Archer-Daniels-Midland Co (ADM) 2007 Q4 法說會逐字稿

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

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

At this time, all participants are in a 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.

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

Dwight Grimestad, Vice President of Investor Relations.

Thank you, Lauren.

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

Before we begin, I'd like to remind you that we are webcasting 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, please turn to Slide 2, the Company's Safe Harbor statement which says some our 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 to such assumptions or factors could produce significantly different results.

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

Slide 3 in our presentation on the Web site shows the matters we will discuss in our conference call today.

I will now turn the call over to Pat Woertz, Chairman, CEO, and President.

Pat?

Thank you, Dwight, and good morning, everyone.

While this is, of course, our fourth quarter call, I thought I would begin with some highlights about the full fiscal year 2007 and that is shown on Slide 4.

Starting with safety, a big highlight and focus area, of course, we closed our fiscal year achieving double-digit improvement in both lost workday work rate and recordable incident rate.

And as we continue to improve safety on our way towards world class, I would like to thank all the ADM colleagues who continue to work safely and who look out for one another.

Turning to financial highlights, this morning ADM announced its third consecutive year of record earnings.

Net earnings for the year were up 65% to a record $2.16 billion, or $3.30 per share, with all major segments producing record results.

Sales revenues surpassed $44 billion, rising 20%, mostly, of course, on the strength of commodity pricing, and also on modest additional volume.

The Company exceeded its targets for both return on net assets and cost per metric ton, and likewise we improved in return on equity, return on invested capital, EBITDA and EBITDA growth.

The Company increased cash dividend payouts in absolute dollars and in cents per share.

The Company issued $1.15 billion of convertible debt during the year.

The issuance was the first of it's kind for ADM and was a very cost effective borrowing.

It provided funds for a significant share buyback of 15.4 million shares of ADM stock.

On the strategic front, a formal strategic planning process was established this year.

ADM outlined its long-term strategic destination to be the global leader in bioenergy, while expanding our premier position in the agricultural processing value chain and we began to flesh out the process for that direction, specifically to diversify feedstocks, to expand the technology platform, to expand our geographic footprint and to complete our bioenergy projects.

On the personnel front, we hired a Senior HR officer, a Chief Technology Officer, created a lead strategy and planning role, we realigned IT, corporate communications and government relations.

I think the year has been one of positive change and a solid move forward to building out the long-term value of this company.

I would like to recognize the people of ADM for their capabilities, their performance, and for continuing commitment to sharing -- to growing shareholder value.

Before I do turn the call over to Doug Schmalz, our Senior Vice President and Chief Financial Officer, for his detailed discussion on the fourth quarter results, let me highlight some of the key items this quarter.

Certainly a standout was our gain related to the exchange of our China joint venture holding for shares in Wilmar International.

This transaction moves up one step forward in our Asia strategy efforts.

Other asset sales, Agricore United, Tyson, Overseas Shipholding continued to pare down non-core assets as we reinvest to align our portfolio with our strategic opportunity.

Results in corn this quarter declined as we dealt with the challenges of higher net corn costs.

Corn prices have come down from recent highs and the USDA forecasts a record crop that should provide abundant supply for all market needs.

Margins were squeezed in European rapeseed crushing and biodiesel and we continue to see some challenges in these areas.

We also see an ample global supply of soybeans and solid demand from meal and oil going forward and we made very good progress on our capital projects this quarter.

We will provide an update on the larger projects today, as I mentioned we would in our last call.

Doug will talk about our efforts to (inaudible) the projects [attained] all of our expectations for safety, for speed, returns, costs and processing efficiency.

Our confidence in the strategic direction remains quite strong.

I think agriculture is responding to the unprecedented opportunities with record crops in the ground.

Now I'll turn it over to Doug and after that, of course, we'll be happy to take your questions.

Doug?

Thanks, Pat, and good morning, everybody.

As Pat mentioned, solid fourth quarter operating results were achieved during the quarter marked by continued high volatility.

If we move to Slide 5, it's a summary of our financial earning highlights for the quarter.

Fiscal year 2007 net sales and other operating income increased 28% to $12.2 billion.

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

Gross profit decreased 13% to $718 million.

Key drivers of the decline in gross profit were a $60 million LIFO charge reflecting the increased commodity prices and lower gross profit in Oilseeds and Corn Processing.

Selling, general and administrative expenses declined 1% to $293 million, as cost reductions exceeded the impact of stronger foreign currencies on translated costs.

In line with our strategic focus, asset sales and repositioning of our asset base was significant in the fourth quarter.

Gains on asset sales in fiscal 2000's fourth quarter of $967 million includes a gain of $440 million on the exchange of our interest in certain Chinese joint ventures for shares of Wilmar International Limited, the largest agricultural processing company in Asia.

It also includes $153 million gain on the sale of the Company's investment in Agricore United.

In addition, we sold our Tyson Foods and Overseas Shipholding common equity positions at a gain of approximately $375 million.

We continue to take actions to align our asset portfolio with our strategic direction.

Financing costs, net equal to interest expense less investment income, was $45 million, which is comparable to last year.

The fiscal year fourth quarter of 2007 effective tax rate increased to 31.5% from 29.5% last year.

Our annual effective rate for the full fiscal 2007 year is 31.5% also, which is up slightly from fiscal year 2006 annual effective rate of 31.2% excluding the $36 million tax adjustment credit, which was included in last year's results.

The increase is attributable to shifts in geographic mix of earnings.

Net earnings increased to $955 million, $1.47 per share from $410 million, $0.62 per share last year.

Moving on to Slide 6.

Six is an earnings summary reflecting unusual items impacting the quarterly results.

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

Net earnings for the quarter ended June 30, 2007 were $955 million, or $1.47 a share compared to net earnings last year of $410 million, or $0.62 per share.

Fiscal 2007 earnings include gains of $616 million on asset sales, which I previously mentioned, abandonment charges of $12 million, a LIFO charge of $38 million, and a charge on debt repurchase of $29 million.

Net earnings excluding these items were $418 million, or $0.65 per share.

Last year's fourth quarter earnings included gains on asset sales of $18 million, FIN 47 and abandonment charges of $37 million, LIFO income of $1 million and Brazilian transactional tax credits of $17 million.

Earnings for the fourth quarter of fiscal year 2006 excluding those items were $411 million, or $0.62 per share.

For your convenience we have included a schedule in the appendix to this slide presentation, which should help you analyze these items by segment for the quarter and fiscal year periods.

Slide 7 states our targeted performance objectives.

We have two performance objectives which we report on a quarterly basis.

First, we set a return on net assets RONA objective of 13% on average.

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

For the 12 months ended June 30, 2007 our return on net assets is 15.7%, even though higher commodity price levels and significant pre-production capitalized project costs have resulted in higher working capital and fixed asset values, which have the effect of reducing the RONA return.

The reported RONA reflects the strong earnings results this year.

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

For fiscal year 2007 we achieved a rate of $108.89, which is better than our stated objective.

We continue to meet this objective by challenging all costs and expenses and establishing benchmarks where comparable external data is available.

Every one dollar change per metric ton translates into approximately 50 million pretax dollars on an annual basis.

Details of the calculation of these non-GAAP RONA and cost per metric ton performance metrics can be found in the appendix to this presentation.

Slide 8 is a summary of our segment operating profit.

I will not spend a lot of detail here other than to note that our total operating profit increased 81% to $1.2 billion.

On Slides 9 to 12 we will review the major drivers which impacted segment earnings for each segment during the fourth quarter.

Moving to Slide 9 is an operating profit analysis of the Oilseeds processing segment.

As you are aware, and as Pat mentioned, we have been joint venture partners with Wilmar for 15 years developing a footprint in the Oilseeds sector in China, as well as palm operations in other regions of Asia.

About a year ago, Wilmar become a publicly listed company on the Singapore Stock Exchange and recently merged with the Kuok Group to become the largest agribusiness company in Asia.

The exchange of our Chinese joint venture interests for shares of Wilmar International Limited results in a strategic realignment of our Asian investments and a gain of $440 million included in operating profit.

Excluding this gain operating profit declined to $147 million from $195 million last year.

Operationally our global production volumes were up year-over-year, soy crush margins improved globally, but were offset by declines in soft seed and biodiesel margins resulting in a net margin reduction of $30 million.

In addition, operating costs increased $19 million, due principally to increased energy and maintenance costs.

The equity earnings of affiliates, principally our Asian joint venture operations, increased $18 million, reflecting the improved soy and palm oil market conditions.

Asset abandonment and FIN 47 charges were $4 million in 2007 compared to $14 million in 2006, a reduction of $10 million.

In addition, last year's results included the $27 million of Brazilian transactional tax credits.

I will now discuss current market conditions in the oilseeds complex.

The rapeseed crop in Europe is smaller than expected and biodiesel imports are entering Europe.

These factors will pressure rapeseed crush and biodiesel margins.

In North America, we saw NOPA industry capacity utilization in the mid 80% range for the quarter, up slightly from last year.

Spot board crush margins are in the $0.63 to $0.65 per bushel range, although cash margins are stronger as a large supply of beans is resulting in an historically low basis.

U.S.

census data show high soybean oil inventories.

These should decline as biodiesel production uses increasing vegetable oil volumes.

On a global basis, we are seeing solid demand for both protein meal and vegetable oil.

Slide 10 is an operating profit analysis of our Corn Processing segment.

Our Corn Processing operating profits decreased to $241 million from $286 million last year, due principally to increased net corn costs and lower ethanol sales volumes.

Although sweetener volumes and pricing increased over prior year levels, results declined due to the higher net corn costs.

Bioproducts results also declined as the impact of lower sales volumes and higher net corn costs exceeded increased selling ethanol prices.

You recall last year we moved inventory in the fourth quarter.

We saw volumes in that quarter were a little higher than what they would normally be based on a production basis.

In addition, our operating costs increased by $9 million due principally to higher energy costs.

Abandonment and FIN 47 charges were $1 million in 2007 compared to $13 million last year, a reduction of $12 million.

Looking at current market conditions, we see the corn prices are well off their recent highs.

The USDA reported that farmers planted an incremental 14 million acres in corn this year, and they report this crop to be in very good condition at this point of the growing cycle.

The USDA is projecting record corn production of 12.8 billion bushels, which should provide sufficient corn to meet all demands.

Restrictions on corn gluten feed shipments to Europe due to GMO concerns continues to put pressure, however, on byproduct credits for corn wet millers.

On the product pricing side, our next real change in sweetener and starch selling prices will come with new contracts for 2008.

Anticipated increase in sweetener demand from Mexico should be beneficial to our third quarter '08 and beyond.

Current market prices for ethanol have declined and we expect to see lower prices in our first quarter of fiscal '08, but ethanol prices have been stable, even as our [bob] has declined, making spot ethanol a zero to 10% per gallon premium gasoline.

Current market prices for corn have also declined and we expect a reduction in net corn costs based on current conditions.

Slide 11 is an operating profit analysis of our Agricultural Services segment.

Operating profit of this segment increased to $241 million from $83 million last year, due principally to the $158 million of gains from sales of business interests, principally the sale of the Company's Agricore United investment.

Global merchandising and handling results improved $49 million due to improved market conditions.

These improvements were partially offset by a $20 million decline in transportation, as southbound barge freight rates and volumes declined from prior year levels.

In addition, operating costs increased $25 million.

Equity earnings of affiliates decreased $5 million and last year's results included a $1 million charge on asset abandonment.

With the anticipated large corn crop, we see grain handling opportunities in Agricultural Services.

Therefore, we continue to improve grain receiving, cleaning and drying capabilities in addition to expanding temporary storage in anticipation of this large crop.

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

Slide 12 is an operating profit analysis of our other segment.

Operating profits increased $10 million to $83 million from $73 million last year.

Margin improvements in food, feed and industrial of $5 million and financial of $19 million were partially offset by operating cost increases of $16 million.

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

Financial margin improvements reflect improved captive insurance earnings.

Equity earnings of affiliates increased $8 million and last year's results included a $17 million gain on asset sales.

Asset abandonment charges were $13 million in 2007 compared to $29 million in 2006, a reduction of $16 million.

In our wheat milling business, we see potential challenges in processing this year's weather-damaged wheat crop.

And in cocoa, current market conditions show an improving processing margin outlook.

Slide 13 analyzes our corporate costs.

Our corporate results were an income of $242 million compared to a charge of $55 million last year.

Investment income increased $31 million due to higher interest rates and higher levels of invested funds.

The impact of LIFO inventory valuations was to decrease corporate results by $59 million, as current year's quarter included a LIFO charge of $60 million compared to a $1 million charge last year.

Security gains increased $363 million, principally reflecting the sales of our Tyson and OSG investment.

During the fourth quarter we repurchased $400 million of outstanding high coupon long-term debt to reposition our debt portfolio.

The transaction is present value positive, but resulted in a $46 million charge this quarter.

Moving to the summary of financial condition on Slide 14.

Our working capital increased 24% to $7.8 billion, due primarily to the effect of higher commodity prices.

That increase is in line with our dollar sales value increase of 28% in this quarter compared to last year.

Working capital includes readily marketable inventories, which have a carrying value of approximately $4.4 billion at June 30.

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

As our capital project spend has increased, our property, plant and equipment has also increased by $717 million.

The increase in investment in affiliates of $513 million results primarily from the Wilmar International Limited transaction discussed previously.

The long-term marketable securities decline of $453 million reflects the sale of our Tyson and Overseas Shipholding investments.

And long-term debt increased $687 million, reflecting the recent $1.1 billion convertible debt offering, net of the $400 million debt repurchase in the fourth quarter.

Cash flow highlights can be found on Slide 15.

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

Our capital project spending for the year increased to $1.2 billion.

We acquired 15.4 million shares of company stock this past year for $533 million, at an average cost of $34.68 per share, and repurchased $400 million of high coupon debt.

We also paid dividends of $281 million.

This spend was financed from cash flows generated in operations, sales of marketable securities and other assets of $860 million, and the proceeds from a $1.15 billion convertible debt offering.

Moving now to a review of our capital investment strategies on Slide 16, I'll now discuss two key elements of our capital investment strategy.

One, increasing capacity in key markets, and secondly, improving cost efficiencies in two of our large plants.

We are increasing capacities in ethanol with the addition of two 275 million-gallon plants and adding to our biodiesel capacity.

We are increasing capacity in cocoa with our Hazleton, Pennsylvania plant.

We are also expanding oilseeds crushing in five North American plants and expanding our transportation and logistics network by adding barges, trucks, rail cars, and expanded grain handling capabilities.

And we are also building a new plant to produce biodegradable plastics.

We are also taking cost efficiency steps by converting two of our corn plants from natural gas to coal co-generation.

Coal co-generation plants typically run at a cost of $4.50 per million BTU.

Coal prices, in addition to being less expensive, have traditionally been much less volatile than natural gas prices which have ranged from $4 to $14 per million BTU over the past few years.

We believe coal co-generation will give ADM a material cost advantage in our two new ethanol plants under construction.

Now we'll move to Slide 17 and I'll discuss our very disciplined approach to project management.

Our commitment is to construct these plants safely, on time, and on budget.

We are committed to continuous improvement in safety for our work force.

Over the past four years, ADM has reduced our work force total recordable injury rate by 46%.

We continually track spend versus budget and look for new opportunities to achieve efficiencies.

For example, we have locked in over half of our materials and equipment costs.

And we now use prefabrication shops to build our process units as we simultaneously build the on site structures.

We also use our long-term relationships with contractors to ensure we have the skilled work force we need to do quality work.

These contractors know our operating procedures and safety training requirements, and we know their project management teams, supervisors and skilled workers.

A critical strength to our project success is the combined expertise of ADM's design, construction and operating engineers.

This combined expertise helps ensure the efficient and safe start-up of our plants.

To achieve excellence in project management, we have placed a team of engineering, accounting, safety, and outside design professionals on site at each major project.

Moving to Slide 18, it's an update of our major project status.

Since our last quarterly update, I'll just mention the changes sort of.

Our Belden, North Dakota plant is in start-up now.

We put the propylene ethylene glycol project on hold for a while while we evaluated the potential impact of new biodiesel technology and after a thorough review, we reinstated this project and the start up date is now scheduled for January '09 instead of October '08.

And since our last conference call, we received our construction permit for the Cedar Rapids ethanol plant and we anticipate completion of this project by August '09.

We'll now move to Slide 19 where I will discuss the ADM advantage in dry mill ethanol production.

ADM has a unique and sustainable advantages when it comes to dry mill ethanol production.

Advantages which come from integrating these facilities into our large ag processing network and our existing corn processing system.

Let me detail some of our advantages.

ADM's extensive corn origination network gives us access to the entire North American crop.

Our new units will not only be the largest ethanol production units in the industry, but they will use the existing infrastructure of two established corn wet mills.

We are building coal co-generation boilers to power our operations with the most cost effective fuel source.

Our ADM unit trains give us a cost advantage in bringing corn to our plants, as well as shipping product out from our plants.

Our extensive ethanol terminal network give us a marketing advantage in meeting our customer needs.

And our global feed business gives us the potential of shipping our DDGs to the highest valued markets around the world.

We continually re-evaluate the rational for all our projects.

Our most recent review of these dry mill ethanol projects reconfirmed our advantage relative to many in the industry.

When you add it all up, we have very sustainable advantage in the production and delivery of dry mill ethanol.

That completes my comments.

And I'll now turn it back to Pat.

Thank you, Doug.

Operator, we can announce Mr.

John Rice, Doug Schmalz and myself are all here to open up for questions.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Diane Geissler with Merrill Lynch.

Yes, good morning.

Good morning, Diane.

Good morning, Diane.

Just a couple of questions.

Actually clarifications here on your comments, Doug, on the volume reduction.

Would you say the volume reduction was more of an inventory build in anticipation of maybe a strengthening in the market here with where, you know, crude and wholesale gas has gone, or was it just the fourth quarter, your fiscal fourth quarter last year was unusually high and therefore the comp, or maybe it was a little bit of both and you could just give us some clarity around that statement?

And since I have John here, I'll kind of turn it over to him and let him add to it, okay?

Sure.

Good morning, Diane.

Good morning.

Last year we had high inventories, or higher inventories of ethanol just because we were entering new markets because of the ban of MTBE in many parts of the country.

So we had built the higher inventories and working with our customers, so they would have an adequate supply.

And so the comparables this fourth quarter compared to last fourth quarter's, that's really the reason for the downtrend, is we had higher inventories and we were reducing our inventories last year.

Okay.

And then I guess the comment that you expected prices first quarter '08 prices to be down, was that sequentially or year-over-year?

Or both?

I just -- if you could clarify that for me.

Sequentially.

Sequentially.

Yes.

And then I guess, you know, I appreciate the, some of the detail you've given here on the capital projects.

Doug, I think you said you spent $1.2 billion this year.

Correct.

In capital.

Could you give us some clarity about now that we're moving into fiscal '08, what we should expect for Cap Ex this year?

Well, I think we'll be up somewhat in the 1.2.

I mean it will depend on how these projects proceeds as we go down through and the spend rate, but I would anticipate that number to be up over the 1.2.

I can't say exactly how much, but I would say maybe up in the 1.4 range, 1.5, or 6.

It'll all depend on how that comes through, Diane.

Okay.

And then would that tail off?

Would that be the bulk of the capital plans that you've spoken about over the last, I don't know, 12 to 18 months where you talked about the 2.5 to $3 billion, or is there more than in fiscal '09 above maintenance?

Most of them are as listed on that schedule.

I mean those are the major ones and those time lines are what we see right now.

Okay.

And then I guess--

And I might just comment.

I think you could categorize it as the peak as in '08, but you're right, there're some that will continue to start up in '09.

Okay.

And this obviously excludes anything you might do on palm oil or sugar-based ethanol, which you've talked about wanting to get into, but -- it's more of a long-range, so that would be incremental to what you have built in?

Correct.

These are the ones we've announced so far.

Correct.

All right.

And then I guess the oilseed crush commentary, if I'm reading you correctly, it sounds like Europe biodiesel, you expect that to be a little bit more challenging in the near-term.

Could you talk a little bit about sort of, you know, I know we've had a buildup in edible oil inventories in light of biodiesel, you're expanding capacities, more capacity coming online just from the industry in general.

Can you talk about how we should, you know, expect that to develop over the course of this next fiscal year?

Some of the drivers in oilseeds?

Well, in Europe, specifically, the rapeseed crop is a little bit less because of the heavier rains.

Harvest is just about done.

We should be finishing up here shortly, but the crop is less than expected.

And we're seeing more imports into Europe of biodiesel, a lot of soybean oil, but now during the winter months, just because the coal flow issues, we'll have -- people will have to blend more rapeseed oil, so we should see more demand for the rapeseed oil during the fourth quarter calendar year and first quarter of '08, fiscal third calendar year also.

So I think it's, you know, the business is not as good as it has been, but still a fairly good business, I want to say.

And is that primarily just the buildup in inventory, the short crop, lack of--

Part of it comes from the higher vegetable oil prices also.

We've seen the futures rally, but we've seen the basis, cash prices be heavily discounted and work their way into the biodiesel markets, just to keep the inventories a little bit less than full capacity.

Okay.

And you're expanding capacity in five of your oilseed crush plants in North America, is that what you said in your capital review?

Yes.

How much incremental capacity are you adding there?

Two to three.

2 to 3%.

We've kind of said it's in line with that.

Kind of in line with what industry's doing.

With the industry, okay.

All right.

Thank you very much.

You're welcome.

Thanks, Diane.

Your next question comes from the line of Vincent Andrews with Morgan Stanley.

Good morning, everyone.

Good morning, Vincent.

How are you?

I'm well, thank you.

I'm wondering if you guys could comment on the fact that we seem to repeatedly read in the press about an ethanol supply glut and all the capacity that's coming online.

I'm wondering if you could just discuss what you're seeing in particular in terms of what the refiners are doing in adding blending infrastructure into markets that have not traditionally blended gasoline?

Perhaps we could just start there.

This is John Rice.

We're working with all our customers.

We are seeing a little bit more blending coming into Florida and also the southeast.

But now, we still have some issues on the vapor pressure down there, so we haven't seen everybody go to full blending in Florida, so that should expand the market.

And also California, we are working with customers there, where they will increase their blend from 5.7 to 10%.

So it's just more of a timing issue.

We still feel very good long-term that that will blend up to the 14 billion gallons, but at times, the capacity comes on a little quicker than what everybody starts blending.

Sure, but I mean even from just kind of a micro economic perspective, it would seem to be that where RBOB is versus where ethanol is, that if I were a blender, I'd be looking to do as much discretionary blending as possible and I would be economically incentivized to add infrastructure and this is forgetting about even the idea that there would be a step up in the RFS.

So from their perspective, I mean are they -- other than Florida and California, are there other markets that they're looking at now in your view?

Yes, I mean what you stated is absolutely correct.

I mean they see the returns, so they're looking to blend as much as they can.

But there's a time lag between, you know, obviously you'd like to do it today, but how long does it take to actually get into a new market?

If you're a refiner, in other words, if you want to open up a new market, what do you think that time lag is?

That really--

It's actually, Andrew, it's being a blender and of course they need the infrastructure built at their terminal, so it's tankage, it's piping, it's additional storage, so all that takes some time.

Okay.

But there's no real way to quantify that time?

It varies.

They all tell us that they want to blend up to the 10%, correct, John?

So I guess it's just through the summer months I think is the way to look at it.

Okay.

And then in terms of the energy bill, any view on when the House is going to pick that up?

Well, most of our indications, of course, is after they come back from the August recess.

In September, there will be good discussions.

We're pretty pleased with the way the Senate bill came through and looking for the House to do some of the same.

Okay.

And have you, or are you looking to swing any of your ethanol capacity to any of the other corn products that you make, given the, you know, theoretically lower ethanol prices that you're seeing sequentially?

When that time arrives, if it does arrive, we will look at, especially with Mexico, going to start importing more high fructose corn syrup.

We feel the first part of next year, yes, we will definitely look at that.

And we've also seen a little uptick in our lacing pricing.

Okay.

And then on the coproducts issue in Europe, is there any visibility on improving in that situation?

Not really.

I personally thought that we would have this issue resolved, and then on June 25th they took a vote and it failed, where the imports were not allowed, so that kind of caught us by surprise.

The next vote comes in the end of September, so we may see a little window of opportunity to ship some corn gluten feed into that market.

And with the European crop having some problems, maybe they'll be more likely to vote in favor of it this time.

But once again, during the winter months, there could be another issue.

Okay.

And I think you said on the last call that you were trying to open up new markets with coproducts, given the issue in Europe.

Is that what you were doing during this quarter and is there any kind of update on how that stands?

I mean it's going very well.

We're converting a lot of customers from other feed products, even from corn.

We're seeing people now buy corn, buying corn gluten feed.

So in the long-term, this is very positive.

Okay.

Thank you.

I'll pass it along.

Thanks, Vincent.

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

Good morning.

Good morning, Christina.

If you wouldn't mind talking about the change that happened in China with your partners.

From what I understand, you had owned, I think, 30% of Chinese crushing and then it transitioned to maybe 18% of Wilmar, and so what exactly do you own now that you didn't own before and how should we think about modeling Chinese oilseed processing, you know, in terms of the impact to you going forward?

Yes, the -- Doug here.

The model really doesn't change other than the percentage ownership changes.

We had a number of joint ventures, you know, with our joint venture partners down there, which we've now sort of consolidated down into this one entity which now has the, really, the ownership interest in all of the Chinese as well as the Kuok Group assets and so forth.

And what we did is exchanged our shares in the joint ventures that we had in China, not in our interest that we had in Wilmar, and then we took a direct stake in the Wilmar International in exchange for those.

So effectively now we have about, a little bit over 16% net ownership in Wilmar International.

Kind of the same group of assets in there, except for the merger that they had that brought in the Kuok Group assets.

So the current difficulty in China with crush margins, given the blue air disease, how will that impact you going forward?

Well, I mean we're -- it had an effect that's really been an effect almost for about nine months to a year.

I mean we're seeing still pretty good meal demand over there right now, and good oil demand.

So, I guess I don't see it as being a huge issue.

Okay.

And then also in Argentina, they have, I guess, some issues with energy and some oilseed crushers are closing down facilities.

How is that impacting you?

Well, I don't think they're really closing down.

When you really look at the statistics, the numbers, they haven't slowed down the crush as much as what the market was thinking and it's really just raising their costs.

They're using fuel oil instead of the natural gas.

But because there that's really what's hurt us in Europe, is a little bit of the vegetable oil going into Europe from Argentina.

Okay.

So I mean when we think about South American crush margins for you looking, I mean Europe, you mentioned is going to be a challenge.

South America should improve sequentially or it should be flat?

What's the outlook down there?

Well, it's going to depend on the crop.

I mean we just have our crush assets in Brazil.

We're still keep seeing the meal market grow in Brazil.

We also have our new biodiesel plant in Rondonopolis starting up, which will also help the oil demand.

So I think it should improve a little bit in Brazil.

Okay.

And then last question.

In terms of LIFO, in the past you had said that it was about a third corn, a third soybean oil and a third soybeans, I guess roughly.

The charge was higher than we thought this quarter.

Was there more of an impact from soybean oil, or soybeans?

Has that allocation changed?

Yes, it did, because of course the high run-up in oil prices.

In soybean oil prices.

(Inaudible) prices is really what it was.

That was the biggest -- I think it was most (inaudible).

Okay.

Thank you.

Christine, I might just add a comment on Wilmar, your original question.

It might be worth kind of reading the Wilmar annual report, looking at the Wilmar investor presentations now since our ownership is in a publicly held company, you can get more data there, you know, on their Web site and they describe sales of $10 billion and earnings of $600 million, et cetera.

So when you think about our equity ownership there coming through on an equity basis, it might be good to kind of reflect on their public information.

Okay.

And Pat, you're still going to report that in Oilseeds Processing in the segment?

Correct, yes.

Okay.

Thank you.

Your next question comes from the line of Ann Gurkin with Davenport.

Good morning.

Good morning, Ann.

I wanted to ask you about the buildout in the ethanol market.

Where are we in terms of the end users?

Do you think the buildout will keep up with the ethanol production right now in the U.S.?

As -- what we're seeing in the market just, and what we're seeing actually in the index, going from about 10 to 15 under to 10 over, I would say yes, it is keeping up.

Okay.

And so you think by year-end we'll have more of a balanced situation with the ethanol supply versus the end market use?

That's just tough to say.

A lot depends on when, you know, it'd be really nice to have two big markets come on, which would be really the southeast or California would have the biggest impact.

We're at about 6.5 billion gallons today and look at about 7 billion by the end of the year.

So it's kind of -- the market's opening is the big question.

Okay.

And are you switching grind capacity in your wet mills back to HFCS right now?

No, we're not.

Do you anticipate doing that in the next six months?

I think a lot of that will depend on how the high fructose pricing goes and with the addition of the new market in Mexico.

And do you expect to negotiate HFCS contracts sooner this year than historically contracts are negotiated?

I would anticipate contracting to be finished kind of like what we saw last year.

That was earlier than normal?

Yes.

Okay.

That's great.

Thank you.

You're welcome.

Your next question comes from the line of Robert Moskow with Credit Suisse.

Thank you.

Could you -- you had made some comments about wheat milling probably having some challenges for the next 12 months, having to do with the crop.

Can you give us an idea of just the extent to which you expect that to be a challenging market and also to the extent that, you know, that the input pricing is obviously going to be a lot higher.

Do you expect your margins to be a lot tighter as a result?

Well, most of our wheat milling business is done based on the price of, or flour business is done based on the price of wheat.

So we really think we're exceptionally strong in this area now, just because of our transportation assets.

We can work with our customers to be able to move wheat from one area to the other area and be able to work on different blends.

So I think I would consider this more of a positive for our milling business.

So does that mean profits should be higher for the next 12 months?

I can't say that for sure.

Because I thought in Doug's comments, the outlook was negative and now you're saying it's more positive.

I said what it was.

It's going to be challenging and I think John's right.

I mean we're going to have to move that wheat crop around and that's going to be a challenge to be able to get that done and do it efficiently and effectively.

Yes, the wheat market is challenging.

I think John's point is we have a business that can accommodate and the logistics can accommodate kind of challenging markets to be an advanced.

Okay.

Thanks.

And regarding Europe, you know, we hear in the headlines about the challenges of operating in Germany with the tax implications changing there.

How is that impacted demand for biodiesel in Germany?

I don't think it's really impacted the demand as much as we're just seeing increased supply coming in from other parts of the world.

Okay.

But are they taxing blenders more aggressively in Germany?

The tax rate came down $0.9, or up $0.09.

Tax rate is up $0.09, and so does that mean it's more economic for them to import or does that -- are the two things not related?

I'm sorry.

I didn't understand the question.

I guess if they are taxing the blenders more aggressively in Germany, does it make any difference to them whether they're importing the oil from Argentina or whether they're getting palm oil from Malaysia, whether they're getting rapeseed domestically?

It really comes down to the coal flow issues and it's -- rapeseed is a lot better with the specifications in Europe to blend during the wintertime.

Thank you very much.

And biodiesel's just more expensive with the new tax.

Yes.

Thank you, Rob.

Your next question comes from the line of Michael Picken with Cleveland Research.

Good morning.

I'm calling on behalf of Christine McCracken.

Just wanted to touch base a little bit more on the sweetener side of the business in terms of the outlook for 2008 and I mean it looks like we still have tight capacity here in the United States and Mexico coming on board, but the corn costs have obviously come down.

How do you sort of see the negotiations playing out?

You know, we've -- like I mentioned before, we see Mexico coming on, so we think it should increase the overall demand and tighten up the supply some more.

So it's too early to say.

We haven't come out with our prices yet.

We'll probably look at doing that maybe in August or September.

Okay.

And in terms of some of the coproducts, you touched on sort of the situation with gluten seed and opening up other markets, but it looks like the other coproducts, corn oil and gluten meal have remained pretty strong.

How do you see those markets trending over the remainder of the year?

I think you're exactly right.

I see corn gluten meal, we're seeing very good demand and good pricing on that and also just because of high oil prices, corn oil is also staying very high.

Okay.

And in terms of, I guess, moving on to the oilseed business, you had mentioned that the meal demand in China hasn't really slipped that much because of the blue air disease.

Is there -- are they expanding on the poultry side, or is it more a function of their just rebuilding the herds, or how is sort of meal demand kept up given the number of losses in the hog herd that are out there?

We've seen a little bit of dip, it's just not huge percentage.

I mean if you look at the bean imports coming into, or going into China, we've seen a little bit of a dip, but it just hasn't been, you know, hasn't had a huge effect.

We've seen a lot of added capacity in added in China also over the last year.

So the ears are looking a little less blue?

I guess.

A couple of your competitors, you know, North American competitors, have recently announced expansions into China.

I mean where are we now today in terms of utilization rates and I recognize there's a number of older inefficient plants that are out there in China, but kind of where do you see that going over the course of the next couple of years?

Right now we think it's right around 65%, and I mean there's annual growth rate over there, about 8 to 10% a year.

So I mean it should keep utilization -- we don't see a lot more plants being built so I think the capacity utilization will keep increasing.

Okay.

Thank you very much.

Thanks, Mike.

Your next question comes from the line of Ed Roesch with Banc of America Securities.

Hi.

Good morning.

Good morning.

There's a chance you covered this and I might have missed it.

I was in and out of the call.

I was wondering on an update out of Europe, because I think in Q1 when there was a switch to the taxing on biodiesel, there's an issue where the mandates had not really caught up and you're in overcapacity.

Could you comment on kind of where those mandates are relative to industry capacity now?

We have seen a lot of additional capacity in the biodiesel come online.

You know, from two years ago we had very high margins in biodiesel and in rapeseed crush margins, but with the smaller crop and with additional capacity, we are seeing effects on that.

Okay.

And the mandates aren't -- haven't ratcheted up enough to kind of offset some of these things?

I'm sorry?

Yes.

That's correct.

Okay.

Any outlook on when that could occur?

I guess I don't have a good handle on that right now.

Okay.

Thanks.

And then I think you covered a lot of these questions.

One last one.

You recently announced, I think a fairly small acquisition of grain elevators around the Illinois area, is that right?

Right.

And could you just kind of comment on what that does strategically for ADM?

Well, when basically with the large corn crop as we said this year, I think positioning ourselves to take advantage of the additional storage, additional transportation, marketing network, et cetera, this is just fits strategically with our global footprint particularly here in the U.S.

About 10 million bushels is what it has.

Okay.

So it's increased capacity along what your existing business line--

Spans our whole origination network.

Okay.

Very good.

All right.

Thanks for your help.

Your next question comes to the line of David Driscoll with Citigroup Investment Research.

Hi.

Good morning, everyone.

Good morning, David.

Good morning, David.

Just two questions for you here.

I think most everything else has been answered.

Back to oilseed.

So net when you take into account, Pat, the decline in profitability in European biodiesel, is that the factor that's going to be prevalent in the outlook for next year, or do you see improving crush margins in North America particularly, you know, being more than enough to offset those declines?

Well, you know we don't give guidance, but I think you've got it right on as far as where the improvements are in North America and, obviously, if we're adding to our capacity here, we feel strongly about North America.

Europe will continue to be challenged, but we'll see how things come up and of course our improved China investments position us with heavier weighting in palm, so you'd even argue that the Asia peak there, while it's still the same holdings is of a nature of a little different variety and I think we'll be strong.

And then my second question.

Doug, you might be the one to answer this question.

The financial segment has had profits that have grown, I think, this year profits came in, reported profits, you know, just shy of $200 million.

Back in '04, these profits were like $33 million.

Can you really talk us through here a little bit about what's driving this segment overall?

There's a lot in that segment and quite frankly, I'd love to hear how you go about trying to forecast, you know, what's happening in that segment and any color you could provide on the sustainability of it, very helpful given the type of profits it's been producing.

Well, you know, included in that is our ADMIS board of trade operation up in Chicago and that has in very, you know, markets that's moving a lot and so forth, they have done better going forward.

You know, we see that business remaining relatively the same.

We've had our funds jump around a lot, so funds really drove a big increase this year, about $50 million of the increase this year for the full-year is in funds.

So you know, the rest of it is pretty consistent.

It doesn't change a lot in the insurance area and so forth.

You may have some ups and downs because it is a captive insurance.

So if we have any losses along the way we can take charges as they are incurred.

So we have reserves on the books that we feel are adequate but we have to replenish those reserves at the point in time we use them.

So that's the main, the main two things that move are I think the funds and ADMIS has been a relatively good performer.

Great.

Thanks a lot, everybody.

You're welcome.

Thanks, David.

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

Good morning, everyone.

Good morning.

Just like to ask a more holistic question.

I know last quarter we talked about, you talked a lot about challenging environment.

This quarter it doesn't seem as much.

You talk about the challenging side of the environment.

Would you consider on a holistic point of view, you know, that things are getting better, worse, or indifferent relative to the last quarter?

I'll tell you, I think this whole year's been a bit challenging and I think if anything, we can just truly manage through the volatility and relative to all markets, not only the commodity markets, it's kind of a challenging time.

So, you know, maybe your guess is as good as mine going forward, but I think the strength that we have to manage through that, I'm still as much if not more confident than ever.

Okay.

And then in terms of the Ag Services business, you know, there was definitely a pretty significant rebound more to historical levels.

Is that something in, you know, '08, '09 and beyond, it's something that, it's a working base to grow off or is it going to be more cyclical around the historical average?

I guess you would -- I shouldn't be a smart alec and say the ice melted on the river, should I?

No.

It's, I think with this large crop coming forward there, are even opportunities for us to take advantage of our strong network there and, of course, that's why we said we made a small acquisition as well.

So we continue to build out storage and the opportunity to handle, so I think Ag Services is a key part of our business going forward.

You know, it will have its ups and downs, too, but I think it's key.

And just on that, the barge rates and the volumes, any improvement in that on the outlook, or is it still, you know, barge rates looking like they're going to be somewhat depressed?

Barge rates are somewhat up, right?

Yes.

With the large crop, you should see movements.

Okay.

Great.

That should make our transportation assets worth that much more, just because the timing of the harvest and when it comes, we are in great shape to be able to move the crops around.

Yes, more and more bushels.

So again, the outlook for Ag Services should be growing off of this base not volatility around this base, I guess is what I'm trying to figure out.

When you handle a crop this big, it should have some upside potential.

Great.

Thank you very much.

Thank you, Ken.

And your next question comes from the line of Pablo Zuanic with JPMorgan.

Good morning, everyone.

Good morning.

Couple of questions on the financials and then strategic.

I mean for me to get to your $0.65 pro forma EPS, I have to where we have 23% tax rate, I think based on what you (inaudible) before the tax rate should be much higher than that.

Can you explain why the tax rate was so low this quarter?

23%?

Yes.

I don't think so.

Because what you did, you know, your reported tax rate is 31.5, but when you gave us the charges that you gave pretax and after-tax--

Their natural rate -- depends upon where it is.

We have some of those items that have no tax--

Excuse me.

I don't want to waste your time, but, you know, the question is the core tax is 23% and that's -- I just want to understand why the tax rate on your ongoing business was so low.

I guess I'm not following what you're saying, because--

Well, let me explain.

You have report on your charges (overlapping speakers) the way that you disclose your charges, the after-tax charges and the before tax charges.

If I take those numbers, the number is $537 million, if you take those numbers, you know, the pretax number, you're using a tax rate of 36% there.

Right.

In the reported numbers in the statement you're using 31.5.

(Inaudible) to get to your $0.65 I have to use 23%.

I want to understand, I mean I have, hopefully (inaudible) to questions to ask you, but I want to understand why was the tax rate so low on your pro forma numbers?

The specific items that occurred in this -- the pro forma items, you want to call them that, are at basically, most of them are at U.S.

rate.

U.S.

rate is 38%.

Look at the operations, the operations rate is declined because we do have tax advantages in our export, sales companies and so forth that reflect directly to our operations, really don't reflect to the one-off type issues.

When we sell shares in a security, it's going to be taxed at the U.S.

rate of 35%.

Okay.

So in the--

So we specifically do that.

Yes, but I don't think your effective--

Why don't we follow up offline on that.

I just think it's misleading.

I mean with all due respect, I think it's misleading to put a pro forma EPS number of $0.65 using a tax rate of 23%, okay?

But anyway.

We'll follow up offline.

All right.

Can I ask you another question if I may?

Sure.

In terms of (inaudible) cash about sugar ethanol, how should we think about Archer Daniels trying to get into [receiving] sugar ethanol?

Is that a hedge in the sense that someday the U.S.

market perhaps could open to [receiving] ethanol?

How should we think about that?

Well, I think you should think about it as an opportunity for profitable growth for us, regardless of what happens in the U.S.

market.

Although you could also think of it as a compliment to our U.S.

ethanol business.

If we want to be the global leader in bioenergy, I think one of the largest ethanol markets in the world and obviously largest crops to produce ethanol is in Brazil.

So I think you can think of it as a profitable growth opportunity on its own, as well as a great compliment to our U.S.

and growing global business.

That's helpful.

And then just when you think of the government potentially and your targets are being proposed, 35, 36 [million] gallons, what do you think is a reasonable number to expect that corn could meet of that total number eventually?

Well, generally speaking, we talk about 14 to 15 billion gallons and that's based on the view not only of ourselves, but national corn growers and others who look at the market with corn and the technology today.

To advance beyond that, we'll need, and assume that that will happen over time, greater yield per acre and then moving to sort of second generation technology or other technologies to produce biofuels.

Okay.

And one last one, if I may.

Yes.

I want to follow-up on the question that came out over the elasticity.

The elasticity, you know, when you have this issue on ethanol that the gap between ethanol and the (inaudible) is so low you would expect the refiners to accelerate.

Obviously there are some structural issues that you talked about, but what do you think it's, (inaudible) international, growth rate, or what is the cap on the growth rate?

If the incentives are so good, why wouldn't the blenders be say, now at 10%?

I mean, how does that work?

I mean what is the, how should we think in terms of those impediments and, you know, how do they cap the potential growth rate?

So last quarter was $0.10 under.

This quarter is, or now it's about $0.10 over.

I think you can think of it as maybe you described or as than earlier question was that blenders will do what's economic, but they will also do what their system can accommodate and that's a system from sort of the beginning to the end from the refinery gate all the way to these various large marketing distribution systems.

So sometimes that includes, you know, pipeline changes.

It includes terminal changes.

It includes truck and barge and rail and long-term contracts and spot contracts and who they're importing from and what they can get locally.

So it's a great optimization model and, yes, they should take more as the economic prices drive them to and they probably do take as much as they can.

But again, the structural implications are an obvious physical issue.

Very helpful.

Pardon, if I may, one last one and then I'll pass it on.

The volume data it's probably I think from the year-to-date, I think what we heard it's only April, I think that number is up about 40, 41% year-to-date.

Obviously we don't have May and June yet, so I cannot compare with your quarter, but let's assume that the industry was still up about 40% in the June quarter and your volumes are down.

I understand this is your (inaudible) inventory adjustment, but why would there be such a difference between ADM trends, the industry leader and the rest of the industry?

Or is it just that ADM is losing share or (inaudible) contracts are being done at rates that are not attractive to you?

How should we think about that?

Our trends are, and you're comparing last year's fourth quarter with this year's fourth quarter.

And last year fourth quarter we had built large inventories because our customers were blending out of MTBE, and so last year fourth quarter we shipped a lot of ethanol out of our inventories.

But [isn't] that something that applies to the rest of the industry also?

I mean your competitors (inaudible) think they went through the same thing, right?

Last year the industry wasn't as large as it is now either.

Right.

Thank you.

You're welcome.

Thank you, Pablo.

Your next question is a follow-up from the line of Christina McGlone with Deutsche Bank.

Thanks for taking the follow-up.

John, last quarter you said that ending, year-end ethanol production would be at 8.6 billion gallons.

Did I misunderstand it now you guys just say that it's going to be 7 billion gallons?

Well, it's always kind -- the market's always constantly moving and we're just taking our best guess.

So I think construction is--

It's RFA's number, too.

Yes.

It's an RFA number.

It's in, construction's slowed down a little bit at certain places so it's always a moving target.

So from 8.6 to 7 billion, that would be your new year-end target is 7 billion?

Because that's a pretty sizable drop.

Yes.

It's not ours, Christina, just to be clear.

Okay.

I thought we'd comment, the RFA takes all of the industry's data and kind of takes it blind and indicates it on their Web site.

So I guess it's an adjustment, if you will, from the industry.

Okay.

Thank you.

Sure.

(OPERATOR INSTRUCTIONS) And your next question is a follow-up from the line of Diane Geissler with Merrill Lynch.

Hi.

Yes.

Thank you for taking the follow-up.

Just one question on the equity investments, or the fund investments.

My understanding of those is those stretch back to the 1990s and that benefits we're seeing from those now from long-term investments, is there a point where, you know, those funds sort of repay what, you know, what they plan to repay and then the benefit from that goes away?

And how should we think about the impact of the funds on your earnings over the next two to three years?

Yes, eventually they terminate.

In effect those funds do go away and they distribute out and that's I think there might be some that are in there that still go out another two or three years, but at the end of that point in time, we'll basically be out of them.

Our carrying values are quite low right now in relation to where they were at one point in time.

So we still could see some uptick in those as they roll out investments and so forth or you could see some down, too, if the markets went bad.

Okay.

But over the course of the next two to three years, you really expect them to be fully distributed.

They should be, that's correct.

Okay.

Perfect.

Thank you.

Operator, is that--

Once again-- I apologize.

(OPERATOR INSTRUCTIONS) Ma'am, there are no further questions in the queue.

Okay.

Thank you so much.

Well, thank you, everyone, for being on the call.

Let me also apologize for scheduling this call on top of another call I know that you need to listen to as well.

We will review that next time and make sure that that's clear.

So thanks.

I appreciate the questions and the attention this year.

We did define our strategic destination.

Our record performance I think reaffirms our strength and the opportunities in that position.

I think we can truly manage through volatility and we enter fiscal 2008 with confidence and momentum.

So thank you all for joining us this morning.

Good day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.