Bunge Global SA (BG) 2004 Q1 法說會逐字稿

Good day everyone. Welcome to Bunge Limited's First Quarter Conference Call. Today's call is being recorded.

At this time, for opening remarks and introduction, I'd like to turn the call over to Ms. Susie Ter-Jung. Please go ahead, ma'am.

Thank you Operator. And thank you everyone for joining us this morning.

Welcome to Bunge Limited's First 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.

Before I turn the call over to Alberto, I would like to make a few preliminary remarks.

As you may know, in addition to our first quarter earnings, we announced today the filing with the SEC of a Registration Statement relating to an equity offering, and a tender offer to buy back minority shareholders. The offering, which we expect will be for 9.5m common shares will finance our planned buyout of minority shareholders in our Brazilian subsidiary, Bunge Brazil. In turn, this could lead to the de-listing of that company from the Sao Paulo Stock Exchange.

This transaction continues our strategy of consolidating and simplifying our ownership and operational structure in Brazil. Any remaining proceeds from the equity offering will be used for general corporate purposes, which may include acquisitions, capital expenditures, and working capital purposes. Unfortunately, due to regulatory restrictions relating to the offering, we cannot at this time provide any more detail about the equity and buy-back offers and will be unable to answer questions relating to them during the question-and-answer period of this call.

As soon as these offering-related restrictions are lifted, we will communicate all relevant information to the investment community.

In the meantime, we refer you to our Registration Statement on Form F3 that was filed this morning with the SEC, and includes all pertinent information relating to the offering and the minority buy-back.

Now, two statements required by the U.S. Securities Laws. The securities referred to in the Registration Statements filed with the SEC today may not be sold, nor may offers to buy be accepted prior to the time the Registration Statement becomes effective. This conference call is not an offer to sell, or the solicitation of an offer to buy these securities. These securities will not be sold in any state in which such offers, solicitation or sale would be unlawful prior to registration or qualification under its security laws.

Copies of the prospectus with respect to the offering, when available, may be obtained from the underwriter.

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 first quarter was an excellent one for Bunge. All of our operations performed well. Our team continues to excel, and our earnings once again validate the effectiveness of our business model.

Before I turn over the call to Bill, who will provide details on our financial results, I would like to highlight two important concepts. First, Bunge's earnings are not directly tied to soybean prices.

And second, our results must be assessed on a yearly basis due to crop cycles and the variance they create in quarterly earnings. Recent months have seen record soybean prices. While it's tempting to use the price of soybeans as a barometer for the future performance, and potential valuation of agri-business companies like Bunge, to do so is wrong.

As evidenced by our past performance, we can make money when prices are high, as they are now, and when prices are low. For example, in 2002, when soybean prices averaged only $5.14 per bushel, we posted solid earnings. The simple reason is that Bunge's overseas processing operations earn most of their income on the margin. The difference between the price at which we sell soybean meal and oil and that which we pay for beans. If demand is strong and the supply of beans is adequate, and if the industry manages capacity in a manner responsive to the market, then profit margins should remain healthy.

We did a statistical analysis of the relationship between crush margins and soybean prices, and in fact, there is no meaningful correlation. Since 1988, the correlation between CBOT crush margins, and the price of nearby soybeans is .30, with an R-squared (ph) of only 9%. This effectively means there is no correlation.

High prices are great for farmers, and we are not farmers. They result in increased farm incomes, which lead to larger plantings. High prices can result in the substitution of other commodities for soy, but the popularity and versatility of soy, recent bans on bone meal and other factors limit this risk.

Low prices benefit food processes and the end consumer. They help to drive demand and the use of soy to replace other oils and protein sources. Fortunately, soybeans are the world's most popular source of protein for animal feed, and are versatile in universal consumer food product.

These facts have driven consistent year-to-year increases in demand that show no sign of abating. At the same time, explosive growth and planted acreage in South America is fueling the supply, and recent industry consolidation has enabled more efficient utilization of capacity on a global level.

Bunge's business model also contributes to the management of downside risks, including those associated with commodity price exposure and logistics. Our integrated operations, which stretch from farm to consumer, and our geographic scope and broad product portfolio mitigate risk by diversifying our income streams.

Now let me turn to the second concept, which is that the right focus for our results is the full year, since profits can shift from quarter to quarter. Keep in mind there are two major harvests per year, one in the Northern Hemisphere, and one in the Southern Hemisphere. They occur roughly six months apart, so there is a natural seasonality to our earnings, especially in agri-business and fertilizer. That said, the precise timing and size of these harvests vary. Due to these variables, projecting future earnings based on one or two quarters is difficult. A yearly assessment is more appropriate.

Now let's talk about our outlook for the coming months. The South American harvest is well underway, and we have much greater visibility as to its size. The large crop is more than adequate to supply our operations for the rest of the year. Of course, what we accept as 'large' today would have been unthinkable even a few years ago. In the last seven years, the South American crop has more than doubled in size. Production continues to grow in South America, and we expect increases there in coming years.

We are comfortable that our fertilizer and food products businesses will continue to perform well. High commodity prices are driving increased spending on crop inputs. We also continue to enjoy advantages in raw material and logistic costs, which benefit our margins.

I will now turn the call over to Bill, who will discuss our financial performance.

Good morning. First, let me give you some perspective on the first quarter. The first quarter typically represents the end of peak crushing activity in North America and Europe, with reduced activity in South American agri-business and fertilizer operations. The first quarter is also typically the weakest quarter of the year for Bunge, but this year we have seen a particularly strong start.

Now let me turn to our results. Bunge's agri-business segment experienced an exceptional first quarter. Results benefited from solid volume growth and improvements in margins, assisted by effective risk management. The volume increase was driven by strong origination volumes in Brazil, as well as solid demand from U.S. and Brazilian meat producers which more than offset lower U.S. export volumes.

Efficiency improvements in logistics and the favorable effects from freight risk management programs also contributed. Our improved logistics position in Brazil has reduced vessel waiting time. With record freight rates, this has generated significant savings.

North American margins were better than expected, but margins in Southern Europe are still depressed due to supply, cost, and capacity issues.

Turning to Bunge's fertilizer segment, sales volumes decreased in line with lower volumes in the Brazilian market as rain in the North and the Northeast of Brazil affected the planting of the winter corn crop.

Segment operating profit increased, as higher margins more than offset the effects of the decrease in volumes, and an increase in SG&A.

International selling prices for imported fertilizers and raw materials were higher than last quarter, and higher than the first quarter of last year. For example, the price of phosphate in the form of granulated MAP was 38% higher than in the first quarter of 2003. Brazilian fertilizer is priced to import parity.

In Bunge's edible oil product segment, on a comparable basis excluding this year, sales volumes increased, driven by growth in Brazil. On this comparable basis, segment-operating profit also grew by 55%, as margins expanded in our soft seed business in Eastern Europe. In Eastern Europe, we purchased all of the soft seeds we use to produce bottled oils at harvest time in the fall. Prices of all vegetable oils have increased since that time as a result of the reduced supply of soybean oil, and our margins have expended. These benefits were partially offset by increases in raw material costs, primarily soybean oil, in our edible oil businesses in the U.S. and Brazil, and a difficult competitive environment in Brazil.

In our milling product segment, volumes increased in our U.S. corn milling business due to higher sales to U.S. food processors and to the U.S. Government for its food-aid program, and the October 2003 acquisition of a corn mill.

Volumes in wheat milling declined slightly. Milling segment operating profit increased as both corn and wheat milling also benefited from higher margins.

Bunge's SG&A increased, despite not having the expenses of the [LaSeur] and our soy ingredients business. The increase was due to the impact of translating the local currency expenses into U.S. dollars at a stronger Real and a stronger Euro, increased bonus, tax and labor provisions, and increased head count in our international marketing business.

The U.S. dollar, Brazilian Real exchange rate at March 31, 2003, was 3 Reals 35 cents per U.S. dollar compared to 2 Reals 91 cents per U.S. dollar at March 31, 2004. The stronger real affects the quarter-to-quarter comparison of our results as the average exchange used to convert local currency SG&A into dollars was significantly lower in this first quarter compared to the first quarter of last year.

Let me point out that despite this currency headwind, our SG&A as a percentage of gross profit, after normalizing for LaSeur (ph) and the soy ingredients, decreased by 6% quarter-on-quarter.

Foreign exchanges losses in the first quarter of 2004 were primarily due to foreign exchange hedging costs on accounts payable of our fertilizer business. In the first quarter of 2003, we recorded foreign exchange gains on U.S. dollar-dominated liabilities in Brazil as a result of a 5% appreciation of the Real.

Interest expense on readily marketable inventories increased due to higher levels of inventories caused by higher commodity prices. Remember that these increased interest costs are passed through directly when products are sold, and thus do not affect profitability.

Interest expense excluding readily marketable inventories declined, despite increased debt levels as we paid off higher cost debt assumed in the Cereol acquisition and replaced it with lower cost, longer term senior notes.

Our quarterly effective tax rate was 40% as compared to 38% in the first quarter of last year. As a result of the short U.S. crop, which is 12% smaller this year than last year we expect our exports to decrease, and therefore, a reduction in related tax benefits.

We have also seen a shift in income to higher tax jurisdictions. However, we remain confident in our tax rate guidance for the full year of 33% to 38%.

Net financial debt increased from year-end 2003, primarily due to higher inventory levels as a result of record soybean prices. However, adjusted for changes in levels of readily marketable inventories, net financial debt declined by $222m. Cash flow from operations was affected by higher levels of operating working capital, caused by the 60% rise in the price of soybeans since mid-2003. For the quarter, higher prices affected cash from operations by approximately $790m. This effect should reverse when prices return to historical averages.

Bunge's balance sheet and debt coverage ratios continue to be extremely solid.

Now let me say a few words about the outlook for our business. We continue to expect a solid year in 2004. As Alberto said, despite weather complications that have reduced expected crop size in South America, we expect large harvests in both Argentina and Brazil that should be about in line with last year, which was a record. We are very pleased with how we have positioned ourselves to manage the complex logistics of the South American harvest, and are already seeing and will continue to see the benefits in our results. Global demand should remain firm for the year.

We are managing the tight supply situation in North America and our integrated business model with its superior geographic and product balance is offsetting any negative effects. Fertilizer demand and prices are strong and should remain so, and we expect continued good performance in our food products division.

As you have seen by now in our release, this past quarter, our convertible notes issued in November 2002 became convertible into common shares. As a result, our fully diluted per share results and guidance assume all holders have converted their notes into common shares, resulting in an increase of approximately 7.8m shares outstanding, and a decrease in after-tax interest expense.

Based on our outlook, and assuming stable currencies in South America and a normal 2004/2005 North American crop, and excluding any effects of our proposed equity offering and minority buy-back in Brazil, we are increasing our guidance for net income to $320m to $340m for the year. This translates to fully diluted earnings per share of $2.96 to $3.14.

Let me close by saying that our outlook for the second, third and fourth quarters of 2004 remains just as positive as it was when we established our original guidance at the beginning of the year.

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

Thank you, Mr. Wells.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you are using a speakerphone, we ask that you please make sure that your mute function is turned off to allow your signal to reach our equipment.

Once again, that is star one for questions. We will pause for just a moment to assemble our roster.

We'll take our first question from Kenneth Laslow (ph), Morgan Stanley.

Good morning everybody.

Good morning Ken.

Good morning.

I know you made several comments about the South American crops. Let me ask you, is there a threshold production level where supply becomes an issue and capacity needs to be reduced? Or you don't see that coming?

There is a threshold, but we do not see it coming. We are quite advanced in the harvest, Ken, and we feel quite comfortable. I think we all now have quite good visibility. When you think about it, we're just in 2001 or 2000, we were talking about 70m tons South America, and we are talking about now 90m tons roughly. I am taking, there are so many different estimates, so we are very comfortable that there is -- that we have now good visibility how it will evolve.

Would you be able to give an idea of what the threshold level would be? Would it be, you know, 49 in Brazil? What is the number that would make you more hesitant in terms of needing to close capacity? How far above are we?

I think we are very well positioned. The crop is in a very good situation. I don't think that has been a worry to anyone so far.

Okay. And separately, in the U.S. what actions are you taking specifically to compensate for the shortage of U.S. supply? I know U.S. soybean supply, I know you're cutting capacity, but are you building inventories of oil, of meal, or can you benefit enough from potential imports from soybean meal and soybean oil from South America? How does that play out?

Well, you know that we idled the facility in [Desdrann], and on the overall we follow the situation very carefully. We are working very close with our customers. But we feel, as you could see in the fourth quarter and the first quarter, the margins are okay. They are not ideal, but the margins are okay. But we feel comfortable that we will be able to sail through the short crop quite well. If necessary, as we said before, we would bring in meal or oil if necessary. So I feel quite comfortable.

And we're also seeing very good results from our soft seed businesses, which help to compensate any weaknesses in the soy business.

My final question is what do you consider a normal crop in the U.S.?

I think we would say probably 75m tons. I don't know how much that is in bushels, but around 75m tons.

Great, thank you very much.

Thanks.

We'll take our next question from Christina McGlone, Deutsche Banks.

Good morning, congratulations.

Good morning.

Good morning, thank you.

Alberto, you expressed comfort with the South American crop, but I'm wondering if you can maybe comment on crush margins, because there have been some reports that farmers are a little reluctant to let go of the beans because of the discount between the Brazilian beans and the U.S. beans.

The crush margins are fine. They are in line with last year's. They are doing very well. And we have been able to buy from the farmers. The farmers are selling. You have to remember the prices are extremely high. At $9 or $10 per bushel, this is very attractive for the farmers. There are farmers doing extremely well. So both in Argentina and in Brazil, we have been able to buy normally.

Obviously, the fertilizer prices are a little bit higher for the new crop, but they are buying as well.

And we have not seen any problems with farmers not delivering beans to us that were previously contracted. We have avoided any of those issues.

Okay. And Bill, in terms of fertilizer, you had mentioned that because of the wet weather, the corn plantings were, I guess it didn't drive fertilizer like it did last year at this time. Does that mean that would be pushed off to the second quarter, or do you just lose that business altogether?

There are two effects. One was the wet weather, which delayed some plantings, and last year we actually saw accelerated purchases by farmers in the first quarter. When we look at the overall pattern for the year, we think we've just returned to a normal pattern. So we don't think we're going to lose those [inaudible].

Okay, so the second quarter, we won't see a bump up in fertilizer? It will just be more of a third-quarter occurrence like normal?

The normal seasonal pattern will hold, which is we should have a stronger second quarter than the first quarter, and the third quarter our strongest for the year, and then a little bit weaker in the fourth quarter. So we're expecting a normal seasonal pattern this year.

Okay. All right, thank you very much.

Thank you.

Our next question comes from David Driscoll, Smith Barney.

Hi, good morning everyone.

Good morning.

Good morning David.

Well, congratulations on a nice quarter.

Thank you.

Certainly, everything is, unfortunately, maybe as clear as mud. I want to go back to something you said here, Bill. You know, I'm a bit confused on how you've come to some conclusions here, because when I do my math, I come to a totally different conclusion.

All right, so it looks to me like guidance originally given in the quarter was for roughly 42 cents a share. That was the mid-point of the guidance that you gave back on February 3. That would roughly be, if I take the three cents off from the 65 cents reported, that would be 62 versus 42, i.e. a 20-cent positive delta in the earnings per share for the quarter. The dilutive effect of the convertible contingent debenture was I think minus 16 cents a share. That would say to me if those were the only effects out there, that full-year guidance should likely have gone up then by four pennies. But it didn't, it went down. It went down by one to three pennies. You know, again, this is EPS basis with everything included.

So that would say to me that overall, the guidance has gone down when I take into account all of these effects, in the back half of the year has gone down by minus five to minus seven cents. So it doesn't look to me like your ideas for somewhere in the order of 2Q, 3Q, 4Q are in fact totally unchanged.

So now, I think I may have my math wrong, because that's not what you said. So can you walk me through where I'm getting this wrong.

Well, David, rather than diving into the math, let me just give the overall message. The overall message is we're optimistic about the year. We had an extremely good first quarter. We continue to be optimistic about the second, third, and fourth quarters, just as optimistic as we were when we originally established guidance.

Now, we increased guidance for the year. The implication of your statement is that we didn't increase guidance enough, that we should have increased it more. Well, as you know, we typically like to take a conservative stance when we look at things, especially in a year when we are seeing a lot of volatility in the market.

So, our guidance is our guidance. It's our best guess about where we're going to be for the year. However, our overall perspective for the year has not changed.

When you talk about guidance, I think the difference between what I'm saying and what you're saying is your guidance is net income guidance, whereas I'm looking at EPS, which would include the effect of that diluted security. So you say that guidance went up, and in net income it did. But on an EPS basis, it went down. Right? Is that the distinction here?

Well, look at net income. Clearly, guidance has gone up. It means that the business is doing better this year, and we anticipate it will do better. The convertible security has always been out there. The only thing that changed was in the first quarter, it became convertible. And so we're now factoring that into our numbers. I apologize if it's causing confusion, but that's just the nature of the beast.

I understand. Then, if I can follow that line of logic, the convertible, of course, is very interesting now because we've dropped below the price at which the $38 number where you would calculate to become dilutive. Can you run me through, refresh me again on what will happen in the second quarter with this diluted security if the stock stays at $36?

If the stock stays below the trigger point at which the security becomes convertible, then in the third quarter, we would not report the dilution of the convertible. So it does actually flip in and out of conversion, depending on if the stock price is above this trigger point, which is about $38.57.

Okay. When I also looked at some of the guidance here, specifically the joint-venture earnings, I hope you can help me here a little bit here. What I understand from your report was that it's $18m to $22m, this joint-venture earnings guidance for the full year. In the fourth quarter, other non-operating income was $15m. This quarter, I think it was $11m.

Assuming that all of the numbers in this other non-operating income is related to joint ventures, your full-year guidance for joint-venture earnings looks way too low. If I were to take $15m or $11m a quarter, I'd get something like $40m. You gave guidance at $18m to $22m. Can you help me here? What's wrong?

First, it's an incorrect assumption to think that it's only joint venture earnings in that number. We also have some expenses that are in that number. We have some interest expenses associated that are not operating in nature so we're not including those in the segment operating profit that reduced the overall expense. And we have some additional expenses associated with overhead.

Also, we have the [Justin Macero][ph] gain in that number in the first quarter. So, it's not a good assumption to make that everything that's happening in that other line is related to joint ventures.

So maybe the best question to ask is what does the other line itself do, which would be inclusive of everything for the full year? Would it be roughly $40m, or is it going to be markedly lower than that, because I think you just said there was a gain in the first quarter in there.

Yeah, I'm sorry David, I don't have that number for you at the moment. We'll try to give some clarity in future communications on that.

Okay, and then maybe just a last question here. Did you give interest, I apologize if I missed this in all of the documents here, but net interest expense guidance for '04?

We did not.

Can you?

I think that, let's separate it into two pieces. Interest expense related to readily marketable inventories we're going to see going up because of the increased level of inventories. But let me remind you that all of that interest expense is passed through when we price those inventories. We recapture it in our gross profit. And so it really has no effect on the bottom line.

The second piece is, of course, what we call our structural interest expense. That should be stable, or perhaps declining slightly because we have refinanced some debt at a lower interest cost.

Okay, and then the last question, I know Susie said a lot on the beginning there about what you can or can't say on this equity offering. But I just wanted to ask this question, and maybe you can answer it. It looks to me like you're offering more shares, i.e., you're going to generate more cash from the equity proceeds than you otherwise need to buy out those minorities. Can you tell me what you're going to do with the residual cash? It looks like something like maybe $90m.

I cannot comment on that, David. You will have to take a look at the Offering Memorandum, and read what's in the offering Memorandum.

Very good. I wanted to ask if I could. Thanks a lot, everybody.

Thank you.

Our next question comes from John McMillin, Prudential Equity Group.

Good morning.

Good morning John.

Good morning John.

Bill, when you say 'effective risk management,' are you suggesting that you bought the soybeans early without fully selling the meal and oil, similar to the reverse of what happened in the third quarter of last year?

Well, there is a variety of different risks that we are managing, John. We are managing energy risks, we're managing freight risks, we're managing the risks of purchases of soybeans, we're managing the risks of the sale of the products to end customers. And we will quite often have different strategies for managing each one of those risks. So it's not quite as simple as you portray. 'Effective risk management' simply means that we think we did it well during the quarter.

And you've done it well in a lot of quarters, more than not. I just, when you don't do it well, the few times you don't do it well, you're pretty open about what you've done. When you do it well, you're pretty closed-mouth about what you've done. Would you agree with that, Alberto?

I would say that our basic, I think we are being transparent in both cases. What we normally do is because this is a business that involves a lot of future business, we have the opportunity in having a futures market, we have the opportunity to protect ourselves against the downside and leave ourselves open for the upside. And I think we have been able to get it quite well here. And so, I feel that we have been consistent when we do well and when we do not do well. So, I don't think we have been saying it in a different way.

All right, and you can talk about the acquisition, can you not?

The acquisition of the minorities in Brazil you mean?

Yes.

Unfortunately not. We're also restricted by U.S. Security Laws.

Only what is in the F3.

There's a pretty good description in the F3.

I read that it's, it looks to me to be additive to the extent that the equity offering is dilutive. But I'm actually surprised -- you're admitting that South American crush margins are low. Are they low, Alberto, because there's increased capacity down there? This is just talking about in the quarter, you said that South American crush margins were low. Could you explain to me why they're lower than they are in the U.S.?

I don't remember, John that we said that or have written it. The only thing I need to remind you that the crush is just starting because we start the harvest in February/March, and really it's ramping up now. So normally, the first quarter in South America is the low season. The high season of the South American crush is second and third quarters. So normally, because of seasonality, the value, or let's call it the profitability is smaller. That's why our first quarter normally is a smaller quarter.

But the profitability of the crush margins that we are seeing are very reasonable. I think what I mentioned before was that we are seeing the same level as last year, and we are very happy with that.

Okay, because I just calculate them as lower down there, but maybe I'm doing my currency wrong. Okay, thanks a lot.

Thank you.

Thank you.

Our next question comes from Christine McCracken, Midwest Research.

Good morning.

Good morning.

Good morning Christine.

Congratulations.

Thank you.

Just on, going back to I think it was David's question on interest rate expectations and delving a little bit into some comments made in the press release relative to lower interest rates in Brazil, and that effect on interest income, can you give us some kind of what you're expecting, I guess, over the relatively near term relative to interest rates in South America?

I think interest rates in Brazil are probably going to continue to decline. I don't think we will see as large a decline as we saw in the second half of last year. I think we will see some relatively small declines in interest rates. But the government is under pressure down there to increase its growth rate, and that probably means we'll see some future interest rate declines.

We may see that interest income declining a bit more this year and into next year for two reasons. One is the decrease in interest rates, but also because a large portion of this cash balance is in our fertilizer business and is going to be used for the new investment program that we have to double our capacity in our fertilizer business in Brazil.

And relative to the stability in Brazil, we've heard some recent reports about, obviously a lot of pressure on the government. Is that showing up in any changes in policy or approach to your business? Is there anything that has shown up thus far, and do you anticipate any kind of major changes down there in the immediate term?

No, not really. What we might see is a potential upside because the policy that the government has been using of very tough fiscal measures and very rigid monetary policies all have kept the economy quite stabilized. But there is not a lot of growth. But there is some expectation from the Brazilian government that there will be growth this year. This should benefit our edible oil business and our milling business.

Okay. And then just on the demand side, looking at some reports this week just on China, and some potential weakness there, is it your expectation that the growth continues, that the demand growth from China continues, let's say over the next few years, or do you see any signs of that slowing at all? And how would that impact your business?

We continue believing that the demand will be strong. This is, you have to remember that our business is very universal. We work with six billion people, and China has 1.2. So in Southeast Asia and India we have to look at the whole region. We see a little bit better demand. You remember that before we had this situation of the Avian Flu, so there was a reduction in demand because of the, the soybean meal was a flat demand. We're seeing it picking up. We don't know yet if it will be back at the strong growth rates that it used to be in China.

But we believe that we will see the traditional trend line of demand for this year, perhaps not at the 4-1/2% that we have been seeing. Perhaps a little bit lower, between 3% and 4% because of the high soybean prices. So there is a little bit of substitution.

But we see strong demand, and continue seeing strong growth, including China.

All right, and then just one final question. You know, the U.S. crop, we're now way ahead, I guess, of where we typically are, at least on the corn side of the business. And that's led a lot of people to possibly lower expectations for soybean acreage in the U.S. this year. Is it your expectation that we still get to the kind of numbers that maybe USDA and others were shooting for, or is there a possibility we might come in light again on soybean acreage?

I think that this is way early. Just remember that last year, in the beginning of August, we had one view, and at the end of August, a very different view. But what we know is from the USDA, the prospectus acreage, the planting --

The Planting Intentions.

Thank you, Bill. -- the Planting Intention was surprisingly high for soybeans. So we are optimistic, but it's very early now.

Right. All right, great, thanks.

Thank you.

Thank you.

Our next question comes from Robert Moscow, Credit Suisse First Boston.

Good morning.

Good morning.

Good morning.

What kind of reports have you heard about Asian rust in the soybean crop in South America, and how are farmers there approaching that issue?

The Asian rust has been stronger, or more intense this year. And what the farmer has to do he has to use more crop chemicals, and that's exactly what they are doing. So it is a negative for the farmer, but we think it is, with the higher prices of the soybeans, this is fully compensated. So we are not seeing a reduction, and quite the opposite. We see a strong intention of continued expansion and growth in soybeans in both Argentina and Brazil.

That's great. That's my only question. Thank you.

Thank you.

Thank you.

And we'll go back to John McMillin, Prudential Equity Group.

I'm just trying to get an inventory accounting question. I know your principle competitor, ADM is on LIFO, and that can influence particularly in a rising grain market, what gets reported. Bill, could you just kind of go through what impact earnings would have had if you had reported on LIFO?

To be honest, John, I have no idea. Most of our inventories are on Marked-to-Market, so they're Marked-to-Market every month.

Okay, thank you.

We'll go next to Tom O'Neill, Barclays Capital.

Yes, thank you. I'm on the Fixed Income area of Barclays Capital. Your credit ratios are not that different from some of your larger competitors. Your rating is mid to low triple B. In terms of your credit rating, do you have any specific goals there? And also in terms of your leverage, after making an adjustment for inventory, you're really not that leveraged. Can you give a sort of a balance-sheet goal there in terms of debt to EBITDA, what you're comfortable with on an adjusted basis? Thanks.

Okay. I think your observation is correct. Our credit ratios are pretty much in line with those of our major competitors who are rated better than we are. We have been in a process with the rating agencies educating them about our business, and really demonstrating to them what Bunge can do, because we have been advancing rapidly in building our business model and our global footprint. The agencies tend to be conservative, and it takes them a while to let's say catch up with the current reality of the business. And so, we're hopeful over time that they will recognize what Bunge has done in terms of strengthening its balance sheet and we'll be appropriately rewarded.

At the same time, in terms of our overall capital structure, the way that we look at this is that we would like to have our fixed assets funded by equity. We would like to have what we think of as our permanent working capital funded by longer-term debt. Then the variable working capital, which is basically readily marketable inventories, which goes up and down with the harvest cycles, we fund with short-term floating-rate debt. And we're perfectly in balance with that. We are just where we want to be.

Okay, great. Thank you.

And we'll go next to David Driscoll, Smith Barney.

Hi, I just wanted to do a little follow up here on North America. The, you know, if I understand things well here in terms of what we've seen from industry data on total crush volumes, the numbers in the first quarter overall for the United States look to me like they were very strong going in January and February and we saw a fairly significant drop-off in March. But net overall, it would seem to me that given a fairly short soybean supply, one may have had the theory, and I really did back at the beginning of the quarter, that we would see a much more rationed approach to soybean processing in the United States.

So what I'm driving at here is did we, in fact, do you guys agree that we saw a substantial crushing number in the first quarter to such an extent where we effectively took volume out of 2Q and 3Q, really related to the fact that we're going to start to run very low on beans in those next two quarters?

What we see is, perhaps the difference, Dave, is that there was a reduction in exports. For example, our plant [Dessdran] is an export plant, mainly an export plant, so it did not operate so we idled it. But the domestic business has been normal.

Now, also you saw recently that based on the USDA report, the ending stock was a larger stock than we expected. So what we see is that we still believe that there might be a necessity to import some meal or some oil before the new harvests come in. But it is probably a much more normal situation than it was at the beginning of the harvest.

Does that have implications for crushed margins in the rest of the world, i.e., are we going to see, you know, because before I was again thinking that you would see a need for imports in the United States, which could potentially drive margins in your South American operations. If that demand is lessened, does that weaken the margin scenario for South America?

I would not say so because also the supply is a little bit lower in South America. Now obviously, the North American crush margins and probably as in our case in Western Europe, they are a little bit lower than usual. But, it should not have an impact, this perhaps reduced expected imports of meal and oil should not have an impact in South America.

Let's say that North American margins for soy crushing are lower, but soft seed, on the other hand, is doing very well.

Okay, and then maybe one last question here. I've been getting this a lot from clients. And everyone asks me that, okay the expectations for South America have continually been coming down here as we have gotten weather reports over the last couple of months. Yet it seems like, you know, largely speaking your guidance is reasonably in line with earnings per share is where it was before. The question is would your numbers have been remarkably stronger had we had normal weather in South America, i.e., is there really, because it almost looks to me like there's no impact. South America total production goes down, no change to Bunge. It doesn't seem to match with kind of, we all know that you're the biggest player down there. So therefore, it seems like something has to suffer if the total crop size is lower, you should have lower volumes than what you might have originally expected back in January.

I don't think we go into these kinds of what-if scenarios. We obviously do this internally. But if you have 15 variables in a year, we never assume that all 15 will be right. We always assume that we will be in a situation where 10 or 11 will be right, and some will go wrong. And every year when you look back, there is some issue in any part of the world regarding weather. So we factor that always in. It is very, very seldom, in fact I never experienced it, a year where all stars were aligned. So I think that's the exception.

Also, because of our market position as the leading company there, and by almost an order of magnitude versus some of our other competitors, we are probably less affected than -- by crop shortages -- than they are because I think we have more ability to work with our business, work with our logistics, and adjust our business. So I think more of the effect is probably felt by smaller competitors.

Well, thanks a lot. I really appreciate the color. Take care.

Thank you.

And we'll go next to Jane Guilday of Barrow, Handley.

Thank you. My question has been answered.

Thank you.

Again, ladies and gentlemen, star one for questions.

We'll go next to Margaret Cannella, JP Morgan.

Thank you, and I think my question is somewhat similar to one that was asked earlier.

As you take a look at what you've been doing in terms of simplifying your overall capital structure, and in terms of funds that you might raise in the equity offering, what would be other actions that you might contemplate in terms of your capital structure in the upcoming year? And in terms of the rating agencies at this point, have they given you any guidance with regard to what the profile might have to look like going forward in order to get an upgrade?

I can't address anything specific to the equity offering. What I can say generally is that we are continually working our on capital structure. In order to make sure that we have the most efficient structure in terms of fact (ph) efficiency and the lowest possible cost of funds. And that's something that we are always working on and continually making improvements to. You don't necessarily always see those improvements, although they are reflected in our numbers. And some of the benefits you have been seeing with improved profitability in Bunge is coming from the work that has been going on over the last couple of years. And I do expect that that work will continue as we go forward.

With regard to the rating agencies, we have a very active dialog with the rating agencies. We are talking with them on a regular basis. Yes, they do give us feedback about things that they would like us to do in order to both maintain and improve our rating. And we certainly take that under advisement when we are planning what we are going to do regarding our capital structure.

Thank you. Should we assume that the master trust structure stays in place permanently, or is that something you want to have permanently, or go away at some point in time as you simplify further?

Our master trust structure, for those who may not be familiar with it, is our central treasury structure. That's what we use for raising funds centrally, for funding our global operations. It has worked tremendously well for us over the last few years, through some difficult market conditions. We think it provides a lot of transparency for investors. They know exactly how funds are being raised and where they're going within our operation. And is one I think the rating agencies like, they like the transparency that it provides as well, and the control that it provides within the company. It's served us well, and at this point, I don't see any need to change it.

Thank you.

And we'll go back to John McMillin, Prudential Equity Group.

Just a follow on to David's question that you didn't really want to answer. So I don't know if this will help. At the same way that the crop came in a little shorter in South America, that obviously enhances the fertilizer profit stream as you look out the next year or two, the fact that prices are up, farmers are doing well, planting might be higher. Am I thinking correctly?

Yes.

High prices are good for farmers. Well-capitalized farmers buy more fertilizer.

I mean, there are a lot of things in the middle, the U.S. crop, but okay, thanks a lot.

And we'll go next to Brad [Frepeck] [ph], Sigma.

Hi guys.

Hi.

Hi.

Good morning. I was hoping if you could break out what the effect of foreign currency was for the quarter. And then I have a few more pretty basic questions.

Yeah, the foreign currency is disclosed in the press release. I believe that we had -- one second, we're just pulling up the schedules here.

And if you could just break out what the components were.

Okay.

Because obviously, you're lapping (ph) now the acquisition of Cereol, and so the Euros are helping but the Real is hurting. Am I thinking of it wrong?

Well, we had that foreign currency loss of $16m. Much of that loss was associated with hedging costs on our receivables portfolio in the fertilizer business in Brazil. We did not really have that much of a foreign currency variation that was showing up in the foreign currency line because we did not have major foreign currency movements within the quarter that affected that particular line.

We do see some effects, particularly in SG&A of the stronger Real, and the stronger Argentine peso. That means that our dollar SG&A is higher, even although the SG&A in local currency may not have increased because of the stronger local exchange rate.

In terms of the Euro, a higher Euro also has a similar effect on some of our industrial costs and our SG&A in Europe. Other than that, we don't have major currency effects in this quarter.

Okay. Then I'd like you to sort of help me conceptually with the way to look at inventory since the [inaudible] once again in dollar amounts this quarter. If I look at your inventory as $4b, and I say, okay $10 a bushel that's something around the terms of 400m bushels. And just in very raw terms, I went back and looked at when you guys became public, and you sort of broke out what you guys were naked long, and you said you were long about 25m bushels on an average year. Since then, you've kind of done a big acquisition. Of the 400m bushels, or the inventory that you're long right now, what percentage of that is naked long?

Actually, I don't recall on the IPO ever breaking out and saying we were naked long on anything.

You gave average, actually you're probably right. You gave average exposure, and I put it into bushels. So it ended up being 25m bushels was what it was.

Okay, we had average exposure in the IPO, and we've been reporting that in our 20F's each year. So we also have the same average exposure numbers in the 20F of this year, if you want to go back and take a look at it.

But that, in general when we purchase inventories, we immediately hedge it. And so, I'm not, I don't think we have naked longs of any significant amount in our inventories.

Okay, well when I hedge something I'd buy, I if I were to hedge soybeans, I'd buy a bushel and I'd sell something. And when I sold something, I'd take cash in, and so my cash flow would be zero, right? And so why is your cash flow negative $720m?

Well, when we buy soybeans, we immediately hedge it on the Chicago Board of Trade. And if you had bought the soybeans, you would hedge it by selling the soybeans on the Chicago Board of Trade in order to fix that price.

If I do that, I collect cash.

No, we sell a future, and the future is only settled at some point in the future. So until we sell the inventory and liquidate the future, or deliver the inventory against the future, we don't have a cash effect.

However, when prices rise, that short hedge in Chicago has a margin call associated with it. And so, in effect what it means is that as prices rise, your inventory is being marked-to-market on a cash basis each day.

Okay. And then, the way that the rating agencies look at it, I follow some other commodity companies, and the copper companies don't sort of give me readily marketable inventories. This has been the first time I've seen this, and granted I've not looked at many soybean companies. But why are soybeans different than copper and any of the other sort of commodities out there as far as the way the rating agencies look at it?

Well, this is actually a methodology that S&P pioneered a few years ago. And we have the write-up, if you're interested in it, we can certainly get it to you. But the basic concept is that there are large and liquid markets for these commodities so that you can sell the commodities into those markets, and realize cash rapidly. And so, I don't know anything about the copper market, but perhaps the copper market is not as liquid as the market for grains.

Okay, all right, thank you. Actually, I have one last follow up.

Cash flow was, again, negative this quarter, and when I modeled it, I was expecting positive because the rate of rise in soybeans didn't accelerate. And you turn inventories about eight times a year, so I sort of expected that negative 620 in Q4 to be, you know, collect that 620. And then I would have expected a negative 720 for this quarter, or something in the same amount which would basically have put you at zero. Why was cash flow a little bit less than I expected?

Well, remember my comment about the inventories effectively being marked-to-market on a cash basis each day, as you see the prices change on the Chicago Board of Trade.

But the amount you turn your inventories, eight times a year, that should right itself pretty quickly.

It will right itself as those inventories are being sold, yes. But we have a large amount of inventories on our balance sheet, and we were in the middle of the U.S. harvest in the fourth quarter. And so we're carrying a large amount of inventories in the fourth quarter and into the first quarter, which are then being - have hedges associated with them that have a cash effect as prices rise. And we saw a 60% price rise since September of last year. So that's the major effect.

And now (ph), we are starting to have the South American harvest coming in.

And so let's say that soybeans stay at $10. Conceptually, what should I expect cash flow to be, positive or negative for this quarter that we're in today?

If they stay at $10, we would expect positive cash flow for the quarter because we would not see price variation going forward, other than any effects of increasing inventories in South America.

I guess if I can still take the horn, Cap-ex came in a little lower than I expected, at about $50m. You guided to 350 to 400 for the year. What do you expect in the next quarter?

I can't give you a quarterly number. We do expect the year to come in at 350 to 400. There are some variations quarter-to-quarter on the Cap-ex spending, depending on how projects advance, etc. Typically, our Cap-ex spending is more heavily weighted towards the third and the fourth quarters.

All right, thanks.

You're welcome.

And Ms. Ter-Jung, we have no other questions from anybody at this time. I would like to turn the conference back over to you for any additional or closing remarks.

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

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.