Bunge Global SA (BG) 2005 Q2 法說會逐字稿

Good day, everyone and welcome to Bunge Limited second quarter conference call. Today's call is being recorded.

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

Thank you, Philip (ph) and thank you everyone, for joining us this morning. Welcome to Bunge Limited second quarter 2005 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. Reconciliation of non-GAAP measures disclosed early on this conference call to the most directly comparable GAAP financial measure are posted on our website, www.bunge.com, in the Investor Information section of the site.

Before I turn the call over to Alberto, I would like to read the Safe Harbor statement. This call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about future financial and operating results. These statements are based on management's current expectations and beliefs, and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in the forward-looking statement. The printed risk factors can be found in our SEC filed report. And now, let me turn the call over to Alberto.

Good morning, everyone. Thank you for joining us. I'm pleased with our performance this quarter. We faced some significant challenges and a tough comparison to last year's extraordinary results. Global market conditions remain good, and I am optimistic for the short and long term. Our positive outlook is unchanged. Bill will take you through our second quarter results and 2005 outlook later in the call.

In our business, there are usually challenges somewhere in the world. We work to improve the integration and geographic and product balance of our company so we can better manage through them. Integration improves efficiency and provides opportunities to create value at multiple points on the food production chain.

And balance helps to reduce our exposure to any one market and to natural risks, such as weather. Things will change from quarter-to-quarter. Over the long term, our operating model should help us to capitalize effectively on decades long and continuing growth trends in the food and agribusiness industry. Rising global population and improvement in per capita incomes are driving increases in food consumption.

The USDA estimates that global serving meal demand will rise by over 5% both this year and next year, and that vegetable oil demand will rise by over 4%. Demand for corn is rising at 2% to 3% per year. Global growth fundamentals are solid.

Agriculture production in South America is expanding to meet this new demand. Fertilizer consumption will increase in tandem. Brazil soil is inherently deficient in key nutrients, so farmers need fertilizer to realize profitable yields. We are positioning Bunge to capitalize on these global trends. The past several months we have completed or announced several projects that will increase our volumes, improve our efficiency, and enhance our access to valuable markets. In Argentina, we began loading ships at our new port in Ramallo, north of Buenos Aires.

We constructed this port on budget and in record time. We also commenced crushing at our newly expanded T-6 industrial joint venture near Valerio (ph). With a capacity of 19,000 tons per day, the soybean crushing plant is currently the largest in the world. Argentina is the world's low cost producer and exporter of soybean products, and these facilities are located in the heart of the nation's growing area and export channel.

In early July, we announced the purchase of a majority share in a soybean crushing and refining plant in the port of Rizhao, China. The plant links Bunge's integrated operations directly to end customs in that Shandong Province, a large market for soybean meal and oil. Supplying the facility from our global origination at work will improve supply chain efficiency and reliability. I made another visit to China earlier this month. It is a dynamic market.

Per capita protein and oil consumption is on the rise and the meat production industry is professionalizing. Our investment in Rizhao is small. It is just a start, but it will allow us more insight into an important market. Also this month, we signed a multi-part deal with (inaudible) in Brazil, through which we acquired the soybean crushing and refining plant, established a long-term soybean meal supply contract, and licensed two national packaged oil brands. The transaction continues a trend toward consolidation in the Brazilian crushing industry, strengthens our relationship with a large agribusiness customer, and expands our presence in the domestic packaged oil market.

All of these investments positioned Bunge to benefit from the growth trends that propel our industry. Thing wills change from quarter-to-quarter, and challenges will arise. But over the long term, the fundamentals will remain strong.

As we detailed in this morning's press release, the Brazilian farm sector is currently weathering a difficult scenario. A severe drought in the south and the stronger Brazilian real had resulted in reduced and delayed fertilizer purchases. The Brazilian government recently announced a 3 billion real program to help farmers during the upcoming planting season. However, we could still see lower acreage planted for soy in the next crop.

On a global level, the current supply and demand outlook is stable. In the United States, weather concerns have resulted in volatile soy future prices on the Chicago Board of Trade. The next four weeks will be critical for yield. It is, therefore, too early to speculate on the size of the US soybean crop.

The third and fourth quarters are traditionally the best for Bunge. This year should be no exception. I will now turn the call over to Bill, who will discuss our financial performance and our outlook for the coming months.

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

Now let me turn to our results. Results in Bunge's agribusiness segment, while strong, were below the second quarter of 2004, which was a period of unusual volatility, strong soft-seed profitability, and above-average earnings from freight management. Agribusiness volumes rebounded, as markets responded to lower commodity and freight prices. The reversal of a pretax $14 million provision, $10 million after tax, due to a favorable tax ruling, contributed to the results for the quarter, offset in part by a lower earnings from freight management. Canadian results declined compared to the second quarter of 2004 due to poor canola seed quality and margins below last year's record levels.

In South America, volumes increased but we're not sufficient to compensate for the effects of a stronger Brazilian real currency on local currency costs when translated into US dollars and higher industrial expenses.

Agribusiness, selling, general and administrative expenses increased, primarily due to higher employee costs, some of which related to the building of our grain origination business in eastern Europe, as well as the effects of a strong Brazilian real.

In Bunge's fertilizer segment, results for the quarter were weak. Volumes declined, as farmers reduced and delayed fertilizer purchases. Last year, farmers advanced product sales to take advantage of an attractive price environment and advanced fertilizer purchases in anticipation of rising prices. Consequently, the market expects a higher proportion of fertilizer sales to occur in the second half of the year as compared to 2004.

Lower volumes were offset in part by benefits from higher international prices for nitrogen-based fertilizer raw materials and a pretax $35 million value-added tax credit, $20 million after tax, related to taxes paid in prior periods. $28 million of this credit related to sales made in 2004 and $7 million to the first quarter of 2005.

Legislation passed in May 2005 permitted companies to record a tax credit for fertilizer inputs that will benefit margins going forward. The AT is part of our normal operating margin. International selling prices for most fertilizer raw materials were relatively steady, with the price of phosphate in the form of granulated MAP only 3% higher than in the second quarter of 2004. However, the price of nitrogen in the form of Urea was 30% higher, which benefited Fasterato (ph), a producer of nitrogen-based intermediate raw materials.

Fertilizer results also suffered from the effects of a stronger Brazilian real, as well as higher expenses. SG&A expenses increased primarily due to higher bad-debt expenses for farmer and customers as well as higher employee expenses. Depreciation expenses increased due to new facilities that commenced production after the second quarter of 2004.

In Bunge's edible oil products segment, results declined in all regions despite lower raw material costs in Brazil and the United States. Volumes in edible oil declined slightly due to lower volumes in Canada, where our facilities had difficulties processing poor quality seeds. Results in eastern Europe were negatively affected by lower margins, poor crop quality, increased competition, and higher energy costs and SG&A expenses. Crop quality in eastern Europe is expected to improve when the new crop is harvested in the third and fourth quarters. Edible oil SG&A expenses increased primarily due to higher advertising expenses in Poland and Brazil, increased employee costs in Europe, and the affects of stronger currencies in Brazil and Romania. The increase in employee costs in Europe was related to building a sales force in Russia.

In our milling products segment, wheat-milling results benefited from higher selling prices as a result of the rally in wheat prices when the outlook for the international wheat crop deteriorated. Bunge benefited from lower raw material prices because it purchased most of its inventory prior to the price rally.

Bunge's SG&A increased compared to the second quarter of 2004 due to the impact of translating local currency expenses into US dollars at a stronger real.

In the second quarter of 2005, the average real-dollar exchange rate was 2.48 reals compared to 3.05 reals in the second quarter of 2004, a 19% strengthening. The stronger real affects the quarter-to-quarter comparison of our results, as the average exchange rate used to convert local currency costs into dollars was significantly higher in the second quarter compared to the second quarter of last year. SG&A also increased due to higher employee costs and increased bad debt provisions.

Interest income increased primarily due to higher average balances of interest-bearing accounts receivable. Interest expense decreased due to lower average borrowings. The second quarter of 2005, we recorded foreign exchange gains of net US dollar denominated liabilities in Brazil, as a result of the 13% depreciation of the real during the quarter. In the second quarter of 2004, we recorded foreign exchange losses on those net liabilities as a result of a 6% depreciation in the real during that quarter. You will recall that these facts are substantially compensated by inventory mark-to-markets included in segment operating profit.

Other income increased primarily due to higher earnings from Bunge's French oilseed processing joint venture. Our quarterly and year-to-date effective tax rate was 28% as compared to 29% in the second quarter of last year and our 2004 annual effective tax rate of 32%. The decline in the tax rate from 2004 was primarily attributable to higher earnings and lower tax jurisdictions. Net financial debt and readily marketable inventories at June 30, 2005 increased 639 million and 874 million respectively from year end 2004, primarily due to seasonally higher levels of inventory, resulting from the purchase of agricultural commodity inventories in South America and increases in inventories in the fertilizer segment and anticipation of sales for the new planting season in South America, which begins in the third and fourth quarters. Adjusted for changes in levels of readily marketable inventories, net financial debt declined by $235 million from year-end 2004.

Cash flow used by operations was $349 million for the six months ended June 30, 2005, compared to $316 million for the six months ended June 30, 2004. Cash flow benefited from the repayment of $220 million in advances made to farmers. Bunge's cash flow in the first half of the year is typically negative, as cash is used to purchase oil seeds and grains from the South American harvest and fertilizer and raw materials in anticipation of planting.

Now let me say a few words about the outlook for our business. Supplies of oilseeds and grains remain ample, despite reduced harvests in Brazil. We continue to anticipate good results in our fertilizer business, but below the extraordinary results from last year. Strengthening of the Brazilian real against the US dollar is a powerful headwind that we have been fighting all year. When we first established our 2005 net income guidance, the Brazilian real was valued at 2.63 real to the US dollar. At second quarter end, it was valued at 2.35 real, an 11% strengthening. Nevertheless, we are maintaining our 2005 net income guidance.

Therefore, assuming stable currencies in South America and Europe and normal 2005-2006 North American and European crops, our 2005 net income guidance is $485 million to $505 million. This translates to fully diluted earnings per share of $4.05 to $4.22. Our guidance includes $19 million or $0.16 per share from the reversal of the allowance against recoverable taxes that we told you about in the first quarter, and $30 million or $0.25 per share, from the tax provision reversal and value-added tax credit detailed in this quarter's release.

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

Thank you, sir.

[Operator Instructions].

We go first to John McMillan with Prudential.

Hello, everybody.

Good morning.

Hi, John.

Alberto, while you might be pleased with the quarterly performance, the market is not. And I'm just trying to get a better read in terms of what changed from that June lunch in New York where, if you said the drought was always your number one concern, I guess I didn't hear it at that lunch. And in terms of the challenges from currency, certainly those have been expressed by management. But if you can just kind of update us in terms of why that lunch in New York didn't go into more detail in terms of the quarterly challenges on an operating basis?

Alberto Weisser We feel quite pleased because when you look where we came from last year and where we are this year and the way we will look forward, I think, as I said, we feel quite pleased because we do not look so specifically into each quarter. You have to look at it on a yearly basis.

And it's always a question of how much moves into one quarter, how much moves into the next quarter. I think our drought assessment has been the same, last call, our meeting in June and it's today the same assessment we are having. And we, as I said, when we think about that we are believing that probably the market is going to buy perhaps only 5% to 10% less than last year, I think this is quite significant. And this is the number that is combined by the fertilizer association.

So we are -- we think -- we feel quite good about it. I think despite the difficulties we had with the real, because the real is strong, we feel that we were able to weather that quite well. So overall when I look at the complete picture and when I look forward, I am quite comfortable. The margins are in a good structure in South America and North America. In Europe, obviously, there are pockets of issues, as I said in the beginning of my remarks. In our business, if there are 15 variables, if 11 are doing well, we are doing very well. So I think it's fine. I am very comfortable, John.

And your track record has been good, but I don't want to make too much of it. But Bill, if I strip out the tax benefit that you've quantified quite clearly related to prior periods and kind of work to a $0.69 operating number in the quarter, I get only an effective tax rate of about 24%. Is that correct?

I haven't done that math, John. But let me give you a little bit more perspective on the tax credits that came into this quarter. And in particular, focusing on the VAT tax credit in Brazil. What is going on there is that as the situation deteriorated in Brazil from the drought, the industry and the government were looking for ways to help the Brazilian farmer to reduce the cost of input. So the industry worked together with the government to develop this legislation, which was passed in May.

And I think this is extremely good news because it does mean that we are going to be able to reduce prices for the farmer, but at the same time, increase our margins. And we can do that because the significant tax reduction occurred. I think that is good news for everybody. Now, you have to understand that managing taxes-- in particular these types of transactional taxes, which are part of our margin-- is just part of our day-to-day business.

And in emerging markets, it is a critical piece of what we do because these taxes can have as big an impact as our industrial costs at different points of time. From our viewpoint, this is purely operational.

Now, if --because of the nature of the beast, sometimes you're going to have clumping of the effects in particular quarters because it's tax-related and it depends on changes in legislation and different government rulings. So we certainly can't control the timing of that. That is another reason why we encourage you to look at a full year as opposed to individual quarters.

And In your full-year guidance, are there any more tax benefits baked into it or non-operating gains baked into it in the second half?

We have detailed for you in the comments that I just went through the exact items which are included in there. Now VAT taxes and transactional taxes are part of our normal operating margin, so of course there are VAT and transactional taxes in our results and our guidance for the rest of the year. Is there going to be any clumping associated with that in particular quarters? I don't know.

Okay. Thank you.

We go next to David Nelson with Credit Suisse.

Good morning, David.

Hello? Can you hear me now?

Yes

Yes.

Sorry. We can start with currency. Assuming the real stays where it is, was the 19% headwind this quarter, looks like 20% maybe in Q3 and 14% in Q4, but that is all factored in for the balance of the year, right?

Yes, we have factored it into the balance of the year in the guidance. As I said, we have seen the significant strengthening, which was a powerful headwind. But we are going to maintain the guidance for the remainder of the year. Now if we see some weakening of the real, and in fact, the real does seem like it started to weaken a little bit in this last week because of some of the political issues in Brazil, there might be some upside in that.

To some degree you have been, you are quantifying here is a non-recurring issues that are positives which people view negatively. But can you at all try to quantify this currency negative that people would view then, therefore, positively?

I can tell you it is material. I am reluctant to give you a specific number on it because I know everyone will immediately start applying that to the exchange rate. Unfortunately, the effect varies at different times in the year, depending on the seasonal adjustments in the working capital, et cetera. But let me give you a sense of the main effects. We hedge away the effective currency movement on our current assets and liabilities. We have been successful in this first half of the year at hedging the effects on our effective tax rate, so you saw our effective tax rate actually decline slightly in the first half of the year. Normally we would expect it to increase if we saw strengthening in the real.

So I think we were quite successful there. The business was strong enough to be able to substantially absorb the effects of the real strengthening on G&A and industrial costs during the first half of the year. So the underlying business performance, we feel, was pretty good, ex that foreign exchange effect.

Now, we're not superhuman. The business wasn't able to fully absorb it, and if we stay at a strong level of the real going forward the rest of the year, we know that the business will not be able to absorb all the effects, which is why we are being a little bit more cautious in maintaining our guidance for the year.

Could it be in the neighborhood of $0.25 of tax reversals?

I really don't want to go there, David, but I will say it was a material effect in the first half.

All right. On the fertilizer legislation that is apparently permanent because you're saying going forward. Now, the $20 million after tax benefit, that is related to prior specific periods -- I guess maybe a grandfathering. Can you at all quantify this positive? How much of a positive this would be going forward?

Let me give you a sense of what that $20 million net income effect came from. We were buying fertilizer raw materials over the last six to eight months in anticipation of the upcoming season. When we buy that, we have taxes associated with it, and so we accrue for those taxes. And now, with this new legislation, as we're going forward, we will be selling those materials at a lower level of tax.

So because of the change in legislation, we had over accrued the taxes built into the inventories. So that's really what is causing the differential in the release of tax in the main numbers. But as we go forward, we will be passing through some benefit to our customers in terms of lower product prices, but obviously keeping some for our self as well. We do expect margin expansion, but it's very difficult to quantify because some of it depends on the supply-demand picture in the market, as well. So, I think it's a positive. I think it is a noteworthy positive development. But again, I'm reluctant to put a number on it

Okay. If I could ask one last maybe, bigger picture issue, you highlighted of course, your first acquisition in China was made about a month ago. Maybe a comment if you would, please, on do you see this as maybe a special situation with you and the seller, or do you see it maybe as a sign of things to come for consolidation over there?

I'm sorry, what do you mean with DSE (ph)?

Your first acquisition in China?

Yes

Do you think that that is a sign of things to come over the next couple of years? Has something changed structurally there? Or is this something specific to this one seller?

Okay. We have been watching and observing and looking for opportunities for a while. And they have never matched our profitability expectations. Now, due to the situation of over-capacity in China, it is extremely important that the location is right. There are some plants that have been built that never have operated and will operate because they were built in the wrong place.

So we have been looking at this specific site for a while. And we think it is very good location. And when the -- because of the difficulties and scenarios in China, the prices became normal and they are willing sellers and at the right price.

Now what, for us, is very important is the way we look at it is the whole chain with the North American origination, South American origination, logistics, and with this asset we have there, it is relevant. What we are doing is mitigating significantly the risk because we are now in charge of our own distribution of meal and oil.

So we see this as a very important step. We are the controlling shareholders, so we can influence the chain. We will be continuing watching it. But it was difficult in the past, and we would not say anything about when we will be able to make the next moves in China. But we are always on the outlook to make this global integrated chain more efficient and more reliable.

Great. Thank you very much.

Thank you, David.

We go next to Christine McCracken with FTN Midwest Equity Research.

Good morning.

Good morning.

Good morning.

I am just wondering if I could go into your comments relative to bad-debt expense in the fertilizer division. Note that, that seems to be higher than it has been in the past. But it seems like it's a relatively consistent percentage of advances. Is that a fair assumption? Or is that something to be concerned about?

We did increase the bad debt provision in this quarter, but it was really not a terribly significant amount. The percentages, in terms of percentage outstanding receivables in the fertilizer business, has gone up. The level of bad debt, which is being reserved as a percent, but again it's not having a terribly material effect on results.

Overall, we're very comfortable with the situation related to farm credit in Brazil. Obviously we have been paying very close attention to it over the last couple of quarters with the drought situation. If we look at our advances to farmers in our Bunge elemental subsidiary, which is the grain company, they are being repaid normally. In fact, when we consider the amount of grain that's been received in our silos as an offset to advances, we are now at 50% of the level that we were at year-end. So payments are proceeding normally. We don't see this as a terribly significant issue going forward.

I think it is fair to say, Bill, it is in line to the volume, as you said.

Absolutely.

Good. And then you did mention the crop outlook in the US that may be a little too soon to make a call on that. But it does seem like Canada and Europe are also an issue. Is there any update on your outlook there?

It's much too early. I think it is much too early. You remember in 2003, early August looked good and then it was difficult. So we rely more on when you-- when you rely on the USDA and everybody is thinking it will be normal situation. It's too early, Christine. It's much too early.

No problem. And then just in terms of historically, volatility in the markets has been at a pretty good time to invest in Bunge or it's been relatively favorable for you. We've seen quite a bit of volatility here lately. Wondering is this something that you expect to take advantage of? Is this something that could possibly help your results going forward?

Yes, we believe that our hedging policies, our hedging activity, the risk management, that we have done quite well. So you are right. In the volatile market, I think we have done well. We managed well through these risk situations. But it is not that relevant, so I would consider this as part of our day-to-day business.

But we do like eager farmers and nervous customers. Usually gives us more power in terms of negotiation.

All right. Just in terms of in your milling division, you did mention you were able to take advantage of some volatility there. Can you give us any indication as to when that kind of unusual setup might roll off? Is that something that you will see here through this quarter and then may kind of work its way down into the back half of the year?

Let me give you perhaps a little bit different perspective on the wheat milling. I think we have dramatically increased our efficiency on buying domestic wheat in South America, in Brazil, and in Argentina. So there is a significant efficiency improvement on wheat milling and also this joint venture with (inaudible) allows us to buy significantly more wheat and made it even more efficient and we also have a better position in the market.

So I would say that a significant portion of the improvement of wheat milling came from better positioning the market at more efficient logistics, also with more brands. So, it is as much as it was the right timing on the purchases. So we will continue benefiting until the end of the year from this.

Good to hear. Thanks a lot.

We go next to Christina Mcglone with Deutsche Bank.

Good morning. Thank you.

Good morning.

I'm trying to just get, I guess, a better handle on fertilizer. Bill, I remember you talking about, in prior quarters, that you saw this year fertilizer profits would be flat to down. And now we're talking about down. I'm guessing this quarter was below your expectation? But if you reconcile that with the fact that soybean prices have risen, including futures from when you last gave guidance, also if you take into account this government assistance that you point out in the press release, can you talk about how your expectations have changed versus the last time-- last quarter when you gave guidance?

Sure. Well, first, just to confirm, yes, this quarter was less than we expected it to be in fertilizer. Nevertheless, when we look at the whole year, we think that we will see a slight reduction in total volume of fertilizer as the industry is projecting 10% to 15%, and we agree with that. But it's not a disastrous scenario.

The amount of fertilizer, which is going to be purchased, is still at a very high level. If you look back over the last few years, we have seen significant growth in the fertilizer industry in Brazil. We are seeing higher product prices and if we get a little bit of a weakening in the real, that will help the farmers, as well. All that is going to stimulate fertilizer purchases.

One thing that it is important to remember is that we have always said that there is the chance for significant shifting between quarters, depending on farmers' selling and buying decisions. And unfortunately, the quarter which is most at risk is really the second quarter because the beginning of the fertilizer-selling season in Brazil really begins in June, July. And it's right in the middle of when the farmer is commercializing their crop in Brazil. So farmers just deciding to hold off for an extra 30 days on fertilizer purchases or hold off for an extra 30 days on commercializing their crops can have a big impact. So again, that is why we encourage you to take a look at the yearly numbers rather than getting too focused on the individual quarters. I think our perception is that that shifting has clearly occurred this year.

So are you-- has your outlook for fertilizer not changed on an annual basis? Or are you a little bit more pessimistic?

Sorry. First let me correct what I said earlier. Susie is pointing out that the volume is down 5% to 10% according to industry, not the 10% to 15%, as I said. I misspoke. Our outlook for fertilizer is a little more pessimistic than it was at the start of the year. That is why we're now talking about results that would be less than last year as opposed to stable to less. But it's not dramatically different. We're still expecting a pretty good year in fertilizer.

Okay. And then, I know edible oil is a lot smaller, but that was much weaker than I thought. Can you maybe talk about that and how should we model it going forward? Have you finished building your sales force in Russia and some of the costs you have absorbed? What is the outlook there?

I think we're going to continue to see some of these costs of building out our eastern European business. That is going to be a bit of a drag on results, probably for the next three quarters or so. But in edible oils, it was really a combination of factors. Some of it was exchange related in South America and Romania. Romania actually had a fairly significant effect on the overall result. We saw the strengthening of the Romanian lei.

As a result, traditionally there are significant exports of sunflower oil out of Romania. But because the lei strengthened, Romanian sunflower oil became less competitive in the international markets and so more of the oil stayed in Romania and that pressured margins in Romania and some of the poor seed quality that we talked about in Canada. So it was really a combination of factors, but we are expecting that most of those are going to work themselves out over the next couple of quarters.

In term of margins, we are starting to buy the seeds in eastern Europe, so the future of our business is being reset. So we are quite optimistic when we look at the edible oil business in eastern Europe starting now with the new crop that is just starting. A lot of that was related to the difficulties in the previous crop.

Okay. Thank you.

We go next to Ken Zaslow with Harris Nesbitt Burns.

Good morning.

Good morning, Ken.

One question remaining out there for me, excluding currency, was your performance in line, below expectations or above expectations?

In the quarter, I would say we're very comfortable with where we came in the quarter. I don't want to get into expectations issues because that implies guidance, and we never did give guidance for the quarter. But I think we are very comfortable with our performance this quarter and, in fact, pleased considering the fact that the two main issues that we've always highlighted as being difficulties for us, drought, particularly in Brazil, and a strengthening Brazilian real, both hit us this quarter and hit us hard. And yet we were able to get through that, we feel, in pretty good shape.

Assuming and you are generally thinking it was in line, plus or minus a degree or so, the reduced guidance on the underlying basis, excluding the $30 million, means that the FX was probably roughly about that number. Is that a fair way of looking at it?

Again, I don't want to work on quantifying the effects. But when we look forward in the year, we are maintaining our guidance, and the reason that we're maintaining it rather than raising it slightly, because of reasonably good performance in the second quarter, is because of foreign exchange in Brazil. It is related to the strengthening of the Brazilian real.

I guess the way I am just trying to get at it is currency went against you more than you expected. You didn't think about this $30 million in your guidance, so keeping your guidance was pretty much a wash is how I'm thinking that you're thinking. Is that not a fair way of thinking about it?

I'm going to let you think about it how you choose, Ken.

Okay. The other smaller question is, freight management usually -- you tend to be -- when the Chinese debacle happened a couple quarters ago, when freight rates dropped, you bought in at low rates, did you get caught on the other side of some freight management? Is that what I read from the press release?

No, no, no. I think what we are seeing is last year it was an exceptional situation and we did very well. Last year was an exceptional situation and this year is normal.

Okay. So there was no-- you didn't get caught on one side of the tree? You basically went back to more normalized levels.

No, no, no. Exactly. Last year was exceptionally good.

Great. Thank you.

We go next to with Leonard Teitelbaum with Merrill Lynch.

Good morning. On the attempt, I know you guys are interested in running a good company. We're just trying to run a good stock. I have some problems that maybe you can straighten out for me. Bill, I think it was last year, we had about $50 million of unusual income whether it was interest earned on the-- when we raised the money to buy in stock and when we actually completed that transaction, buying ahead, I think, as you'd indicated earlier on some items that provided income. And I'm trying to figure out, as we start to look at this company from a base building effort, how much of what happened either this quarter or what you see this year should be considered, whether it's part of the tax transaction or not, as non-repeatable?

Are we looking at-- we had $50 million last year of unusual gains. Now we've got some things coming in this year. Is it that we're always going to have something unusual in the numbers? Or it just happened by circumstance that we had two years of some pretty significant non-- what we would consider non-operating items?

Our business is global, and we work in emerging markets, so you tend to have a whole bunch of different affects that come in because of that. What we try to do is just highlight it and give you the information, so you can make whatever adjustments you feel like. With regard to the tax effects this year, the VAT taxes in Argentina and the VAT taxes on this change in the law related to fertilizer in Brazil, as I think we've tried to be very clear, those are a normal part of our operating business. The timing can get affected by government decisions. But that is just a normal part of our operating margin.

Taking that, I guess, to the next step, would $4 -- your guidance for this year, let's pick a number, $4.10, $4.05, whatever it is. Should that be the base to which we project for the following year?

Yes.

Okay. I just want to make sure of that, because I think it's very important that we all come away from this call trying to at least figure out, from an earnings standpoint, what the base is on a sustainable basis and where we go from here. So I just want to make very clear on this. You are saying we should use the current guidance, subject to any changes between now and the end of the year, as a base to which we project?

Yes. If there is something unusual that happens between now and then, we'll tell you about it.

You talk about clotting. I think I'm getting a clot here. Okay. I just want to make sure that that -- let's hold that part at bay. Now, if we take a look at some of the projections that I have seen, while we think soybeans will be down, we see other crops as being up, notably cotton. Are you factoring -- what are you factoring in, if soybeans are down? Are you factoring in other crops being up, or are you going to let each crop stand on its own here?

What do you mean with soybeans being down?

If acreage for fertilizer is down, some of the projections I have seen is acreage per cotton, for example, would be up. And I'm trying to figure that in by significant crops to fertilizer usage. And if fertilizer for soybeans or-- sorry, acres devoted to soybeans are down, is there some offset here that we're just not asking the question correctly?

Typically farmers are going to plant. They may plant corn or cotton, sometimes, even sugar instead of soy, and they're going to need fertilizer for that. And so, cotton in fact is more intensive in fertilizer usage. So is sugar. And so yes, there are offsets. Our fertilizer business sells to all of the cultivations, not only to soybeans.

If soybeans were down this year, would other crops pick up in acreage, would other crops pick up that differential in terms of acreage? Or are you looking at total planted acres to be down?

We don't look -- where are you talking? US or South America?

South America, Alberto.

South America, the acreage. It is a little bit early to say what the acreage will be because it really starts only the planting in September. Our feeling is that-- you have to you remember that the break-even point for the farm on soybeans is very low. It's someplace between $3.50 and $4.00 per bushel. And the soybean is, at the moment, close to 7. So you have to separate the little bit of noise from the reality. And there's this noise about drought. This is history, so we'll talk about next year. And the farmers are -- it's much too early. I'm not so sure if we will see-- it is much too early to see if we will see a reduction in acreage or not. Once a farmer has a piece of land, they will use it, and especially when you talk about the interior of the country, it is very difficult to plant corn there and to farm the corn per ton value is lower, so the logistics are problematic.

The volume of cotton in terms of cotton farming is good. Sugarcane is in a different area. We are quite optimistic about the volume that is going to be out there. The demand is very strong for meal and oil, so the world needs the beans. So if we have a normal crop in the US, we will need to have a growth of the crop in South America. Because we do not look so much quarter-by-quarter, we have a very good feeling about when we look into the next couple of months or quarters or the next season. It's much too early to say that there will be a reduction in acreage.

Given the projection or progression that you have had in earnings of almost double digit here, obviously this year being somewhat different-Bill, I know you are not in the business of making projections, but do you see a violation of some of the historic trends as we get beyond this, let's say this bump in the road? If you will call it that. We're still trying to quantify it and classify it here. But if $4.03 or whatever it is is going to be the number, or 4.20, whatever it is going to be in going forward, do you see a double digit growth next year from what Alberto just said?

We think all the fundamentals of our business are still in place and unchanged, Lenny.

When you look at 2003, 2004, 2005 and we exclude the very strong exceptionals last year, we think we are very much on trend line, as we said. We feel 2005 will be a good year.

Our long-term guidance is that we believe we can produce 10% to 12% increases in earnings per share on average over a five-year period, and we see no reason to change that.

Thank you very much.

(Operator Instructions)

We go next to David Driscoll with Citigroup.

Hi, good morning, everyone.

Good morning, David.

Just wanted to make a statement here. This is something that I think you have not too much control on, but that would be first call and how first call is posting numbers. There has been a significant inconsistency on the treatment of your figures versus the treatment of just about any other stock that I look at. And what I'm specifically talking about is how these taxes and these benefits and/or penalties have been treated.

We just had Kraft Foods report last week, and they reported reversals of tax items, and they were positive. Yet the first call figures actually include those tax benefits. As we saw in Bunge's figures for the first quarter, which had a $0.16 benefit from taxes, first call doesn't include it. So there's been, in my opinion, a complete inconsistency here as what's going on first call. And I for one just completely object to it. I would ask you -- I know you made a number of comments on this, Bill. But specifically, though, I just want to get this almost on the record. The tax benefits that you're taking this quarter, this $0.25. This $0.25, was a penalty in prior quarters. Is that correct?

Yes, it was a cost in prior quarter.

Right. So then the truest treatment would be for us to allocate maybe these $0.25 back to those prior quarters, if we knew specifically each and every quarter exactly where it was. But since that's almost never the case, the practice, of course, on Wall Street has been just to keep them in the numbers. So I would certainly encourage the buy side out there listening to do so on this one.

As I think a number of speakers or questioners have already asked, on the foreign exchange side, Bill, I know you don't seem to want to give a number here on the benefits. But I think it is absolutely critical that clients out there really understand that the magnitude of the impact on foreign exchange is well above what you would post as a benefit on the foreign exchange line on the income statement. So I believe that number was a benefit of $23 million. But I believe also that if I understand how the company works, that the penalties related to the Brazilian real appreciation in both agribusiness and fertilizer would be significantly above that number, hence the headwind that you have described. Is that correct?

Again, David, I don't want to get into quantification, but I will say that it was a material impact in the first half of the year.

A material impact on balance inclusive of that foreign exchange line on the P&L?

That's correct.

Okay. Well, then that is as far as I think I can go on those two items. In terms of your prepared comments, you said, I think in there, that soy acreage could be, in fact, down in Brazil, and I think -- I forget, maybe it was Lenny who was just asking that question. But why would you make that statement right now, given the fact that prices have rallied rather substantially from just the beginning of the calendar year? I know they remain down year-over-year, but these prices --can you just tell us from your best guess, is a Brazilian farmer, a soybean farmer, are they profitable at these soybean prices?

We said it could because we want to be careful. It could be, and obviously we think about the farmer who lost 75% of his crop last year with the drought. So there could be. We have to be careful. Now, it could very well be that there will not be a reduction. The break-even point is probably, let's say, $4 per bushel. And if that is the case, at $7, there is no doubt they will plant. So it's very difficult to say at this stage what the acreage will be, and we don't like to see it. But we want to be on the careful side. If the farmers do whatever we see, they will not leave their lands empty. So it's too early to say.

To give a clear answer to your question, David, at this is level of product prices, farmers are profitable in Brazil, and nicely profitable.

But you have to remember that they were having returns of 100% over the last years. So if the returns are perhaps down to 15%, they think this is down. But it is a very, very solid profitability.

I believe this and I have seen in it other places. But I can tell you that I think people have followed headlines just a little too much and know that bean prices are down, and there's just been so much talk about Brazilian profitability that it seems that people are losing the forest here through the trees, that the Brazilian farmers remain very profitable.

You have to remember that what's been going on in Brazil over the last three months or so is that the farmers have been pressuring the government for assistance. And so naturally there have been all sorts of disastrous headlines which are out there as a way of pressuring the politicians. So farmers are very effective at this game.

And we have to be also very rational about it. The growth is going to be 5% this year and demand 5% next year. We believe it will continue like this. Where is it going to come from? It is not India, not China, not in the US. It is marginally. It has to come from South America. So the growth will have to come. If there is not enough, the prices will go up. So we are very relaxed and optimistic about it.

One final question relates to crush margins. We have seen that PVOC board (ph) crush margins averaged in the first half through the end of June about $0.43 a bushel. And then, from just simply this period here in July, we've got numbers at around $0.60 a bushel. This really looks to me like a material improvement in crushing margins. Have you incorporated this type of improvement fully into your guidance, Bill? Or is this something where you don't go all the way with the $0.60, and you really take a more cautious view.

Our guidance is our guidance, Dave. I think we should be a little bit careful about looking at the crush margins at this particular time in the year, because the industry is normally going into maintenance mode at this time of the year. So you tend to have capacity going down, which supports replacement crush margins. And so you don't want to just take that and extrapolate it out through the rest of the year. But building on what Alberto said earlier, the crush margin environment in the United States appears good, and we would expect to have pretty reasonable margin environment as we go forward into the next harvest.

Very good. Thanks a lot, everyone.

Thank you.

We return to John McMillan with Prudential.

Hello, again.

I won't try to compare you to Kraft. The only other quarter you missed goes back to September '03, when there were some bad hedges, and it was clear that the hit was a hiccup. I know you answered the question on freight, but were there any other kind of hedges that negatively impacted results?

Nothing. And you have to remember in 2003, remember the fourth quarter of 2003, that's why we say let's not look so much at quarters, let's look at the whole year.

2003 was a great year for us.

And then, in terms of your statement, I know it's a form statement that your guidance depends on stable currency and stable crops. But as Christine McCracken said, it is clear that you're really not going to get a stable US crop this year, even if it starts raining and so forth. And I'm just trying to see if you would agree with this statement. If we did get a short US crop, soybean crop, and corn crop, could a case be made that while it might have some negative short-term impacts, it might actually help 2006 results as the Brazilian farmers get more money from higher price points and acreage plants kind of increase? Is that how you look at it?

It would be very good for the South American business. There is no question.

And does that net-net, benefit you?

That is why we say we like our geographic balance. We have seen in the past that if there's trouble in one area, we compensate normally with offsets in other areas. And I will be cautious to start talking about the crop this year. It's too early. There are still five weeks to go.

John, if I could just comment on one thing. I would not say that the statement that we have regarding our guidance about currencies and the crops is just a form statement. That's there for a reason. And we are exposed to risk on the movements in currencies, particularly the Brazilian real, and also if there is a big crop issue again, particularly in Brazil. Obviously, those are two things that affected us this quarter, so it's not just a form statement.

Thanks.

We go next to Christine Mcglone with Deutsche Bank.

Christine Mcglone Hi. Just wanted to add clarification. Bill, you talked about the shifting in the fertilizer purchases. Is it back to a more normal pattern or is it extraordinarily back half weighted this year?

Well, last year was abnormal in as much as the farmers anticipated purchases. This year is abnormal in as much as they're delaying purchases. So we have probably the worst possible scenario, where you are comparing an advanced purchase scenario versus a delayed purchase scenario. So neither year is normal, unfortunately.

Okay. Thank you.

That concludes our question and answer session and our conference for today. Thank you for your participation. You may now disconnect.

Thank you.