Archer-Daniels-Midland Co (ADM) 2007 Q3 法說會逐字稿

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

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

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

We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS).

This conference is being recorded for replay purposes.

I would now like to turn the presentation over it to your host for today's call, Mr.

Dwight Grimestad, Vice President, Investor Relations.

Sir, you may proceed.

Thank you Carol.

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

Before we begin, I would like to remind you that we are web casting our call and that you can access it at ADM's web site, ADMWorld.com.

The replay will also be available at that address.

For those following the presentation on the web site, please turn to slide two, the Company's Safe Harbor statement, which says that some of our comments today 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 governments.

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, Chairman, CEO and President.

Pat?

Thank you, Dwight, and good morning, everyone.

We are very happy today to discuss with you our solid third-quarter results.

We are particularly pleased that we achieved these results during a particularly challenging quarter.

In our last call, we said we had the strength and global asset base and deep experience to manage through the challenges of our business, and I think our results this quarter demonstrate just that.

We continue to beat our stated metrics for returns and cost per metric ton, and we will talk about those in a minute.

Our performance in our three major segments, Corn Processing was particularly strong.

We talked last quarter about the margin challenges in Oilseed segment in the third quarter, which is traditionally sort of seasonally weak.

Our Agricultural Services results declined due to lower global merchandising and handling results, and these results included the impact of logistics and weather issues as well as higher inventory handling costs.

We continue to take actions to align our portfolio with the Company's strategic direction.

We can talk a little bit about those later.

And we disposed of some of our noncore assets this quarter, and continue to do so into the fourth quarter and we will talk about that as well.

Our view forward is quite optimistic, it's bolstered by strong planting intention reports and widening margins, and our future opportunities continue to be very bright indeed.

We have several people on the call today.

Doug Schmalz, our Senior Vice President and CFO, of course, will review the quarter and the current market conditions; Brian Peterson, who many of you know, Senior Vice President of Corporate Affairs is also with us today.

You also may know Brian has announced his retirement, so we are taking this opportunity to thank Brian for his participation in these calls.

Then our guest executive today is John Rice, Executive Vice President of Global Marketing and Risk Management, and he will try to provide some perspective on the global crops and particularly the North American planting progress.

As always, we will be happy to take all of your questions.

So on to you, Doug.

Thank you, Pat.

We will move to slide 3 of the presentation.

As Pat mentioned, solid quarter results were achieved during a challenging quarter.

As in past calls I will use this slide presentation which is accessible to you on your web site in my presentation.

I'll refer to the slide numbers as I go through my comments.

On slide 4, sets forth a summary of financial earnings highlights.

Our fiscal year 2007 third-quarter net sales and other operating income increased 25% to $11.4 billion.

The most significant driver of the increase was increased selling prices.

Our gross profits decreased 3% to $746 million.

Key drivers of the decline in gross profit were a $24 million LIFO charge, reflecting increased commodity prices and lower margin contributions in Oilseed and Agricultural Services.

A reduction in manufacturing cost partially offset those declines.

Selling, general and administrative expenses declined slightly by 1% to $294 million, as cost reductions exceeded the impact of the stronger foreign currencies on translated costs.

Our third-quarter results included a $53 million gain realized upon the sale of the Company's Arkady food ingredient business, and we've continued to take actions to align our asset portfolio with our strategic direction.

Financing costs net equal the interest expense less investment income increased 17% to $49 million.

The increase results from higher short-term interest rates and higher borrowing levels in support of increased working capital.

These increases were partially offset by the lower interest rate of our recently issued convertible debt.

The fiscal year 2007 third-quarter effective tax rate increased to 34.8% from 29.4% last year.

The increase in the quarterly rate reflects adjustment upward of our anticipated full-year effective tax rate to 31.4%.

The annual adjusted affected tax rate is comparable to fiscal year 2006 annual effective rate of 31.2%, if we exclude the $36 million tax adjustment credit, which was included in last year's results.

The increase in the estimated full year affected tax rate results primarily from shifts in the geographic mix of earnings.

Slide 5 is a summary of earnings and unusual items.

For information all the amounts reflected on this slide are on an after-tax basis.

Our net earnings for the quarter ended March 31, 2007 were $363 million or $0.56 per share, a 4% increase over net earnings last year of $348 million or $0.53 per share.

Fiscal year 2007 third-quarter earnings include a $9 million gain on security transactions, a LIFO charge of $14 million and a $33 million gain on the sale of Arkady's food ingredient business.

Net earnings excluding these items were $335 million, or $0.51 per share.

Last year's third-quarter earnings included gains on security transactions of $4 million, an abandonment charge of $3 million, and net plant cost of $7 million.

Earnings for third-quarter fiscal year 2006 excluding these items were $354 million or $0.54 a share.

Slide 6 states our targeted performance objectives.

At a November analyst meeting in Chicago, we established two performance objectives, which we will report on a quarterly basis.

First we set a Return On Net Assets, a RONA, objective of 13% on average.

This metric aggressively exceeds our cost of capital by approximately 5%.

For the 12 months ended March 31, 2007, return on net asset is 13.7%, even though higher commodity price levels and significant capital costs related to construction in progress have resulted in higher working capital and fixed asset values, which have the effect of reducing RONA return.

The reported RONA performance reflects the strong earnings performance in this year.

Secondly, we set a targeted cost per metric ton of production objective of less than $110.

For year-to-date fiscal 2007, we are currently running at a rate of $108.20, which is within our stated objective.

We have adjusted the cost numerator in fiscal 2007 to exclude certain freight costs, which had inadvertently been classified in manufacturing costs.

Those were approximately $134 million.

We would have been right around the $110 level without those costs in, but we're at about $108.20 without it; and if you took those out of fiscal year 2006 numbers, which they were also misclassified in, our 2006 number would have been about $107.80.

So we're a little bit higher than last year, but still underneath our $110 objective.

We continue to meet the objective by challenging all costs and expenses and establishing bench marks where comparable external data is available.

If you look at it, every $1 change in per metric ton translates into approximately $50 million of pretax dollars on an annual basis.

Details of these calculations of the non-GAAP performance metrics can be found in the appendix to the presentation.

Slide 7 is a summary of segment operating profit.

As highlighted on the slide, total operating profit for the quarter increased 8% to $593 million.

On pages 8 to 12, I will review the major drivers which impacted segment earnings during this third quarter.

On slide 8, operating profit analysis of our Oilseeds processing segment, operating profit decreased to $169 million from $177 million last year, due principally to lower margin performance of approximately $32 million.

Our production volumes were down slightly year over year.

In addition, soft seed and biodiesel margins declined.

These declines were partially offset by improved fertilizer margins in South America.

NOPA industry capacity utilization in North America was in the high 80% range for the quarter, up slightly from last year.

Partially offsetting the margin declines were operating cost reductions of $14 million, related principally to reduced energy costs.

In addition, earnings of nonconsolidated affiliates, principally our Asian JV operations, increased $6 million.

Last year's results were negatively impacted by a $4 million asset abandonment charge.

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

John Rice will speak to this a little bit later.

Our spot board crush margins are in a $0.63 to $0.65 per bushel range, North American industry-wide soybean oil inventory levels are high, and anticipation of the growing biodiesel demand is supporting oil price levels.

According to the National Biodiesel Board, new biodiesel capacity ranging from 125 to 250 million gallons is scheduled to come online in the next quarter.

Slide 9 is operating profit analysis of the Corn Processing segment.

Corn Processing operating profit increased to $252 million from $219 million last year, due principally to operating cost reductions and improved earnings of equity affiliates.

Volumes increased over prior year levels as we continued to see solid demand for our sweetener, starch, and ethanol products.

Margins were comparable to last year.

Our operating cost reductions, principally energy, improved results by $30 million, and equity earnings of affiliates contributed $10 million to the increase.

Last year's results included an $8 million gain upon the sale of a closed citric acid plant.

As we look at current market conditions in the corn processing segment, we see excellent planning intentions, resulting in some reduction of current corn pricing.

John Rice will speak to this a little later.

On the product pricing side, sweetener selling prices will be up in the calendar year 2007, reflecting the 20% plus increase across our sweetener and starches product line we received in the last contracting session.

We also expect ethanol prices in the fourth quarter, April through June, to increase from the price levels received on third-quarter shipments.

Other bioproduct categories are improving, and industry sources recently reported announced lysine price increases of $0.15 per kilo.

Restrictions of corn gluten feed shipments to Europe, due to the GMO concerns, is putting some pressure on bioproducts credits for corn wet miller.

Slide 10 is an operating profit analysis of our Agricultural Services segment.

Operating profits decreased to $40 million from $79 million last year, due principally to a $39 million reduction in global merchandising and handling operating results.

These lower results reflected the impact of logistics, weather issues, as well as inventory handling costs.

These conditions also affected our operating costs, which increased $17 million over last year levels.

Equity earnings of affiliates increased $6 million.

The current year quarter includes a $12 million trade disruption insurance recovery, related to the Katrina hurricane last year.

This gain is offset by a $12 million charge in our captive insurance company results, which I'll discuss in a little while.

We continue to see 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.

Slide 11 is an operating profit analysis of our Other segment.

The operating profits increased to $132 million from $75 million last year.

Margin improvement in food, feed and industrial group of $2 million and financial products of $10 million were offset by the operating cost increases of $20 million.

Our operating margins at the Company's wheat milling feed and protein specialty businesses improved, but were partially offset by lower cocoa operating results.

Financial margin improvements resulted from improved investor services operations.

Earnings of equity affiliates increased $9 million, and as I mentioned earlier, realized a $53 million gain upon the sale of our Arkady food ingredient business.

The other increase of $3 million reflects the $12 million charge in our captive insurance operations, which I discussed earlier; and that's net of $15 million of cost which was incurred last year related to the sale and discontinuance of our Irish feed business.

Current market conditions show an improving cocoa and wheat processing margin outlook.

Slide 12 is an analysis of our corporate costs.

Corporate results were a charge of $37 million for the quarter compared with a charge of $57 million last year.

Investment income increased $28 million due to the higher interest rates and higher levels of invested funds.

The impact of LIFO inventory valuations was to decrease corporate results by $24 million, as the current year quarter included a $23 million LIFO charge compared to a $1 million of LIFO income last year.

Security gains were $9 million for the quarter.

We continue to review, analyze and align our asset portfolio with our strategic focus.

During the past quarter, we disposed of our Arkady food ingredient business, which I mentioned earlier, and subsequent to March 31, we have sold our equity positions in Tyson Foods and Overseas Ship Holding.

The Tyson and Overseas Ship Holding liquidations have generated cash proceeds of $560 million, and a net after-tax gain of approximately $220 million or $0.34 per share.

These transactions will be included and reported in our fourth-quarter results.

Slide 13's summary of our financial condition.

A significant item there is our working capital has increased about $1.9 billion due primarily to the effect of the higher commodity price and quantity levels.

Our working capital does include revenue marketable inventories, which have a carrying value of approximately $4.8 billion at March 31.

The increase in working capital was financed principally with cash generated in operations.

As our capital spend has increased on recently announced projects, property plant and equipment has increased by $530 million.

Our long-term debt increased $1.1 billion due to our recent convertible debt offering; proceeds from the offering were used to reduce commercial paper borrowings outstanding, and to repurchase 10.4 million shares of Company stock.

Slide 14 is an update of the status of our various major capital projects.

What we have added new this quarter from last quarter is a schedule of completion dates.

As you can see our Mexico Missouri JV biodiesel plant is up and running; Velva, North Dakota, and Rondopolis, Brazil biodiesel facilities are scheduled to be on line this summer.

All of our capital projects are on schedule and we are within our capital budget.

Slide 15 sets forth cash flow highlights for the fiscal year to date.

As I mentioned previously, cash generated from operations was primarily used in support of working capital increases.

Our capital spend for the nine months increased to $844 million as construction of many of our recently announced projects are underway.

We have acquired 15.4 million shares of Company stock this year for $533 million, at an average cost of $34.68 per share.

We have also paid dividends of $207 million, commercial paper borrowings and proceeds from our recently issued $1.15 billion convertible debt offering were used to finance these and other cash needs.

That concludes my remarks.

I will now turn it over to John Rice, who will review the current situation in the global crops we process.

John?

Thank you, Doug.

We're pleased to provide some perspective on crop planting intentions in the key global regions.

We believe they show a very robust outlook for agricultural production.

On May 11, the USDA will issue their initial estimate of the 2007-2008 supply and demand numbers, which will include projections for the upcoming U.S.

corn and soybean crop.

Currently USDA estimates 06-07 world corn production at 696 million tons versus 695 million last year.

In the U.S.

planted area is forecasted at 90.5 million acres, up considerably from the 78.3 million last year.

As of April 29th, planting progress was 23% compared to 48% last year and an average of 42%.

Final planting numbers will depend on the weather.

USDA currently estimates a corn carryout of 877 million bushels.

If the full 90.5 million acres are planted and achieved trend type yields we could see a 12.7 billion bushel crop that would add to this year's carryout.

In Brazil, corn production should increase to 49 million tons from 42 million tons last year.

Looking at China, China produced 143 million tons of corn in 2006-07, and the market anticipates a small increase in the area in 07-08.

Now let's look at soybean production.

The USDA estimates world soybean production for the 2006-07 crop year will rise 234 million tons from 220 million last year.

South American production, which is finishing harvest at this time, is estimated at 110 tons, million tons, up from 104 million last year.

Soybean planting has just begun in the U.S., and the USDA estimates planting acres at 67.1 million versus 75.5 million last year due to last year's record carryout of 615 million bushels, we should have adequate supplies for the 07-08 crop.

Turning to rapeseed, the EU 27 rapeseed crop is estimated at 18.8 million tons, an increase over the 16.1 million ton crop last year, according to Oil World.

In Canada, the recent planted area estimate shows canola acres at 14.8 million versus 13.3 million last year.

China's rapeseed crop is estimated to stay near the 12.2 million figure of last year.

Overall, Oil World estimates world rape, or canola, production for 2007-08 at 53.1 million tons, up from the 46.7 million from last year.

Now we will touch on wheat.

The USDA estimate for 2006-07 wheat crop shows production at 594 million tons, down from 621 million last year.

The U.S.

wheat planting for the 2007 was estimated at 60.3 million acres in the March 30 report versus a 57.3 million last year.

The April freeze will likely reduce that area further.

I will now turn the call back to Pat.

Very good.

Well, thank you Doug, and John.

Carol, operator, would you mind opening the call, please, for questions?

Absolutely, ma'am.

(OPERATOR INSTRUCTIONS).

Your first question comes from Eric Katzman of Deutsche Bank.

Please proceed.

Hi.

Good morning, everybody.

Morning Eric.

My first question is somewhat conceptual.

Pat, one of the things that we have noticed over the last year or so is that the stock price kind of seems, I think again, based on our calculations, about an 85% correlation between the movement of the price of oil and your stock.

And I guess what do you, what do you kind of think about that?

I mean, obviously the Board and you are taking the Company in the direction of, of more exposure to energy.

But do you, are you concerned that there is that much of a correlation at this point?

Well, Eric, first of all, we're all about long-term value for shareholders.

So short-term movements and so forth can be related to a lot of different things.

I certainly feel that we have the strength and opportunities in not only the bio energy space, but in this whole, agricultural processing value chain.

And I believe that, we have a very strong food business and food-related earnings.

So any correlations with energy prices are the matter of the market viewing that, but I think we have to equal and in fact we talked a fair amount about how they work together.

You couldn't be in this bio-energy space that we're in or even take advantage of the opportunities of scale and scope that are in our capital plans, even for growth, without the strong base.

And in fact much of our growth is related to shoring up that strong base, even making it stronger and actually growing in some geographic area.

So I think they're very interrelated and, hopefully the market sees our long-term opportunities as we do, as very, very strong.

Okay.

And then kind of a more specific follow-up, then I'll pass it on.

The ag services was a lot lower than we had expected and -- was there any trading issues or was this all more kind of related to the weather and barge and rail traffic and that kind of stuff?

Well, in that business is a lot of everything.

That's our storage, our transportation, some trading around the same, and services to our core businesses.

John may want to build on this a little bit.

And they're actually fully integrated with our risk management practices and the operating results.

We did have some logistical and weather challenges, related to frozen rivers and the like.

We also had a very strong -- you might remember we had a very strong third quarter last year.

Right.

So a little bit of the comparison is that [it's] down associated with that.

But certainly our positions on all crops in the business unit, everything is brought to mark-to-market in any given quarter, so you always find a little bit of that.

But it's a very integrated business.

John, I don't know if you want to add anything to that.

Eric, all of our businesses have trading positions as we trade around our assets.

So we don't separate those out in our earnings at all, they're all an integral part of the earnings and the assets that we manage.

So some areas may be down for a little while and other areas could be up.

All right.

I'll pass it on, thank you.

Thank you.

Your next question comes to you from the line of John McMillin of Prudential Equity Group.

Please proceed.

Good morning, everybody.

Morning, John.

Brian, good luck.

Thank you, John.

The best.

I like the slide.

I think when you call these numbers solid, Pat, they're clearly not as solid as I was looking for, the Street was looking for.

I know, looking at things sequentially doesn't make sense, because there's a clear seasonality in your business, but to have operating income drop on a sequential basis $767 million to $540 million, it's just bigger than I had anticipated.

I know the slides kind of review it, but it just seems like the quarter from the corn standpoint, you talked about getting similar ethanol prices in this March quarter as you got in the December quarter.

Is that still accurate?

I'm sorry, could you repeat that last part?

You cut off right at the end there, John.

I think you said in the last quarter that your ethanol price realization in this quarter would be similar to what it was in the December quarter.

That's right.

Yes, right about the same.

This quarter we expect it going up.

Drop, the drop in bio products earnings sequentially was all higher corn.

Well, basically if you look at it we're saying the margin didn't change much.

We really had as cost of corn went up our prices covered that cost of corn increases.

Yes, Doug, I'm looking at what you earned in bio products in the December quarter and what you earned in bio products in this March quarter.

Okay.

It's cost of corn.

Yes, John, cost of corn.

As Doug mentioned in his report, we also saw the bio product credits go down a little bit just because of the GMO issue on the corn gluten feed going to Europe.

And just to go more into the ag services, because that kind of came out of left field for me.

Bundy had mentioned things about bad hedges, and maybe you do things differently, but in some ways these numbers kind of support that some of their hits were industrywide.

I just, frozen rivers have to happen every winter, just -- I guess I didn't get any feel that this quarter in ag services would be so much below the December quarter.

Can you just kind of go into a little more detail, why the sequential drop was so large?

I think there are a number of things.

It's not true, rivers don't always freeze.

Last year we had an unusual situation and we didn't have a lot of frozen rivers, so we were able to move more.

When that happens, you tend to have build ups within the Gulf, you have a lot of backup of materials, and so forth.

That affects your cost of carrying inventories, you carry more inventories.

There's just a lot of logistics things that happen.

As John mentioned also, and as our policies state, we do mark our inventories to market every quarter.

We give information in our MDA on our net positions and so forth.

As futures and cash markets move in different directions you do have some of that, but that happens every quarter when we book our inventories.

So we have those adjustments and our footprint is different than everybody else.

And it moves differently than other people.

But we think overall, you know, we manage, try to hang to the best of our abilities to our processing margins.

And therefore we will have variability in that, but it is what it is and that's what we deal with every day.

Okay, fair enough.

And just to John, I mean, I guess I appreciate the description of USDA statistics, but what does it mean for ADM?

I mean going forward we want bigger the better, is that about accurate?

Well, that's very important, yes.

It will be very important to watch the weather over the next couple of weeks.

We are behind in our corn planting, but we have had very good weather the last four days around the Midwest.

If you look at it, it's really the Iowa, Illinois, Indiana and Ohio that's a little bit behind normal.

As long as we have some good weather we will quickly catch up.

Okay, thank you.

Your next question comes from the line of Pablo Zuanic of JP Morgan.

Please proceed.

Good morning, everyone.

Morning.

More general question, Patricia, would you comment in terms of capacity, supply outlook for ethanol here in the U.S.?

Are you concerned about increasing capacity in the market over the next two years, how is that aligned with your forecast for demand?

If you could just walk us through that please.

Well, sure.

John, do you want to take -- that's all right, I was going to start.

Let me just start with supply and demand.

Demand is quite strong and supply will be catching up associated with that.

In fact, we should be higher at the end of the year than we previously forecasted.

I think John is going to pull out the data here to reflect that.

At the end of '07, we show the capacity will be about 8.6 billion gallons.

As we have said before, the total market we feel that 10% ethanol blend will be right at about 14 billion gallons.

Now, in the course of all this, in the next year, we need to make sure we are shipping into new markets and working with our customers where they are going to be blending up to the 10% ethanol.

So a lot of it is just the timing.

Eventually we feel very positive that we will get to the 14% blending or 10% blending up to 14 billion gallons.

But we could see little blips in the road along the way.

Pablo, one further discussion on that topic having just spent some time in Washington last week.

You know, there are several bills and a lot of discussion about expanding the renewable fuel standard; but also there's discussion about expanding the opportunity to have a greater than 10% blend, not only permitted, but allowed and warranted under the current auto manufacturers.

So there's a fair amount of discussion about that, too.

You might know that the Underwriters Laboratory actually warrants the fuel dispensers up to 15%.

So there's discussions from the 12 to 15, again to get out past the cliff expectation or what some people might see as a cliff, once we get to the 10% to get well beyond that.

To get past 10% you need more growth on the [flex fuel ] car feed, right?

Is that something you expect will happen?

That's the point, maybe you don't need as much growth in the flex fuel car feed, but maybe even the current vehicle, there's quite a business of testing underway for current vehicles without the flex fuel adjustments to be able to run a greater blend than 10%.

Okay.

Just one follow-up; in terms of biodiesel most of the news flow from Europe is not good.

The tax credit issue in Germany is affecting apparently demand there and the economics of the business, our take here in the diesel biodiesel in the U.S., there are question marks about whether there will be enough beans to really supply the needed amounts for the [provide to] biodiesel production.

How should we think of biodiesel evolving right now?

We tend to have a more cautious view on biodiesel.

In Europe, the situation was just a little bit of a smaller carryout in the rapeseed crop and then also a lot of expansion in the biodiesel production.

We feel that that will quickly correct itself over this next year and we have a large rapeseed crop coming on next year.

So we feel margins should maybe not be as good as they were during the high time, but they should be very profitable next year.

In the U.S., it's really a slower growth in the industry.

We're trying to really work on our side on making sure the quality of the product that everybody produces is acceptable to all the blenders.

That's what most of our time and effort is working on now in the U.S..

Just one last one if I may, China, very impressed with your presence there with your joint ventures in oilseed crushing.

But how should we think of that evolving over time?

Do you take full control of those assets or (inaudible) control of that business, or this is pretty much a 50% marriage pretty much going forward?

How should we think about that?

Well, I think you should think of it as an opportunity for growth for us.

What our exact configuration with our partners there, or I think it will be a more simplistic streamlined participation with our partners.

We have very good partners.

In fact, having solid and good partners in that region, we think, is critical for growth.

So we will be a larger and better participant and so will they.

I think you can think of it as a growth area for us.

Thank you very much.

Thank you.

Your next question comes from Kenneth Zaslow of BMO Capital Markets.

Please proceed.

Good morning, everyone.

Morning, Ken.

I need to explore a little bit more on this ag services, I'm not 100% good with this yet.

In terms of the pieces of the puzzle that kind of hurt you this quarter , as you go back and look at the averages for five quarters, abd I understand there's seasonality, the average is roughly call it $98 million.

This quarter it comes in at $40 million.

Can you kind of parse out a little bit better in terms of what was really the catalyst?

I mean, what is one time in nature?

Is this the new run rate?

How do we look at it going forward, rather than this one

Ken, let me start, maybe Doug can add it to it.

I think this is a particularly challenging quarter and I think there are upsides to this segment going forward.

So maybe that's one general way to look at it.

If you look over five quarters, I think again quarter three is often one of the more challenging ones with respect to weather and logistics, although some years as we mentioned last year was particularly strong for other reasons.

So, a complete one-off, no, but certainly unusually challenging, yes, and more upside in the future.

Doug, do you want to -- ?

Yes.

If you look at it, it was sort of across the whole board, it was in our global merchandising -- was down year over year; our elevator operations in and of themselves really gets back into logistics here and so forth was down from a profitability standpoint and so was our transportation group.

So it wasn't in just one area, it was across the whole spectrum of our ag services group.

A lot of it has to do with, was there a lot of merchandising activity around?

Were the opportunities there between different parts of the world, and they just didn't present themselves during the quarter as they have in past quarters?

We expect some of that to prove as we go forward here as crop conditions and crops change and the new U.S.

crop comes on.

That's going to provide opportunities I'm sure around the world and we will just try to capitalize on it as we go.

And in terms of, you know, what's happening at this point, are we still backed up in some of the rivers?

Do we still have ice-cold, freezing conditions, are there any conditions that would lay over until this quarter?

No, everything is clear.

I think it's pretty clear now all the way up the rivers.

Okay.

And then in terms of the corn, it's actually not overly surprising that corn, obviously higher corn prices would funnel through your income statement sooner or later.

How long are we going to have this coming through the income statement?

Is this something that should last two more quarters at these levels or, as we have seen corn turn a corner potentially, how long does the current high corn prices kind of lay into your quarterly income statement?

I think, you know, a lot of it's going to depend on what happens with this crop, Ken.

We don't have the corn in the bin yet.

And it's going to be a summer of watching weather conditions and whatnot as to where we go into this whole next fiscal year or crop year.

But I'm sorry, I'm talking more about the current conditions that we're in right now.

Say, we have seen corn hit the 450 marker.

How long would that type of corn yield?

We all have different forecasts for where corn is going to be, but where the environment was say three or so months ago, how long will it take to kind of funnel through your income statement?

And then whatever new forecasts are for corn, that will come back into your income statement?

Well, Ken, answering your question in detail is really kind of letting everybody know what our corn position is.

That would be fine.

I'd be good with that, I don't think anybody would argue.

That's just another way to ask are you hedged.

I wasn't even try to get that.

I'm trying to really get to the idea of, corn did hit highs, how long does it take before we start to funnel that through, I guess.

I don't know how best you could answer that, but it's kind of a core question, no?

Yes, it's a core question, but I mean there's a lot of factors that come into net corn.

You have the corn gluten meal, corn oil prices, you have the feed prices, how far everybody is buying out.

Obviously the corn prices, the basis, so there's just a lot of moving parts when it comes down to the net corn.

Okay.

All right.

Thank you.

Thanks, Ken.

Your next question comes to you from Diane Geissler of Merrill Lynch.

Please proceed.

Good morning, Diane.

I have a question for you, just kind of touching on some of the points that John mentioned and, we look back over seven or eight quarters, you have been fairly consistent in the call it $0.60 to $0.70 range in terms of quarterly EPS, if I'm looking back -- there were a couple quarters where it was below that, but generally speaking, somewhere in the $0.60 range.

Was that just kind of everything went well for you, and that is what we should assume?

Is it a peak number and this is more your mid-point range?

Or is this just kind of okay, we have some specific challenges in our -- some of our divisions, we think this is more of a one-off type number and we think we can get back to that $0.60 to $0.65 range?

I'll start here, Diane.

That's ultimately a very difficult question because we don't give guidance; but I can say there are upsides even to the $0.60 quarters because of our future opportunities and our investments.

One thing we are going to try to do next quarter, particularly having these sort of guest spots if you will, to focus on one particular area of both opportunity and sharing a deeper dive into our -- into our work here, is we're going to put all our projects out next quarter for you on a timeframe and have a couple of extra charts and look toward these capital investments; our project economics a little bit; some of our project metrics; showing you what phases they're in, when they're coming through.

I think there's a lot of depth in operating, in looking deeper into some of those operations.

This quarter we did have market challenges, we did have quarterly challenges; and I think they were somewhat unique to this quarter.

We see upside going forward.

Well, I appreciate that commentary.

Going through your projects like that, I think, would be extremely helpful for me.

Given that, obviously, I know you have these projects coming on line, it's always sort of a question about when the timing is, kind of the puts and takes of yes, you're increasing your volume on the ethanol side.

But obviously corn prices are up, so what does that mean in real dollar terms?

Anything around that would be extremely helpful for me.

Then I guess just back onto the ag services, I calculate your revenue line, your revenue line was up, obviously, because crop prices are up.

But is there, when I hear merchandising I usually think of that as just the pass on of product with a margin attached to it.

So if your revenue line was this strong this quarter, I guess I'm still not quite sure why the margin wasn't there as well.

Well, Diane, this is John.

We also had a different situation this year.

First of all, like we said earlier this quarter is historically a slow quarter for a lot of our business.

And this year with the Utopia coming out of the crop reports and everything else, we had the markets run up early before December.

A lot of people came out and bought forward to get their purchases all the way through April and May.

So we did see a lot of downturn just in the overall business side of this, about handling the grain, as Doug had mentioned.

It's just how the whole market reacted.

I see.

Well, I appreciate the commentary.

Thank you.

Thanks, Diane.

Your next question comes from Christine McCracken of Cleveland Research.

Please proceed.

Morning.

Good morning, Christine.

Just from your outlook, you talked a lot about the expectations around corn acreage for the coming year.

But you haven't touched on really the demand side of the equation specific to USDA's projection for exports and for feed.

It seems at least from what we're seeing today and from your comments that demand is actually very healthy.

And yet USDA isn't looking for a ton of growth and that kind of helps them to get to their numbers.

I'm wondering from your perspective, maybe from an inside view, how do you look at demand globally?

And how will that affect global grain prices?

Well, one thing (inaudible) high prices is high prices, I learned over the course of my 31 years.

In terms of corn, Argentina has a larger crop, Brazil has a larger crop, and China has a larger crop.

So we're seeing more exports coming out of those countries that will reduce our exports out of the U.S.

Also with the DDGs and corn gluten feed, a lot more people are feeding that into their rations instead of using corn.

So I'm not, to say what corn prices are, there's a lot of factors that still come into play, but we are seeing some rationing on the United States just because other countries are growing more corn.

Thus far we haven't seen a big cut back, so it's really going forward?

Yes.

Exactly The harvest in Argentina just really started, and the same with Brazil.

And that crop, just to be clear, looks very large at this point?

Yes.

All right.

Then just in terms of as you look forward in terms of your projections around ethanol production and capacity, you and everyone else thinks the industry will get substantially larger from here.

But it seems like this year we got the easy acres into corn and it seems like going forward it is going to be tougher to find incremental acreage.

Is the answer really to increase the yields?

Is that where the majority of the of the big increase in corn supplies will come from the kind of supply or fuel this big increase in ethanol production?

Or is there more incremental acreage from CRP?

Pat, you were just in DC.

I don't know what they're saying today on CRP, but is that the answer?

Is it kind of a combination of all those things?

I think it's actually a combination, Christine.

Certainly the additional yield, if you talk to the seed manufacturers, they believe if it's not the next crop, it's the one after that will have the significant -- if you will -- jump or sea change.

There is additional acreage in the conservation group, but whether or not it will be more than 5% or so that anyone would be willing to give up, maybe up to 10, but I think it's the combination of all those factors.

And again the national corn growers even are more optimistic than perhaps even the Washington folks on all that.

This crop will be able to test yet again some of the yields.

So we will be able to learn more with this season.

And just, you know, the industry has made a big push toward larger ethanol facilities and it seems like that's going to help the efficiencies and raise the breakeven quite a bit.

Any guess as to where breakeven is today on some of these larger facilities?

No.

I guess it's a moving target with oil, but -- no guess there?

I do not have one.

Okay.

And then just finally, if you could talk about the expectation, your expectations for the crop.

I know a lot of people are concerned a little bit with dry conditions in some areas.

Is there anything at this point you can add given that you're right in the heart of the action, as it were?

No, I really can't.

The most important thing we have going now is to make sure we get the corn crop in the ground within the next 20 days.

And then, it's really going to be the weather.

All right.

I'll leave it there.

Also making sure we get the soybean crop in the ground also.

I guess we can say the activity is as high as we have ever seen it, both those that have been watching this for many years and as a student of it.

The planters are quite active and the weather is good right now.

All right.

Good luck, Brian.

Thank you.

Your next question comes from Ann Gurkin of Davenport.

Please proceed.

Good morning.

Morning, Ann.

I have a couple questions related to the corn business.

Are you able to get adequate pricing on bioproducts?

Bioproducts or byproducts?

Bioproducts, excuse me.

Bio.

Yes, we are seeing -- we had a plant shutdown in South Korea, so we had our price increase and we are seeing very good demand for lysine and other products in bioproducts.

And those are meeting expectations or are the margins running a little bit behind on those products?

They're getting better, Ann.

(multiple speakers) We're working hard to get them there.

Okay.

Are you adding grind capacity for the corn business or are you increasing adding sweetener production?

We're not adding any sweetener production.

We do have idle sweetener capacity that when Mexico comes online, we could switch from ethanol into our sweetener.

We are seeing a little bit of increase in our grind because of better utilizations and efficiencies in our plants.

That's grind in the U.S.?

Yes.

When will you determine or make a decision about Mexican capacity?

I'm sorry?

When will you make a decision about bringing back on Mexican grind capacity?

When we actually sell more products.

That would probably be fourth quarter of this year.

Okay.

And then you all put out an announcement about a JV with Purdue.

Any other details you can give us?

Well, I think it's just the start of additional partnerships.

One thing we have talked about in this whole area of bio-energy -- whether it be greener fuels, greener chemical components -- is that we are, we are really understanding and targeting our own capabilities, but also the capabilities of others so that we can have good partnerships in areas where others are strong and we may need that compliment.

So whether it be with universities, with some private industries, national labs, governments, et cetera, I think you will see more partnerships coming forward.

More announcements later this year?

Most definitely.

Lastly can you give me the capacity utilization in China?

Probably right around 65%.

55?

65.

65.

Great.

Thank you.

Thanks, Ann.

Thank you.

Your next question comes from Robert Moskow of Credit Suisse.

Please proceed.

Morning.

I just wanted to make sure I'm clear.

So are you saying that ethanol pricing, lysine pricing and HFCS pricing, you expect pricing to flow through even stronger for the next couple quarters on all three of these items?

Our sweetener pricing really is contracted by year.

So that was in place coming into this last quarter and we'll continue through this year at those levels.

We do expect for the next quarter ethanol pricing to be up over this quarter's levels, and we -- as John mentioned, I mentioned too, we have seen a price increase in our lysine of $0.15 a kilo which we'd expect to start coming through in the next quarters.

What's really driving the ethanol pricing?

Is it the correlation between ethanol and just regular gas?

Or is it, are you just able to, do you have better negotiating power with your customers?

The price of unleaded gas has really been going a lot higher just because the gasoline stocks are below a five-year historical average right now, and that's really leading the ethanol prices higher.

They have been for the last five weeks still coming down.

Further announcements tomorrow, but that always is correlated to ethanol pricing.

(multiple speakers) but of course that's some of the prices customers look at.

And a lot of your comments today said well, we have to wait until the crop is in the bin on corn and we have to see how the plantings reports go.

My question then is, let's say the plantings don't go well and these projections for corn production don't come to fruition.

How bad can things get if corn production is say 10% weaker than what you thought?

Well, coming into the total of the world supply and demand once again, if we have a bad corn crop here, you will see increased corn acres and soybean acres around the world.

That will alleviate any disruption we have here short term, I feel.

It's one of those areas which we identify, of course, we have been in this business a long time, abd it's one of our higher risk areas is crops and the availability of crops and the strength of crops around the globe.

So we look at it on a total management basis and a global basis.

And we will deal with those things well if they come, too.

Okay.

And I guess one final question.

You have a target out there for return on net assets.

Have you ever said for your ethanol expansion plans internally, do you have the same kind of target or do you desire a higher return on those capacity investments?

We have actually different targets for all of our business.

So that some we expect a higher rate of return, some we don't even have many assets around and expect that we have a different rate of return than those that are newer or in an earlier phase.

Of course, those plants that are under construction, you have sort of preproductive capital or no return until they are built and in the ground.

So our 13%, we actually think, is a very robust target.

It's well above our cost to capital, it's well above competitor kind of returns.

We feel that it's a very strong bogey, but some projects will return higher than that and some slightly lower.

Thank you very much.

Thank you, Rob.

Thank you.

And your next question comes to you from the line of David Driscoll of Citigroup.

Please proceed.

Thank you.

Good morning, everybody.

How are you?

Not bad.

Wanted to start off with the ethanol business.

John, you made a couple of comments about corn costs.

Can you guys tell us what was the percentage increase year on year in corn costs?

I know you don't like to give the specific numbers, but perhaps you'd be willing to give that.

It was up.

Very specific, I see.

Okay.

Can you at least, can you give us any feeling here?

I mean, are we in store for significant continued step ups for the next few quarters on corn costs?

Net corn costs.

David, it all depends on what the price of corn does.

We're not going to get into what our actual corn position is.

Directionally, can you even give us directionally?

We will play into the Company's profitability.

Okay.

Just exploring on the corn cost just a little bit further because you said something that doesn't seem to match the market data we have.

You said, John, in your comments that your byproduct credits were, I think you said lower than and they hurt your corn costs in the quarter.

As we look at the marketplace [byproduct] credits have actually risen and that is historically very logical given that you generally see them rise when corn prices are on the rise.

If I throw another piece of information at you, we just listened to the corn products presentation on their wet mill and operation and they seem pretty favorably disposed to what happened to the byproduct credits.

What is the disconnect here?

Why are you telling me that the byproduct credits were not favorable for you guys?

We have the GMO feed issue in Europe, since we're the largest corn wet miller in the United States.

That will have more effect on us than anybody else until we develop new markets, which we are developing new markets in the corn gluten feed.

I think it's more of a short-term issue; and feed is not moving as well.

That remains to be true as we speak?

There is more feed around the -- being sold now, yes

Okay.

Doug, you indicated that sweetener prices had flowed through into the first quarter so the price increase is fully in, in -- sorry in the March quarter it's fully flowed through on (inaudible) price increases.

Is that correct?

They come through, yes -- starting in February, so there's some slippage in the early part, there will be a little bit of pickup.

But that wouldn't be real material to the total numbers.

Okay.

Pat, can you comment just a little bit on ethanol prices?

You did give the comment on ethanol prices being up next quarter.

If you guys won't answer the corn side of it, would you at least give us the directional idea on, you expect ethanol profitability to improve as we go forward from today's quarter?

Or would it still be under pressure?

I'm trying to skin the cat here a couple of ways and hopefully you're willing to give us some insight.

We said the pricing we expect to be higher in this quarter, but to answer the question about profitability or margin you're back to what is net corn, so depending on your assumptions on net corn that would sort of relate to the answer for next quarter.

I think going into the driving season is another thing to think about.

We are, demand is strong, demand is looking to be strong throughout the summer on all the looks we see on the traditional gasoline pool.

So that should also have a pickup in terms of pricing.

David?

Also on your byproduct credit, in terms of dollars the byproduct credit was higher, but the percentage was lower for net corn.

Okay.

Pat, you've mentioned a couple times on the call here that you're more optimistic on the outlook, yet when I listen to what's going on now it doesn't actually, number of callers have already pointed out the big sequential negative variances that have happened.

Why are you really optimistic on the outlook?

I don't think it's come through so clearly on the call so far, where do you see the profit opportunities materializing and are you talking about something in a multi year kind of optimism or are you talking something in the terms of the -- of the next, one, two, three, four quarters?

Well, yes and yes.

I think the long-term opportunities are very strong and that's again why we're trying to lay out for you in both these calls and some of our longer term discussions what those opportunities are.

And when they can come online, how, multi year outlooks.

Always we will have challenges in any particular quarter, so I don't think that either disrupts or changes my view of the opportunities long term.

I am actually more convinced this quarter that we have the ability to manage through challenges more than anybody else out there, and what we have in terms of assets and capability to do that.

It is, it actually increases my confidence for the long term.

So these challenges, and you ask many different ways and many of you on the call today on, tell us more about net corn, I couldn't find a better place to be in the most challenging of times and I actually think we have more upside than not.

Maybe if I could just go after ag services with my final question.

One last point here I'm trying to get a sense on.

I think everybody has been going around the way here on the difference between Archer Daniels and Bundy.

They made a big deal about their losses in the quarter on unrealized losses from hedging activities in South America.

Can you just address for us -- yes or no -- was the South American hedging loss a significant component for your ag services business?

Well, in general we said, ag services is a whole basket of things.

The answer is no to your particular question about South America, but the basket associated with ag services is weather, transportation, carrying cost, it's not just any particular type of position.

And again maybe that reflects why I feel so strong by about our merchandising operations, our ability to risk manage.

I think we can feel very good in that challenging quarter, very good.

Wonderful.

Thank you very much for all the answers.

Thanks, David.

And your next question comes from the line of Edgar Roesch of Banc of America Securities.

Please proceed.

Good morning.

Morning.

Just a quick question for you.

You mentioned some seasonal factors in oilseed processing that created some challenges, but looking year over year you mentioned lower soft seed processing margins there.

Could you just give us a little more color on that aspect?

Thank you.

Historically we just always see a little bit of a downturn in the feeding, logistics and everything else on that side of the business.

Also we have seen a little bit of a downturn in the meal demand over in China, even though China profitability was very good for us.

So it's just more of a seasonal than it is long term.

But last year did you experience unusually strong results, because the same seasonal factors would have been in play then, right?

We did actually.

Last year we had a better situation on biodiesel in Europe, which strengthened our soft seed margins in Europe a year ago relative to this year.

Okay, thanks very much.

Just one follow up to the anticipated demand in Europe on biodiesel is still very strong.

It's expected to double between today and 2012, so all that should pull through and again in the longer term as legislation is still being developed.

It is a place where we're very glad we have been for 11 years and continue to feel strong about our position.

Very good, thank you for that.

(OPERATOR INSTRUCTIONS).

I do have a follow up question from Diane Geissler of Merrill Lynch.

Ma'am, please proceed.

Good morning.

Just one thing on the ethanol and your commentary about the pricing in this quarter.

Could you just refresh us -- is there any, I know your contracting situations have changed just under the IFF and how that works.

Is there, what is the -- as you look toward the end of the summer and then beyond in terms of what ethanol pricing will look like?

A lot of that will be related to unleaded pricing.

Okay.

So is it safe for us to assume that unleaded stays here or maybe gets a little stronger as we move into the summer driving season, that we should look for an uptick even in the quarters on ethanol pricing?

That's happened in the past, but we're not in the business to forecast specific prices.

What I can say is the driving season usually pulls a lot of demand through.

Actually the maintenance season associated with refineries has found a lot of refinery downtime.

Depending on how folks perform in the heavy run season, all that remains to be seen.

But it's part of the equation of how to fulfill that demand with a continued supply that frankly has been tight over the last couple of summers.

On the DOE announcement, is that the project, that's obviously a longer term project, is that the, am I right in assuming that's the project for the incremental volume off the same base feed stock?

It is not.

It's a different project, Diane.

This one is related to fermentation enzymes and particularly related to breaking down the heavy cellulose type material that folks think about in strawgrass wood chips and many of the more heavy cellulose materials.

The other project you're talking about is related to thermochemically treating the hulls and getting the 15% increase which is still an item we're going forward on in addition to the one we announced with Purdue.

Okay, all right, thank you.

Thank you.

You have another follow up question from the line of John McMillin of Prudential Equity Group.

Sir, you may proceed.

Hello again.

Christine said easy acres, that sounds like a TV show.

You're breaking up, could you move just a little closer to the mic?

Yes, I'm sorry.

Doug, can you go into the -- you talk about Asian profits and the Oilseed segment.

I know you converted your position to an equity stake below 20%, so when you, in the break down of that Oilseed segment and the changes in equity income, are you including Omar in that?

Omar in the equity and affiliates, because that transaction isn't closed yet and we will continue on after that with equity accounting, based on the way it's structured today.

Even though your position is what, about 12%?

In the Company?

16% at the end of the day, but there's different ways of ownership for that 16.

So we do get some equity accounting on that.

Okay.

So you don't need 20.

Thanks a lot.

Yes.

Ladies and gentlemen, this concludes the question-and-answer portion of today's presentation.

I'll now turn your program back to Pat for closing remarks.

Ma'am.

Okay.

Well, thank you, let me wrap up with a couple of thoughts.

Again our outlook is very positive.

I think our performance this quarter, as I have mentioned, just reinforces the confidence in our ability to manage the business.

We performed well; we see excellent opportunities ahead.

Next quarter we will have a discussion a little bit around our projects and particularly our capital spend and more specificity on those projects.

So, thank you all for joining us this morning and everyone stay safe.

Ladies and gentlemen, this concludes your presentation for today.

Thank you for participating, and you may now disconnect.

Have a great day.