Archer-Daniels-Midland Co (ADM) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Archer Daniels Midland Company earnings conference call.

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

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

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

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr.

Dwight Grimestad, Vice President, investor relations.

Please proceed.

Thank you, Latasha.

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

Before we begin let me just acknowledge that we've heard we've had a couple of problems downloading the slides from our website, so if you could please call us we'll be sure to get you a copy of the slides.

Let me remind you that we are webcasting our call and that you can access it at our website which is admworld.com.

The replay will also be available at that address.

Turning to slide two, for those following the presentation, on slide 2 the Company's Safe Harbor statement says that some of our comments constitute forward-looking statements that reflect management's current view and estimates of future economic circumstances, industry conditions, Company performance and financial results.

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

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

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

Slide three lists the matters we will discuss in our conference call today, and I will now turn it over to our Chairman and Chief Executive, Pat Woertz.

Thank you, Dwight, and good morning, everyone.

As is our custom at ADM I would like start this morning with a safety moment.

Later this week at our board of directors' meeting on Thursday we will discuss ADM's performance metrics for the quarter and several of those metrics do relate to safety.

For the calendar year 2007, our lost work day rate has improved 26% for ADM colleagues and 13% for ADM colleague contractors respectively from the prior year.

Of course safety isn't about numbers or rates; it is about people and those results do indicate that more people are going home safely every day than ever before.

So thank you to everyone who's focusing on staying safe and driving towards zero injuries, zero incidents.

This morning we announced our earnings and I'm pleased to say that the results this quarter set yet another milestone for us, a new record for first-quarter earnings.

Again I think it shows the strength of ADM's diversified assets and product portfolio and certainly demonstrates the capability of our organization.

A year ago our first quarter earnings were also a record at that time and they reflected a steep growth in the ethenol market.

Our record earnings this first quarter reflect our strength in oil seed processing, sweeteners and starches, our global capabilities in grain manufa -- grain merchandising and handling, and in risk management.

We're seeing global demand for protein and oil, which is strong.

We're handling a large volume of North American crops, global commodities and freight markets are offering lots of opportunities, and we have completed most of our sweetener price discussions for the year.

I would like to take a moment to update you on the strategic actions that we have taken since our last conference call.

We have completed the acquisition that we announced of the business operations of Fasco Mills.

That increases our U.S.

grain elevation footprint.

We have shared our views on second and third-generation biofuels.

Our Chief Technology Officer's spoken at analyst conference and those charts and slides are available for your viewing.

We formed a very innovative alliance, I think, with ConocoPhillips to develop biocrude technology options for the future.

We formed an industrial chemicals group and added to our technology and research skill sets.

We also realigned our organization and we streamlined our reporting structure.

So I'll turn it over now to Doug, who will take you through the quarter.

John Rice, who, of course, is our EVP of commercial and production since our realignment of the organization, Doug and I will be back with you for Q & A after Doug takes you through the slides.

We've also taken a few steps this morning that I'll call your attention to to have, I hope, more disclosure and transparency in a couple of our segment results and also our volume, so I hope you'll look for that today, as well.

Doug, over to you.

Thanks, Pat, and good morning, everyone, and thanks for being on the call this morning.

As we have done in recent calls I will be using slides today to review our financial performs, and as Dwight said, they can be accessed via our website as usual.

In my remarks I will refer to the relevant slides as we go through those.

If you go to slide 4 you'll see the summary of our quarter's financial earnings highlights.

As you can see, our net sales and other operating income increased 36% to $12.8 billion.

About three-quarters of that is reflective of price -- commodity price increases and about one-quarter of that is due to volume increases.

One thing to notice there, as you well know, the absolute value of commodities does not really drive always down to our gross profit margin, especially when you look at like our oil seed business in our ag services sector where oil seeds is more on a crushed margin basis independent of what the value of the beans and ag services is a service business throughput type of business.

So as you can see, our gross profits increased 7% to $930 million.

If you exclude from that the inflationary impact of the LIFO adjustments that we had this quarter, that increase is around 15% as we had a charge of $83 million in this quarter and $17 million last quarter -- last year's quarter for LIFO charges.

That improvement really reflects, as Pat had mentioned, the strength in our oil seeds, sweetener, starches and agricultural services businesses, and also just a large North American crop, and the wheat shortages around the world and other imbalances around the globe really led us to have good opportunities in our risk management results this last quarter.

Looking at selling, general and administrative expenses were up 14%, $44 million, to $354 million for the quarter.

It's primarily driven by higher employee-related costs, which includes $23 million of charges resulting from the recently-announced corporate realignment initiative that we took this last quarter and also effects of our foreign currency cost translations, particularly the Euro.

Our financing costs net declined to $25 million from $36 million last year.

That decline really reflects the cost savings that we're getting because of our repurchase last year of $400 million of high-coupon debt and replacing that with (inaudible) this quarter, and then also we issued our very low-cost convertible debentures last year in the amount of $1.15 billion.

So the impact of that is that it's had a positive impact on our net financing costs.

Our effective tax rates are 31.8% this years.

That's up 6% from last year's first quarter, but it's just up slightly from the 31.5% which we had for our full fiscal year '07.

That increase is primarily related to just shifts in our geographic mix of earnings.

With all that, our net earnings and earnings per share increased 9% and 11% respectively, representing a record Company first quarter and as Pat said, a very solid start to our current fiscal year.

Moving on to slide five, I'll reflect on certain items which impacted our quarterly results, and as usual, the items on these slides are stated on an after-tax basis.

The most significant items were the LIFO and business realignment charges I referred to a moment ago.

After tax, those two items negatively impacted the quarterly results by $65 million or $0.10 a share compared to last year's LIFO charge of $10 million or approximately $0.015 a share.

The other items were security gains and asset abandonment charges and in total were relatively similar to last year's first quarter.

A schedule to help you analyze those items by segment for the quarter is in the appendix to the presentation.

Moving to page 6 gives -- or slide six gives us an update of our performance against targeted long-term performance objectives.

As you know, we have two performance objectives which we report on a quarterly basis.

Our RONA for the rolling four quarters ended September 30, 2007, at 14.6%, exceeding our target of 13%, even though our working capital has risen sharply and preproductive capital spending has increase.

We also have a cost objective of less than $110 per metric ton processed.

Our rolling four-quarter cost of $108.70 is below our objective, but our first quarter cost ends up being about $112.98, which is above our objective, and it's really due to the one-time $23 million realignment charge that I discussed earlier and also from long-term incentive program costs, which are always skewed into our first quarter of each year.

In order to provide more meaningful information in our financial presentations, as Pat mentioned we've included in the appendix to this presentation a breakdown of the process quantities by commodity used to calculate our cost per metric ton number.

We've also included in the calculation the quantity of barley processed by our malt division to align with the financial results our wheat, cocoa and malt portion of our other segment.

The details of the calculations of these non-GAAP RONA and cost per metric ton performance metrics can be found in the appendix to the presentation, including the by product -- by commodity breakdowns for prior years.

We gave you the three years plus each quarter for 2007.

On slide 7 you will see a comparative summary of operating profit, which looks a little different this quarter.

As part of our corporate reorganization we have realigned certain operations in our segments to the way we view the results of operations.

The changes made reflect reclassifications of operations such as protein specialties, natural health and nutrition, and animal feed, which were previously reported in our other segment.

These and other miscellaneous operations, which in any one year combined represented less than 3% of our total operating profit, have been reclassified to the segments which provide the feedstock from which they are produced.

This then leaves cocoa, wheat, malt and financial services in the other segment.

Our reclassified segment operating profits for the last three years are set forth in the appendix to the slide presentation as well as the restated quarters of last year.

As you can note on the slide, our total operating profit for the first quarter of fiscal '08 increased 23% to a record first quarter $797 million, and on slides 8 to 12, I'll review with you the individual segments comparative earnings for this quarter.

On page 8 is an operating profit analysis of the oil seeds processing segment.

Our oil seeds processing operating profit increased 23% to a first quarter record $209 million from $170 million last year, due principally to strong global protein and oil demand.

Crushing and origination increased $27 million due principally to better crush margins in North America and improved origination results in South America, partially offset by lower European crush margins.

Our refining packaging biodiesel and other increased $13 million, principally due to higher North American refining volumes and margins and to better vitamin E results.

Asia results were comparable to last year.

Our current market conditions for global oil seeds processing are generally positive.

Increased global protein demand is supporting better global crush -- cash crush margins.

Recent investments in several of our European plants let us reduce dependency on any one seed type.

This allows us to enhance processing margins by allowing production flexibility and opportunisticly responding to rapidly changing supply-and-demand factors.

Global demand for vegetable oil remains strong in spite of the high prices.

As we approach the colder winter weather in Europe, we anticipate increase in seasonal demand for rapeseed oil for use in biodiesel plants.

We recently completed construction of our first biodiesel plant in Rondonopolis.

the largest in Brazil.

and are very optimistic about the business there ahead of the 2% biodiesel blending mandate which is due to come into force in January of 2008.

Slide nine we'll move to is an operating profit analysis of our corn processing segment.

Our core processing operating profit decreased 12% to $253 million from $289 million last year, due principally to the lower ethenol sales prices and volumes and higher net corn costs, which were partially offset by favorable risk management results.

Sweetener and starches results improved $45 million due to additional sales volumes and higher selling prices for all key products, partially offset by the higher net corn costs.

Bioproducts results declined $81 million, principally due to higher net corn costs and lower ethenol sales volumes and prices.

Last year's bioproducts results, as you recall, reflect the positive impact on ethenol volumes and prices of the phase out of MTBE.

As we look at current market conditions in the corn processing segment, we see the gross corn prices are well off their recent highs and bi-product values have improved as new markets outside the EU had been found to absorb corn gluten feed.

This leads us to expect positive co-product value impacts on net corn costs in the fiscal 2008 quarters ahead.

USDA is projecting a $13.3 billion bushel crop, which would result in a carry-out of slightly less than two billion bushels and provide sufficient corn quantities for 2008.

Our 2008 sweetener and starch contract pricing negotiations are almost complete and we anticipate average selling prices to increase slightly over 10% in 2008.

Also we expect to see an increase in Mexico demand for sweeteners in calendar year '08.

As we expected our average selling prices for ethanol declined during the first quarter of fiscal '08.

Although we are seeing some improvement in pricing from the recent lows, we expect second quarter ethanol pricing to also be down from first quarter levels.

The North American market for ethanol is growing and recent additional demand from operators in Florida, Tennessee, North Carolina, South Carolina and Georgia are encouraging.

Finally, we are seeing higher selling prices for lysine due to higher global feed grain prices.

Slide 10 is an operating profit analysis of our agricultural services segment.

Agricultural services operating profit doubled to $229 million from $115 million last year.

Our merchandising and handling results improved $120 million due to excellent grain origination and export market opportunities in both commodity and freight markets, coupled with pronounced global grain imbalances caused by both supply and demand factors.

Our transportation results, consisting of barge and truck operations, while still strong declined $6 million as barge loading activity was slightly below last year's level due to timing.

Towards the end of this quarter, harvest activity had picked up significantly in the southern river areas, but had not really hit full pace in the upper regions by quarter end.

Although southbound volumes remain good, we have seen some softening in northbound volumes.

We continue to invest in grain handling assets, improving grain receiving, cleaning, and drying capabilities in addition to expanding temporary storage to handle the large North American crops.

We are handling record volumes today and are seeing good elevation income.

Higher and more volatile grain prices along with all-time high ocean freight rates continue to offer supply chain opportunities.

Slide 11 is an operating profit analysis of our other processing segment.

Other operating profit increased 43% to $106 million from $74 million last year, principally due to increased financial results.

Our wheat, cocoa and malt operations declined $5 million.

Wheat milling operating profit increased due principally to improved North American milling margins partially offset by lower European results due to the increased wheat costs there.

We continue to expect challenges in processing this year's weather-damaged wheat crop, which could create opportunities for our strategically placed mills and origination network.

Cocoa operating results declined as higher inventory carrying costs, lower [press] margins, and weaker chocolate market conditions in North America depressed overall margins.

Increased sales volumes of cocoa butter and powder partially offset those margin declines.

Current market conditions should support a better margin outlook going forward.

Malt operating results improved as we continued to find ways to integrate this business and to leverage our network around it.

Financial results increased $37 million principally on improved managed fund investment results.

Slide 12 is an analysis of our corporate costs, which more than doubled to $150 million from last year's $72 million.

Our investment income net increased by $23 million.

The impact of LIFO inventory valuation was to decrease results by $66 million as the current year's quarter included a LIFO charge of $83 million compared to a $17 million charge last year.

A $23 million charge was taken this quarter for organizational realignment costs, and we estimate savings going forward from this realignment of approximately $22 million on an annual basis.

On slide 13 is a summary of financial condition as of September 30, 2007.

As you look at those numbers, it's principally related to working capital which has continued to increase sharply and was up 29%, or $2.3 billion, from June 30 due to the increased inventory quantities and higher commodity price levels.

These higher price levels have been im -- have also impacted our receivable values.

These working capital increases and additional capital spending have been funded by cash from operations of approximately $620 million and an increase of $2 billion of short-term borrowings.

Moving to slide 14 is the summary our cash flow highlights for this quarter.

As I previously mentioned, cash generated from operations was primarily used to finance significantly increased needs for working capital.

In addition, $2 billion of short-term debt was drawn down and $120 million of marketable securities were sold to supplement working capital needs to fund $359 million of new property, plant, equipment additions and fund $134 million of dividends and share repurchases during the quarter.

During the quarter we acquired 1.9 million shares for $60 million at an average cost of $32.65 per share.

At this time I'll turn it back to Pat and we'll be glad to take any of your questions.

Thank you, Doug.

Operator, if you could open the line for questions, John, Doug, and I are here to respond.

Thank you.

(OPERATOR INSTRUCTIONS) and your first question comes from the line of Eric Katzman with Deutsche Bank.

Please proceed.

Hi.

Good morning, everybody.

Good morning, Eric.

How are you?

I'm well, thank you.

I guess my first question has to do with the volume increase of 9% in the quarter.

Since we really haven't had that number before, can you compare that to history and are you seeing, I guess, outsized growth globally?

Are you taking share from smaller competitors?

Can you just frame that 9% number?

I think a lot of that increase of the 9% comes through our ag services as we moved a lot of wheat this quarter.

Oil sales in general were up in volume, also, but a lot of it comes through the ag services sector, and really that's dependent on what is availability around.

The large crops in the U.S.

help that.

And so it's very difficult to compare that because it really gets into the macro things of how large the crops are and so forth.

Okay.

All right.

And then can you also -- versus our model, the ag service business was very, very strong, and obviously with all of the volatility out there, you had the opportunity to exploit that.

Do you see the same thing continuing?

I mean, are we in a different level of volatility?

I guess, sometimes, Pat, that word has been used against you but maybe now we can use it for you.

How do you think about that and then how should we think about ag services?

I appreciate your question, Eric.

The time of the year when we're handling the crop, and particularly the North American crop, I think having volatility and then size of our business and scale, you'd argue that that should work in our favor with respect to the ability to not only move that crop, have other origination opportunities.

Our global footprint allows more opportunities today than ever before, and the freight markets are allowing that.

I think our risk management comes into play with not only volatility but the large volume of crops we're dealing with.

Okay, and then last question and I'll pass it on.

I guess maybe this is more for John, but the -- I was a little bit surprised, I guess, in terms of the corn processing division.

It sounds like the price that you got is maybe below what most people were expecting.

Is that because you're maybe angling a little more there towards market share, and does that -- is that also reflected in volumes being down in the ethanol piece?

I'll pass it on.

Thanks.

Well, the price increase, that also includes multiyear contracts, which we also have increases on our sweetener and some starch contracts.

We're also seeing a little bit more volume going into Mexico comparing this quarter to last year's quarter.

We're seeing volumes there.

But as you're looking domestically, we don't see much growth in the sweeteners area right now.

So I think the price increase I was very happy with.

When you start looking at it, we're also starting to get closer to the sugar price in certain areas.

That's something else we're also cognizant going forward and corn's going to also play a big part in this coming forward -- head corn I should say.

Then did you swing capacity to ethanol -- or from ethanol to sweeteners this quarter or are they just unrelated?

It's unrelated this quarter.

We have a lot of different products.

Lysine prices are getting a lot better so we're also looking at the lysine swing from ethanol to other products, but normally during the summer we also see pretty -- that's usually or best demand period for the sweetener products.

Okay.

All right.

Thank you.

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

Please proceed.

Hi and thank you, and congratulations on a great quarter.

Can I ask you about European biodiesel?

The results there were also better than what I had expected.

I remember last quarter you seemed to be concerned about -- that the tax regime in Germany and then also about an influx of biodiesel exports from South America and North America into Europe.

Has anything changed there in the quarter, and should we expect better results this coming year?

The biodiesel market in Europe it's still going to struggle a little bit just because we have new taxes coming on in 2008 in January and we are seeing a lot of exports from the United States and South America on the biodiesel and the vegetable oil going over to Europe.

I would not say that it's a terrible business but right now we are going to struggle a little bit more.

But during the winter months, we also feel like we're in a better position just because of our rapeseed crush and more of the biodiesel has to produced and made from rapeseed oil

Robert, something I might add to your question there to keep in mind and that's that the biodiesel operations are really an integral part of our oil seed complex with crushing -- origination crushing, the production assets and transportation, so it becomes again one stream that -- and add value.

But even as the business struggles, other streams, it kind of picks up some of that integration value.

Are you expecting another increase in biodiesel volume in Europe?

And is that what can help your refining margins further in Europe?

It can.

The volume's really going to be coming as the price of vegetable oil relates to the price of diesel fuel over there, so it's really going to be dictated by margin and what kind of margins we can get on the biodiesel side as opposed to refining it and taking it to the food markets.

And then one follow up.

Just on ocean freight, you said that the ocean freight prices are going your way this quarter.

The inevitable question is going to be, let's say that we continue to have strong demand and volatility like you say -- like to see in an environment like that going on for another year -- but are you locked in on your ocean freight costs?

Are you making an unusual margin on ocean freight?

And at what point do those costs go up for you and could that margin come down?

Well, there's a lot of questions in there, but we have long-term charters in a lot of our operations.

We're always moving grain crops around the world.

We're trading ocean freight on a daily basis along with on a monthly basis depending on where we see the sales coming and the opportunities and where we're going to originate crops from at any given time.

So, yes, ocean freight does have a huge importance in our business and we manage it on a daily basis and we're always looking at it.

There has been -- we always talk about volatility in our market, but in the ocean freight, we've seen increased volatility in this last two quarters.

Okay.

Well, congratulations again and thank you for the increased disclosure as well.

It's very helpful.

Thanks, Robert.

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

Please proceed.

Good morning, everyone.

Good morning, Vincent.

I was just wondering if you could touch on the evolution of the co-product situation in the EU.

Recently, they approved the 2006 biotech.

And just give a little more detail on the other markets that you've opened up and how you see that playing out through the balance of the year?

They approved the 2006 crop, but so much of the harvest was already in the system and the pipeline for 2007, so there was just a small portion of corn gluten feed that could actually go to Europe during that small window.

Going forward, since we had that tough period last year we were able to develop a lot of new global markets for our corn gluten feed.

We're seeing more feeding in that also in the United States.

It's really working with a lot of our customers, too.

They'll buy corn and depending on what the corn gluten feed price is related to the price of corn, we will buy and sell out of those positions and give them the opportunity to buy other crops, so they may buy corn at one time.

As the corn gluten feed price goes down we may replace that with corn gluten feed and vice versa.

So by us just having all kinds of different products that we can offer to our customers really gives us, I think, a hand -- a leading edge in the commodity markets around the world.

I was just incrementally hear that the EU might try to expedite the approval of the 2007 biotech that are new products.

Is that consistent with what you might be hearing?

I was so disappointed last year that I hate to get my hopes up this year on that, but yes, we do hear the same thing that they are trying to expedite it, so we will be able to ship corn gluten feed this year.

Also with the issues they had with their crops this last year because of drought, they may be more likely to expedite that.

Sure.

We've also all heard about Florida, Georgia, North Carolina and so forth addressing the fuel specs issues.

Do you have any expectations for when those markets could open up from an ethanol perspective?

I've been a little disappointed on the speed of that, but we hear Georgia's supposed to come up in the first of December.

We are selling a little bit into Florida as we speak.

North Carolina we're starting to see a little bit, also.

So I think it's slowly coming infrastructure's that's seemed to take a little longer than what I anticipated, but I do see here in the next quarter or next two quarters that the southeast should really start blending a lot more.

But infrastructure has been more of an issue than I thought, especially with the discount of RBOB that we (inaudible).

Sure.

And I guess one last question.

In your -- there was no material reversal of any sort of hedging loss in your quarter in the ag services business.

One of your competitors had a very large reversal.

I just wanted to make sure there was nothing similar you want to tell us about?

No, there was not, Vincent.

Okay, great.

I'll pass it along.

Thank you very much.

Thanks, Vincent.

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

Please proceed.

Hello, good morning?

Hey, Ken, good morning.

Just one quick question first.

The high fructose corn syrup side, you said favorable risk management.

Is that capitalizing on basis?

Is that how we should interpret that?

It's capitalizing on global markets, on everything.

It's not only just basis.

It can be flat price.

It can be arbitrages between the different core markets throughout world, the different ratios even between the bean and corn prices.

So it's a little bit encompassing of everything.

In a typical quarter, do you tend to buy more on the spot basis and then be able to capitalize on the basis ,or is it more done on a futures market?

It varies by quarter, by year.

There's really not a rule of thumb.

e have a very good group of merchandisers and traders out here and w e have very good communications; what we think the crop is, where we think demand is.

So depending on our opinion on that, we'll go -- we'll tend to lean that direction.

Are you guys building up inventories at all in ethanol?

We are a little bit, yes, because we anticipated the southeast to start blending a little quicker, but yes -- so we have built a little bit.

But when you really look at the whole industry, the industry's gone up but really the days of supply has not, so inventory's gone up but also demand's gone up.

So the last time you built up inventory of any substance it was either the California market opening up or the MTBE ban.

Is that fair?

Yes, that's fair.

So there is some anticipation by you that these markets will open up?

That's what I just want to make sure.

That's right.

Would you think about buying ethanol assets rather than building and at what price?

And how do you think about it, just because it seems like a lot of these capacity buildups are slowing down a little bit and it seems like there may be opportunity to come in and buy some assets a little bit cheaper than maybe build it?

Yes, I'll take that one, Ken.

We're actively engaged in this market all the time, and we know where every plant location is.

We have a sense of what locations might be interesting to us, but it would have to be a real value and scale and fit with our network, but it's not to say we aren't looking and aware.

Great, I appreciate it.

Thanks, Ken.

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

Please proceed.

Good morning.

Good morning, Ann.

Just wanted to spend a little time on getting an update on your work and -- besides ethanol, other renewable fuels?

[Switch grass], maybe are you closer to doing anything in sugar in South America.

Can we just get an update there?

Sure.

We've talked about diversifying our feedstocks, which would include more palm, sugar, potential biomass to be run not only for first but sort of second generation biofuels.

Mike Pacheco, who is our new Chief Technology Officer, spent a little bit of time in about five slides or so -- which you might want to look up on our website -- but talked a little bit about, so to speak, first of all our advantage in the dry mill ethanol world, which, of course, we're completing two plants adjacent to our wet mills facilities, but then spent time on the nearer term focus on commercializing technology, again in a wide range; food, feed, industrial bioproducts and then biofuels.

When it comes to the biofuels piece, we walked through the spectrum of not only technology conversion, but also feedstocks and also end products, and are attempting at this point, and I would say by February of next year, we will have a very limited list -- or a very highly focus list, I should say, of the kind of opportunities for both conversion feedstock and end products.

A good example is our ConocoPhillips project that we announced, which is looking at biomass to biocrude, so this would be a type of crude oil that could be run in the traditional refineries yet made from biomass at very cost effective prices.

So that's an example something where we actually have that one up and running.

There's a couple of other collaborative researches we've announced; one with the Colorado Consortium, one with Purdue University, et cetera.

So a lot going on but more clarification and I would say fine tuning of that by early next year.

Great.

Thank you.

Thank you.

And your next question comes from the line of Diane Geissler with Merrill Lynch.

Please proceed.

Good morning.

Good morning, Diane.

Congratulations.

Thank you.

Just getting back to the outperformance in at services this quarter, seems like there are a variety of things going on but the two most important are just the ultimate size of the crop this year versus last year, and then the dislocations globally and your ability to capture margin there.

In this quarter can you quantify or is it like two-thirds, one-third the outperformance?

I'm just trying to get a feeling for what's the sustainability?

Obviously the first piece is probably more sustainable, just having larger crops in the U.S.

from here on in and your ability to capture value there.

If could you give us just a little bit more clarity or commentary around what really drove that and one versus the other?

Well, I don't have any data to really be able to quantify it like that, but when's really led to it this quarter was we had back-to-back droughts in Australia, we had -- in Eastern Europe we also had a problem with the wheat crop, so that really created some opportunities to move different feedstocks, different grains to different parts of the world.

That really led to -- we have a huge corn crop here in the United States.

People were looking at instead of feeding feed wheat, feeding corn or corn gluten feed products.

So it really just set up well with our whole structure and our merchandising capabilities around the globe to be able to service our customers all different parts of grain.

So I guess in my mind -- without really going back, I'd have a hard time quantifying exactly how much this quarter is opposed to any other quarter -- large crops also plays a big part in it and in the second quarter or third quarter we'll have the South America crop coming online.

Diane, I might add to that as I have learned -- been a student of this business, we've been building for these kinds of crop years for ten years.

Again, elevation assets towards transportation, et cetera.

So when you have great price movements and great crop movements and great crop volumes, I don't think there's a system that can handle it better than ours.

So I know your question's more about sustainability and how much going forward and if you could quantify the unusual items here, but you might argue that every quarter's going to have some unusual items, be it weather, be it volatility, and so maybe that's just a little bit of add-on to it.

Okay, well I appreciate that.

It's just you look at the number, and I don't think you've ever done more than $120 million or $130 million in operating profit in any quarter going back the quarters that you've given us on this segment reporting, so then you look at the $229 million and it's a big number.

So I just want to get a little bit better feeling for what a normal quarter would be but obviously there is never a normal quarter.

You bet.

Okay.

Well, that really was my main question.

Thank you very much.

Thanks, Diane.

Your next question comes from the line of Christine McCracken with Cleveland Research.

Please proceed.

Good morning.

Hey, Christine?

First just a point of clarification.

You mentioned that you had a little late (inaudible) and that it might help you in the next quarter.

Can you give us any color around the percentage maybe of volumes that you expect to shift or any color that you could help -- that might clarify the situation?

It's very minor.

It was just really the timing of the crop for our southbound.

There is some concern around the industry.

We are seeing less steel imports, less cement imports coming into the United States.

There is a little bit of an effect on the northbound business, but the southbound business with our large corn crop and soybean stock that we still have and crop coming on export markets still should be very good and we anticipate very good southbound movement.

As more fertilizer keeps coming into the United States for the corn crops that should also help some of the northbound.

All right, doesn't sound like a big deal then.

Just looking at ethanol, you obviously gave us some color on what we view as a normalized ethanol market today.

Can you tell us now, with the situation where it is, if you look at your plan expansion in the same way or can you give us an update on the timing of when those volume increases could come?

Well, I believe that right now it's going to be more of a consumption-driven market than supply.

I think depending on how all the plants come online and the timing of them, they could actually come on quicker than some of the markets.

So I think from a timing perspective here over the next year, for everybody else I don't know exactly but we do hear of some plants being delayed, some construction being delayed, some people actually having permits and not finishing.

so you may see not as many plants come online.

Our plants, since they're so integrated with our other corn plants, we're keeping construction going and we feel we have a low-cost projects being built there that will make us very competitive over the long run.

Those plants are still online.

Schedule wise they may fall become a month or two, but we thought we'd update probably in the third quarter, once we get through the winter months and see how the steel shipments and everything else comes.

But right now,we're still looking ahead and planning to build our ethanol plants because we long term see the growth in the market.

Okay, and just in terms of -- you look at these markets.

Why is it that these (inaudible) aren't adding or making the structural adjustments to use the ethanol faster?

It seems like the economics would warrant that at this point.

Do you have any view on that or is it just that they need to make some changes and are dragging their feet a bit?

Christine, I think John said we're disappointed that it hasn't come a little faster, in particularly in the southwest where I think there's good intent there but the actions around getting that infrastructure in place has been slower than we thought.

Certainly with the lower prices, there's lots of economic incentive to blend as much as possible, but obviously, if you don't have the infrastructure to blend it, that's hard to do.

It may be a good point to make why we, along with others, believe that this energy bill is being discussed, we've formed some interest with environmental groups, with certainly if you call it second-generation as well as first-generation ethanol.

There's not a good ethanol and bad ethanol, there's the -- we'll never get to some of these second and third-generation opportunities if we abandon our corn ethanol base.

So we think it's important to have a renewable bill standard to help support a smooth transition, kind of getting back to the point of how infrastructure gets done.

And sometimes with the smooth transition that an RFS standard allows year by year, that infrastructure can happen again on a smooth basis rather than quickly overnight to say replace MPBE, which is -- was the discussion a year ago.

Do you get the sense that there's been any shift in political support for the renewable fuels industry or do you still sense that it's coming but that it's taking a little longer than you expected?

We sense still a strong amount of support and bi-partisan support for ethanol.

There is some discussion for other parts of an energy bill thats perhaps are more controversial or difficult, so maybe the part that could get passed more appropriately will get bogged down with other items.

But we still sense a good amount of support and I guess I'd give it that 60% chance which we have talked about before.

We're working again with a broad range of stakeholder to help advance that bill.

Great.

I'll leave it there.

Just to echo, I really appreciate all the increased detail.

I might ultimately understand your business some day.

(LAUGHTER)

That's good, Christine.

Your next question comes from the line of David Driscoll with Citi Investment Research.

Please proceed.

Okay, thank you.

Good morning, everyone.

Good morning, David.

Pat, I definitely want to say thanks for the increased disclosure.

I really do appreciate it.

It's a good amount of information and we'll look forward to spending some time looking at it.

A couple of quick questions.

Some of these [pieces] have been asked, but I just want to go back over things.

The 10% price increase, that does appear to be a little bit less than what we hear in terms of the industry talks.

It would be -- John, is the reason for this is that this is the nature of the multiyear contracts and the effect of the blended increase would be not just on the ones you sign today but on the overall business that you have?

I.e., more than half of the business is under multiyear contracts.

Is that the what I to look at the 10%?

Yes, that's one way to look at it.

All our multiyear contracts do have increases, and depending on the year and when it actually comes, it can have a different increase that can play on that.

Also in some markets where our fructose price is -- and you start getting into the West Coast market or something start bumping up into sugar prices, too.

We came out with a 15% to 17% list price increase, and the market is still very tight in capacity.

We have Mexico coming on next year, so I would -- I'm not disappointed at all with a 10% price increase and we've had back-to-back years of very good price increases.

So I look at 10% as a very good price increase for this year, looking at what's happening around the world in the markets.

On Mexico itself, can you guys share with us your estimate for what you think the overall potential for fructose demand for Mexico industry wide?

You don't have to say your particular number, I'm just curious where you see fructose demand going to from where it was in 2007?

David, we anticipate the total Mexican sweetener market to grow from about 400,000 metric tons in 2007 -- which I think is the rate that it's at about now -- to about 750,000 metric tons.

What part of that is the soft drink market, I think, is what, about a million metric tons, John, and --

Yes.

-- and that is about 50%, I guess, sugar and sweetener there.

So I think it's quite a positive message and positive story there and we'll see how this all unfolds.

Given that you guys --

That open market down there with sugar prices and the crop in Mexico, I think there's some opportunity to ship a little more fructose this next year.

We're seeing a lot of interest and people are starting to talk contracts for next year.

That brings up the question on excess capacity.

You guys run your front end grind at 100%.

You do need to switch -- as I understand it you're going to have to switch from one product line over to fructose.

Can you just give us a sense on what level of capacity -- excess capacity that you have?

Is it the ability to shift 10% of the grind?

Is that percentage too high?

I'm again trying to get a ballpark here.

Well, that's the number we've been throwing out lately, but as we keep increasing drying a little bit, just because of the efficiencies, that number keeps getting a little bit smaller.

During the winter months, we ship less fructose domestically and we'll be able to just take some of that fructose and ship it down into Mexico and probably produce less ethanol during that time period.

Understood.

Pat, on the ethanol side -- and John, you guys gave some nice color on some of the markets.

John, in some of your prepared comments you said that EU markets are opening a bit slower because of infrastructure issues.

How do the fuel specification issues impact or how have they impacted the ability of those markets to open?

I want to really understand here the differential between the specification issues and the infrastructure issues as you guys see it.

I'll start that one and this may be a question, David, to dig into and give you a little more color offline because it really depends on the state specs and the movement between states.

It's a factor, but certainly infrastructure is a much bigger issue.

You've got to have the ability to take the volumes and to move the volumes before you can have the flexibility to make sure you're meeting specs by state.

Infrastructure's a bigger issue, but as far as field specs by [pad] or by state, we can talk about that and maybe have a little more to [fill] around that.

I'd consider it minimal, though, as per your thinking.

Okay.

Final question I had for you guys was can you just give me a little color on what you see happening in South America, particularly on the soy crop?

I.E., what's your outlook?

The crop is about 5% to 10% behind last year's pace right now and it's just been a little bit dry.

We're seeing very good rains down in Brazil right now, so we feel the planting should get caught up.

The crop may be a little bit later this year than what we see in normal years.

We're hearing anywhere from 0% to 7% increase in acreage, but I think really time will tell as the -- depending on how the weather goes.

With these prices now with -- the strong Real is having a price reaction -- or I should say the farmers are having reaction to how much additional land they want to expand down there right now.

You're saying the negative reaction because of the Real was partially offset by -- I would trust by the higher prices for soy?

Correct.

Great.

Thank you for all the answers.

Take care.

Thanks, David.

Your next question comes from the line of Ian Horowitz with Soleil Securities.

Please proceed.

Good morning, everyone.

Good morning.

Hi, Ian.

Excellent quarter.

Just a couple of quick questions.

Should the [Velva] plant add your tonnage to this coming quarter?

If so, can you give us an indication of what that would be?

Yes, the Velva plant is up and running biodiesel.

We're shipping -- just because of the holiday markets are working right now, a lot of that production is actually going over to the European market.

I can't remember off the top of my head the size of that plant.

It's not that -- it'll have a small effect but in the grand scheme of things it's just a total.

75 million?

75 (inaudible), I think.

Thanks.

(LAUGHTER)

So --

It just plays into our whole network on --

Great, but that's backed on to a crush facility?

You're breaking up there, Ian.

Can you say that one, one more time?

Yes, that biodiesel plant is backed on to a crush facility, so that shouldn't change overall tonnage, correct?

No, it's just -- exactly, just where the oil ends up going.

Okay.

Second thing, I've heard from a -- we've heard from a number of different ethanol producers about their -- we've seen a massive drift towards bought contracts.

Can you just comment on where you're seeing things between spot and forward contracts or gasoline plus contracts?

And the follow-up question to that is are you seeing much demand for anything beyond the first quarter -- first calendar quarter of '08 in terms of being able to write out by contract?

Market still is very spot.

When the ethanol prices got down to $1.50 a gallon, we were so much cheaper than imports coming to the CDI in the United States.

You started to see more interest, especially with the differential between the RBOB and ethanol.

A lot of people had interest in buying out forward.

Now a lot of people were not able to do that and then ethanol prices have come up a little bit.

I'd probably say as markets develop you're starting to see a little bit more people looking to buy a quarter, maybe two quarters out, but we're still not back to anywhere close to people wanting to buy a year unless they can really buy it very cheap.

Ian, maybe another little bit of color around that.

As we look to the future, we're working with various testing programs.

The Department of Energy Argonne lab is doing some testing on e12 and e15 and even some testing up to e20.

If you think about volumes of ethanol being able to be absorbed into the system at a greater pace with the current infrastructure while e85, for example, gets its legs and some traction, I think e12 and e15 can help fill some of that gap when and if that testing's completed.

Great.

Your recent announcement on the industrial chemical business, does this affect your relationship with Metabolix at all, or how will you look to Metabolix?

It doesn't affect our relationship at all.

We brought in an individual that understands the applications and all the -- and how a lot of these chemi -- green chemicals can fit in the market and that's really what we're looking at.

With Mike Pacheco's leadership we're looking at a lot of different chemicals we can produce from many of our feedstocks and we really needed to get somebody in here to be able to help us with the applications in the market side of it, and what makes sense, especially on a scaling up.

And maybe again a little more on that, Ian.

Metabolix has some of their own announcements out there, but we recently visited their marketing site and their customer pipeline is really growing each quarter.

I think there's about 80 different product, or potential product applications that now we're working on, so I think the applications will be ready as that plant comes onstream December '08.

And will Mike be responsible for that relationship going forward?

No, actually, that report's up to me, but like a lot of our businesses, we have to coordinate production with research and commercials.

We have to work very closely together.

Okay, one last question and then I'll get back in the queue.

You mentioned and a number of your competitors mentioned HSCS pricing coming very close to the sugar price.

Do you have any sense on where we could start seeing demand destruction on HSCS with regards to the price or can we really assume that HSCS has the ability to get to parity or near parity with sugar and still be able to be absorbed into the market?

The rough rule of thumb -- this hasn't been an issue for quite sometime.

The rough rule of thumb is we always feel that a 10% discount to sugar we will not lose any market share at all.

People like to handle the high fructose, they already have the systems in place.

So just watch in the world sugar markets are also going to have an impact on it.

Okay, great.

Thanks again for the disclosure, and I'll get back.

Great, thank you.

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

Please proceed.

Hi, good morning.

Hi, Ed, how are you?

Pretty good.

Congratulations.

Most of my questions here have been answered, so just want to take one more pass at the drivers in ag services, and you'd mentioned some global grain dislocations that created some opportunities?

I was also wondering if just in the U.S.

do the large crop rotations and shifting acreage that is more prevalent today with the volatility in the prices, does that create more opportunities in some of these local markets that might have been settled down into routines where farmers are only tweaking a percentage or 5% or so a year in terms of their allocation of the crops and now their doing much more drastic shifts?

Thanks.

Guess that gives us more opportunities just when people switch from corn to beans and the same amount of acres you're getting three times the volume, so that helps with all our logistics, our transportation.

It also just gives us more volume.

When people start planting different crops around the areas in normal places that they normally don't grow it, they need to be able to shift wheat maybe to an export market, which really helps our transportation.

It'll also play into our milling.

We've got to take the better quality wheat and take it to different mills to be able to process it for our flour customers.

So I know I'm dancing around this answer, but yes, all these type of fluctuations in the market definitely play into our infrastructure.

Just to add to that, John, if you're spreading out the rate of harvest as well, does that also play a part?

You know if the harvest takes longer or year over year, you're at different points in your cycle.

Yes it does, but it can vary from year to year.

If the -- a year like this, where we had very dry in the east the harvest came off very quickly.

And then the harvest was slower in the west.

They ended up moving grain from east to west a little bit more than normal.

So each year -- it's kind of a tough question to answer, because each year we'll little bit different that we can play in the logistics team and how -- where we want to ship crops from one area to the other area.

Okay, and could I just ask one last one and then I'll let it -- pass it on.

This was clearly an opportunity this past quarter and I'm wondering -- you mentioned going down into South America as the next step and the harvest there later in the fiscal year.

So, I'm just wondering are those opportunities likely to be greater in North America than South America?

Well, for the next quarter, I think -- we still are in the process of harvesting our crop --

Sure.

-- (inaudible) the field.

So in the South America crop, right now the exports are less out of there and mostly exports, wheat, corn and soybeans are going to come out of the United States in the next quarter.

Okay, thank you.

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

Please proceed.

Good morning, everyone.

Good morning.

Just a couple of questions.

I want to follow up on the agricultural services point, can't you just give us the dollar revenue for the agricultural services?

How much was that (inaudible)?

How much was volume and price if you are going to give that number?

I know it's not going to be in the same Q, but it would help if you give it now.

We'll have the dollar values of the revenues in our 10-Q which will be filed by the end of this week.

I don't have that right here, but we did -- we had vol -- the volume increases that we talked about a lot of that came through our ag services group as we moved commodities around the globe.

Right.

Now as a rule of thumb -- and maybe this is too simplistic -- but when I think of agricultural services in a high-priced inflation environment fro grain, does that normally translate into also higher percentage operating margins for that division or not necessarily?

I think as I mentioned earlier, if you look at the two businesses of ours, if you take the oil seed sector and you take the ag services sector, the margins that are made on a -- for example on an oil seed.

Whether it's an $8 bean or a $5 bean, you might have a little more opportunity to make a little more off of an $8 than a $5, but the crush margins on those really don't change much.

They can be the same for either.

Then if you look at the ag services that is a trading margin that you make off of that and whether, once again, you may make a little bit more margin of of it thatn you would if it were a $10 bean or $5, but the impact to gross margin is just not relative directly to the sales price.

If you look at our actual dollar values this year of ag services, it looks like we'll be about $5.5 billion of sales in this quarter compared to about $4 billion last year, so up about $1.6 billion.

Thank you.

On the crushing side, when I think of the outlook for North American crushing margins, I see that soy bean prices continue to go up and that's going to be a source of pressure.

On the soybean meal side that I'm aware of, (inaudible) still is not necessarily growing much so I don't see it as a big driver of demand.

And on the soybean oil side, the biodiesel industry, at least in the U.S.

hasn't taken off, so why should I assume that crushing margins in North America are going to get better?

They may actually come down.

We're seeing meal demands up about 6% and oil demand up about 8%.

And we're also seeing a lot of growth in the Latin American countries, so we're starting to see more exports.

As the Couth American crop gets less and less right now we will be able to export more, we feel, into Asia in terms of soybean oil.

But we're seeing very good protein demand around the world and oil demand right now.

And Pablo, those were global demand numbers.

Yes.

Again, very strong.

All right, and just to follow up.

Maybe this is more out in left field, but some day Castro may die, Cuba may become a U.S.

partner and the U.S.

may want import sugar from Cuba.

If that happens -- and I know it's way out there, but if that were to happen that could be very detrimental to the HSCS industry, right?

I guess it's on no one's radar screen, but --

Well, actually all markets are on our radar screen, and I think this Company has had the look of that potential occurring for many years, so I think we look at it.

John, I don't know if you have anything to add to that, but --

No.

It's just another market opportunity and what happens there I guess we -- I haven't really looked at that yet.

Just a last one.

Industrial fuel specs in the southeast, southwest, how much of a fuel spec issue is a weather-related issue?

It sounds like some states, it's just a matter of signature.

The congress in those states agreeing and just changing the stakes, but I'm wondering because of heat in the summer or because of weather issues maybe those stakes are there for a reason?

Well, sure, there's always RVP issues for summertime fuel and that's there for the warmer weather reasons.

We have alw -- we've thought about more fundable standardization with respect to fuel specs, and I think the more standardization we could across the county, somewhat of easier it would be to allow the infrastructure to move.

But I don't think weather's a show stopper, or those parts of the spec are a show stopper.

One last one if I may.

In terms of biodiesel, obviously you;re in Europe, a new plant in the U.S., and now the largest plant in Brazil, just help us think through in terms of what's the outlook in those three regions?

In terms like you're a lot more bullish on Brazil.

If so, is that true and why?

I think your question related to biodiesel and that's --

Biodiesel, that's right.

(inaudible).

It's in Rondonopolis and we think the demand there inland right around the plant, so to speak, will be strong.

That'll be a good market for us.

U.S.

will grow more slowly on the biodiesel side.

I'm not sure if I heard -- did I hear your question correctly?

Well, yes, I'm just trying to understand.

It sounds like different research I look at from either industry experts outside the USDA and other consultants that we talk to, they make it sound like in the long term, the country with the best potential for biodiesel is Brazil and I just wanted to get your take on that part?

They have a 2% mandate coming up in January.

A lot of it's going to have to do with government policies, import/export tariffs.

Brazil has been -- had a very good record of looking at renewable fuels.

We can just see what they've done in the sugar, so I would guess I wouldn't be surprised long term if they keep trying to push the biodiesel mandate higher.

All right, thanks.

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

Please proceed.

Just a quick follow up.

You have your industrial chemicals group that you're forming and then you also have one your top people, Bill Camp, developing an Asian strategy, and yet you have relationships with Wilmar in the far east and then Metabolix in industrial chemicals.

Do your partners there consider your efforts to be competition against them and how do you view these efforts?

In terms of Metabolix, no.

We've had a lot of discussions with Metabolix about what products we're looking at getting into.

They're really more looking at the PHA right now.

I know they're also looking at some other industrial chemicals, but ours are really based on the feedstocks we already make.

What about Asia?

In Asia, we've had a few discussions with them right now but we're still on the ground floor of really developing our industrial chemical platform.

Right now, we have the propylene, ethanol, glycol plant.

It's really the first plant that we're going to be bringing online and it's still a -- kind of a research and development area in what we can produce.

Can we be very cost competitive and what the applications are, so we're still in the early stages of that, I guess.

Are you saying that the Asian efforts are related to industrial chemicals, or you're still trying to figure out a strategy for Asia that potentially could go beyond your relationship with Wilmar?

Well, the latter is the case.

I think maybe we were confusing your two questions there, Rob, sorry.

But in Asia our strategy is very linked to Wilmar because of our investment in the largest agricultural company in Asia.

But more holistically, we're looking at the broadest of strategies in Asia and that will be -- that's the basis of our work right now that you refer to Bill taking on.

Okay, thank you.

(OPERATOR QUESTIONS)

Okay, operator, do we have no more questions?

I have one that has just queued up.

Your next question comes from the line of John Roberts with Buckingham Research.

Please proceed.

Good morning.

Good morning, John.

Last quarter you actually warned us that this quarter would have a lot of opportunistic activity.

I was wondering if you felt as good right now about the potential for opportunistic activity in the December quarter as you felt back in the summer about the September quarter?

That's -- I think we feel really strongly about our organization, about the markets that we're participating in, and I think we've -- I hope we've been open with you today related to where we're seeing strong demand, where we're seeing markets a little weaker, and I think we're quite positive for the long term.

So I appreciate your question, John.

I think we're in a good place.

Thank you.

Thank you.

And your next question comes from the line of John McMillin with [Florida Abbott].

Please proceed.

Well hello, John.

My first question is a bi-sider.

I heard you say the benefits of lower bi-products would be more going forward.

Did I hear that correctly that -- we obviously know corn oil is up and bi-products are up, but did some of your prepared remarks say that that benefit is more going forward than it was in the past quarter?

I think what we said was for 2000 -- we were talking about ethanol is reduced the ethanol pricing down next quarter but we also said we see some improvements in bi-product values, which should help us on our corn costs going forward, yes.

More than in the past quarter?

In this current quarter, yes.

Okay.

Thank you.

Thanks, John.

I show no further questions in the queue.

I would now like to turn the call over for closing remarks.

Okay, well thanks very much, everyone, for your interests and we'll see you next quarter.

This concludes the presentation and you may all now disconnect.

Good day.