Bunge Global SA (BG) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to Bunge Limited Third 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 Stewart Lindsay. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us this morning. Welcome to Bunge Limited Third Quarter 2005 Earnings Conference Call. With me today 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 orally in this conference call to the most directly comparable GAAP financial measures are posted on our Web site, www.bunge.com, in the Investor Information section. Before we proceed, I'd 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. These statements are based on management's current expectations and beliefs and are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. The pertinent risk factors can be found in our SEC filed reports. And now, let me turn the call over to Alberto.

Good morning, everyone. Thank you for joining us. Well, we had a difficult third quarter. The challenging market conditions that began early in the year in Brazil, notably slower farm selling and the appreciating real (ph) continued to affect our operations.

In our industry, individual regions or markets will experience periodic short-term downturns, often precipitated by weather. A global business like Bunge's helps to mitigate these risks. In the current case, the Brazilian farm sector has had several negative forces acting upon it, including a drought and an appreciating currency. These challenges have been more persistent than we anticipated, but we believe they are only temporary and that the Brazilian farm sector will reset to more normal operating conditions in 2006.

Two developments would speed this recovery. First, a normal soy harvest starting in February will improve farm incomes and spur crops sales. The USDA estimates a larger harvest than last year. Second, a more stable currency will improve margins. Farmers are still profitable at current real US dollar exchange rates. What has been most detrimental to them this year is the timing of the appreciation. The real has strengthened since they bought inputs last year. Since both input and crop prices are dollar linked, farmers lost money on the change in currency when they sold their crops. We faced a similar problem with our fertilizer inventories.

We are optimistic for Brazil's rebound and for good market fundamentals on a global level in 2006. Next year, the USDA predicts global demand for both soybean meal and vegetable oil will rise over 5%. The supply picture also looks good. Northern hemisphere grain and oil seed crops are large.

A promised new trend is the rising production of biodiesel in the European Union, US and other nations. Greater biodiesel production should create millions of tons of additional demand for vegetable oil over the next decade that will favorably impact the entire agribusiness value chain from seed production to processing and refining. We are already seeing higher crushing margins in Europe as a result of this trend.

While we believe that Bunge's capital will be best spent on our core agribusiness, fertilizer and food products businesses, we are eager to help develop the biodiesel industry and to be a supplier to it. We are combining our company's European biodiesel assets with those of Diester Industrie in a joint venture that received European Union approval earlier this month. Bunge will hold a minority stake.

The primary driver of demand in our industry, however, remains the consistent growth in global food consumption. Take China, for example. Our Board of Directors met there earlier this month in order to improve its knowledge of the market. China's large organizing population and rapid per capita income growth speak to the potential in our industry. The country is an outstanding example, but the principles are valid globally.

The world is a big and growing place, six billion people and counting, people who are earning more money and spending their euro, RMB, baht or oober (ph) on a better diet. Someone will need to supply this food. North and South America and Eastern Europe are the logical sources. And someone will need to process and transport it. That is Bunge's role.

Our global business with strong positions in the world's largest food production regions and growing presence in the world's fastest growing consumption markets is well-positioned to fulfill this role successfully. We will face short-term challenges, but these underlying effects make us confident in the long-term potential of our business.

I will now turn the call over to Bill, who will discuss our results and outlook.

Good morning. Historically, the third quarter is a period of high sales in fertilizer. It represents the tail end of the crushing season in South America and the start of harvest season in North America and Europe. Agribusiness results in this quarter were below the third quarter of 2004, which was a period of extraordinarily strong results.

As Alberto detailed, slow farmer selling in Brazil reduced volumes and pressured crushing margins. Cost increased, primarily due to the effects of a stronger Brazilian real on local currency operating cost when translated into US dollars. In the third quarter of 2005, the average real dollar exchange rate was 2 reais 34 compared to 2 reais 98 in the third quarter of 2004, a 27% appreciation in the value of the real versus the US dollar.

In North America, results, while good, were below last year's high levels. Strong demand for biodiesel benefited results in Europe. Selling, general and administrative expenses declined due to reduced bad debt expense and lower variable compensation expense.

Last year, ocean freight rates were high, which gave us opportunities to realize good freight management results. This year, with prices lower, opportunities were not as readily available-- in addition, slower farmer selling in Brazil, reduced volumes and the benefit from existing domestic freight contracts.

Fertilizer results in this quarter were weak, despite the improved volumes, which increased only in the latter part of the quarter, as farmers committed to planting. Results suffered due to higher costs, brought on primarily by a stronger Brazilian real. Local costs were higher when translated into US dollars and inventory costs proved substantial.

In anticipation of strong demand, our fertilizer business purchased a large amount of raw material inventory earlier in the year. Since the real appreciated during the year, that inventory was sold at a stronger real US dollar exchange rate. When translated into US dollars, this foreign exchange differential raised costs. Fertilizer prices in dollar terms remained relatively stable, so margins were compressed.

However, as farmers have now returned to the market, we are working through this inventory and believe that, in large part, it will be sold by year-end. When it is, and assuming a stable currency, margin pressure due to foreign exchange will lessen.

Edible oil results improved in Brazil and North America due to higher volumes and strong margins. Results were negatively affected by lower margins and expensive raw materials in Eastern Europe. Cost increased due to higher energy and SG&A expenses. The increase in SG&A expenses compared to the same period in 2004 was due primarily to increased employee costs in Europe related to building a sales force in Russia, the effects of a stronger Brazilian real on local cost when translated into US dollars and higher advertising expenses in Poland, which billing results benefited from higher volumes and improved product mix in Brazil.

Interest income decreased, primarily due to lower average balances of invested cash. Interest expense increased, primarily due to higher average borrowings. Foreign exchange gains in the third quarter of 2005 and 2004 resulted from the appreciation of the Brazilian real compared to the US dollar on the net US dollar denominated monetary liability position of Bunge's Brazilian subsidiaries. Reduction in margins due to changes in inventory values substantially offset these gains.

Other income expense net increased compared to the third quarter of 2004, primarily due to higher earnings from Bunge's German biodiesel joint venture and gains on sales of assets in South America. Bunge's income tax benefit for the third quarter of 2005 reflects a $38 million reduction in deferred tax asset valuation allowances, stemming from a legal restructuring initiated with a buyout of minority interest in 2004. We expected to book this valuation allowance adjustment in the fourth quarter. However, our implementation plan moved faster than expected and under US GAAP rules, we were obliged to recognize the benefit this quarter.

Excluding this item, the effective tax rate for the third quarter of 2005 was 11%, compared to 30% in the same period in 2004 and 32% for fiscal 2004. Also excluding this item, Bunge's effective tax rate for the nine months ended September 30, 2005, was 22%. The decline in the tax rate was primarily attributable to a reduction in earnings in higher tax jurisdictions.

Minority share of net income decreased when compared to 2004 due to lower earnings from the company's less than wholly owned subsidiaries and the acquisition in the third and fourth quarters of 2004 of the remaining 17% minority interest in Bunge Brazil SA. Bunge now owns 100% of Bunge Brazil.

Net financial debt at September 30, 2005, increased 468 million from December 31, 2004, primarily due to lower cash balances, higher levels of inventory in South America resulting from slower farmer purchases of fertilizer, the seasonal purchase of agricultural commodity inventories and higher receivables. Cash flow used by operations was 50 million for the nine months ended September 30, 2005, compared to 940 million provided by operations in the nine months ended September 30, 2004. Cash flow from operations declined form last year's extraordinarily high levels primarily due to higher working capital needs.

2005 has been a challenging year. Nevertheless, market fundamentals point towards improved operating conditions in 2006. Agribusiness activity has shifted to the Northern Hemisphere where solid demand, large recent harvests and high biodiesel margins are positive for results.

In the edible oil sector, lower new crop seed prices and strong vegetable oil demand should gradually help margins. We expect raw material cost for our bottled oil business in Russia to decline substantially when our new plant in Voronezh comes online in late 2006.

The fourth quarter is still an important period for fertilizer sales. In September, ANDA, the Brazilian Fertilizer Association, estimated industry retail volumes would drop by 12% for the year. We expect Bunge's total fertilizer volumes to be better than the industry. Margins will remain pressured until inventory purchased at weaker real exchange rates is sold. We believe that most of this inventory should be sold by year-end. We expect continued improvement in Bunge's effective tax rate, primarily related to foreign exchange hedging activities.

Assuming stable currencies in South America and Europe and normal 2005, 2006 North American and European crops, our revised 2005 net income guidance is 475 million to 495 million, representing $3.97 to $4.13 per share. This fully diluted per share guidance is based on an estimated weighted average of 121 million shares outstanding and includes the weighted average common shares issuable upon the conversion of Bunge Limited Finance Corp's 3-3/4%convertible notes, due 2022, which we intend to redeem on November 22, 2005. Additional information on our guidance is detailed in our press release.

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

[OPERATOR INSTRUCTIONS]

We'll take our first question from Christina McGlone from Deutsche Bank.

Good morning. I guess first question really has to do with the idea of the tax rate being low. From what I understand, Bill, when the real appreciates, obviously it has a negative effect on operating income. And the lever that you have at your disposal is to use hedging activities to decrease the tax rate to mitigate the impact on net income. So, I guess maybe, if you can clarify how is this done? I mean, do you kind of increase-- do you lever up in Brazil in order to lower your taxable income there? And maybe you could talk about or increase the transparency regarding that.

And then, I guess in the future, if we see the real appreciate, should we continue to see the tax rate come down as an offset to the negative impact on operating income?

Certainly. Let me try and provide some clarity on it. Obviously, when the real appreciates, it pressures our businesses in the operating profit area because we see increased cost when translated into US dollars. We have an active program to try and mitigate that effect. And the primary technique that we use is related to the funding of those operations.

We fund the operations from our central treasury. That central treasury is offshore to Brazil. And the loans that we provide to our Brazilian operations are typically denominated in US dollars. However, we do have the option of swapping those loans into local currency into reais. And we exercise that option to swap into reais when we believe that the currency is appreciating. What that does is it creates a higher interest cost, which is deductible for local tax purposes, which means that we can get tax benefits.

Now, under normal circumstances, if the real is stable, we would not see any impact on the effective tax rate. If, however, the real is going to go in the other direction and devalue, we have the option of funding in US dollars, which again provides us with some tax benefits in Brazil because you have the devaluation creating an exchange loss, which is also tax deductible in that country. So, we have some flexibility in managing our funding position, matching currencies in which we are funding in order to offset the pressure on operating profit.

Okay. So, I mean, looking-- at first glance, you would look at this number and say it's low quality because the tax rate's 11%. So basically, you're kind of-- your view is you need to look at the whole picture because if you're going to say, normalize the tax rate, you also might want to normalize the effect of currency on operating income?

Well, one is offsetting the other. We can't entirely offset the effect of a strengthening real, but we can substantially mitigate it. And I think when you look at the bottom line numbers, you see that we have been successful in substantially mitigating it during the year. And one is a direct offset of the other. Now unfortunately, it does mean that your operating profit number is less. But, we have been able to protect the bottom line.

Okay. And then, Alberto, you had talked about the USDA projection of 5% on growth in vegetable oil and meal. How is the outbreak of AI in Europe and China effecting that estimate? I mean, we're hearing that chicken demand is actually declining. And so, maybe we won't see the up-tick in Brazilian chicken exports that we saw during the last outbreak. How does that impact Bunge and how does that impact the meal projection?

It's a little bit early to say the whole consequences. But, the Avian Flu situation we had in Asia and the demand was there. The demand increase was there. So, I think the USDA estimates include these factors. But obviously, it's very difficult to evaluate all of the consequences.

Okay. And then, last question. You talked about closing crush capacity in South America and I know that ADM has done that, as well. Do you expect those facilities to stay closed and utilization levels to improve or if farmers start letting go of their beans, will we see those facilities open and still be sort of in a depressed utilization environment?

The-- this could happen. We have reduced capacity in Brazil. At the same time, we have a little bit more production in Argentina. We have a new plant on stream. Our new state-of-the-art plant also in Bilboa (ph), Spain is going to be up and running by the end of the year. So, there is a little bit of a shift probably happening. And some of the less efficient plans in Brazil will either stay down for a longer period of time or will be closed down completely. We might have one of the other plants, as well, that we might keep down for a longer period of time.

Okay, thank you.

We'll take our next question from Leonard Teitelbaum from Merrill Lynch.

Good morning. I got a public accountant because I didn't like taxes and I don't want to go into them again, either. But, let me just try and get a couple of things out here. In fertilizer, even though the local agencies are talking about down year volumes, we're actually up 6%, right-- I mean, according to your release here?

That's correct.

Would you expect, considering that we would have normal shipping days, I presume, quarter-over-quarter, that in terms of volumes, you would be up in Q4?

Overall, what is important, Lenny, to see is that the whole volume picture for the country will be down. So, we have picked up in this quarter some of it. Obviously, the quality was not as good as usual. But overall, we are still 6% down vis-à-vis last year. So, we believe that we will be doing a little bit better than the market. But overall, we still believe that the estimate of the industry is correct, that the whole industry will be down around 12%.

But, you're up 6% in the quarter.

Six--.

-- I'm trying to figure out for the fourth quarter, not-- so, the fourth quarter, you're saying is going to be down?

Overall for the year, we will be down, Lenny. But, I think for the fourth quarter, we could easily have a positive number.

Right. That's what-- I mean, unless I'm wrong, that's what I come to. Now, let's just take that through. Does this mean from an operations point of view that results have kind of bottomed now and that we ought to look for a turn beginning in the fourth quarter or is that too early?

Well, we believe that things are going to improve from here going forward. Obviously, in the guidance that we've given you, that implies what the fourth quarter is going to be. We do expect to see a deterioration of operating profit in the fourth quarter, primarily because of the appreciation of the real. We also believe that we're going to be able to substantially offset most of that through our hedging activities that we discussed on a previous question.

We should also see North America beginning to perform quite well because we believe both North America and European conditions are good at this point. So, we see the trend as upward from here and we are actually quite optimistic for next year.

One point which I think it's important to stress-- Alberto mentioned it in his comments-- is that even at this current level of the real, if the real stays stable in next year, the Brazilian farmer will be fine, the Brazilian farmer will be profitable and we will be fine. We will be profitable next year, as well. It was the delta, the change in the exchange rate, which really put stress on the farmer and ourselves this year. At this current level of the real, the industry in Brazil is okay.

Great and I appreciate your answer because this is a question that you have to look at this thing not just on a one line item, but to kind of combine a few things here to get a total picture because tax rate is one thing, but it's a part and parcel effect of the exchange rate on operating income, if I understood you right now.

Bill, if we look into next year, you've indicated in here that your normal returns should obtain. Are we talking-- that's your double-digit growth. What is the base we should be using to test that? And that's what I'm having trouble. Is the 405-- or sorry. Your guidance for net income for this year, are we looking at 11% gain from the reported net income here? Is that what we should-- or double-digit gain from the reported net income? Is that the base we should be looking at?

Well, Lenny, I remember you asked me that on the last call and I'm going to give you the same answer, which is that we think the midpoint of our previous guidance, which was 495 million, is a reasonable base from which to extrapolate our long-term earnings guidance. Now, our earnings guidance is 10 to 12% earnings per share increase on average over five years. And so, we think 495 million net income is a reasonable base to use for that.

Now however, let me caution you that this is agribusiness and we have up years and we have down years. So, last year was a particularly good year. This year, we're having a more difficult year. Logically, we should come back to trend and we think the long-term trend is going to be the 10 to 12% increase. But, we have not yet completed our budget process and have not yet established our guidance for next year. So, I would caution people on simply taking 495 million and applying 10% to it and saying that's the number for next year because that is not necessarily the case.

Okay. Along that line, which share should we be using? You're going to call in-- you're calling in the convert for cash, right?

That is correct, yes.

Okay. Now, the shares associated with that are going to have to come out of the fully diluted share count--.

--That's right--.

--The interest cost should go up on the borrowing, assuming you're going to obviously pay more than the coupon rate on the convert. Is that correct?

Interest rate will go-- well, our assumption is that the convert will be converted by the holders because it is so deeply in the money.

Oh, it'll be. Okay.

So, I think we're likely to see all of the shares being issued. So, we would expect that the full, I think it's close to 7.7 million shares, will in fact become outstanding. That implies that the-- our fully diluted EPS should not change at all because that number is included in our fully diluted EPS. However, our interest expense will come down by the 3-3/4%, which we're currently paying on that 250 million.

Right. And under the-- and your option expense, what are you estimating that to be for next year?

Option expense on stock options?

Yes.

Company. We have not put any estimates out on that, but if you go into the notes in our financial statements, you can see there the effect of that.

Okay. My guess is-- my point is, you had not changed your most recent published data, then.

We have not.

Okay, fine. Diane (ph), do you have any question on that?

Yeah, just on the fourth quarter-- hi, it's Diane. Moving the tax benefit into the third quarter, is there anything less that we'll see in the fourth quarter or should we just expect no extra tax benefit from the reorganization of the subs?

The-- what we did say when we announced this benefit that was going to come from the reorganization is that we expect an ongoing benefit of 2 to 4% in our effective tax rate as we go forward. And we do expect that that ongoing benefit will begin in the fourth quarter. But, we'll continue forward as we go forward. So, that benefit will be there. The remaining difference between that and the 10 to 14% that we currently have as our new guidance for the year relates to the hedging activities we were discussing earlier.

So, there's no additional in addition to the 38 million one time that you saw in the third quarter?

No.

Okay. Great. Thank you.

Thank you.

And next, we'll go to Christine McCracken from FTN Midwest.

Good morning. Clearly, it's been a challenging year for you, but I think it's been slightly more challenging for some of us analysts. In any case, wanted to touch on the drop in bad debt expense that you mentioned in your comments. Does this imply that farmers are now repaying those loans or what's changed there?

We have seen normal performance in farmer advances in Brazil, normal levels of repayment. Some of the decrease in bad debt expense was related to Brazil and some of it was related to other regions in the world.

But, we are talking about the agribusiness part. And obviously, in fertilizers, it's higher vis-à-vis last year.

Okay. But, you still don't anticipate any significant write-offs there?

We do not, no.

Okay. And then, can you talk about the drop in freight rates that you mentioned in the quarter? Is there anything specific behind that? You'd think in this current environment that freight rates would actually be higher, given the limit-- I guess the restrictions I guess or limited amount of capacity that's out there. Is that tied to China or is there something else there?

I think the freight situation today is more normal. Last year, we had more opportunities because of the high rate. And I think capacity has come on-stream in ocean vessels. So, we believe that the current environment is a more normal environment and could be the trend for the near future.

So, it's really not a timing issue. It's more of a normalization--?

--Yes, especially as a comparison because last year, we had these very high rates and gave us more opportunities.

Sure. And then, relative to the expectations for soybean acreage in Brazil-- we're now into kind of the full swing, I guess, on planning. Some reports are saying that acreages has come out. Others are saying it's just delayed. Can you talk about what your assumptions are for the year?

Yes. I think the USDA estimate is a more reliable one and also what we are seeing, which is that acreage will be down. Now, all the estimates for the production are up. Even the most conservatives are talking about a higher production. You have to remember that Brazil was effected last year with a severe drought in the southern part [inaudible].

So, if the production was around 51 million tons this year, even the most conservatives are up. So, it's a little bit early, but the planting is okay. There is a little bit less technology, a little bit less acreage. But, all-- we are confident with the estimate of the FDA that the production will be up. The rains are normal. But, this-- it's a little bit early. The-- we only are going to know much more about it at the beginning of the year.

Certainly, the volumes that we have been experiencing in the last month or so in the fertilizer business is a bullish indicator for next year.

Though, on soybeans, fertilizer sales will probably be a little less impactful?

Yes.

Okay. And then, you didn't mention anything tied to the hurricane. It seems like there's been a little disruption there. It didn't seem like you guys had any significant damage. But, I mean, it seems like the river delays are having some impact on the US commodity markets. Can you comment on whether or not you think that's the case and maybe what the current status of the river is?

Yes. We don’t think it will have a material effect on us. That's why we have not mentioned it too much, although we had 15 facilities in that area and one oilseed processing plant in New Orleans, so-- which was hit and it was down for a week. But, it's all up and running.

Overall, the effect, I think it is balanced. There are some negatives, some positives. The rain that fell on Iowa and Indiana-- Ohio and Indiana was positive for the yields. So, I think also the barges, it was an issue, but I think it is starting to normalize. We do not think it will have a negative or positive effect on our business.

So, these repots out of the Midwest talking about lack of storage capacity really in your view aren't a big deal at this point?

No, we don't think so. It's a big crop. So, it's a big crop and so, business is going well in the Midwest. So, we expect a good quarter in North America.

Good to hear it. Thanks.

Next, we'll go to David Nelson from Credit Suisse First Boston.

Good morning. Just tying in with the farmer here and I guess really the advances you're making with farmers continue to grow, although as noted, bad debt expense overall is down, but not in fertilizer. Could you make a comment on the rise in your advances to farmers, how you view that as a business or is that really just to help the agribusiness and fertilizer operations with sourcing capabilities? How do you view the risk and reward of these rising advances?

Well, we do view the financing business as a business. It's a critical part of our grain origination efforts and also helps us in selling fertilizer. But, we make good money on these advances, certainly well above our cost of capital. And our loss experience on the advances over the last 25, 30 years that we've been doing this has been very low. So, the returns have been quite attractive in the business.

When you look at the increase in the outstanding amount of the advances, it's actually exactly in line with the increase in volumes that we're doing in our grain origination business in Brazil. So, the two are advancing in tandem.

So, you're not looking to expand it beyond the pains of origination capabilities?

No, because first, we have to match it with the growth and our capabilities in origination. But also, we are very stringent about our credit requirements. And so, we believe that we are operating with the top 30% of Brazilian farmers in terms of credit and we'd like to keep it that way.

Maybe just to follow on, you've mentioned that even though the farmer in Brazil isn't making as much money, they're still profitable. How does the balance sheet look of farmers in Brazil, the type of people you're lending to? What do you-- you talk about lending to the top 30%. If the balance sheet of the farmer in Brazil improves overall, could you then therefore expand to 50% if balance sheets warrant?

I think that the first point is that the Brazilian farmer has been spoiled over the last two, three years. The returns were up to 100%. Now this year, they are still making money, although much less, so they feel poorer. And with a stable currency, the outlook for next year is very positive for the farmer. And the breakeven point is quite low. So overall, the outlook for the farmer is positive.

Also, the farmer is very well capitalized in the sense that they have a lot of un-priced beans and those beans are as good as money. They can turn those into money any time they want to just by calling us and accepting the price that is reasonable in the market. And so, that is capital in the hands of the farmer and that's quite a large amount of money.

With regard to the improvement of the balance sheet of the farmer, over time, the Brazilian farmer will get wealthier and will become better and better capitalized. And with that, we think we will probably be willing to expand our financial business a little bit more. But, it's not something I would say is going to have any material impact in the next couple of years. But logically, as the farm sector gets better and better capitalized in Brazil, we'll be willing to extend a bit more credit to them.

Any impact on the farmer in Brazil, psychologically or otherwise, from the outbreak of Foot and Mouth Disease down there?

It is just too early to say anything about it. But, I think it is, as far as we know, it's very localized in the part of Mato Grosso do Sul. It's a little bit early to say. There is no impact at the moment.

Great. Thank you very much.

Thank you. And next, we'll go to David Driscoll from Citigroup Investment Research.

Thanks. Good morning, everyone. Bill, you'd mentioned in response to a number of questions, but Lenny's in particular, that the stable real would be what you need in order to see a lessening of the problems on margins. I guess I need a little bit more on this one because essentially, the question is is that is it simply a year-over-year change in the real that we should look at? It doesn't sound like that if I listen to some of your other comments where you mention that fertilizer purchases earlier this year-- i.e., not a full year ago-- were the primary determinant of some of the cost pressures on the fertilizer business.

Can you help me understand then what is the relevant comparison? When I look at the real and I'm trying to understand what its impact is going to be, should I be looking at a sequential movement in the real, a year-over-year improvement? And how does that foot to what you were commenting on the earlier advance purchases of fertilizer raw materials?

Sure, Dave. This is hard, I think, for a lot of people to understand. But, it's not so much the absolute level of the real which is important, but the change in the value of the real--.

--Timing--.

--And the timing of that change. So, the bigger impact on us is when the real revalues and revalues particularly in the fertilizer business when we're buying the input in that business. That's the biggest impact that we have.

Also, the change in the value is what drives some of these tax effects, as well, which gives us opportunity to hedge against the, some of the effect of the real on the fertilizer business. Now, the absolute value of the real does have an effect when you're translating your SG&A and when you're translating some of your industrial cost. But, that is not as significant as the change.

When I look at the current real value of 225 to the dollar, the numbers going forward next year would indicate that in the first quarter of '06, we're going to have an appreciating real year-on-year if the 225 holds. Same thing would be true in the second quarter of '06. So, I must admit that I'm totally unclear as to if that year-over-year comparison should be made and if it's as negative as it would appear at first blush.

If this happens, what you are saying, it should be very positive for the farmers because they all have been buying now the inputs at 225. And when they sell the crop, they are receiving much more currency for what they are selling for. So, this would be much more like it was in 2003 and 2004. What really hurt the farmer this year was that they bought it at nearly 3 and sold the crop at 230, 240. So, if this happens, what most people are expecting-- in fact, we are seeing this week already the currency getting weaker, especially with the interest rates going down in Brazil. I think it is at 228 already today. So, if this trend goes, this is going to be very positive.

But, I think your question was directed towards something else, David. When you look at the quarter-on-quarter comparison for the first quarter of next year, there would be a lower absolute rate versus the first quarter of this year. Yes, that is a negative effect. However, it is not such a material one when you compare it to the effect of the change in exchange rates that we have been discussing.

Wow, this certainly is complex. Next question would be, on the tax rate going forward in 2006, if I recall correctly, Q1 and Q2, you had been at the low end of your prior established range of 28 to 32%. You had been coming in at 28% both quarters. And then, you gave this new estimated impact for the effect of the restructuring of Bunge Brazil had a reduction of the tax rate between two and four points. So then, by my calculation, if I use that 28% as really the right number rather than a higher midpoint, which we had not seen come through on the P&L, it looks to me like the '06 and beyond tax rate should be about 25%. Bill, would you agree with that or is that too aggressive?

Well, I don't want to comment on what the tax rate will be in '06. Let me just say that if you look at our historical experience tax rates, we feel that it should be 2 to 4% lower than that because of this restructuring in Brazil. Logically, that puts you somewhere in the mid-20 range.

Okay. Going back to one of Lenny's questions, I think this is just vital here and I want to make sure that we have at least one point of it established. You don't want to give '06 guidance right now, but can you at least eliminate a situation where-- do you see any chance that 2006 would actually be a down year versus your 2005 guidance?

If we saw a substantial incremental strengthening of the real and we saw a big crop failure, particularly in Brazil again, that would create difficult conditions next year. But, with normal harvests and a stable currency in Brazil, we expect that we should have a good year next year.

Above your--and again, this is all relative to your current guidance?

Well, the current guidance is 475 to 495, I believe. And I really don't want to put in place any number for next year at this point.

But, we believe it will be trend line next year. So, we believe it should be-- we should be back on the trend line next year.

Hey, Alberto, what everyone out there is struggling with is that in the first and second quarters, there were tax benefits that I don't think that we expect that would reoccur again. You've also had all of these complex foreign currency issues. And so then, the reason why this question comes up over and over again is that people out here are very unclear as to whether or not they should use this 490 million, $500 million net income number as the base from which to go forward because maybe there are some items in here that don't reoccur.

And quite frankly, we don't want to be just simply optimistic hoping that something will happen. But, your business is very complex, which is why I think these questions are recurring over and over again and why I was trying to simply eliminate a condition here where under-- it sounds to me, Bill, like you had to describe some fairly unusual circumstances with a giant crop failure. Perhaps an appreciating real is not an unusual circumstance, but nonetheless, ones that are not currently in place in order to describe a down year versus your established net income guidance today. Is that a correct-- would you guys agree with that in principle?

Yeah, next year we see as being a solid year. It would take some extraordinary circumstances like you described in order for us to have as difficult a year as we had this year. Perhaps a better way to approach it is just to say that our original guidance that we established for this year was I think a midpoint of 465 and that was based on normal conditions in Brazil.

Four hundred sixty five.

Four hundred and sixty five. Now logically, we would expect to grow above that number. And we also believe that 495 is a reasonable number to use for the base for our longer-term 10 to 12% earnings per share guidance over the next five years. I don't know if that's helpful to you, David.

Yeah, very much so. I definitely appreciate these comments.

But, let me give you, David, one more-- another perspective. The world needs around 200 million tons of soybeans and that is growing at 5%, which means that the world needs 10 million tons additional beans year after year. So, there is only so much that can be expanded. In US, we are having a good crop. Argentina is getting to its limits. China is not being able to expand too much.

So, a lot of this expansion has to come from South America. We had-- this year, there was no growth in production vis-à-vis 2004. So, only 50 million tons in comparison to the previous year. So, what this means is that if there is no growth or if there is a drought, if there is a little bit of an issue in one part of the world, obviously that will have an impact on the pricing of soybeans. And this will change immediately the picture for the outlook for the farmers.

So, the trend-- the beauty of this business is that the farm economics, they are always reset every harvest. So, that's why we are very optimistic about how it will look next year. If there is a little bit more difficult harvest in South America, this will have a very positive effect on planting, on the planting season in South America the end of next year and also the planting season in North America. So, that is why we are believing that we are back at trend line next year.

Well, very good. Thank you, Alberto, and thanks, Bill, for those comments. I'll pass it on.

Next, we'll go to Ken Zaslow from Harris Nesbitt.

Good morning. A couple questions. First, the reduction in tax rate, just making sure I'm clear, from 18 to 22% to 10 to 14 is entirely hedging related?

Within that reduction-- well, let me step back. The reduction in tax rate relates to the entire year. And so, within that number is the 38 million in the one time tax benefit from the restructuring of Bunge Brazil. However, the change between 18 to 22 and 10 to 14 is entirely related to hedging activities.

Do you expect the Brazilian real to appreciate, continue to appreciate?

It's very difficult to say what foreign currencies are going to do.

The reason I ask is it sounds like you have a pretty good idea of which way the currency is going to go if you keep on covering yourself on the tax rate. Is that not a fair way-- I'm just trying to figure that out is, you have a very good idea of which way the real is going to go if you're always covering yourself on the tax rate.

Before Bill answers, I would say, we do not have a good idea because if we knew it would have appreciated the way it did, we would have done some other hedging tactics. And it was not perfect. So, when you look back at 2005, we did not get it 100% right. So, Bill?

The difficulty is is that you, when you're buying your fertilizer inputs, for example, you're starting to buy at the end of the previous year and then, you continue buying into the beginning of the next year. But, you're not going to be selling until the fall. And so, if you're looking six to nine months ahead and trying to call what the exchange rate is going to be six to nine months ahead is quite difficult.

But fortunately, we do have the short-term hedging techniques that we can use to adapt our position quite quickly in order to protect ourselves somewhat. Now, if you ask me what's my opinion on the likely path of the Brazilian real, everything that I see from external sources and also internally suggests to me that the Brazilian real is overvalued at this point. And logically, when a currency is overvalued, eventually it corrects back to its natural level.

Also, at this level, the real is clearly damaging the Brazilian economy. It is clearly damaging exporters. And it is not helping the farm sector in Brazil, which is a tremendously important piece of the equation within Brazil. So, all of that leads me to believe that we should see the real at some point coming back to a more normal level.

In addition, we have the shorter-term factors that the Brazilian Central Bank has begun reducing interest rates, which is one of the clear reasons why the real has strengthened. And so, that probably also is going to over time remove one of the reasons for the strengthening.

No, I agree. Outside currency, it sounds like the issues that have plagued you-- and I'm trying to figure out which ones are temporary and which are not because-- the sales force in Russia, the marketing in Poland and the inventory are the three major ones outside pure currency. Is that fair and are those all going to reverse in '06?

I think also, we have I think mentioned it in previous quarters. We did not buy extremely well the sun-seed crop in Eastern Europe in the last crop. So, we did suffer during the year on the margin side in Russia, Ukraine and also Romania. So, I think this is gone. The new crop is in. And we are much more comfortable with the new situation. So, this means our margins in the edible oil business will lower in Eastern Europe.

The other ones are investments. We also mentioned, we had one, still one situation that will be with us for a couple of more months. At the moment, all the-- we are the second largest seller of bottled oil in Russia and we are buying the oil from Ukraine, Romania and Hungary, which is very expensive because of tariffs. So, once our plant is up and running in the last part of next year, this situation should improve significantly in Russia, as well.

The new crop coming in, does that issue that you were talking about with the bottled oil-- and I don't want to take up too much more time-- is it's going to reverse in the end of '06?

It will reverse already in the fourth quarter of this year and should be impacting positively us in the first three quarters also of next year. And in addition, in the fourth quarter of next year, we will have an additional improvement also from Russia.

I see. What is the order of magnitude on the inventory hit from the penalty that you were talking about in the fertilizer? Are we talking about 10 million or are we talking about 50 or 60 million?

You mean fertilizer or the edible oil in Eastern--?

--No, that's Ecuador. I'm sorry. The fertilizer, the penalty that you said that you're going to continue to pressure margins for the next quarter or so and then, it's going to reverse in '06.

We aren't putting a number on it. However, it is quite a material number. Also, let me remind you that last year, we had what we said was about a $25 million benefit in the fertilizer business from having bought the fertilizer inventories earlier in the year and seeing a price run up in fertilizer during the year. So, that also is effecting the comparison somewhat. But, I don't want to put a number on the foreign exchange effect, but it is quite material.

Okay. Bill, I guess what I'm just trying to get at is if all these are temporary issues that will be subsiding in '06, it seems like you backed off a little bit of the idea that-- or Bill, you had backed off a little bit on the idea that you can grow off your base on a 10 to 12% level going forward.

No, I am not backing off on that at all. We can grow at 10 to 12% in earnings per share from a base of 495 million on average over the next five years.

Okay. I appreciate it. Thank you.

Now, we'll go to John McMillan from Prudential Equity Group.

Good morning. Is it fair to say, Alberto, if the Brazilian farmers have been spoiled the last few years, so maybe have Bunge shareholders?

I think-- I don't know how to, what your real question is, but--.

--Actually, it was more of a comment.

I'm sorry?

It was more of a comment.

Oh, okay. Look, John. I am-- I think we are very confident when you look at where we have come from, the acquisition of Seriol (ph), the expansion. I think we are-- we have been growing at 27% per annum over the last seven years. So, with the consolidation of Seriol, what we are saying now is we probably will be growing more, as we are indicating on our guidance, in the 10 to 12% EPS on a more organic growth.

And also, I'm very relaxed about the situation. We could have handled it better this year, but we were probably above trend line. I normally like to say, there are 15 variables in our business and if 11 are doing well, we are fine. And last year, more than 11 were doing fine. This year, less than 11. And I believe that next year, we'll go back to the 11 variables. So, I’m very comfortable with the trend line. And we are very relaxed and very optimistic when we look into next year and the years after.

I guess I'm just getting into a situation maybe two, three, four years ago when currency was going down and that was benefiting you and those benefits, although you didn't quantify them last year in fertilizer, weren't maybe fully appreciated or discussed.

Well, we've always said that currency is a big factor in the business and that a depreciating currency, particularly in Brazil and Argentina, helps us and that a revaluing currency is bad for us. We have not quantified those effects, but we've made it very clear to the market right from the IPO. I remember, this was probably the biggest single issue that we discussed with every single investor in our 170 visits that we made to investors during the IPO.

Okay, that's fair.

But, we could have done better this year had we reacted faster on the appreciation of the currency. So, I think there are enough instruments to mitigate it. So, not all we did this year was right.

Okay, that's fair enough. Now, the tax rate I'm backing into in the fourth quarter is about 13-1/2, 14%. Does that sound about right, Bill, given your full year guidance third quarter?

We haven't actually crunched the numbers for the fourth quarter. We're looking at it from an annual basis, which is where the guidance is 10 to 14%. But, it seems reasonable, John.

Okay. And if I just take your July 28 assumed pretax guidance, just I get a number of around 820 million. And now, I guess your assumed pretax guidance is roughly 640 million.

Are you talking about operating profit, John?

No, I'm talking about pretax income, taking it all the way down. Now, I fully agree that this rough, whatever it comes to, 175 million or 20% drop in pretax, is not all operating shortfalls because you do have some legitimate hedging against the currency. But, just to kind of quantify it, if your pretax guidance has come down about 20% since July, how much would you guess is kind of like pure, the business getting worse reductions versus currency offsets and so forth? Can you just help us quantify it?

Before Bill answers, let me tell you, in June, we did not expect that we would have the trouble we had in fertilizer and with the appreciation of the currency and so on. So-- but, I consider this as a temporary thing, like missing a beat. And so, it is significant.

Yeah, I would say most of that is currency related, John. Obviously, there are some factors in the business like reducing crushing capacity in Brazil and less origination volume in Brazil because farmers are holding back grain. But frankly, that's driven by the currency, as well. So, if you look at it from that perspective, most, if not all of it would be currency related.

And the most important thing is the timing of the currency. We could have appreciation, for example, from now on and it would not effect the farm economics so negatively because the farmers bought most of the input at 3 reais and sold their crops at 240, 225. That was really depreciation and the timing.

Okay. And just-- you're just basically saying, through the nine months, your fertilizer volumes are down 6% did I hear?

Yes.

Okay. And for the full year, you'd expect that kind of number, which certainly shows some kind of market share increase versus a market that's down, as you're indicating 12 because according to ANDA, they have shipments down 17%.

Don't forget, in our number, it also includes sales that-- we have different segments in the fertilizer business. We have our resell segment and we have our nutrient segment where we are producing fertilizer intermediate raw materials that we're selling to the rest of the industry. So, we account both those volumes. So, the numbers are not directly comparable. But, we do expect that in the retail sector, with is the ANDA number, we will be better than the market as a whole. So yes, we will pick up some market share.

Great. And then just finally, in terms of North America soybean crushing, what are you seeing so far out of the gate?

The outlook is very good, responsive, good crop. The demand is good. The meat industry's margins are solid, so you have been-- I'm sure you have been following the board crush margins. So, the outlook in, from our point of view is very positive.

Okay. Well, thanks for everything.

Thank you. At this time, we'll go to Victor Galliano (ph) from HSBC.

Hi. Good morning. Just a couple of questions. In terms of the fertilizers, you were-- obviously, you were talking about the market share gains there. And even though we've seen price increases, obviously, we've seen this margin contraction, enormous margin contraction. Is this entirely the currency appreciation? Is there anything else in there? Are there any other costs you're absorbing that you wouldn't normally do or that you had to do because of the mad rush to try and fill the orders that came in very late in the quarter in the sense of distribution costs or transportation costs?

We have a little bit more expenses, industrial expenses because we continue investing because-- so, there is-- there are more industrial expenses and more depreciation in our business this year vis-à-vis last year, but lower volume. So, that is a-- there is a negative. And also, there has been, because of the-- the margins have also compressed. A very important part is because of the, there is a lot of inventory in Brazil and there is pricing pressure also in the market. The whole industry is in the same situation as we are. So, the farmer obviously benefited a little bit more from this competitive environment.

Again, that inventory is being liquidated and we expect that it's going to be taken care of by the end of the year.

And that is your inventory as well as the competition's?

Yeah, we think the overhang in the market of the entire industry will be taken care of by year-end.

By year-end, okay. And just one follow up question on your loans to farmers. Can you give me an idea of what the total amount outstanding is and what your NPL ratio is on that?

The actual amounts, I think, are disclosed in our filings. But, the total amount is approximately $800 million. The-- I'm sorry, which ratio? NPL?

The NPL, yeah. Non-performing, yeah.

Non-performing. It's very small. We don't disclose the exact number, but it is very small.

And it hasn't changed over the last year or so radically?

It has not changed dramatically, no.

Okay. Thank you.

Next we'll go to Fashad Visogi (ph) from Nicholas Applegate.

Morning, guys. You've pretty much answered all the question I had in currency and taxes. Just two other questions. How many mines are you operating in Brazil right now, faucet phosphate mines?

We're operating four out of the five principle phosphate mines in Brazil.

And are you planning on taking any of them offline or are you going to stay with the four?

No. We produce all we can. You remember that Brazil is not self-sufficient. And what were reduced were inputs were reduced because the mines are very competitive. So, we continue operating as much as we can.

In fact, we're opening up a new one in a joint venture together with Yaro (ph).

Okay. And the other question is do you have any new initiatives and logistics in Brazil or Argentina?

We-- there are many initiatives. You are probably talking about investments, right?

Right.

Investments, what we are doing at the moment is clearly we are building the new-- in Argentina, it's done. We inaugurated it in September, the Hamage Port (ph). It's going well. And in Brazil, we are building two terminals, one fertilize import terminal in Santos and an export, a grain export terminal. So, we are in the middle of building it, so-- and there will be other initiatives, but at the moment, nothing concrete to talk about it.

Okay. All right. Thanks a lot, guys.

Next, we'll go to Charlie Leculture (ph) from Paxton (ph).

Yeah, hi. Back in June or in July in the press release, you referenced fertilizer volumes being down 5 to 10%. And so now, it sounds like they're going to be down less than 12. And you talked about maybe 6%. And you referenced the Brazilian real at 2.35. And I think you said now for the quarter, it was 2.36. So, it actually doesn't sound like either of those things changed that much. But to John McMillan's question, income from operations before taxes and minority interest is about $180 million, potentially lower.

So, I'm still unclear in terms of how it changed that much because when you look at the press release you put out in June, July versus now, it really hasn't changed.

Well, the-- don't forget that it's the average rate which counts when you're selling the fertilizer. And you're just looking at the point rate at the end of July. And in fact, the average rate that we were looking at at that time was substantially higher. I think it was probably around 245, approximately. So-- and the spot rate at the end of September was down to around 225. So, the average rate was hovering below, I think below 230. So--.

--So, you're saying it was 236? I thought that you had said for the third quarter it was like 235 or 236.

Yeah, for the third quarter. But, most of the fertilizer volume came at the end of August and September when the real had devalued substantially, right. So, it's the average rate when you're actually selling it.

So, it seems like one cent equals about $10 million of pretax income

No, I wouldn't go there, but the-- a lower average rate in terms of sales price is fairly significant.

Okay. And then, just in terms-- I understand that you're not giving any formal guidance, but just in terms of the notion that everybody seems to be moving towards in terms of being up 10% off of a base of about 485. I mean, simple math suggests that your pretax income before taxes and minority interests have to be up about 30% if, in fact, the tax rate moves into the mid-20's and that's even before factoring in the absence in '06 of these value-added tax credits. Do you think that's reasonable?

Well, we think that a recovery of operating profit next year, because of the absence of the same kind of exchange pressures and a reasonable crop, is reasonable. And obviously, we've seen a significant decline in operating profit this year. And we would expect to be able to capture most of that if not exceed it.

Okay. And then just lastly, does the fact that you start the year with the real significantly stronger than you started 2005 represent any headwind for EPS at all?

It is a headwind because there is still some effect of translating your SG&A and translating some of your industrial cost. But, it's nowhere near as large an effect as the change of the real.

Okay, thanks.

It appears there are no further questions at this time. Mr. Lindsay, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you all for joining us this morning. Bye bye.

That concludes today's conference. You may now disconnect.