Bunge Global SA (BG) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the Bunge Limited's fourth-quarter conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Susie Ter-Jung, Director of Global Communications. Please go ahead ma'am.

Thank you, Matt, and thank you, everyone, for joining us this morning. Welcome to Bunge Limited's fourth-quarter 2003 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. Before I turn the call over to Alberto, I'd like to read the Safe Harbor statement.

This call may contain forward looking statements within the meaning of the Safe Harbor provision 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 risk, uncertainties, and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. Important risk factors can be found in our SEC filed reports.

Now I'll turn the call over to Alberto.

Good morning, everyone, and thank you for joining us today. The fourth quarter was an exceptional one for Bunge. We were pleased by its strength. Our agribusiness division benefited from a unique combination of favorable demand, increased crop sales by farmers and good margins. Our other divisions also performed well. We're clearly happy with the results and Bill will provide details later in the call.

The fourth quarter was an excellent end to a successful but challenging year. It was our first full year of combined operations with [indiscernible]. We saw overall growth and expansion in key markets and improvement in financial performance. At the same time, we experienced challenges in the form of another short crop in the U.S., the smallest in seven years, and currency volatility in South America.

2003 illustrated some basic realities about our industry -- some long-standing and some more recent. The first I would like to discuss is volatility. Bunge's results can change from quarter to quarter due to a variety of factors. From farmers in Brazil changing the timing of their fertilizer purchases to the entrance of Mother Nature. As such, ours is a business that demands a longer-term view. A year to year rather than a quarter to quarter perspective. This longer term view shows that our industry can produce superior long-term growth and returns.

But the big picture reveals other important and very promising realities about the industry and Bunge. Many of you have heard me describe these before but some things deserve to be repeated.

First, our industry enjoys long-term sustainable organic growth trends. Demand for our products is strong. Global soybean meal and vegetable oil consumption grew by 4.6 percent and 4.8 percent, respectively, over the past 15 years.

For the past ten years, the Brazilian fertilizer industry has grown at over 8 percent while the rest of the world has remained flat. We see these strengths continuing. This is organic growth driven by natural forces such as population growth and rising standards of living. Keep in mind our market is 6 billion people strong.

Second, size and market leadership matter. Bunge has the volume level and geographic scope to capitalize on growth trends and we have leading positions globally.

Third, both Bunge and the industry as a whole are better equipped than ever to manage volatility. Why we succeed -- in large part because we operate in every major part of the farm to consumer food chain and in every major market in the world. Geographic balance and product adversity mitigate risk by lowering our exposure to any one market, region, or product.

Our 2003 results demonstrate this. U.S. and European agribusiness markets were weaker than usual but we compensated them with strong performance in South America and other parts of the world. And we balanced our earnings with good results in fertilizer and food products.

Our recognition strategy -- especially the successful integration of Cereol is an essential part of the strength.

We have also proven that our foreign exchange risk management strategy works in up and down markets. In 2002, we benefited from currency situation (ph) in South America. In 2003 despite depreciation in the Argentine peso and the Brazilian real we made money as well.

Lastly, the industry as a whole is more disciplined. Recent consolidation has left larger players each with greater flexibility that can take corrective steps more easily. The U.S. agribusiness market was tough in 2003 but the industry still performed well because companies -- including Bunge -- took steps to adjust capacity to balance supply and demand. These steps are sometimes difficult for employees and customers but they are essential to the overall health of the industry. The ability to implement them quickly and accurately will improve the long-term profitability of the industry.

The combination of these factors will help to ensure our continued success.

In 2004, we intend to focus on several important areas. First, we will continued to work on improving our efficiency and operational excellence. There's always more to do in this area and we will not reduce our focus on it.

Second, we will enhance our custom and farmer relationships by providing service, product quality, and innovation.

Third, we will look for and seize on opportunities for growth. Our capital investments are concentrated in high growth areas like fertilizer raw materials, Asia, Eastern Europe, grain origination and of course on logistics. The power of our integrated and balanced business model and the Bunge team give me the confidence that we can continue to deliver on our promises.

I will now turn over -- turn the call over to Bill, so he can provide you with the details of our financial performance.

Good morning.

Before I discuss the quarter's results and our outlook for 2004, I would like to highlight some of the changes we made to our earnings release.

This was in an effort to increase transparency and respond to requests from many of you. Operating performance -- which we previously disclosed only on a consolidated basis -- is now called total segment operating profit. In this press release for the first time, we have disclosed operating profit by segment.

Segment operating profit adjusts the segments' results from operations to include the financial cost of carrying operating working capital, including foreign exchange and interest on debt financing operating working capital. We believe this to be the best indicator of our business performance. And it is in fact one of our key internal metrics.

Interest income on advances to farmers which was previously recorded in the interest income line -- included in our consolidated statements of income -- has been reclassified to gross profit to reflect the operational nature of this income. Prior year amounts have been restated to reflect this reclassification.

We have highlighted certain charges and gains that we thought would be of interest to you. These items are outside the normal course of business and not recurring on a regular basis and include gains or losses on asset sales, income or loss from discontinued operations, cumulative effects of changes in accounting principles, impairments or restructuring charges and effects of tax on litigation settlements.

In addition, our earnings release now includes cash flow and balance sheet data.

We are committed to provide transparent high-quality information to investors and will continue to improve our disclosure to ensure we do so.

Now let me give you some perspective on the fourth quarter. The fourth quarter typically represents the peak of crushing activity in North America and Europe with reduced activity in South American agribusiness and fertilizer operations.

However, this quarter was anything but typical. High soybean prices -- as a result of two back-to-back short crops in the United States -- drove Chicago Board of Trade prices to near seven-year highs. These high prices caused farmers in North America to aggressively sell new crop beans and farmers in South America to sell beans that they had been storing from the prior harvest. As a result, agribusiness volumes in Brazil increased almost 50 percent from the same quarter of last year.

This aggressive selling, combined with very strong customer demand, caused significantly higher than expected margins across the board in both North and South America and in international marketing. The unusually high soybean prices also helped our fertilizer business as Brazilian farmers responded by increasing their planted acreage, making it a busier quarter for our retail fertilizer business, which increased sales volumes 24 percent from the same quarter of last year.

Turning to foreign exchange and its effect on quarter to quarter comparison of our results, I would like to point out that the U.S. dollar, Brazilian real exchange rate at the end of 2002 was 3 reais 53 for U.S. dollar and at year-end 2003 was two reais 89 per U.S. dollar or a 22 percent appreciation for the full year. This was a significant headwind for our business.

And now, let me return to our results.

Bunge's agribusiness segment experienced an exceptional fourth quarter. Agribusiness sales volumes and segment operating profit increased as higher soybean prices caused a wave of farmer selling in North and South America. Customer demand was very strong and margins benefited.

Our risk management strategies performed well and protected us from the market substantial volatility. Our increasingly efficient global logistics business and competitive freight pricing locked in as part of our risk management programs helped offset current record freight rates.

Western European margins continued to suffer from lower capacity utilization and higher industrial expenses. Agribusiness segment operating profits would have increased 153 percent but for a pretax 56 million non-cash impairment charge on long-term operating assets in our Western European oil seed processing operations.

We felt it was necessary to write down a portion of the property, plant, and equipment, and goodwill, relating to these operations as a result of the continued challenging operating conditions in that region.

We have plans to streamline production, increase productivity, reduce costs, and upgrade certain facilities. We are confident that with these measures we will see an improvement in these operations.

Turning to Bunge's fertilizer segment, sales volumes and gross profits increased primarily due to higher average selling prices as well as increases in sales volumes as farmers reacted to higher commodity prices by increasing their planted acreage.

International selling prices for imported fertilizers and raw materials were higher than last quarter and higher than the fourth quarter of last year. For example, ammonia and urea were 47 percent and 55 percent higher than in the fourth quarter of 2002. Brazilian fertilizer is priced to import parity.

Nevertheless fertilizer segment operating profit decreased because of higher SG&A expenses, attributable to the appreciation of the Brazilian real, increased transactional taxes and an institutional advertising campaign.

In Bunge's food products segment, sales volume and segment operating profit increased, reflecting improved results in both edible oil and milling products. Edible oil results were driven by contributions from European and North American edible oils businesses and our margarine and mayonnaise business in Brazil.

Brazil's margarine and mayonnaise business benefited from higher sales prices and lower costs as a result of its ongoing efficiency program. These improvements were partially offset by increases in raw material cost, primarily soybean oil.

Volumes increased in our Brazilian wheat milling business as we began to reap the rewards of stepped-up marketing efforts. And in our U.S. corn milling business on higher sales to the U.S. government for its food aid program and the October 2003 acquisition of a corn mill.

Wheat milling also benefited from higher margins and reductions in expenses. Foreign exchange gains incurred primarily on the net U.S. dollar denominated monetary liability position of Bunge's Brazilian subsidiaries decreased 48 million from the fourth quarter of last year.

You will recall that these effects are substantially compensated by inventory mark to markets included in gross profit. Interest expense declined 11 percent, primarily due to lower average interest rates in Brazil and the repayment of outstanding serial (ph) bonds. Interest income increased slightly as higher cash balances were partially offset by lower interest rates.

Other income in the quarter included our share of earnings from Solae, [indiscernible], and our joint ventures in Argentina.

Our quarterly effective tax rate was 35 percent as compared to the fourth quarter of last year when our effective tax rate was 0, due to benefits associated with the devaluation of the Brazilian real and a tax credit for a refund of prior year's taxes.

Income tax expense this quarter included a net charge of 23 million, due to a new Argentine income tax law passed in the fourth quarter of 2003. While final regulations have not yet been introduced for this law, we have fully provided for any possible fiscal year 2003 effects. We are changing our business procedures to minimize potential effects as we go forward.

Net financial debt at year-end was slightly below levels at the end of last year. However, adjusting for changes in levels of readily marketable inventories, net financial debt declined by 380 million. Cash flow from operations was negatively affected by higher levels of operating working capital, caused by the 40 percent rise in the price of soybeans since mid 2003.

This effect should reverse when prices return to historical averages. Bunge's balance sheet and debt coverage ratios continues to be extremely solid.

Now let me say a few words about the outlook for our business this year. We're looking forward to a solid year in 2004. Crop outlook in South America is good and we expect record harvest in both Argentina and Brazil. We are well-positioned to manage the complex logistics of the upcoming harvest season in South America and don't foresee any decreases in capacity or capacity utilization there.

Global demand should remain firm for the year. North America will be difficult until the new harvest but we remain confident that our integrated business model -- with its superior geographic and product balance -- will offset any negative effects. While Indian flu will have a negative impact on Asian demand its effects are too early to quantify. Further there are expected to be some offsets due to increased demand for soy meal in the Americas. We will continue to monitor developments closely.

Fertilizer demand and prices are strong and should remain so. And we expect continued good performance in our food products division. Based on this outlook and assuming stable currencies in South America and a normal 2004/2005 North American crop, we are providing earnings guidance as detailed in the press release.

Bunge's profitability has grown rapidly over the last few years and stepped up to a new level. Despite a more challenging starting point, we remain confident in our ability to deliver 10 to 12 percent average annual earnings per share increases over the next five years. This is based on our anticipated earnings of 300 to 320 million or $2.97 to $3.17 per fully diluted share in 2004.

Now we will be happy to take your questions. Operator?

+++ q-and-a.

[Operator Instructions].

Ken Zaslow with Morgan Stanley.

If I were to add back the impairment charge on any gains on RMI, this was Monday's biggest quarter in terms of underlying operating profit in agribusiness. Yet the question that comes out of this is how much is sustainable and how much was caused by hedging and cost savings and other activities that may not be sustainable going forward?

There's no question we had an outstanding quarter in the fourth quarter. We do feel that there were some unusual effects there, the ones that we have described. We would not expect that we would see the fourth quarter of this year replicating the fourth quarter that we saw in 2003.

That's one of the reasons that we have set our guidance where we have for 2004 which would be based on normal operations of our business so we would not expect to see a repeat of this quarter -- of the fourth quarter 2003 this year.

What percentage -- I guess more directly -- what percentage of the operating profit really came from underlying operations that should be counted as going forward?

Well, all of the -- all of the results came from underlying operations. It was a result of very strong margin environment in North and South America. A good performance on our risk management, particularly with regards to freight. And very strong margins in international marketing so it's all part of our normal business. But there was a combination of factors caused by the significant price rise on the CBOT which caused us to have this outstanding result in the fourth quarter.

As we go forward, we would point you to the guidance for 2004 which I think gives you a good indication of where we think the normal operation of our business should be.

And it was also good volume. When you see it was a significantly higher volume -- higher volume with higher margins was the basic reason.

The second question I have is, one of your competitors last week described the South American (indiscernible) environment as very challenging in terms of overcapacity in margin structure. In your prepared comments, you did make a reference that margins were I think solid or good, I think overcapacity was not an issue. Could you just give a little bit more feel for year-over-year margin in South America and to what extent overcapacity exists in South America?

All the margins in the last quarter were, as we said, even better in 2002. So we did not feel this what you mentioned. Now, also in terms of capacity I think we have to remember that there is the capacity utilization that is often reported by industries association that includes some old and small facilities. Many of them have not been utilized in a while. So we believe that the capacity utilization has been in the industry kind of the same as last year perhaps in 2003, it was even a little bit higher the capacity utilization. So we feel very comfortable about 2003 and about 2004.

David Driscoll with Smith Barney.

Well, first, congratulations on a quarter -- really quite a remarkable result. I would also like to say that I do appreciate the additional disclosures -- it's much easier now to get our models updated and so forth. So thank you for that.

On talking about, I would just like to pick up on one thing you just said a moment ago that you said you expect kind of normal operations in agribusiness in 2004. I would kind of rhetoric (ph) immediately that second quarter and third quarter, in my estimation, appear to be anything but normal, given the fact that the soybean situation is so tight in the United States. If you could just discuss this a little bit, I would be very very interested to understand how you see those two quarters developing?

And then, what's going to happen in terms of soy meal movements from South America to North America? And given your substantial market share positions in South America, it's like we all expect North American -- or I expect North American margins to suffer but at the same time it looks like you have a very strong offset and it may be even better than that.

So this is a fairly complicated situation that I'd really like to hear your thoughts on.

Let me start on that, Dave. First of all, I think we believe that there will not be any trouble to our customers. There will be enough soybean meal and there will be enough oil for them. Now, obviously, there are different movements in the markets. One of them is for the higher prices. We expect there will be a small substitution for example to canola meal and there might be perhaps a small reduction in the demand. And we could even see that there will be some imports of soybean meal so we believe that in the second and third quarter we -- at least from the customer point of view, there will be -- there should not be an issue.

In terms of the margins, it is a little bit difficult. Obviously, we are anticipating as we said a little bit more difficult environment in either the second or perhaps in the third-quarter which probably will be offset with our production from South America. If the meal will have to be imported it probably will have to come from South America.

Okay, then looking -- I'd like to switch over to the cash-flow statement -- question for Bill.

Bill, when I just look at the cash-flow statement I think a lot of folks when they just read cash flow from operations and they see the negative $41 million are going to have a question in their mind. Here's -- I've done something here and I've taken the $380 million that were attributable to the price increase in soybean and the $57 million from that arbitration settlement.

If you add those numbers back, you get something like $400 million in cash flow from operations. Would you say that that's kind of the way to look at operations of the business?

I think that's the right way to look at it. We did see a significant effect from the increase in the 40 percent increase in bean prices since midyear. And that's basically the 380 million increase in readily marketable inventories. If you adjust for that and also this arbitration settlement of about $50 million, you see that in fact, we had positive free cash flow for the year covered all of our CapEx and covered all of our dividend payments. So I think we were actually right on track for where we wanted to be for the year X this price increase.

And we'll actually see these numbers show up in the cash-flow statement if and when soybean prices decline perhaps sometime in 2004?

That's right. You should see an exactly opposite effect of more cash being generated as soybean prices come down since the cost of carrying working capital will come down in proportion.

And overall -- just kind of a pie level question here. You've had a difficult harvest in Europe and in North America, Europe this year, North America for the last two years. How then does that really affect the P&L on the Company? If we get normal harvest in both North America and in Europe, it would seem to me that your operations could do substantially better and that that -- I would say almost well in excess of where your current guidance is am I just being optimistic here or is that really the embedded potential within the business?

Why don't I start and I'll leave Bill ...? First, obviously, when you talk about the European crop, we were not so much affected last year by the European crop, when you talk about rape sunflowers -- these are our main raw materials, that was a decent crop. And it was more the poorer crop was more wheat in other areas. But it affected some of the crushing soybean crushing in Western Europe. So I would say the main issue was the soybean crop from North America. Now, overall, obviously we feel quite good about or we feel better even if there's a good crop -- but when we give guidance, it's to our best of our knowledge.

Let me also say, David -- that first an editorial comment. When have we ever seen anything normal in this business? But if we assume that we did have all crops in all the places that we operate coming out at normalized levels, so would there be any upside in our numbers? Probably yes.

But we know that things are never perfect in our industry and we have taken that into account when we're establishing our guidance.

Bill, would you give us a comment on the quarterly guidance or the quarterly pattern for next year, you obviously you gave us a number for the first quarter. In terms of just relatively -- you know, strength in Q2, Q3, Q4. Could you give us a feel for how those quarters should go?

Well, the second quarter, I think we should see a reasonable performance in the second quarter, given that that's when the South American harvest is coming in. I think we have most risk in the third quarter because that is when the main effect of the shortages in North America should be materializing. And then the fourth quarter, I think we would expect to be reasonably strong, assuming that we have a good harvest in the United States.

But, overall, when we look at the year, we think the year is shaping up to be a solid year of good performance.

As I said on my introduction, we really have to look at more from a year to year basis. We have to be very, very careful that we don't get too much hang up on this quarterly. There are too many shifts possible between one quarter and the other.

Understood. Thank you very much and congratulations on a good quarter.

Eric Katzman with Deutsche Bank.

I guess somewhat following up on David's question. I have seen a lot of consolidation in the industry. Would you expect kind of returns to exceed the last peak, given the consolidation in the industry? And how long have on average kind of, let's say, positive cycles kind of lasted historically? Thanks.

When you look at -- I don't like to talk about peaks because when you look at the last cycle -- positive cycle -- it went from '88 to '98, so it was 11 years of an up cycle. And our industry is very interesting because we have very strong demand; as I mentioned, 4.5 percent on the oilseed side. And so the industry gets into trouble if there is a dramatic overcapacity. And this happened in '95, '96 too much capacity came on stream, because it was a very fragmented industry.

So I'm very optimistic that we are in a long-term cycle. If history should explain something it should be 11 years starting in 2001. But I'm also very optimistic because the industry has changed. It is not as fragmented anymore, and you need the integration to give the flexibility and the service to the customers. And so I'm quite optimistic about the long-term view.

And the last time that, let's say, the normalized part of the cycle you earned -- I guess, you obviously weren't public then, but let's say your return on assets -- I don't know what they were, again, because you were private. But if they were, let's say, 12 percent are they -- would you expect significantly above that today, or is that still a decent bogey? You can define the return measure however you want.

Our actual business mix had changed a bit since the midpoint of last cycle. Also our size as a Company is dramatically different. I think we've gone from 7 million tons of crushed capacity to today we are probably at 36 to 37 million tons of crushed capacity. And today we're integrated all the way to the end customer, which we were not at the midpoint of the prior cycle. So there have actually been some dramatic shifts in Bunge's business as well.

If we look at normalized returns however, I do think that the return we are experiencing now, which is probably in the 10 to 12 percent range, is a solid achievable return for our Company over a sustained period of time. I don't think it is the peak level, however, because I don't think we've reached the peak yet in the cycle.

Christina McGlone with Deutsche Bank.

Maybe if you could talk a little bit more about the operating profit in fertilizer. That came in below expectations, and I'm wondering what exactly transactional taxes and institutional advertising what you're referring to? And then also in terms of an outlook there?

Sure. We don't see this as being any particular problem in the fertilizer area. This was something which really just occurred in the fourth quarter. We also do see shifts from quarter to quarter in fertilizer buying patterns by farmers that tend to affect it.

The main effects were, one, we did say some effect from a stronger real on SG&A. The second was we had a major institutional advertising campaign in Brazil, which is actually, I think, the first one Bunge has ever done in Brazil. And there were incremental expenses associated with that. That campaign is now over, so that is not something that will go on in the future.

And we have various different transaction taxes from time to time. There's a tax called CPMF, which is a financial tax on transfers of funds in Brazil. We had some extra expense associated with that. We had some extra expense associated with the ICMS tax, which is a state VAT tax in Brazil. Again, that was a one time type of thing. So we just had some bunching of those expenses in one particular quarter. We don't see it as anything systemic with the fertilizer business.

So basically if these were more spread out then you wouldn't have seen this decline in profitability? And then you don't expect advertising campaign to occur again next year?

We will be doing a little bit more institutional advertising this year, but not on the scale on which we did in the third and fourth quarter of last year. And, yes, if these expenses were spread out over the full year, rather than bunched in one quarter, we would not expect to see any significant impact on profitability.

And, Bill, CapEx guidance for next year is a little bit higher than I had expected. Is that because of the new -- the fact that you need to upgrade facilities in Europe, or what is it due to?

We are just accelerating some of our plans a little bit, in particular in fertilizers in Brazil. One of the effects that we did see in the fourth quarter was that we tapped out on capacity in some of our plants producing intermediate fertilizer products in Brazil. And consequently, we had to buy in more raw materials from third parties. And obviously the margin on doing that is lower than the margin on when we produce it.

As you know, we announced, I think, a couple months ago that we were planning on doubling our fertilizer capacity in Brazil over the next five years. And we have accelerated some of those plans in order to help out with this capacity situation.

And then in terms of the freight contracts, how long do they go? When do you anticipate having to roll them over? And I assume it would be at a higher cost?

We don't go into details on how far out we're hedged on any particular exposure. Let me just say that we have a good balance between our freight contracts, our hedging on those freight contracts, and the existing book of business that we currently have. Freight is not an issue we view as a negative for this year. It is probably a positive.

And last question. Alberto, there was some articles saying that three tiny trading firms were going to deal with local Brazilian producers. And I'm wondering how will that affect Bunge?

This happens all the time that somebody starts to -- makes an announcement and thinks that the grain origination business is very easy. We are 100 years there. We have set up a huge network of assets and contacts so far (indiscernible) and logistics and systems and networks of people. So we do not see this as something unusual. Normally, I don't know the exact statistic, but not all of them work out. They realize that it is much more difficult. And they realize that we can give them a much better service than they can do it on their own. We don't see this as a serious threat.

John McMillin with Prudential Equity.

Congratulations, everybody. The only bad news is sometimes it's embarrassing to have a 65 cent estimate when do almost $1 higher on an operating basis. How come you didn't come out with a press release just kind of highlighting the big positive surprise, Alberto?

Do you mind if I take the question, John?

Sure.

There was significant volatility in the quarter. And that volatility was continuing right through the end of the quarter. As you know, we had the mad cow scares in the U.S. in December, and that was affecting the commodity market. And so we had large movements occurring in the commodity markets right through the end of the quarter.

You will call in the third quarter when we saw a shift in the commodity market we did come out and we did revise earnings. And then when we actually announced earnings probably three or four weeks later we were, in fact, close to back where we had originally been in our original guidance. And we were taken to the woodshed by the market for that. So we learned our lesson and decided that this quarter, given the significant volatility, it was just not wise to update guidance until we were absolutely sure where things turned out.

I understand. Sometimes when you quantify it -- when you come out with a surprise you have got to tell people exactly what it would be. And this was so good it was probably tough to get your arms around. But can I just kind of go through some of the -- I tried to build a model stripping out these one time items, and I got -- if you take out the 23 million tax charge -- I got only a 24 percent operating tax rate for the quarter, if you take out this one time Argentine tax benefit. Is that right, Bill?

For the quarter?

Yes. And if you could go more into the Argentine tax. Exactly that it is and how will it impact your business going forward?

I have not done the calculation stripping out the effect of the Argentine tax. So let us do that calculation and we will try to see if we can come up with some more perspective for you on that.

With regard to what the tax actually is. The Argentine government in the fourth quarter revised the way that it felt that income tax should be calculated on exports which were being sold intercompany. So if we were selling from our Argentine subsidiary to another subsidiary that in turn sold to customers, Argentine felt that instead of calculating the tax at the date on which the sale was made, the tax should be calculated on the date on which the shipment actually took place. And they should use the higher of the sales price or the price of the product on the date of shipment.

It's unclear to us whether this is actually a retroactive tax that goes back to the beginning of 2003, or exactly when it begins to occur, because the regulations have not yet come out on this tax. So we have taken a cautious approach and provided fully for any potential effects in 2003. We're also now changing the way that we do business in order to make sure that we minimize the effects of this tax going forward.

And if you net all the one time items in the fourth quarter, you get a 65 cent charge, or would it be a little less than that because there was a small capital gain tied to the baking sale?

The capital gain tied to the baking sale I think is in there, because it is in the discontinued number.

So it would be able a 65 cent hit, would be the one time?

66.

66?

Yes, that's the number on additional financial information on page 8.

So 66. Thank you. Congratulations, again.

Leonard Teitelbaum from Merrill Lynch.

Again, my congratulations. And I guess proving that you can't make us happy no matter what you do, Bill, we ask that you just press along.

Let me ask a couple of things. Number one, have you seen any unusual build? And I would suspect that you did. We are having trouble getting it -- unusual build up in your customer inventory because all of a sudden product was available, albeit, at a higher price in Q4?

No, we have not seen anything unusual. On the demand side it was steady.

Second then. You approach China differently than some of your competitors. Is there any thought to changing the way you do business in China, i.e., buying assets instead of basically letting others make the investment?

I'm sure that eventually we will have some assets in China, like we are expanding in India. More than 50 percent of the population lives in Asia between China, India and Southeast Asia. We have a very, very large presence in southeast Asia and also a significant export into China.

But we want to find the right opportunity. It has really to make sense to us. So we have a large team in China who deals directly with a customer selling the beans and the oil. And we're building a lot of expertise there. So eventually I expect that we will be investing in China.

I guess, Alberto, the follow on point to my question was that if you are going to go in there at this stage of the game, isn't it going to require significant amounts of capital in order to be a presence, especially since your competitors have been in there for a very, very long period of time, and have their assets in place? Or am I assuming you're going to go in there on a pari parsu basis with your competitors in terms of manufacturing capability?

I'm very relaxed about it. I'm sure there will be a shake out situation. And there will be good opportunities perhaps to buy somebody. It's a fragmented industry. It is not consolidated. And perhaps not all players are interested in staying in the long-term.

Remember that we bought Saipol also to become a large player in '97 in South America. And we are quite relaxed about this. There will be moments were somebody has different ideas. There will be moments where perhaps due to overcapacity the margins will not be very strong in that part of the world. So we're just waiting for the right opportunity. And it might be first perhaps even more downstream than upstream. So we're analyzing the market very, very carefully and constantly for the right opportunity.

Like Argentina was considered a complete consolidated market, and we were able to buy La Plata Cereol (ph) in the right moment. We take a long-term view on this. We have 200 years of history. We plan to be in business for another 200 years at least.

I don't.

And remind me again, Bill, what is the third quarter where we had -- when the market had their spike and we were kind of caught in a bad hedge position because of the rapid move in the market that penalized us in Q3 of last year. And if that -- if my memory is right, and Diane is probably the one who will remember it exactly. But I've got to suspect that when you said the third quarter was going to be tough, did you take that into account when you make that statement?

The third quarter of this year you mean?

Yes, sir.

Well, I expect that we will see some volatility in the markets in the third quarter, as we're coming into the U.S. harvest. But I hope this year that we have a better perspective on the market, and have our hedge strategy more aligned. So hopefully we will see that effect.

Thank you very much. Again, a hell of a job.

Christine McCracken with Midwest Research.

Congratulations. Just looking -- you know, several of your competitors now have announced U.S. processing capacity reductions. You mentioned that you don't expect any South American capacity to come out. But are you expecting to shuttle any additional capacity in the U.S. to help alleviate maybe the tight conditions this spring?

I think we -- yes. If the economics do not work, we will do it like we have done in the past, either temporary or completely like we have done. There's no question about it that we would do that, if it is necessary.

So at this point you don't feel it is necessary to shuttle any capacity despite cargo and ADM's announcement.

For the next two months or one, two months we don't see it, the necessity.

Fair enough. And then in terms of the timing, you guys discussed some of the earlier selling by farmers of their beans, given the very high prices. Does that negatively impact your volumes in the next quarter at all? And maybe you can discuss kind of what your outlook is there?

I don't think is going to negatively affect volumes, because a lot of the selling we were seeing in South America was old crop beans, beans that had in storage. And the new crops that are coming in now are very large. To give you some perspective, I think the U.S. harvest for the -- the harvest that we're in at the moment -- is approximately 66 million tons. And in South America we've heard reports of anywhere from 96, 97 up to 100 million tons in South America.

So we are talking about a large harvest, very large volumes. And obviously we will have to handle our share of that, so I don't expect we will see any decline in volumes.

Is there enough storage for all those beans?

There is going to be some very complicated logistics in moving those beans out to market. That's one of the things that we feel that we are well-positioned to manage, and actually one of the things that gives us advantage in those markets.

I know it's really early and there's a lot that that can change in the next couple of months, but essentially you had talked about a pretty constructive outlook for a normal year of soy bean prices coming this fall, as we get maybe a more normal crop. But the early expectation, I think, at this point is there's going to be actually more corn going in the next year. And with Chinese demand still very high, is it your expectation that soy prices do come down, or is this kind of the new level for soy?

No, we really believe that this is too high. And the long-term trend -- when you take 50 years of trends, it should come down because of, I think, this is an unusual situation. As we will see the South American crop, you have to remember it is over 100 million tons that is going to come to the market. And the North American crop is something like 65 million tons. So this should be in balance very soon. And a normal crop in the U.S. would be 75 million tons. So even if the corn goes up, we believe that we will see -- obviously it depends all on the weather, but three years in a row of dry weather in the U.S., it is time to have a normal crop.

I agreed.

There is an iron rule that high price brings more supply. I would expect to see that in soy beans.

Unfortunately, there's higher prices of corn too, though. So you know you can't tell. And then finally just a clean up question on poultry. You had mentioned that it tied to AI -- that you expect some increased demand here from U.S. poultry. Is that -- are you referring to the 1 to 2 percent that we're expecting, or is this over and above that, tied to the outbreak of A and B influenza?

I think this is over and above it. And it would be both North and South America -- if we do see reductions in production in Southeast Asia, it is highly likely that that will be compensated by increases in production in North and South America.

We are seeing a very strong increase in orders into the meat companies in South America, especially to Japan and other areas.

Order of magnitude in terms of poultry expansion in Brazil?

It is too difficult to say. We have to see it evolving. It's on a -- its too early to really give a clear picture.

Great quarter. Thanks for the additional disclosures.

[Operator Instructions]. Andrew Cash from UBS.

Am I right in assuming that there was a trading benefit in the agribusiness -- a trading or arbitrage benefit because of the run up in soybean prices?

There was a very minimal effect of trading. Almost all of what we saw in the improved results related to improved margins coming from volume, just a greater spread between the price at which we bought beans and the price at which we were selling product. And some gains from freight.

The other question I had is, since you mentioned it, and I don't think it sounds like much. But this transfer of funds tax, I don't understand. I never heard of that before. If you can explain that? I think that was in your fertilizer business?

Yes, there is a tax in both Brazil and Argentina. In Brazil it is called CPMF. It's a tax on every financial transaction. So you write a check out of your personal bank account, there's a tax on it that goes straight to the government. Any money transfer, any payment of any kind in the economy incurs this tax. That's one of the taxes. The other I was referring to is ICMS, which is a VAT type tax between the states.

Those are ongoing taxes or is that something new?

No, these are taxes that have been around for a long time in Brazil. They just happened to bunch a little bit more in this particular quarter. One reason we paid more CPMF in fertilizer was because we bought out a large number of minority shares in Fosterto (ph) in the quarter. I think it was probably 87 or $88 million that we paid for those shares. And of course you had CPMF tax on that.

At this time, there are no further questions. I would like to turn the call back over to management for any additional or closing comments.

Thank you very much, everyone. We appreciate your attention, and look to speaking to you next quarter. Bye-bye.

That does conclude today's teleconference. Again, thank you for your participation. You may disconnect at this time.