Bunge Global SA (BG) 2002 Q4 法說會逐字稿

Good day, everyone and welcome to Bunge Limited Second Quarter Conference Call. Today's call is being recorded. And at this time for opening remarks and introduction, I'd like to turn the call over to Ms. Susie Ter-Jung, please go ahead.

Thank you, David and thank you everyone for joining us this morning. Welcome to Bunge Limited second quarter 2004 earnings conference call. With me on today's call to discuss our results, are Alberto Weisser, Bunge's Chairman and CEO and Bill Wells, Bunge's Chief Financial Officer.

For today's call, we are providing a real time transcript to subscribers of CCBC Streetevents. To access the service please go to myccbn.com and select the Streetevents tab after logging in and select our ticker symbol, BG. Reconciliation of non-GAAP measures disclosed early on this conference call to the most directly comparable GAAP financial measures are posted on our Eeb site www.bunge.com in the investor information section of the site.

Before I turn the call over to Alberto, I would like to read the Safe Harbor statement. This call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Including statements about future financial and operating results.

These statements are based on management's current expectations and beliefs and are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. The pertinent risk factors can be found in our SEC filed reports, and now, let me turn the call over to Alberto.

Good morning, everyone. Thank you for joining us. The second quarter was an excellent one for Bunge, despite a volatile every business environment. All of our operations performed well. Our global team continues to focus on building the business and our earnings, once again, validated the effectiveness of our business model and balance.

Bill will provide details on our financial results and, our outlook for the remainder of 2004 later in the call. Next Monday, August 2nd, marks the third anniversary of Bunge's initial public offerings and listing on the New York Stock Exchange. I would like to take this opportunity to reflect on how Bunge, a company in it's third century of existence, has changed and grown over the past three years.

Our shareholders have benefited from an almost 150% increase in Bunge stock price and our market capitalization has increased from $1.3 billion at the IPO to over $4 billion today. We have raised almost $1 billion of equity to finance future growth. These funds have been and will be invested in projects that generate good returns for shareholders and are a well aligned with our global strategy.

Driven both by disciplined accusations and the strong organic growth inherent in our businesses since year end 2001, or volumes have increased 50%. Our operating profit has increased 100%, and our net income has increased almost 125%. But, perhaps more important than these improved financial results, are the developments in Bunge's business portfolio.

Today, Bunge is much more balanced from a product perspective with a significant presence in other oil seeds such as like canola, grapeseed and sunflower and a significantly expanded geographic presence with operations in 13 more countries than in August of 2001. Many of these countries are in high growth markets like Eastern Europe.

Not only are we executing on our strategy to position Bunge for growth, but our enhanced product and geographic balance together with our growing global customers base helps mitigate risk as shown once again by our results in this second quarter. In our business, all stars are never perfectly aligned, which is why this balance is so critical.

The interruption this quarter of soybean trade between Brazil and China was a case in point and, has potentially significant implications for world trade that affect more than just these two countries and more than just soybeans.

Interruption of global trade is a serious issue, with real negative consequences for all involved including China, since China will increasingly rely on global markets for soybeans and other grains. Situations like this highlight the importance of International Corporation and standard harmonization.

For global trade to work efficiently, and, to preserve its benefits, we must work together to maintain respect for commercial markets and contract sanctity. A broad group of industry associations in the US, Brazil and Argentina are working together with three governments and with China to preserve benefit of global trade for all parties. They have already achieved positive results and I'm optimistic about continued future progress.

Despite volatile agribusiness markets during the first half of the year, Bunge achieved outstanding results. Frankly, better than we expected. I attribute this principally to the balance in the integrated global business model.

Time and again we have seen how weakness in one part of our business is compensated by strength in another. This is coupled with disciplined risk management and empowered local management will react quickly to changing local conditions.

Let me highlight one important element of our performance this quarter. Our strong operating results and the declining agricultural commodity prices allow us to generate $404 million in operating cash flow. This reverses the trends over the past two quarters, which was caused by the rapid increase in agricultural commodity prices. Prices are now beginning to normalize as the market looks forward to the coming North American harvest.

As we said, the right focus for our results is the full year as profits can shift from quarter-to-quarter. Keep in mind there are two major harvests a year, one in the northern hemisphere and one in the southern hemisphere. They occur roughly six months apart and so there's natural seasonality to our earnings especially in agribusiness and fertilizer. That said, the precise timing and size of these harvests vary, as do farmer buying and selling decisions.

Due to these variables, projecting quarterly earnings is difficult. A yearly assessment is more appropriate. I am very proud of our team. Both, for what we have accomplished since our IPO almost three years ago and, for how we have handled the great increase market volatility since the poor North American soy crop last fall. I will now turn the call over to Bill, who will discuss our financial performance and our outlook for the coming months.

Good morning. First let me give you some perspective on the second quarter. The second quarter typically represents a higher level of activity for our South American agribusiness operations and the winding down of crushing operations in North America and Europe. Fertilizer sales are normally slow as we build stocks for the strong demand of the South American planting season. As a result, the second quarter is typically seasonally weaker than the third and fourth quarters, but this year, we have seen an unusually strong start to the year.

Now, let me turn to our results. Bunge's agribusiness segment experienced an exceptional quarter. Results benefited from solid volume growth and improvements in operating profit in most business lines and geographies. The volume increase was driven mainly by higher origination volumes for wheat in North America and corn for export in Brazil. Effective freight and risk management, strong soft seed profitability and efficiency improvements in logistics contributed to the results for the quarter.

The effects of this quarter's trade interruption between Brazil and China are fully accounted for in this quarter's results, and we don't expect any future negative financial consequences related to that disruption. Agricultural commodity prices, in particular soy, are beginning to realign to current market expectations of good crops for the coming North American harvest. Let me remind you, however, that Bunge's profitability is not determined by whether soybean prices are high or low -- a fact amply demonstrated this quarter.

Turning to Bunge's fertilizer segment, higher average selling prices for fertilizers and increases in sales volumes resulted in improved segment operating profit. International selling prices for imported fertilizers and raw materials were higher than last quarter and higher than the second quarter of last year. For example, the price of phosphate, in the form of granulated MAP, was 18% higher than in the second quarter of 2003. Brazilian fertilizer is priced to import parity.

In Bunge's Edible oil product segment, sales volumes increased driven by growth in North and South America. On a comparable basis, excluding Lucier, segment operating profit increased, as margins expanded in our soft seed business in Eastern Europe. In our milling product segment, results benefited from higher sales volumes in both corn milling in the US and wheat milling in Brazil. Improved production yields from good corn quality and, favorable product mix in wheat milling as a result of the Jacque and Marcero (ph) transaction.

On a comparable basis, excluding Lucier and soy ingredients, Bunge's SG&A increased due to increase bonus, legal and tax provisions and, increased headcount in our international marketing business. SG&A in the second quarter of 2003 benefited from an $11 million curtailment gain related to certain pension and post retirement benefit plans.

Interest expense on debt, financing readily marketable inventories increased, due to higher debt levels associated with the higher level of agricultural inventories, purchased at higher commodity prices. Average readily marketable inventories were 867 million, higher in the second quarter of 2004, compared it to same quarter in 2003.

Average soybean futures prices were 50% higher in the same period. Total interest expense increased due to higher debt levels, offset in part by lower average interest rates on long-term borrowing as higher cost debt assumed in the serial acquisition was replaced with lower cost, longer term senior notes.

In the second quarter of 2004, we recorded foreign exchange losses on net US dollar denominated liabilities in Brazil as a result of the 6% evaluation of the Riyal. In the second quarter of 2003, we recorded foreign exchange gains on those net liabilities as a result of a 17% appreciation of the Riyal.

You will recall that these effects are substantially compensated by inventory mark-to-markets included in segment operating profit. Our quarterly effective tax rate was 29% as compared to 33% excluding the tax-free gain on the sale of soy ingredients business in the second quarter of last year.

Year-to-date our effective tax rate was 33%, the same as our 2003 annual effective tax rate. Our second quarter 2004 effective tax rate benefited from the devaluation of the Brazilian Riyal. Net financial debt increased from December 31st, 2003, primarily due to seasonally higher levels of inventory resulting from the purchase agricultural commodity inventories in South America and increased levels of operating working capital resulting from higher agricultural commodity prices and increases in sales volumes.

Cash flow from operations in the second quarter of 2004 was $404 million, compared to $223 million in the second quarter of 2003. This reflected strong operating results and declining agricultural commodity prices, which reduced required operating working capital.

In this quarter, Bunge successfully completed an equity offering of 9,775,000 common shares raising net proceeds of approximately $330 million. Substantially, all of these funds will be used to buyback the outstanding minority interest in Bunge Brazil SA, Bunge's publicly traded Brazilian subsidiary. The buyback is proceeding as planned and is expected to close this fall.

Now, let me say a few words about the outlook for our business. We continue to expect a solid year in 2004 and, are optimistic about the second half of the year. Current US growing prospects are good. If weather conditions remain favorable and the US crop develops according to expectations, CBOT futures prices should return to more normal levels and we expect our working capital usage to decrease as a consequence.

Global mill demand growth is positive, but below trend line affected by higher prices. As prices adjust to normal levels, we expect demand to rebound. Higher volumes and lower prices should be positive for our North American business. Fertilizer demand and prices are strong and should remain so, and we expect continued good performance in our food products division.

Considering, our positive outlook for the second half of the year and, assuming stable currencies in South America and a normal 2004-2005 North American crop, we are raising our net income guidance for fiscal 2004 to between $355 million to $375 million. This translates to fully diluted earnings per share of $3.12 to $3.29. This guidance assumes full conversion of our outstanding convertible debt and includes the effects of our recent share issue and the proposed buyout of minorities in Bunge Brazil.

As Alberto highlighted, Bunge is three years old as a public company. We hope that during this time, the public markets have come to understand why the right focus for our results is not quarterly but longer term.

Consistent, with this fact and with the goal of shifting investor focus to our long-term value creation, we have decided to begin providing only annual guidance. I would like to close by extending congratulations from all of us here at Bunge to Christine McCracken and Greg Penser on the birth of their son Andrew yesterday. With Andrew's pedigree, we fully expect to be fielding tough questions from him on this call someday.

Now, we'll be happy to take your questions. Operator.

[OPERATOR INSTRUCTIONS] Our first question today comes from David Driscoll with Smith Barney.

Hi, Good morning everyone.

Good morning David.

Good morning David.

Congratulations on a very nice quarter.

Thank you.

A couple of questions. Can you give us kind of a macro picture that for the year what you would expect your total volume growth to be, and then if you could talk about '05, I think it would be, quite helpful.

And, I suppose maybe if I digressed and just told you that what I'm trying to drive at here there's been a number of activities from cereal, that have come into play. I mean, the company has changed since you have become public. So then if we think about the effects that have happened in terms of volume growth this year, what should we be looking for next year and can you reiterate your long-term EPS targets?

OK, David, let me start that and then when it comes to the guidance, I will ask Bill to come in. When we look at the -- especially when we look at longer -- have a bit longer view, we are quite optimistic. What you are seeing is that the prices of soybeans and other products are coming down, which is positive for demand. You might have seen that USDA has included in their projection for next year the soybean meal demand to grow at 7%. So this year, it's a little below trend line.

Next year, we'll be a little bit higher, above trend line, so we will be back on the trend line so we are quite optimistic with that, which would also be positive for our fertilizer business, so overall, we are looking at the future in a positive way. We also at the beginning of the -- obviously, when you think about the supply side, this is end of July, and August is critical and weather for the North American crop.

Remember last year this time, we said it would be a very good harvest, and August changed that. But at this stage, all indications are that we are going to have a very solid harvest in North America. It's one of the reasons why you see the prices coming down, as well so there's an expectation for good crop, and also all indications, we see from buying fertilizer are that we should have a normal crop also in South America. So our general view is quite positive. And, in terms of volume growth, Bill, do you want to reiterate or...?

Sure. Our guidance on an average annual basis over 5 years is 6 to 8% volume growth for the company as a whole. I don't see any reason why we would not be able to achieve that this year, and certainly, we think that we're in line with that as we go forward in future years. That translates to an average annual increase of EPS of 10 to 12%, again, on average over 5 years, and I don't see why we would not be able to meet those targets.

So, Bill and Alberto, when I looked at my quarterly numbers for the back half of the year, I know you don't want to give quarterly guidance anymore, but if you could you at least directionally give me some indications here that it looks to me like Q3, we were still suffering under the lower crop from last year in the United States, but then in Q4 if the US crop is a good crop, then the volume comparisons year-on-year should be very favorable and that's where we should see the largest boost. Do I have that directionally right?

Remember that in our business, as I said, not all stars are always aligned, so it was with a short crop, it was not very easy, but, with this global footprint, we have and with the position of them having much bigger balance, many of these areas are compensated. Do you want to talk about seasonality a little bit?

Sure. Well, first, just in terms of what's normal, we would normally expect to see greater volume and higher results in the third and fourth quarter of the year. Typically the first quarter is our weakest quarter followed by the second and then the third and fourth quarters are the strongest quarters.

This year in the first half of the year, we did see some reduced volume in fertilizer in the first quarter because there were some dry conditions for the planting of the second harvest in Brazil. So, that reduced fertilizer volumes a little bit in the first quarter, although we saw very solid volume performance in the second quarter in fertilizer and of course the short crop in North America has been creating a volume drag throughout the first half of the year.

Assuming that the crop in North America is a normal one, I would expect that we would see a better performance in terms of volume in the second half of the year, both in fertilizers and also in the North American crop. Let me emphasize, however, that year-to-date, we're still at 6% volume growth in terms of total tonnage, so we are in line with our overall guidance. Even with this weaker performance in the first quarter in fertilizer and then in the first semester in North America.

Also, if I could follow up on the food product segment. The performance on that division, at least sequentially was a lot better, but yet the conditions sequentially don't seem to have changed much, but obviously something has changed. What drove the gross profit improvement sequentially 93 versus 74?

I think overall, I don't see exactly the details here, but overall, in this area, we clearly are making progress also in terms of our productivity measures. Overall, we have done better in Europe. We have done well in US. We have done better in South America. So this is an area, where as you all realize it has not been a lot of growth in North America, and we -- a lot of it is coming from productivity increases.

And then lastly, Bill, if I can ask my favorite question on interest expense. Can you give us some indications as to where we might be headed for the final two quarters of the year and then your outlook on '05?

Sure. As you probably saw, we had a declining interest expense for our interest expense not related to readily marketable inventories.. I expect that that decline will continue as we go forward. In fact, we might even see somewhat better results there. We have been working on our debt profile and, I think have been quite successful in being able to reduce some of our interest expenses.

On the readily marketable inventory side, there is a higher level of interest expense there. That's almost entirely explained by the increase in readily marketable inventories. Naturally, as we see the prices of our agricultural commodities coming down and consequentially the dollar value of our agricultural commodities that we have to carry reducing that interest expense should also start to decline a little bit because we'll be carrying a lesser amount of debt to finance those inventories.

But, let me remind you that is -- that interest expense related to readily marketable inventories is a straight pass-through in pricing to customers so, it really should not be any bottom line impact of the decrease in interest expense related to readily marketable inventories.

Your other division was a net expense this quarter of a million dollars. That line, if I recall correctly, contains your Solae and Lesieur ventures. It is -- what's going on there, and when do we expect to see meaningful profit contributions?

Well, the first thing that happened there was in the prior quarter, we had, I think, a $5 million gain associated with the asset swap that we did with (inaudible) in the wheat business in Brazil so, that inflated the number a little bit in the prior quarter. But, also we saw some reduced results out of our T6 joint venture in Argentina, which is really what's affecting that number most on this particular quarter.

Then on the forward look for I expect that line to be driven by Lesieur and Solae, is that a good assumption? When would you say that there be meaningful contributions from those entities?

It will be Lesieur, Solae and T6. T6 is an important joint venture, as well. I think we're already seeing meaningful contributions. I would expect to see positive numbers in the third and the fourth quarter.

Super. Again, great quarter. Thanks a lot.

Thank you.

Thanks.

Our next question comes from David Nelson with Credit Suisse First Boston.

Good morning and congratulations.

Thank you. Good morning.

Thank you.

US margins seemed to have held up quite well in soy processing, obviously, despite volumes, how much crushing capacity do you think has been shut down and therefore, what utilizations -- what has utilization been, and how much has been shut down permanently?

The statistics from NOPA are that the crush is down around 13% in this quarter, the previous quarter. So, I think there's no new announcement of any permanent shutdown, only the ones that have been announced before.

So, I think overall, everybody is either -- we have announced that we have idled pedestrian plan, so I think there is --what it shows, David, is that we are at the right balance. Probably everyone is running the plants. We don't see it exactly. But, we are probably running some of the plants at the lower rate. But the business is in balance, so it's a very rational situation.

I'd like to turn to Asia. There has been some more Avian influenza -- cases of Avian influenza over there, including in China. Could you talked about how demand may be coming back in China, or how it may be inhibited by the new cases?

We don't see that at the moment. In fact, we are seeing pickup, as I was mentioning before on the demand side that we expect with the lower prices of soybean mill, we expect the increase, and the FDA is talking about 7% growth next year. We're seeing indications of demand picking up with the lower prices so, we have not seen anything yet on the Avian flu. It might be a very spotty situation or very individual one.

Right. Post the equity offering in your filing, your prospectus, you talked about the potential for -- or assuming no G&A savings from while of this minority interest, and now that's done, can you talk it all about what potential do you might see for G&A savings with that?

Really, there isn't that much potential for G&A saving because, obviously, we're operating that company, I think, reasonably efficiently now. There may be some opportunities for a little bit of restructuring on the tax side that we be a little bit more efficient on the tax side. I don't think any of that would show up in this year's results, though. That's something that would be a potential for next year or following years.

Great. Thank you very much.

Our next question comes from Eric Katzman with Deutsche Bank.

Hi. Good morning, everybody.

Good morning, Eric.

I suppose congratulations are in order. Also, to Christine and Greg. It's another mouth to feed in the world, so you have to be excited about that.

Positive for our business.

Exactly. I have to raise my volume growth target. I guess a few questions. First, on the tax rate with it being down to around 29%, but for the full year, you're still assuming a relatively high rate. Even if the -- wouldn't -- I mean, even the Riyal stays where it is, wouldn't the tax rate still be lower on a full-year basis?

If the Riyal stays where it is, I think we would have the tax rate within the range that we communicated. There is the upside, if we do see some further devaluation of the Riyal and as the Riyal has devalue a little bit this year.

OK. And, I guess I was-wondering, if you would comment, at one point you said, the cost of a new plant, depending upon where you are in the world for a fully integrated oil processing facility was between, I think, $50 to $100 million or $60 to $120, and, I'm wondering, if you could kind of put that in context of barriers to entry and where you see processing capacity, I guess, to a certain extent a follow-on to Dave Nelson's question.

I think your number is right in terms of the investments. This is one barrier of entry. Another one is very important, as we have seen it again and again and again, that the winners are the integrated players. You have to have origins in both hemispheres the silos. You have that efficient logistics.

One of the successes that we had in this quarter was that we did much better in logistics in South America this year than we did last year, so having good contact with the customer so the good view on the risk. So I think, that is also becoming more and more important so when you see the additional capacity that has been coming on stream.

You remember that we need something like to 5 to 6 million tons of additional mill every year based on the 4.5% growth so this, you could translate that into something like 4, 5 plants state-of-the-art plants.

So, the additional capacity we have seeing coming up is in China and also in Argentina, a little bit in Brazil so and other parts of the world -- also Middle East so on. And its -- with the exception of China, which is a very localized situation, which is a domestic business, it's very natural that it happens in Argentina. The supplier has been growing, and it's one of the most efficient places to be. The growing area is very close to the ports. The ports are Panamex ports. So, I would consider that these capacity additions are quite normal.

And the other, I guess, the last question and I will let it go, is I suppose that to a certain extent we've tried to assume that the low-carb diet trends in the US have promoted more animal-based protein consumption and that has helped your business. But to the extent that that plateaus or falls off, would that be a material drag on the business, or is this just such a US -- kind of US-centric diet change that on the global scale, it really doesn't matter?

When you look at the consumption of edible oils worldwide, North America is relevant, but it is not the key driver of growth. And, what we have seen is that the growth in North America in the past has been in edible oils of around 1% growth. This year, it's probably a little bit less, but there's still growth so despite all the issues, there is -- so a little bit to our surprise, in fact, we see growth this year.

So, we don't see there a significant affect. There's a lot of bakery products out there that are still being used and frying so, we do not see a major shift here. So, also the Atkin's Diet, people might have reduced other consumptions, but the -- let's not forget that fat is one of the most important component of taste in all of the products. And the oil, we like to call it the oil on frying, the oil on the bakery, is probably the most important component of these routes.

OK.

Just add to that, I mean, the Atkin's Diet is basically a US phenomena. While the US is a very important market, it's still less than 300 million people, and we view our market as being 6 billion people worldwide. So, and, we really are focusing for growth much more on Eastern Europe, South America, and Asia.

OK. Fair point. Thank you.

Our next question comes from Leonard Teitlebaum, Merrill Lynch.

Good morning

Good morning.

Good morning, Lenny.

good quarter. Did you have a -- talk about the just one small thing, and I'm trying to get a handle, we had a good move up in the food products area, margins got squeezed. Can you talk a little bit about the margin impact on the food products area? I know it's a small part of the business. I'm just trying to see if there's something here that I'm missing.

The major effect in food products was actually in our Eastern European business. Margins increased and the reason is because we had higher global oil prices. And because of that, they had a little bit more pricing power in those markets. The one thing to remember when looking at the overall numbers is that you have to adjust for the sale of Lesieur last year. And so when you pull out the Lesieur numbers, we actually saw pretty reasonable increase in operating profit.

I'm more -- I think Dave Nelson brought up a point I was going to try to hone in on a little bit and that is, are we permanently moth balling plans for a plant in the US and relocate the investment more into another part of the world, or is this still an issue to be decided?

I imagine that you're asking for the whole industry.

I'm asking really for you.

You remember, we have idled one plant, Vicksburg in 2000, and this year, we have idle temporary Destrehan. It's a very, very efficient plant. So we expect with a good crop, they will all be crushing. We do not expect any shutdown, definite shutdown, but we obviously are always looking at opportunities to have very efficient plants, and we look at it constantly. If there's one plant that is not performing, we might look at it, but there's nothing out there at this moment.

But, we also have to remember that there is growth in the US market. It's lower growth than elsewhere in the world, but it's still growing. And, so there will be a need for some incremental capacity over time. So, I would expect to see some capacity added over time. What we have done in the past, however is that we have shut down inefficient capacity and we have added efficient capacity. So we have managed our total capacity matched it to market growth, and increased our efficiency and improved our footprint.

The point I'm taking away from this and we've talked about this before, you're trying to decouple, I think, the AG cycle from the business cycle as far as your participation. And that -- we look at it, I think the term was US-centric, and I think it's a good one instead of globally, and that's probably our error. But if we're going to put this thing on a pure business cycle, why would you not want to keep crushing capacity in the US constrained to protect margins there and concentrate on areas of growth? I guess that's the one part that I'm not fully appreciating.

Well, I don't know exactly what you mean about the AG cycle. What we see is that we have very solid constant demand growth in our businesses. You look at soybean mill growing at 4.5% regularly, vegetable oil growing at 4.5% on a global basis and fertilizer at 6, 7%. So we do not see cycle, let's call it, like this.

Now, the North America, it's still the second largest market in the world after Europe. It's a very strong meat industry, very significant consumption of oil. So, I think it is extremely important to serve our customers well here. It's a very interesting, extremely interesting market. We should not confuse what we are seeing is that US is becoming less relevant for the growth on exports, but the domestic market is extremely important, very large and very relevant. So, I don't know if I understood your question, Lenny.

Well I guess, what I'm just -- and maybe we can follow-up off-line here, and I guess I'm trying to get to the integrity of the growth rate after having something that has been impacted I think by extraordinary margins this career. Even I'm just in the US but also in the world and how that translates into growth is really the point I'm trying to get to. And are we going to see a year next year that we may not grow at the 10%, and that's going to come after '05? Or do we look for a growth rate to push forward from the adjusted level that you have just given us?

Actually, I think what we were trying to communicate is that if anything, we're likely to have a lower volume growth rate this year because you had the difficult North American harvest and we lost some fertilizer volume in the first quarter.

And what Alberto was trying to communicate is that with the price decline, we actually expect growth in mill demand and potentially also edible oil demand for the above trend line next year. So if anything, we think the perspective is for a growth rate which, in terms of volume, which is better than this year.

Thank you very much.

Thank you.

We'll take a follow-up from David Driscoll, Smith Barney.

Thanks a lot. The follow-up is related to the similar line of questions going on here. But specifically, can you guys tell us how much capacity you are going to add the remaining portion of '04? Or maybe give me the metrics however you look at them, '04 versus '03 and then '05 versus '04?

Well, we have announced that we together with our partner in Argentina (inaudible), we're expanding to 6 - 8,000 tons per day, so that should be on stream next year. We also have announced that we are building the plant in Ilyichevsk, directly in the port. I think this one to be it's probably the most efficient plant in Ukraine. It's a sunflower plant, and if I am not mistaken, the number is 600,000 pounds per year of sunflower. Not much more.

We have added capacity, which is running in Brazil, we added last year, so we are running. We have expanded on Annapolis. And I think, what is also very important, we also took on in the last 12 months three smaller players in Brazil. We rented three plants with an option to buy them because they got weaker.

They were not as integrated and we might see that eventually these plants will be shut down. These are small and efficient plants, which are running very profitably at the moment in the local niche. It's a local situation, but probably long term they will not be there. I think this is all what we have announced.

Collectively then, can you say that capacity expansion industry wide in Brazil and Argentina is equal to the production increases of soybeans, greater than or less than?

I think when you look at --you have to look at 2003, '04 and '05. When you look at these three years, it probably will be a little bit more, a little bit more than the demand if you take in this year. Now, if you add next year's demand, let's assume USDA is right, 7%, and then it will be in line.

But your question was related to supply of soybeans, David. It's below the increase in the supply of soybeans.

Would you also say that your ability -- this is a concern that I have heard from some -- some clients that the ability -- the expansion has all happened very rapidly in Argentina and consequently, actually having supply for your plants is not assured.

Now, it doesn't sound like that's really true given what you guys have just said, but if you could give me a little color there and how have you protected yourself, i.e., I think you've got some other projects going on in Brazil, railroad, etc. that you guys were trying to participate in, and I never heard what eventually happened there.

I think we are, we are very comfortable with the -- you know there has been significantly more exports of soybeans from Brazil and Argentina in the past which gives indication that there is room for more crushing. Now, there are some announcements that really, the announcements are done, and when you really look at it, many of the projects are either delayed or don't have a permit yet. Some did not start. So, it is much slower than what you see there. So, we feel very comfortable with the situation that we will have enough supply; that we will -- we are very comfortable with that.

We are always taking actions to make sure that our crushing capacity is balanced with our origination capacity, which is also balanced with our customer base around the world. So, we want to keep those well aligned. There are probably, you know, 40 or 50 different actions that we take in order to make sure that that is the case.

So, we can't point to one single thing and say, this is going to make sure that everything is well aligned because there's a constant rebalancing which is going on in the business, acquisition of silos here, upgrade in port capacity there, developing new customers there, but this is something we pay a lot of attention to.

There's a lot focus on the crushing part, but you have to remember that s probably a very -- it's important part of the small part in the whole chain. It's the origination and it's logistics and it's the contact to the customers around the world, it's the farmer contact, so it is a part. In the middle of that we, obviously, adjust -- it's not so much seen how much we invest in silos and originations and ports. Its always part of the whole chain. So it was pretty much in chain, adding the refineries when necessary. And what we are seeing, I think we are seeing discipline in the industry.

And then maybe one final question. It's related, I think to your -- it's minority interest and, you know, Bill, if you could give us some understanding here as to when you expect, I think you mentioned on your prepared comments, something by the end of the year, you know, buying those fertilizer interest in, but then -- if you could give us as much details you can on how that minority interest line will be going forward, it'll be very helpful?

Yes. We said it was -- we hope to close this in the fall. The fall is either end of the third quarter or probably early in the fourth quarter. We are in the middle of the process with the regulators in Brazil. I think it's going quite well. The minorities from the market contacts we've had seem to be comfortable with the terms and conditions of the offers. So we don't see an impediment there as we're going forward. In terms of the actuarial effect of the minority buyout, I would refer you back to the prospectus on the equity offer, there's detail on there related to it.

Very good. I have seen that. Would you -- what's left in the minority interest line once we've completed this transaction?

Yes. We still have minorities in a variety of different locations around the world. The primary one is going to be Phosberto (ph), which is one of our fertilizer subsidiaries in Brazil, but we also have minorities in a number of other locations.

Superb. Thanks a lot everyone.

Thank you.

Our next question comes from Lavonne Von Redden with Hockey Capital (ph).

Yes. Good morning everyone. I'm a little new to this story. I wanted to discuss, I guess, how the lower, I guess, AG commodity prices kind of work into the cash flow equation. If you can kind of talk about when the prices start to moderate decline in the quarter, and kind of how should we think about that, obviously, the inventories came down but as the inventories come down, do we look at the accounts receivable going up, just trying to get some understanding of how that all comes together?

Sure.

Thank you.

As AG prices rise and we're purchasing inventories, obviously, the value of inventories goes up. That creates a bit of a bubble within the balance sheet that those inventories have sold on the inventories translate into accounts receivable and when we receive the receivables, we obviously get the cash back.

As inventory prices -- as AG prices come down, it does take a little while for that to translate through our cash flow numbers, we're starting to see that effect in the second quarter. I would expect to see more of that effect in the third quarter. We do have some immediate impact because of the way that we hedge our agricultural commodities, inventories using short futures contracts on the Chicago Board of Trade.

Those are adjusted every single day in our margin accounts as prices come down. We get cash back on our margin related to those hedges so that we have seen some of that effect in the second quarter. But as -- we've seen prices beginning to come back to more normal levels.

Assuming that the harvest is a reasonable harvest in North America, we'd expect the prices to be in line with the historical norms, and that means that our inventory should go back to their historical norms, and we would expect to see substantial incremental cash flow from that showing up in the third and fourth quarter.

And the cash flow that you expect from that its going to be used really for, I guess, repurchase of short term debt?

We'll just repay the debt associated with it, yes.

OK. Thank you.

We'll go next to Philip Wilson (ph) with Credit Suisse First Boston.

Yes. Good morning. Philip Wilson research here CSFB. And, also relatively new to this story. Two questions this morning. I recognize that Argentina is only a small percentage of your business, but I still have one question related to it. Based on the latest I had heard from the IMF, they had not concluded the review yet of their credit lines to the country. Now in a bad case scenario that the debt rescheduling initiatives were not to happen later this year, is that having any impact whatsoever on your ability to finance straight out of that country or all of that is being financed through inter-company loans anyhow?

We finance everything through our global central treasury. And, so there really is no effect. Argentina's problems with its creditors have no direct affect on our ability to affect the business in Argentina.

The one affect that it does have is an indirect affect on our balance sheet in as much as we have had our VAT receivables from the Argentine government on a cash basis for some time now. Just to give some more perspective on the quarter, we did, in fact, increase those reserves related to VAT this quarter because we purchased some more inventories in Argentina. So that's really the only effect that we've seen recently.

What is important is you have to think about that 95% of all business in Argentina is export, so our customers are in Europe and Asia and so on, and we made normal business, we bought normally the products in the middle of the crisis of 2001, 2002 so we call it -- it's much more like an origination of supply coming from that part of the world similar to the mineral oil business and what is key is where our customers are, which are the ones who pay it in Europe and Asia. So, we are very comfortable with our operations there.

OK. Thank you. And then the second question I had this morning, kind of follow up on the earlier question on the Atkin's diet. This morning there was an article on the journal review of the food pyramid by the US government. Is that review going to have any impact whatsoever on your business here in the US?

We -- look, we are very -- I think they are happy that there's a discussion about it. People are realizing that the lipids, the oil is an extremely component of the diet. You need to have something like 30 -- something percent of your caloric intake has to come from oil.

So there will be an objective discussion about how important it is. It's important for the cell formation and important to get the vitamins into the cells and so on. And when people talk about fat, often it is related to too much food or sugar or other kind of carbohydrates.

So I think this -- all of this discussion will probably have a positive impact because people will realize you need a balanced diet. You need the proteins, you need the lipids, the oils and we don't believe this should have a negative impact. You might see a little bit - let's call it the impact might be that the global consumption in the US might be reduced volume.

But this should be minor in total aspect of when you talk about 100 million tons sold of oils worldwide. And from the 6 billion people, only 300 live in US. So this should not have -- it should not move the needle.

OK. Great. Thanks so much gentlemen.

Thank you.

And just as a reminder, that's "*,1" for questions. We'll go to Brad Tirpak with Sigma Capital.

Hi guys.

Good morning.

Good morning. The tax rate came in lower than I expected, and I was hoping you could explain to us what the debits and credits are for that, why was it lower -- start with the statutory rate, and then just bring us through why it was lower?

The main effect in the quarter was because we had a devaluation of the Brazilian Riyal. We fund our operations in Brazil from our central treasury operation. On the statutory books in Brazil, when there's a devaluation of the Riyal, the dollar is denominated in US dollar, so it creates an exchange loss that's deductible for US -- sorry for Brazilian tax purposes. And so that has a positive effect.

OK. Can you tell me what the cash paid for taxes was this quarter?

I don't recall the exact number on cash tax in this quarter. I'm sorry. We'll try and get that for you afterwards.

But was it more or less in line with the $58 million accrued?

It would have been less.

Would have been less. And so that goes to the other non-current asset lines that your deferred tax asset went up? And that other current asset line went from 596 to 696, was that $100 million there?

Again, I don't recall the exact numbers but we'll try and get you the details.

What else would be any other current asset line?

In other current assets, we also have the effect of the mark-to-market on a number of our hedge positions that goes in there.

OK. On the road show, you were explaining to us that there was a gain from the Sole, the structuring the Sole joint venture, and that you are amortizing part of that gain for a period of time. What amount was that amortization in this quarter?

No. We are not amortizing that gain.

So you are not amortizing that gain?

No. We took $111 million in the second quarter of last year. There is a deferred gain related to our remaining percentage in that joint venture, which if, in fact, we sold that at some point in the future, we would recognize, but it is not being aim advertised.

OK. The deferred gain is not being aim advertised?

That's correct.

I notice that accounts receivable went up this quarter a little more than I expected. What can you just explain to me why that was? It was up to $300 million.

Yes. We're seeing the effect of the higher inventory prices flowing through the accounts receivable.

OK. And what was the allowance for doubtful accounts?

Again, I don't recall the exact number. Relatively small.

Ok. Thank you.

Thank you.

Currently, we have no further questions. So, I'll hand the call back over for any additional or closing remarks.

Thank you all very much for joining us this morning, and we look forward to speaking to you again next quarter.

Thank you everyone, for your participation in today's conference call. Again, that concludes today's conference call, and everybody may disconnect at this time.