is on track.

Okay.

So you would expect one to come on at the beginning of the second calendar quarter of '08, and one to come on line in September -- September quarter?

Or now, the last quarter of '08, sorry, calendar.

I know.

Okay.

I am just looking at my notes, here.

I don't think they were both to come on at the same time.

I believe one is year end '08, and the other is mid-year '08.

Okay.

Perfect.

Thank you.

Kenneth Zaslow, BMO Capital Markets.

Pat, your tone has changed a little bit from last quarter.

Can you -- is there something that we should read into that, I guess is my first question.

Are you a psychologist, Ken?

You're great.

I guess I reserve the right to continue to get smarter and happier.

How is that?

You go from volatile commodity prices, to great.

You kind of -- I am just trying to figure out if you're having more confidence in your team there?

What is it that has changed?

Well, you see the markets, as I do.

I think that turbulence and volatility continues.

So, I believe that's true.

I do have a lot of confidence in this team and our ability to manage through it.

And I think that the financial strength of this Company, our share buyback.

I was teasing about, it but I do.

I did get smarter, and I get happier every quarter.

And I will ask the same question I asked last time.

Is volatility good for you guys?

Well, good or bad, I just think we have this remarkable ability that we have so much experience in doing it, that I think it is good on a relative basis, I think we will be better than ever.

If you ask a pilot, if I could go back to my example, do they really like flying through turbulence?

Well, they're equipped.

They're trained for it.

Some might say, yes, they like that, because it allows them to use their skills and their metrics, and all that they have in front of them.

And probably a smooth ride is, in many cases, more enjoyable for some.

But I think we're very good at this.

So I would say that we know what we're doing in times of turbulence, as you call it.

Our asset base is always there to support us in that sense, too.

And that asset base comes into play very [keyly] -- in very key ways during these times.

I would like to ask a couple questions about the other 75% of your business outside of ethanol.

The first question is on the Oilseed business, that continues to exceed my expectations.

Is it the European operation, is the North American, is it South America?

Can you give us a little color on the different operations and how that performed during the quarter?

Yes, it's kind of across the board.

And, Brian, do you want to comment just a little bit, probably also around current market conditions there.

Yes.

We saw a good strong performance from all regions, Ken, in this last quarter.

As Europe did well, biodiesel business there.

The margins in the biodiesel business itself are down.

But we continue to see strong demand from that sector for the vegetable oils from our crushing operations.

So if you look at it in totality, even though where the margin is in the value chain, it is still very strong value creation there overall.

North America had good results, although this is -- tends to be a slower season.

And South America, again, we had, as we make the transition to the -- from one crop year to the next, we had good results, even under those circumstances.

I think that we have seen, I think it is obvious if one looks at the board margins, that board margins have declined a little bit.

And we have to deal with that.

But we continue to see very good demand from our protein meal customers and from our vegetable oil customers.

We do have one of our biodiesel plants, of course, has come on stream, and that's generating some additional demand for oil.

So even though board margins are down, again, I think we've got basically a very good demand situation for the products.

And of course, a very good supply situation on soybeans.

We've got a record -- record stocks of soybeans in this country.

And South America is on the verge of harvesting a record crop in South America.

So we're very confident about the Oilseed business going forward.

And my final question, I know it is a small part of the business, but between cocoa and wheat, the higher prices have obviously translated to higher profitability.

That a fair way of assessing that?

You're referring to wheat or to -- ?

Wheat and cocoa.

Because the volatility -- there, the pricing seems to have gotten a lot stronger, and your results in the food and feed seem to have again -- .

I think on the cocoa, you have to look at -- we're making the comparison this quarter versus a year ago against a very strong performance a year ago.

We still have very strong turns in the cocoa business, albeit they're a bit down from what they were a year ago.

But we have seen a strengthening of the margins recently in the cocoa business.

Great.

Thank you.

David Driscoll, Citigroup Investment.

First off, certainly, congratulations on record results, and thanks for the slides.

Like to start off with a couple of brief questions, and then maybe a bit more of a philosophical question at the end.

Pat, can you give us your best guess on the time line for when you think commercialization of cellulosic ethanol is practical?

I understand it would be somewhat of a guess here, but I am thinking your guess is better than ours.

Well, maybe I will comment a little bit about others, as well as -- it will be a great question to ask us in the next quarter, as we continue to take our strategic direction and think further about what partners, what technology, how we're proceeding on this level.

But most had said, I would say two years ago, that it was beyond the 10 year horizon.

I think our look at it, because of all the dollars, as well as the discussion of real money going after this technology in a broad array of types of technology, that it is probably closer in.

So whether that means it is seven years or five years or -- and then you could ask what is the definition of cellulosic.

And we like to talk about the very close in of the here and now.

Obviously, the crops we gather in corn and so forth, we can take some of that cellulose materials that are already there.

And I would say that commercialization of corn hulls, et cetera, is in the two year time frame.

So we're in a much -- depends on how you define that word.

But I think commercialization of that piece of it, as we continue to progress, it won't be an on-off switch, of today you have it, tomorrow you don't.

There is infrastructure to be built, et cetera.

But I think the closer in one is just a couple of years away.

That's very helpful.

Pat, I would also like to really tap into your expertise on the petroleum side.

This is a bit complicated, but I am going to try to keep it high level.

There have been a number of concerns from my petroleum analysts on blend stock components that go into the RBOB gasoline for summertime blending of ethanol.

Do you have any concerns here for us on that particular topic, and whether or not we would then see a shortage of certain components for blend stock?

And whether that would have an impact on the pricing relationship between ethanol and gasoline?

That's ultimately what I am trying to get a sense on, if you have a particularly strong feeling either way.

Okay.

Well, it is a little bit of an obscure part of the gasoline business that one might talk about, and that is the variety of blend stocks that can be used, and are used to create different specifications of gasoline in different parts of the country.

There is about still a good number of 14 boutique fuels of various varieties during different seasons that gasoline blenders need.

And depending on their ability to get, and the economics associated with other blend stocks, ethanol, we believe, is a very good component that competes against many of these other blend stocks that allow blenders to get at their target specs in a way that is much more readily available this coming season, than it has ever been before.

Again, every season that the infrastructure allows for more ethanol to be distributed, obviously we're up to about 5 billion gallons in this country now, and that just continues to grow.

So as far as pricing, I won't comment, because it really depends on the availability of a lot of other blend stocks, as well.

But I think ethanol will continue to compete very nicely for both its octane content, as well as its economics and availability.

That was very helpful.

Final question, and this is a philosophical question for you.

And I would just pass on the comment that this has maybe been the single most asked question to me by your shareholders, and as well as prospective ones.

And that's really your corn hedging philosophy.

I know you guys don't want to comment on exactly where your corn hedges are, for obvious reasons.

So I won't make you do that.

But what I really would ask of you, Pat, and of your team, is to explain to people how much risk do you want to take as an organization?

I think some people flat out think you guys are taking massive amounts of risk on corn prices.

And I really think it is incredibly appropriate for you to address that, and really just delve into the philosophy on how you want to manage your corn risk.

Well, massive isn't a word that we use a lot around here on any direction.

We don't disclose our proprietary corn position.

You know that.

We generally follow a policy of hedging our corn position.

But of course, depending on market conditions, and that's why I talked about our strength and our ability to look through these markets.

And our ability even, I think forecast out and think out multiple time dimensions.

We will from time to time fix purchase price of anticipated volumes of corn to be processed in future months.

And we also have the ability to manage the corn basis risk, as well as the risks associated with selling our co-products.

Maybe I am not saying anything you don't already know.

But I don't think it is fair to say much more about philosophy, because it becomes part of the strength, again, of our system to understand our assets and movements and our expectations.

We do have great controls in place, if you're asking about the control side.

We know our positions.

We know where they are all the time, every day.

It is an integrated management process that we think we do really well, and we get better at all the time.

I appreciate that answer.

And I am certainly looking forward to spring planting.

Thanks a lot.

There you go.

Good moisture in the ground, right?

Okay.

You bet.

Bye-bye.

Ann Gurkin, Davenport.

Just a couple things.

I was wondering if we could start with sweetener contracts.

Are you willing to comment on the percent that are tolling arrangements this year?

Is that a greater percentage versus last year?

Any kind of commentary?

It is the same, approximately.

Okay.

Have you given out what your projected biodiesel production will be in '07 and '08?

No.

No, we have not.

How about overall industry, domestic industry?

We'll have to get back to you on that, Ann.

There is a couple places you can go to think about that.

I don't know that we've said which range we are -- what we believe.

Let me -- let's get back to you on that one, Ann.

Okay.

There was an article today in the paper about the transportation of ethanol, and I know that's been a talking point, that it is tough to move.

Any improvement in terms of moving ethanol?

I am sorry.

I was looking up your biodiesel question.

Say it again.

Brian?

Any changes in the ability to transport ethanol, was Ann's question.

And I think we see not only ADM, but we see the industry increasing its ability to ship by unit trains, Ann.

And ADM has ordered 1,600 new cars to support the growth of our business.

But I think we're seeing the rest of the industry also recognize the importance of transportation to help this business grow.

And so I think we're seeing more and more people having the ability to ship by large volume unit trains, which certainly enhances the transportation capability and infrastructure for this ethanol industry.

Okay.

That's great.

And then any further investments in the sugar ethanol arena?

None that we're announcing now.

We are looking at, as we talked about our sort of longer-term strategic objective diversifying our feed stocks or continuing to diversify our feed stocks, and sugar is certainly one we're looking at.

So nothing to say at the moment.

Okay.

And also, Ann, I just wanted to comment, I don't have the slides with me from our analyst day.

But I believe our range of biodiesel production is in those slides.

So we'll -- .

So you still support that range?

Yes.

Okay.

That's great.

Thank you.

Christine McCracken, Cleveland Research.

Just wanted to pursue your commentary or your announcement that you were expanding processing at several of your Oilseed plants, I guess in November.

Looking ahead at some of your commentary around the expansion of corn acres this year, at least the expectation of that, how does that play with your announcement to expand Oilseed crushing for this year?

Yes, Ann, we announced that we were increasing capacity at five locations in the U.S.

We're doing this because the market is growing.

We continue to see increasing demand for protein meals and oils in the U.S.

And we feel that this is necessary to meet the needs of our customers.

If you put it in the context which I think you were, about increasing corn acreage, and probably taking acres away from soybeans, that -- I think we are going to see that this year.

But I think that, also probably at the same time, we're going to see an increase in acres in South America, and probably an increase in overall soybean supplies, or oilseed supplies around the world.

So this may create a shift on how the export market is supplied.

But I think we have -- what we're focused on right now and why we're increasing the -- our capacity very modestly here in the U.S., is we continue to see growth in the domestic market, and we need new capacity to meet that growth.

Christine, I would maybe rephrase also what Brian said, or add to it, that it is really matching demand that we see.

It is not getting out ahead of it.

All right.

I guess, because a few years ago we got into an over capacity situation.

And I don't know how much incremental demand out of the livestock sector you're going to see, unless you expect a big shift towards meal and away from other.

I mean, it seems like you're going to have actually more competition from distillers, in direct relationship to the meal demand.

And from the oil side, clearly biodiesel is driving that to some extent.

But maybe you have an offset with some of the move away trans fat.

So I'm curious, is it a significant increase that you are looking for here, especially, I mean, are you expecting to import soybeans [to some of these] plants?

I guess it is not matching up very well.

Well, I think it is a modest -- it's a modest increase.

And it also provides efficiencies for our plants.

So it is sort of a combination of additional debottlenecking efficiencies, as well as some creep in capacity.

I think, Christine, the point to remember is that the U.S. still exports a lot of soybeans.

Brazil, it's anticipated, will substantially increase their production in response to these higher prices.

So there could be a shift in export, or the amount of soybeans going to supply and export markets from the U.S. to South America, and still leaving a very ample supply of soybeans for an expanded -- modestly expanded U.S. oilseed crushing capacity.

But any -- can you give us an idea of how much expansion?

I mean are we talking about like a 2% kind of number?

Or is it significantly more than that?

No.

I think that's in the ballpark.

Okay.

And then just if you could, obviously there has been some developments on the Mexican situation with high fructose.

And it looks like that's going to hit, or benefit the industry primarily in '08 is my understanding, given some of the timing of improved access.

Can you talk about how that might affect, I guess, your high fructose operations and sweetener exports to Mexico?

Or if you expect to put more money into your sweetener operations going forward?

Well, we're very pleased to see the positive development with Mexico on the HFCS trade.

As you are well aware, there is a tariff rate quota system up until 2008, which allows an expanded amount of HFCS to move to Mexico.

Then in 2008, we're expecting a free open market, which would allow the market to expand further.

Will this result in increased capacity?

I tend to doubt it.

We have capacity in the HFCS industry right now, where we could produce more HFCS.

I think one of the reasons the market has tightened here, is that ADM has found, and other companies I believe, also have found alternative uses for their starch.

Alternative uses, that is, to produce HFCS, which have resulted in expanded profitability in this business.

I think that as the HFCS market expands, hopefully it will when we see an open border with Mexico, I think then the HFCS pricing could result in more of the starch going into HFCS production, and possibly away from some of the other uses of starch.

So I think the situation we find ourselves in, is we have adequate front end grind, and we have a variety of products that we can make from this.

And depending upon the profitability, we can switch it to HFCS, or we can switch it to a variety of other products.

So I think we find that we're in a very good situation right now , and are looking forward to the opening of the border and the trade with Mexico.

Any risk?

You're still favorable to sugar with the policies that are in place here domestically.

But on some of the packaged food calls lately, they've been bringing up, obviously, the impact of higher sweetener prices, as obviously a cost pressure for them.

Have you run into any resistance from your customer base on -- you have a 20% increase this year, on top of obviously some incremental gains in the past few years after getting hammered a few years ago.

I am just wondering at what point do you start having difficult conversations with your customers, and maybe some of those guys looking for alternatives?

Well, HFCS is -- prices are still a very good, attractive alternative to sugar for our customers.

We have, with the pricing that's in the market right now, we're still at a substantial discount to refined sugar in this country.

Looking back historically, the spread between sugar and HFCS has been much closer than it has been today.

And so the answer to the question is, no, we're not seeing resistance.

We're still offering a product that's very competitive.

And I think with even at higher prices, would still be very competitive with sugar.

Great.

I will leave it there.

[OPERATOR INSTRUCTIONS] Alec Patterson, RCM.

And echoing the comments about the slides, appreciate it.

The working capital increase, I realize crop price changes and seasonality play a role here, but it is a fairly significant step up.

Could you just speak to how that may round out for the rest of the year, and how maybe just inherently higher grain prices is going to eventually have to flow through the P&L?

Sure.

If you look historically in our business, you will see the peaks in working capital going through in the second and third quarters.

As you go in between crop years, generally your quantities will come down some.

A lot will depend, of course, on what happens with the plantings that go in in the spring as far as the price side.

So it will tend to move through the crop year.

And the crop year sort of ends in between the end of our fiscal year, in between the crop years.

So that's sort of the new set of circumstances comes into play after that, and we move forward again.

But generally it is the second and third quarter where it peaks out.

So in other words, you're not seeing this increase of about 1.5 billion as unusual or yet to be reflected in the P&L in a meaningful way?

No.

We've seen that before.

That's not been unusual.

Okay.

On the ethanol, talking about how your discussions with customers and the contracting terms have been changing, are you finding since, say, six months ago, that the average maturity of your contracts by your customer requests, are increasing or decreasing?

I think it is about the same.

So while we talked about six month contracts before, I think we're finding some longer and some shorter.

But generally speaking, they average about the same, maybe just a tad longer, but not anything significant.

Okay.

And then on, sort of following Christine's questions or line of questioning, the biodiesel market, at least some of the numbers in U.S. that I have seen, suggest a fairly significant ramp up in capacity over the next two years or eighteen months.

And it just seems with the rotation into corn this year, and granted, yes, South America may come to the rescue.

Just net/net, the biodiesel capacity [inaudible] on oilseed in the U.S. is just going to be huge.

I mean, how do you guys look at that and feel comfortable about supply in North America?

First of all, the biodiesel market is much more in its infancy stages than the ethanol, for example, which you kind of started your question on.

So while there are new plants coming on stream, they are not of a huge size.

There is still an ability to take -- to do fairly easy blending with traditional diesel stocks with biodiesel.

And it improves, of course, the sulfur content because of the no sulfur allowance.

So I think there is still an opportunity for this part of the business to grow, albeit slowly.

And I think it will require some imports of other oils, perhaps palm, et cetera, and start to see a little bit of that, as well.

Okay.

So, you're not over the next couple of years worried about the supply draw -- or I should say the demand draw on oilseeds in North America to supply the biodiesel plants being an issue for North American pricing for oils?

I see it as opportunity, actually.

And being a global player, we have the opportunity to move the oil around as needed.

We've had a record carryout of soy oil.

So I think it is a good thing for an ADM to have new markets emerging and have ways to be able to move those feed stocks around.

Okay.

And then just lastly, along the lines of comments you made about how the government is setting the mandates, and thinking through about how supply will meet the growth of the industry, what sort of conversations are you having with your customers in the protein complex, that, obviously, they're more concerned about what's going on in the alternative fuels market, in terms of drawing on their feed stocks.

What sort of pressures are they bringing to the table with you to try and mitigate these issues?

I actually don't hear a lot of that.

In fact, I have asked about particular customers that may make some public statements about worrying about different public policy issues, and how that's affecting our customer conversations.

And I hear back that that's a -- it is a commercial transaction, we're doing fine, we don't have that kind of difference.

They just want to be sure we continue -- they continue to have their needs supplied.

And in fact, the conversation does flow from, you have been a consistent supplier, it has been reliable, it is part of the overall integrated package of a discussion with customers is the continuity of supply, as well as every other aspect of it.

If I might add, we're also working with our customer to try to make these new sources of protein, such as distiller dried grains, more readily available to our customers outside the cattle industry.

So we're trying to make it more readily available and nutritionally suitable for both the swine and our poultry customers.

So you're finding it really is more of a concern about supply, and really their thought process along the impact on a step function up in pricing for feed stock is something they'll just deal with it and pass it through eventually.

And so they're less concerned about their margin erosion, and more concerned about volume of supply?

I think that's a fair comment, yes.

Okay.

Thank you.

At this time there are no further questions.

Very good.

Well, let me just wrap up by saying thank you.

And maybe a final thought about, as we approach the future, both near-term and long-term with confidence, we continue to think we're uniquely positioned for these bright opportunities ahead.

And I will turn to the last slide, which we'll always add one also with upcoming events.

So in this case, we have both the CAGNY Conference, and we've noted May 1 for our third quarter earnings release.

We'll also issue a press release, as we always do, for that date.

But maybe having that planned in advance, we thought might be helpful.

Thank you all.

Good day.