Bunge Global SA (BG) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the Bunge Ltd. third quarter conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Suzy Teryung.

Thank you, Steve, and thank you everyone for joining us this morning. Welcome to Bunge Ltd. 2004 earnings conference call. With me on today's call to discuss our results are Alberto Weisser, Bunge's Chairman and CEO, and Bill Wells, Bunge's Chief Financial Officer. For today's call, we are providing a realtime transcript to subscribers of CCBN street events. To assess the service please go to myccbn.com and select the street events tab after logging in and selecting our ticker symbol BG.

Reconciliation of non-GAAP measures discussed orally on this conference to the most directly comparable GAAP financial measure are posted on our web site, www.bunge.com in the investor information section of the site.

Before I turn the call over to Alberto, I would like to read the safe harbor statement. This call may contain forward-looking statements within the meaning of the safe harbor provisions of the private securities litigation reform act of 1995, including statements about future financial and operating results.

These statements are based on management's current expectations and beliefs, and are subject to a number of risks, uncertainties an 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. Now let me turn the call over to Alberto.

Good morning, everyone. Thank you for joining us. Bunge has an excellent third quarter. All of our divisions did well and generated solid bottom line results. We are extremely pleased with our performance. We recently transitioned from a period of relatively scarce soybean supply and high prices, to one of plentiful supply and prices at lower historical levels.

We consider the current environment a return to more normal market conditions, one in which I am confident Bunge can do very well. Let me provide a brief overview of current industry conditions and offer some insights into why we are confident.

First, supply is plentiful and should remain so. This year's soybean crop is a record, over 3 billion bushels, around 85 million tons. This is a 27% increase over last year's short crop of 67 million tons. The South American soy crops should be big as well. USDA estimates call for a 12 million ton increase in Brazil and a 5million ton increase in Argentina. According to the Brazilian Ministry Offing Agriculture, planted acreage in Brazil should expand by 3-5%. All fertilizer sales support this forecast.

Second, the demand picture is compelling. Soybean prices have returned to normal historical levels. These prices should stimulate increased purchases of meal and oil around the world. USDA estimates for the coming year show a 6% increase in global soybean meal demand, and a 5% increase in oil demand.

Margins in the meat business are solid. Livestock numbers are expanding and we are seeing a shift back towards soy meal and feed formulations. Soybean meal has the amino acid profile that best matches nutritional requirements of hogs and chickens, and therefore, at normalized prices, it is the preferred protein ingredient for their feed.

In China, trade issues have complicated business, but underlying demand remains solid. GDP growth looks to stay strong and USDA is forecasting a 9% increase in soybean meal consumption next year.

Third, strong, consistent growth in demand requires increases in crushing capacity. In effect, the industry needs about 7 million tons of new capacity each year to keep up with growth and global demand for soybean meal. When you consider that Argentina is the low-cost producer and cross off soybeans and benefits from excellent logistics, it makes sense that capacity increases should occur there.

We expect capacity there to increase in the next 12 months, but not all of the announced plans will be on line in time for the coming crop. Now, a few words about Brazil. For Brazilian growers, this year will prove harder than previous ones. Lower prices, higher input costs, and the strengthening of the oil will reduce farm profitability from extraordinary levels experienced in recent years.

Nevertheless, global demand for soy bean meal and oil is growing and Brazil with abundant arable land, water and sunshine will be the primary source of future supply. U.S. and European Union cannot expand acreage and China's farmland is contracting due to organization and shortages of water. Over time, we should continue to see robust production growth in Brazil.

Brazilian soil is inherently deficient of nutrients, so farmers will always need fertilizers. This is a basic fact that will continue to drive growth. Brazilian agriculture production has grown strongly through hyperinflation, debt default, maxi evaluation and low prices in the past. There will be short-term situations, but the fundamentals will stay the same. The growth is going to be more and Brazil is going to feed it. So what is the significance of all this to Bunge?

First, big crops are good. In fact, we prefer them. Plentiful supply and strong demand enable Bunge to do what it does best, handle large volume efficiently and profitably. Large crops and healthy demand facilitate better returns on our storage and logistics assets. The combination ensures better capacity utilization in our crushing and refining facilities and enables us to reap larger incremental benefits, form strategic investments, especially in logistics.

Volume puts pressure on transport networks. Our investments and dedicated port facilities and the efficient management of our global transfer station system help us move products at lower cost.

Second, Bunge's business model is designed to prosper in a variety of conditions. All balance across business, product and geography, and our involvement along the entire food change enable us to capture value. Our results demonstrate this. Our activities in Europe and our alliance with Bunge are an important examples of how we are enhancing the balance of our business model. The position and successful integration of steady oil established Bunge as a market leader in Europe. Since then, we have moved aggressively to build on this position.

Eastern Europe is an area of particular focus. It enjoys growing consumer markets and expanding meat production. Importantly, it also has the potential, like Brazil, to be a low-cost producer and significant exporter of grain. Hopefully, you saw this morning's announcement of our agreement to purchase a grain terminal in the port of Wastof in Russia. Bunge is the first international company to own a dedicated export terminal in Wastof, which is a major export outlet for grains grown in southern Russia.

We are also putting the finishing touches on a new grain terminal in Port of Liepaja in Latvia. The facility, which should be completed soon, will serve domestic meat producers in the Baltic states and Russia with meal imports while exporting locally-produced grains. At the same time, we are enhancing our origination and crushing capabilities. We have begun construction on a new joint venture crushing plant in the port of Ileches in Ukraine. The plant will be the only one in eastern Europe capable of crushing both Ukrainian sunflower and imported soy.

In the food product sector, we introduced in partnership with DuPont, a low lin soybean oil that will serve the market for reduced and trans fat products in the U.S. The oil Nutrium Low Lin, has passed extensive customer taste and functionality testing. Bunge expects to produce roughly 20 million pounds of Nutrium from the 2005 crop and have full-scale commercial availability, nearly 1 billion pounds by 2009.

To put this in perspective, in 2004, Bunge will sell 6 billion pounds of soybean oil in the United States, or almost one-third of the total U.S. market of 18 billion pounds. Nutrium Low Lin is the first product from our strategic alliance with DuPont. The linkage of DuPont's science and Bunge's logistics processing and customer relationships is truly powerful.

Overall, we have reasons to be optimistic. The fundamentals of our industry are sound and Bunge's business model continues to prove its effectiveness in resilience. We are increasing both our earnings guide for 2004 and the base for calculation of our long-term earnings per share target. Much of my optimism rests on my belief in the team we have at Bunge.

All of the progress we have made, and all of the developments that I have shared today are the products of a strong deeply-talented group. As we continue to grow, we are committed to building our team and staying true to the unique way we work together. I will now turn the call over to Bill, who will discuss our financial performance and our outlook for the coming months.

Good morning. First let me give you some perspective on the third quarter. The third quarter typically represents the tail end of crushing activity in South America, and the beginning of the harvest in North America. It is also the midpoint for the fertilizer-selling season in South America. As Alberto said, this third quarter also saw the global soy market transition from a period of scarcity to one of abundant supply. As a result, markets were volatile, as soybean prices returned to normal historical levels.

Now let me turn to our results. Bunge's agribusiness segment experienced an exceptional quarter. Results benefited from improvements in operating profit in most business lines and geographies. A large North American soybean harvest allowed us to bring our North American processing capacity back on line with attractive margins. Our Southern U.S. grain origination assets benefited from the early soybean harvest and nearly ideal harvest conditions.

Profitability in European soy processing operations improved, with prospects of a large North American soybean harvest. Effective freight and risk management, strong soft seed profitability and efficiency improvements in logistics also contributed to the results for the quarter. Agribusiness volumes for the quarter were flat versus last year, and down from the prior quarter, as demand was affected by the high soy prices earlier in the year, and a reduction in sales to China. We expect our volumes to benefit in the future from the large U.S. harvest and normal prices.

This quarter's results demonstrated, once again, that our agribusiness profitability is not tied to the level of soybean prices, and that we can make money when prices are high, as they were in the first six months of this year, and when they are at normal levels, as they are now. Turning to Bunge's fertilizer segment, higher average selling prices for fertilizers resulted in improved segment operating profits. International selling prices were imported fertilizers and raw materials were higher than the third quarter of last year.

For example, the price of phosphate in the form of granulated MAP was 22% higher than in the third quarter of 2003. Brazilian fertilizer is priced to import parity. After above trend line volume growth of 19% in 2003, the Brazilian retail fertilizer markets growth leveled off in 2004, and year to date is slightly below 2003. Our year to date retail sales volumes increased from 2003, as we increased market share. In the third quarter of 2004, this increase in retail volumes was more than offset by decreased in sales volumes of low margin fertilizer byproducts such as gypsum.

In Bunge's Edible oil products segment, third quarter 2004 results included a $3 million impairment charge related to improving Bunge's North American asset footprint, and a $2 million bad debt charge. Third quarter 2003 results included a $2 million gain related to the curtailment of certain post retirement benefit plans.

On a comparable basis, excluding the 2004 charges, and the 2003 gain, Bunge's Edible oil operating profits increased due to higher sales volumes and margin expansion in Hungary and Poland, higher raw material prices pressured margins in other regions. In our milling products segment, wheat milling results were affected by lower selling prices in Brazil while U.S. corn milling results were flat. Third quarter 2003 results included a $2 million gain related to the curtailment of certain post retirement benefit plans. Bunge's SGNA increased 29% from the third quarter of 2003, and 20% from the second quarter of 2004.

Due to increased bonus, legal and tax provisions, an $18 million increase in bad debt provisions associated with higher commodity prices, and increased head count in our international marketing business. In addition, third quarter of 2003 SGNA benefited from a $5 million curtailment gain related to certain post retirement benefit plans. Despite higher levels of invested cash from our June 2004 equity offerings, interest income declined primarily due to lower interest rates earned on assets in Brazil. Interest expense on debt financing readily marketable inventories increased due to higher debt levels associated with a higher level of agricultural inventories, purchased at higher commodity prices.

Average readily marketable inventories were $210 million, higher in the third quarter of 2004, compared to the same quarter in 2003. Total interest expense decreased, primarily due to lower interest rates on our outstanding debts and benefits from interest rate hedges, partially offset by an approximate $500 million increase in average borrowings, compared to the same quarter in 2003. We were able to reduce interest rates on our long-term borrowings by replacing higher cost debt assumed in the cereal acquisition, with lower costs, longer-term senior notes.

In the third quarter of 2004, we recorded foreign exchange gains on net U.S. dollar denominated liabilities in Brazil. As a result of the 9% appreciation of the real, compared to foreign exchange losses on those net liabilities as a result of the 2% evaluation of the real in the third quarter 2003. You will recall that's these effects are substantially compensated by inventory market-to-market included in segment operating profits.

In the third quarter of 2003, we recorded a gain on a net U.S. dollar denominated monetary asset position in Argentina. Other income expense net increased primarily due to an increase in earnings by Cereol, our joint venture in France, and gains on interest rate hedges. Our quarterly effective tax rates increased to 30% from 28% in the third quarter of last year, primarily due to a shift in income to higher tax jurisdictions.

Despite an appreciation on the Brazilian real, our quarterly effective tax rate was lower than expected due to tax-deductible payments as part of the purchase price for the Bunge Brazil minorities. This reduced our 2004 year-to-date income tax expense. Our year-to-date 2004 effective tax rate of 32% is lower than our previous tax rate guidance, primarily as a result of these payments.

Consequently, we are lowering our 2004 tax guidance to a range of 30-35%. On October 22, new legislation was enacted in the U.S. that phases out the extra territorial income act tax legislation. Essentially the new law spreads benefits previously provided to exporters across all manufacturers. Although most of our U.S. activities qualify as manufacturing, we believe this new law will be less beneficial to us than the prior tax legislation.

Applying the new tax law to our 2003 earnings, our effective tax rate would have increased about 3%. However, our business outside of the United States is growing faster than our U.S. business, and much of that growth is coming in jurisdictions with statutory tax rates below U.S. rates. As such, we don't see a significant longer-term impact of the new legislation on our overall effective tax rate.

Minority interest increased significantly from both the third quarter of 2003 and the second quarter of 2004 as a result of increased profitability at Bunge's Brazilian subsidiaries. On September 27, 2004, Bunge acquired an additional 15% interest in the outstanding shares of Bunge Brazil and delisted the company from Sao Paulo stock exchange. The purchase price for the shares was $282 million, financed by the net proceeds from our June 2004 equity offering.

Bunge now owns approximately 98% of Bunge Brazil, and in the fourth quarter intends to acquire the remaining shares at an estimated cost of $30 million. Net financial debt decreased by $607 million from December 31, 2003, primarily due to lower commodity prices, seasonally lower levels of working capital and robust cash flows from operations.

Cash flow from operations in the third quarter of 2004 was over 1.2 billion, and $838 million increase from the third quarter of 2003. This reflected strong operating results and declining agricultural commodity prices, which reduced required operating working capital. Free cash flow year-to-date after CapEx and dividends was $660 million, which was used to reduce outstanding debt.

Now let me say a few words about the outlook for our business. 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. We expect a normal fourth quarter in 2004. Let me remind you that the fourth quarter of 2003 was anything but typical, producing exceptionally good results.

Due to our continued positive outlook, and assuming stable currencies in South America, we are raising our 2004 net income guidance by $85 million, to between $440 million to $460 million. This translates to fully diluted earnings per share of $3.85-4.03.This guidance assumes full conversion of our outstanding convertible debts. All of our 2004 EPS numbers are based on an estimated weighted average of 115.5 million shares outstanding. We are also increasing our long-term EPS target by raising the base from which we intend to grow our EPS.

In February 2004, we established a new higher base of $300 to $320 net income or $2.97 to $3.17 per share. Today, we are increasing net base for 2004 by $19 million to between $390 million-410 net income or $3.42-3.59 per share. Our new higher base reflects our recognition of the greater earnings potential created by Bunge's improved global footprint and product balance after the successful integration of cereal.

Nevertheless, this new base is approximately $50 million below our expected 2004 net income, due to several exceptional factors in 2004. Profitability in our retail fertilizer business was helped by the purchase of raw materials early in the year.

Subsequently, international fertilizer prices rose before we sold the end products, positively affecting retail margins. Several financial and tax benefits are also improving 2004 results. Interest rates swaps entered into to more closely align our interest costs with those passed through to customers, and hedges against rising interest rates, increased net income by $11 million during the third quarter of 2004.

We also earned $8 million from a foreign exchange hedging strategy associated with the Bunge Brazil minority buyback in the quarter. Additional payments associated with the minority buyback also benefited our 2004 net income by $10 million by reducing our tax expense. Although our EPS growth rates may vary from year-to-year, the strength of our business model has been repeatedly demonstrated since Bunge became a public company. We believe we can increase EPS 10-12% per year on average from our new base of $3.42 to $3.59 per share over the five-year period beginning in 2004. Now we will be happy to take your questions. Operator.

Thank you.

[OPERATOR INSTRUCTIONS].

We will go first to David Nelson, Credit Suisse First Boston.

Good morning and congratulations

Thank you, David.

Good morning. Just walking back, Bill, to the $50 million that you consider to be non-recurring, $8 million For Ex, $11 million hedging, $10 million, interest on net equity for your Bunge Brazil. That applies $21 million, you're assuming, that's not recurring from fertilizer. Is 21 the right number for fertilizer?

Approximately, David, yes.

OK, as I look back over last year with all the volatility that you referred to, would you consider some of the profits you made in transportation by astute forward hedging on transportation, and maybe normal profits on trading due to the high level of volatility in the market, that might be abnormal, too?

When we look forward into next year, I think we are going to see us make money in a -- let's call it in a different environment. We're going to see much higher volumes, we hope, and also a lot of the efficiencies from the productivity created through that volume moving through that system and through some of our productivity programs coming into place. It will be a different environment next year, but we think that the earnings should be well in line with what we have communicated today.

So you just make it in a different way because of the logistical system?

Exactly.

OK, $18 million in bad debt expense. Is that China?

No, it's not. It's simply related to the fact that with the increase in prices, the absolute amount of our receivables balance increased as well, and so when you have -- let's say we have a normal percentage of bad debt against that receivables balance, we experienced exactly the same percentage, but because the receivables balance is higher in nominal dollars you end up with a higher charge.

Great. You went through a lot of things. If I could ask one last thing, please. On currency, you mentioned Argentine there I couldn't write it down fast enough. Was there a net currency gain or loss in the quarter?

Related to Argentina, no. Last year, we did have a net currency gain related to Argentina in last year's quarter.

What about overall for the corporation including the Brazilian real?

The Brazilian real has not moved that significantly when you look at the whole year. We have gotten some benefited related to hedging the amounts of money we've put in for the buyout of the minorities in Brazil. We went -- entered the hedging strategy in early July related to that once we were sure that the transaction was going to occur and on terms that had been finely defined with the minorities, and that hedging strategy did produce some gains for us.

Right. Just to stay on currency, with all your exposure in Europe now, should we be concerned about the dollar weakening against the euro?

In general, our business is dollar denominated in Europe, so we're not that exposed to movements of the euro. The one area we are exposed would be our fixed costs in Europe, which are euro denominated. We pay close attention to that, and we do hedge that based on what we think the outlook will be for dollar/euro.

And all of eastern Europe business, this is much more local business, so that should not be affected.

Was Cargill's recent acquisition of the bottled oil business in India, how does that business compare to yours?

I don't know the details about the acquisition, so I'm sorry for that, Dave.

OK,. I'll follow up later. Thank you very much.

Thank you.

We will go next to Christine McCracken, FTN Midwest Research.

Good morning.

Good morning, Christine.

I was just wondering if you could comment on the fertilizer outlook. You're kind of looking at, it seems like, slightly lower volumes despite what we have heard as continued expansion or -- continued expansion or growth in planted acreage in south America. Could you try to, I guess, try to break those two numbers together for me?

Yes. What we have to realize that the environment we are getting in now, where we are in now is a normal environment. When you look at the last two years, it was exceptionally. Some farmers were having returns on investment of 100%, so the soybeans, the corn, the -- some of the fertilizer and the crop chemicals, the equipments, so this is a much more normal environment, and we have seen that South America, Argentina, Brazil, they have, over the last 10 years, more than tripled the size of the expansion, and this was all driven by demand, because the demand continues expanding.

So what we expect is, that we will see much more normal trend from now on in terms of growth in acreage and expansion of the agricultural land, and in terms of fertilizer, the fact is that the soil in Brazil is not very rich. It's full of nutrients, so if you need the yield, and that's what the farmer's need, and so they have to use fertilizer, so we expect, when you look at our -- when you look at our indications looking forward in terms of volume growth targets for fertilizer, we indicate growth rates of 5-7% in terms of volume. We think this will be the case over the next five years, including next year.

Right. So is there -- but you haven't seen a move away from input use given the decline in soybean costs. Is that fair to say, or is that part of the reason that maybe you're seeing lighter fertilizer volume?

You're right that this year the volume is kind of flat in the whole industry, although Bunge's volume is up, so we gained market share, and this is a little bit related, also, that last year the growth was 19%, so there is a little bit of a pipeline effect, and so when you look at the last 13, 15 years, the growth has been around 9% and this is also the growth of the soybean in South America. They also have been growing at 9% in terms of the supply side, so they're pretty much in line, so this year has been flat, high prices, but also because of the dramatic growth last year.

As I recall, there was some timing issues last year relative to the planting season. You haven't seen that this year, is that right?

You know, we just finished September, and so we are in the middle of it. We don't expect any timing issue, but we will only know by the end of the year.

Got you. Just secondly, on the recent approval of GMO's in South America, how is that going to affect your supply change? You are going to have to adapt your system to segregate those beans to meet your customer's needs, or how do you have to as that for that?

You know, we have in place already clearly identity preserved system or we certify our customers. We have a tractability system, so some customers ask exactly, they want to know where the products are coming from, so we have also dedicated plans for different products, so we are ready for it, so there is really no change for us.

Does that change the cost of production for farmers, and might that change maybe accelerate even the growth in soybean acreage?

For farmers, the GMO's are -- it's of less last cost. For the logistics systems that we have to set up for, there is an additional cost and we have to charge for that additional cost, so we charge a premium.

But farmers could expand GMO acreage of soy bean -- or even expand their soybean acreage as this lower cost production system gives them a cost advantage, is that right?

I would say the expansion of the acreage is more related to demand. The GMO's will give them a cost advantage, so they will be able to produce at a higher return.

Great. I'll follow up later. Thanks.

Thank you.

We will go to Christina Malone, Deutsche Bank.

Thank you. Congratulations.

Thank you, Christine.

Thank you.

Alberto, I noticed in your comments that you said that lower prices should stimulate demand. I'm wondering if you have seen any indication of that yet, and if not, when do you think the pickup will start?

Yes, we have started to see some pickup of the demand. We mentioned that the USDA is estimating an increase in meal demand next year of around 6%. What most people don't realize is that we went through a real dramatic situation over the last 12 months. Oil and meal have nearly doubled in prices.

When you think of it, that the oil demand continues growing, so meal probably was flat, perhaps down, probably a little bit down, but we don't know how much of that was pipeline effect that really shows how little the real demand cyclicality we see on the demand side of meal and oil, but to your point, we are starting to see a pickup on demand.

And has Asia been affected at all by the new Asian influenza outbreak?

During this year, yes, it was affected. Higher prices even influenza but you have to remember, that if Thailand reduced its production, this was picked up by other countries like U.S. and South America, so we sold much more meal, especially in South America to domestic livestock producers, so probably overall, the general production of meat perhaps states in line.

OK, and when turning to fertilizer again. Did I hear you correctly? Did you say fertilizer volumes are expected to grow 5-7% next year?

That is our target for the next five years. What we are saying is that we believe that our growth will be 5-7%, although we have seen in the past that the agricultural -- for the last 13 years, fertilizer expansion has been at 9% per annum, so in the 13 years, that is why we are a little bit more cautious saying that we expect it to grow at 5 to 7%.

But that's the average number, so it could be -- it could vary from that range next year, but we would expect to pick that up in the average, over the five years.

OK and with pricing coming down -- I mean, should we be looking at an operating profit decline fertilizer for next year?

I don't think so. When we're looking at the overall market, though we might see some price decreases, depending on what happens with supply in the international market, but we also have, I think, significant opportunities to improve our productivity within our fertilizer business, as with our other businesses. Remember that we did eight acquisitions over a period of six or seven years to build the fertilizer business, and so we are still rationalizing all of that production and finding opportunities to improve productivity.

There's another element, which is an important element overtime that we're going to be investing to increase our local production in Brazil. We're going to be spending $400 million to double our capacity over the next five years. Every ton of local production that we produce and substitute an import a ton, there is a big pickup in margin so that's helpful on the margin side as well.

OK, I guess my last question, you highlighted that the profitability looks to improve there and I remember before you had said that some of your facilities there were a little outdated and that you needed to upgrade them and implement some cost reduction efforts. Where are we in terms of those efforts?

I understood you are talking about Europe?. In term of the synergies, we indicated to the public in general we were able to reach all the synergies. In fact, we were able to exceed them slightly in Europe, so this part is going quite well. Now, the upgrades of the footprint and the plants, this obviously takes years, and we have been working already on it for the last two years, but we expect this only to finish latest in three years from now by that time, we will have the final configuration of the footprints and see all the benefits by that time.

But we will steadily start seeing some of the benefits coming in over the next couple of years.

OK, thank you.

We'll take our next question, Leonard Titlebalm (ph), Merril Lynch.

Good morning, simply outstanding. I would like to ask a couple of questions. Is it possible, or maybe this is not the right way to look at it, if I take a look at the agribusiness section, is there a way to break that down between how much money was garnered from logistics year over year, versus how much from crush?

The way we look at it is really in the three operating pieces of that segment, which is the origination, the oil seed processing and international marketing and roughly all of our improvements and profitability there break out about one-third, one-third, one-third in each of those areas.

David, to Christine's point earlier, you said you had expected fertilizer would be up next year. Would that be without -- after excising the$20 million of unusual or including that? In other words, is it 161 or 141 that we look at to be the increase?

Well, actually, I'm not sure that I expected it to be up, just that I did not expect it to decline, and that's not really looking at what's unusual in that business, just looking forward at what we think some of the productivity improvements can be, we think there will be some volume growth next year. We believe that we can certainly maintain profitability in that business.

But your point is right. We do see that this year we had some exceptional profitability because of these higher pricing, so we do not expect that to repeat.

OK. The second thing, I've got to guess, you're going to be printing up substantial amounts of working capital as inventory carrying values come down, if for nothing else. Are you expecting to see an increase in free cash, and I'm looking now from an implications of both interest rates as well as perhaps any acquisitions that they might do?

These we've already seen a significant increase in free cash, as you can see in the third quarter results.

Right.

Our first priority is to pay down our debt to make sure that our balance sheet is in solid shape, and then it's to fund growth of the business. We do, however, have a very disciplined approach to our CapEx (ph). I think we are going to continue that disciplined approach. We will be looking at acquisitions in the future. That is part of our stated strategy, but we also have a disciplined approach to the acquisitions and as you know, those come along from time to time. You can't really plan them, so to the extent that there is incremental cash flow beyond the needs for investment of the business, I think we will be paying down debt with it.

Just two more questions on the international side. Some of your colleagues in this industry are also looking at Eastern Europe as the place to expand. Are you starting to see competition for acquisitions over there, or is there still such more of an embryonic stage from that standpoint that you're not having to pay up for assets because of, let's say, competing bidders?

It's a very, very large area, Eastern Europe, so some areas are more consolidated. Others are not, so I think -

But Romania, Hungary, that area?

Yes. Hungary is completely consolidated. We have a very high market share there but in Romania, we have a 40% market share in bottle oil, and we have a 30% market share in Bulgaria, 50% in Ukraine, but in terms of the bottle oil, I think it is there still a little bit to be done but not much. Now in terms of grain origination, it's a very fragmented industry, so the field is open, but many European, very often we don't move, if it does not pay, we will not move. So it has to be reasonable. We have to have the right returns. I think -- so far, nobody has overpaid.

OK. Last question concerning China. It's my understanding some kind of tariff has been now imposed by China on imported meal and oil, I guess as a way to keep some of the domestic crushing industry, you know, viable over there. If that's indeed the case, and first I'd like confirmation that it is, but and if it is the case some of the expansion of crushing capacity in South America it seems to me, to put the owners of that crush capacity in a position to export meal and oil, not just to be used internally, and if that's destined for China, can you reconcile how that would work if, again, tariffs or taxes are placed on -- by China on imports versus the cost of doing business by exporting from South America?

Yes. China really basically only imports beans. It has an independent industry. Now, it does have to import from time to time oil. Now, it's correct that there are a lot of - there are some trade issues going on with China, and different group of industry associations in the U.S, in Brazil and Argentina. We are working together very closely with the local governments, and also with China to eliminate this, because I think it is in the interest of everyone that we have a free trade flow to China, because China will always have to import corn. It will always have to import beans and oils, so I think we are working very hard to get this done.

Now, in terms of the South American exports, you have to remember that meal goes -- a lot of the meal goes into Europe, and the oil is exported into the Middle East into India, so the exports of South America are to southeast Asia into Europe and to the Middle East, so these are different markets, and also some are in to Japan, so these are different markets.

Very good. Thank you very much. Congratulations, again. Thank you.

We'll take our next question, Ken Stkzalow (ph), Harris Nesbitt.

Good morning, guys.

Good morning Ken.

Can you discuss the progress you guys have made with getting South American farmers to release soybeans?

You have to remember, they are our partners so we work with them, and this is the time of the year where there is always these issues about are they selling or not, because the farmers want to be sure how northern hemisphere crop is evolving, so if there is a problem with a crop, and the prices go up, they want to be well positioned, so the crop is basically done and the harvest is basically done in North America, so they are starting to sell again, and we anticipate this, so that's why we prepare for that, and we have a lot of storage, so we will continue crushing through this time, and we are starting to see again that the selling is going on. There is a lot of soybeans out there, and thy are selling again.

To follow on to that. How should you see your south American crush margin evolve, assuming it is not so robust right now, but if you are saying they are releasing, should we see significant expansion over the next 12 months in South American soy crush?

The crush margins normally tend to get weaker now, because this is the time when the North American crushing activity really occurs, and in terms of - so this is a very normal process, although they are doing fine in Argentina, they are a little bit weaker than in Brazil. Now, in terms of the crush capacity, I think that is going up pretty much in line with the way that the demand goes. You know, we have some capacity going up in Argentina. At the same time, we took down capacity or the industry took down capacity in other parts. I think this the whole process of the crush margins capacity and demand, I think it is pretty decent in South America.

Did you find that you are able to get access to soybeans in South America, a little better than your competitors because of your fertilizer business? Can you comment on that?

I don't know if we are having a better access or not, but I suspect it's probably the same. Perhaps we have a little bit better, but some of our competitors are also in fertilizer, so I think it is pretty the same for everyone, so for the larger players, for the smaller players, they obviously have more trouble with working capital, financing and logistics issues and so on. We might have a little bit of an advantage because we are selling now the crop chemicals with due one, so our partnership with the farmers is becoming quite powerful.

And just flipping to North America, to what extent are you seeing soybean meal pricing were develop in the west just from the two co-ops?

I don't think we've really seen any impact.

No impact at all in terms of the pricing for soybean in the U.S?

Not a noticeable one.

OK. And the last question I have is: Did you give an actual number of your synergies for cereal in 2004?

We did give our targets. Our target was over a three-year period to have synergies come in at 40 to 45 million annualized in the year '03, and we are slightly ahead of that target.

What about specifically for '04, just give I am just looking at 2003, I think you incurred about $25 million in integration costs, and if you say, 2004, says was 10 to $12 million or something like that, $40 or $7 million swing in 2004? Is that the way to think about it?

I think the -- that the right way to look at it is just to think about the$40 to $45 million coming in fairly evenly over that three-year period

OK

On an annualized basis and then you have to make some assumptions about on how much it cost us to get that, but by the end of the third year, there's no implemented cost to getting that synergy, it should just be a continuing contribution as it goes forward.

But '04 was a significant switch from a cost in '03 to say, one-third of the$45 million. Is that fair?

Yes, there was far or less cost in '04 to obtain those synergies than there was in '03. In '03, we had quite significant costs.

Great, thank you very much.

Thank you Ken.

We will take our next question, David Driscoll Smith Barney Citigroup.

Good morning, guys.

Good morning, David

When you guys beat estimates, you really beat estimates. We love it. I would just come back to you guys with an observation here, that a lot of clients have talked to us about volatility within the numbers, and I think, you know, Bill, Alberto, we've talked about the difficulty of guidance. You have changed the format of how you give your report guidance, no more quarterlies, just only annuals. I wanted to just hear your thought on when people use the word volatility, they look at numbers and they say, OK, there was substantial upsides to what management was previously guiding.

But the question will, I think, beyond everyone's mind, is there a downside of a similar magnitude to your guidance, you know, in future periods. Now, I hope that was clear, if not, I'll try to clear it up, but if so, Bill, Alberto, could you give us just a little bit of your thoughts as to, you know, these deviations that we've seen from guidance, and then what that means in terms of, you know, any possible downside? What kind of risk do investors really have?

Let me start with that, Dave. When you look at the way we operate, we move future amounts of volumes. We have the origination, logistics, processing, again, logistics distribution around the world. Now, they are price movements of all these different commodities we work with, including, also, energy and freight and so on, so we have a very active risk management to protect ourselves, and our basic rule is we want to protect the downside but leave the upside up, so I know this is never perfect, but this is exactly what we work all the time with. Let's protect our downside. Let's protect our downside, so I would suspect that when you look at now, also, we are public own only three years but when we look back at Bunge's history, that's exactly the way it works, so we -- there is significantly less volatility on the downside.

Let me give my perspective. All industries have clear volatility. You look at the package food companies right now. They are being affected by higher input costs, etc. One of the differences in our industry is that we have a lot more tools to work with in order to reduce that volatility than many other companies and other industries do. Certainly over the last 12 months, I think you've seen just about the most extreme situation anyone in this industry can could have imagined in terms of a scenario that developed, and overall the industry, I think the industry handled it pretty well.

We Bunge, are proud of the way we dealt with it at, but I have to say that the rest of the industry did a pretty good job, too, and that shows that these tools do in fact work in extreme -- in periods of extreme volatility. The other thing that gives me a lot of confidence is the balance within the business. You hear us talking about balance a lot, about the integrated business model, about the balanced global footprint in terms of both geographies and product, and the reason we talk about it a lot is because it is incredibly important.

This is what really fundamentally protects us is that every time you see a deterioration in one part of a business, inevitably, another part of the business improves, and we have offsets, and we have seen that time, after time, after time in our business, and so we actually focus on that trying to build up the overall balance in terms of geography on the product as one of our primary risk met again

If I move over to cash flows, I've got a lot of questions, last concern on the cash of the company for the last couple of years. You know this quarter we saw just an incredible performance here. We saw $940 million from cash from operations versus negative 316 through the first six months of this year. If we're in a stabling agriculture price environment, and that seems to be may be completely unreasonable, but if we are in a stable price environment, Bill, what kind of cash flow from operation performance would you be looking for, and may be if I were to refine that, really it's going to come down to working capitol, how much working capital do you really see being plowed into the business in the coming years?

Well, what we say is that our targets for free cash flow is $1. $1 of positive free cash flow, and what we're trying to say by that is that we're going to be reinvesting all of the cash, which is being generated by the business back into the business, because we have a lot of high return opportunities around the world. Now, if we look at our CapEx guidance, we're saying we are going to invest $350 to $400 million in CapEx, and then you add on to that dividends, which are about $100 million for Bunge share holders and dividends to minorities.

So we need to be generating a cash flow which is sufficient to cover that $500 million requirement of CapEx, and dividends, and when we look at our overall results, if you assume that, you know, given the basis that we just established, the mid point of that basis, around $400 million in net income, if you add to that about 200 million in depreciation, you're now at $600 million. Add to that, let's say another $100 million of minorities and the scenario is about $700 million. So $700 million, less the $500 million of CapEx and dividends, you have $200 million left over for investment and in working capital expansion, which we think is about right for growing the business.

Good answer. Can you give me a little detail on how South America performed? In your press release, and I'm just talking specifically the crushing operations. In the press release, we talked a lot about North America. Just, if I missed this, I apologize.

Argentina did a little bit worse than last year, and Brazil did better. In fact, we increased our market share in Brazil. You have to remember, we took on three more plans. One is the one we build and we took on, we leased three plants that's an option to buy them, one we are not operating because the equation means that is better to one of the margin pictures is better by not operating it than operating it and so our market share went up, so overall, the total South American picture is OK.

The press release really cited the fact that the North American harvest occurred early and this drove, I think, a substantial portion of agribusiness operations in the third quarter. Am I reading this correctly? Because I normally think that the third quarter is still driven by South America, so this would be a typical quarter, given how I kind of normally think of the seasonality. Do I have this correct?

I would say that perhaps -- I think it was a normal -- in fact, it was a normal harvest, vis-a-vis the less three were not normal, and they start in the south, and because we have much of our assets in the south, we started picking up a part of the business early, so I think it is more of a question of this year's normal. In past, it was not normal, so I think your assessment is correct that the third quarter, especially strong, in South America, it is also fertilizer, but we start to see some of the business coming in from North America. That's one of the reasons we always see the third quarter as one of our strongest quarters.

And I wanted to just follow up on a question that I think Lenny who asked, he was asking about China and he mentioned something about new tariffs on meal and oil. If there's a new tariff on meal, that's completely irrelevant, right, because there are no imports of meal, China does not import any meal? I believe that's right.

First of all, I'm not aware of new tariffs. I think the tariff structure has been in place for some time now to incentivize processing beans in China as opposed in importing meal and oil. There are some new regulations with new sanitary and trade regulations, which are causing a little bit of disruption. That may have been what you are referring to on the oil side.

OK, because the oil really is my concern. I believe they import about 2.4 million metric tons of oil each year, which would represent, I think about a quarter of all global imports of oil, so then if there is a disruption in that market, it would seem meaningful.

Dave, this regulation came in to place on October 1st, but the flow of oil I is normal at the moment.

The other thing, I think it would be interesting for you to perhaps take a look at David, is the impact of bio diesel as we go forward. There has been a spate of construction of new bio diesel capacity in Europe and it appears we are starting to get something similar here in the U.S., so new legislation has come in the U.S. that's given a incentive to by diesel production. The European directive some buying diesel will expand by diesel capacity there from around 1.5 million tons up to about 5 million tons. When you're looking at world vegetable oil demand, this is quite significant.

Super. I appreciate all the answers in the time. Thanks a lot, everyone.

Thanks .

You are welcome.

[Operator Instructions] We go toed to Tai Dubek (ph), Bank of America Securities.

Hello good morning.

Good morning.

A question for you on the free cash flow. As I understand it the rating agencies, one of the things they're looking at is some free cash flow generation as one of the obstacles in terms of ratings upgrade, and it looks like that you're definitely going to be generating positive free cash flow this year, and I'm sure you're keeping in touch with the rating agency. I wonder if you could tell us what kind of guidance you have got from the rating agencies in terms of some obstacles in terms of ratings upgrades.

Well, free cash flow is certainly one of those that they focused on in the past. Obviously, we will be discussing with them our free cash flow picture as we go forward, so I think it's probably a more positive outlook than it was in the past, but as you know, the rating agencies make up their own minds about what they're going to do.

OK. Also, Cracken mentioned, as an industry, the trade disruptions with China cost several hundred million dollars, as kind of a ballpark figure, and even though you mentioned the situation in your press release and in some of our prepared comments, it seems like you were either able to manage through that situation or because of your geographic diversity, it really was offset by some positive developments elsewhere in your franchise. Can you speak to that just a bit?

I think you are correct, and we addressed this issue in the second quarter. All our losses we had were accounted for, and obviously we are in the process of dealing with these customers, former customers that created the problem and therefore we don't like to talk about it because we are dealing with them and trying to solve the issue, but it's all accounted for, so we had to. What is also very important that I would like to mention is we had 11 ships that were on a route and we discharged them, so the flow of products to the end consumer was guaranteed so there was no problem on the disruption for the end consumer in China, but we're dealing on a one-by-one case with these customers that created the trouble, but as far as I understand, this is all basically done in the industry now.

But you are correct that because of our global footprint, we were able to manage through it, and offset most of these effects.

OK and one final question you have an outstanding private placement of about $125 million, and will that be paid off by the end of the year?

At this point, we're simply paying our debt as they come due. I don't think we have any plans on prepaying any debt.

OK, very good. Thank you very much.

Thank you.

Having no further questions, I would like to turn the question back over to Suzy Teryung for any additional or closing comments.

Thank you all everyone for joining us this morning and we will talk to you next quarter.