Bunge Global SA (BG) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to Bunge Limited's fourth quarter conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Ms. Susie Ter-Jung.

Thank you, Jennifer, and thank you, everyone, for joining us this morning. Welcome to Bunge Limited's fourth 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 on this conference call to the most directly comparable GAAP financial measures are posted on our website, www.bunge.com, in the investor information section.

Recently we asked outside advisors to conduct a perception survey regarding Bunge's investor communications. We would like to thank those of you who participated for sharing your time and opinions. We appreciate your feedback.

Among other things, the survey made clear to us that we could improve our communications regarding how tax and currency, particularly the Brazilian real, affect our business and financial results. In this regard, we have posted today some information on these two topics in the investor information section of our website. We hope you find this information helpful.

Before we proceed, 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 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 today. 2005 was a difficult year for Bunge. We faced significant external challenges and we made some mistakes. We have improved our operations, however, and while we will not see a return to trend line growth in all areas, we believe that 2006 will be a better year.

In 2005 our principal problems stemmed from a weak operating environment in Brazil. Farm economics deteriorated due to a drought, lower soybean prices and a steadily appreciating Brazilian real. Farmers reacted by withholding crop sales and delaying purchases of farm inputs. The real appreciation affected Bunge directly, primarily by raising local costs and squeezing margins. Fertilizer inventory purchased earlier in the year was sold later at a stronger real/U.S. dollar exchange rate, pressuring dollar margins.

If we had started the year with a lower level of fertilizer inventory, reducing crushing capacity sooner and improved our foreign exchange risk management program, we would have achieved better results. The appreciation of the real and its timing was, perhaps, the biggest negative of the year and we did not anticipate it or react to it quickly enough. We hedged our balance sheet exposure, but not our local costs and we could have made better decisions when hedging fertilizer inventories. We estimate that local cost in dollar terms increased by 19% in 2005 due to foreign exchange.

The market situation in Brazil will improve more slowly than we had anticipated, largely due to the continued strength of the real. Farm economics in that company remain weak and retail fertilizer volumes will likely be flat for the year. We are not waiting for better conditions, however. We have taken steps to improve our performance in the current environment and, largely as a result of these changes, expect Bunge to produce better operational results in 2006.

We have initiated an expanded and refined risk management program that will lower our exposure to the Brazilian real by hedging both the balance sheet and expenses.

We have liquidated higher-priced fertilizer inventories, which should benefit margins. We are beginning 2006 with inventory value approximately 20% below levels at the start of 2005.

We have reduced our work force in Brazil by approximately 10%, initiated cost savings, permanently closed two oilseed processing plants and idled seven fertilizer facilities.

We estimate that these steps will save $60 to $80 million in 2006.

We have also reduced our ongoing effective tax rate through a legal restructuring.

In 2006 we will stay focused on growth and efficiencies. This year we intend to create a stronger link to customers in China by purchasing a second soybean crushing and refining plant in that country. We will bring onstream two new crushing plants in Spain, replacing less efficient assets. We will also expand our phosphate mining capacity in Brazil by over 10% and substitute more fertilizer imports with domestic supply at better margins.

2006 should see the start of operations at our new grain and fertilizer terminal in Santos, Brazil, one of many logistics projects that help to improve the efficiency of our integrated food production chain, as well as the conclusion-- completion of two new sunseed crushing plants in Eastern Europe.

By year end, our new Russian plant should supply our domestic bottled oil business at improved margins.

We are also leveraging the efficiencies of our existing infrastructure to initiate a small sugar origination and marketing business.

Our industry will always be influenced by a variety of factors, some working in our favor and some to our disadvantage. Overall, however, we remain confident in Bunge's long-term growth potential and its global strategy. Our purpose is to improve the global food and agribusiness chain and we believe that the value of this role will only increase in coming years as demand and trade expand. The world will grow and consume more food and we are positioning Bunge to serve the fastest-growing markets efficiently.

Bill will now provide an overview of our results and outlook.

Good morning. This quarter we took many steps that, while painful, were necessary for a fresh start in 2006. We liquidated high-priced fertilizer inventory, shut inefficient plants, reduced costs and, most painful of all, let almost 1000 of our fellow Bunge co-workers go in Brazil. It was truly a tough quarter. Nevertheless, we go forward stronger, more efficient and ready for the new year.

Now let's talk about results. In agribusiness, strong results in the Northern Hemisphere was more than offset by weak results in Brazil. Bunge's U.S. businesses and global softseed operations benefited from solid margins and produced strong results.

In Brazil slow farmer selling and an appreciating local currency continued to pressure margins and increase local costs when translated into U.S. dollars.

Freight management results declined from last year. Energy costs increased in the U.S. and Argentina. Selling, general and administrative expenses declined due to lower variable compensation expenses and reduced bad debt.

Results included $35 million of impairment charges related to the closure of two oilseed processing plants in Brazil and the impairment of one plant in India and $10 million of restructuring charges related to operations in Brazil and Europe.

Fertilizer results in the quarter were extremely poor, despite higher volumes. Margins were pressured by higher average inventory costs, higher industrial costs and the liquidation of excess inventories. Fertilizer raw material inventory purchased earlier in the year in anticipation of good demand, was sold at a stronger real/U.S. dollar exchange rate later in the year, squeezing dollar margins.

Due to a stronger real relative to the same period last year, local costs were higher when translated into U.S. dollars. Results include a $2 million cash restructuring charge.

Edible oil results declined, primarily due to weaker performance in Europe. Improved results in Ukraine and Hungary were more than offset by lower volumes and margins in Romania, higher advertising expenses for a new margarine brand in Poland and higher SG&A in Russia.

In North America, strong demand for canola oil and trans-fatty acid replacement products benefited results. Energy and transport costs rose in the U.S.

In Brazil, stronger performance in margarine and specialty oil was offset by lower margins and volumes in packaged oil. Costs rose due to the appreciation of the Brazilian real and higher marketing expenses for a repositioned margarine brand. Results included a $2 million cash restructuring charge.

Wheat milling results benefited from higher volumes and improved product mix, but were offset by margin declines in corn milling.

Interest income decreased, primarily due to lower average balances of invested cash. Interest expense increased, primarily due to higher average borrowings funding operating working capital and increases in short-term interest rates. Foreign exchange losses in the fourth quarter of 2005 resulted from the effects of the devaluation of the Brazilian real at year end compared to the U.S. dollar on the net U.S. dollar-denominated monetary liability position of Bunge's Brazilian subsidiaries.

In the fourth quarter of 2004, the Brazilian real and the euro appreciated against the U.S. dollar, which resulted in foreign exchange gains on the net U.S. dollar-denominated monetary liability position of Bunge's Brazilian and European subsidiaries.

In the fourth quarter of 2005, Bunge received a favorable U.S. tax ruling with respect to the unremitted earnings of a foreign subsidiary holding company. As a result, Bunge liquidated this foreign subsidiary, reduced the associated deferred tax liability and recognized a $77 million one-time, non-cash tax benefit. Additionally, Bunge decreased its deferred tax valuation allowance by $36 million, primarily as a result of projected increased taxable income in subsidiaries with previously reserved net operating losses.

Due to efforts to restructure our Brazilian subsidiaries, we expect Bunge's future effective tax rate, excluding 2006, to fall within a range of 23% to 28%. The effective tax rate in 2006 should be lower due to our hedging program for foreign exchange-related tax exposures.

As Susie noted, more information about Bunge's taxes, including a reconciliation of income tax expense at the U.S. statutory rate to Bunge's effective tax rate, is available in the investor information section of our website.

Minority share of net income decreased when compared to 2004 due to lower earnings at Fosfertil.

Net financial debt at December 31st, 2005, decreased $52 million from December 31st, 2004. Cash flow provided by operations was $382 million in 2005 compared to $802 million in 2004. Cash flow from operations declined from last year, primarily due to lower segment operating profit.

Cash flow from operations in the fourth quarter of 2005 included approximately $155 million from the sale of accounts receivable through a new securitization facility.

Now let me discuss Bunge's outlook and guidance for 2006. The global agribusiness market should experience good conditions in 2006, but will not be free of challenges. We see growing demand for our core products -- soybean meal and vegetable oil -- and strong consumption of biodiesel that should benefit the softseed market, but continued weakness in Brazil and a tougher crushing environment in Argentina. North America should have a good year, but a difficult comparison to excellent results in 2004 and 2005.

We anticipate higher energy costs generally and headwinds in our freight management business. Expectations are for flat retail sales in the Brazilian fertilizer market. Solid demand for vegetable oil and improved results in Ukraine should contribute to improved performance in edible oils.

Overall, we expect Bunge to produce better operational results in 2006 due to initiatives to improve margins, lower costs and mitigate exposure to the real. Many of these initiatives are already in place and are beginning to produce results.

Our 2006 guidance is as follows -- depreciation, depletion and amortization, $300 million to $310 million; capital expenditures, net of asset dispositions, $490 million to $510 million; $195 million to $215 million, maintenance, safety and environmental capital expenditures; effective tax rate, 18% to 22%; joint venture earnings, $40 million to $45 million.

This guidance assumes the following -- stable currencies in South America and Europe; normal 2005-2006 North and South American and European crops; stable international fertilizer prices; and flat Brazilian retail market fertilizer sales, when compared to 2005.

Based on these assumptions, our 2006 net income guidance is $520 million to $540 million, representing $4.29 to $4.45 per share. This fully diluted per share guidance is based on an estimated weighted average of 121.3 million shares outstanding, includes $0.05 per share for stock option expense, and is a reasonable base for calculating Bunge's five-year 10% to 12% average annual EPS growth target.

Before taking your questions, we would like to update you on a change to our investor relations team. Susie Ter-Jung, who has served as Global Communications Director for over two years, is moving to Rome where she will serve as CFO of Bunge's Italian operations and commodity marketing business in the Mediterranean. Stewart Lindsey and I will fill in as IR contacts until we have identified a full-time replacement.

I would also like to say that Susie has done a great job for Bunge and express the thanks of Alberto, myself and her co-workers. We wish her great success in her new job.

We will now be happy to take your questions. Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from David Nelson, Credit Suisse.

Good morning.

Good morning, David.

Good morning, David.

And I appreciate your initial candor there, Alberto. On fertilizer, how much did moving that high-cost fertilizer through your system hurt earnings and is that done now?

We do not know a precise number on that, because this is-- there are a couple of different factors and different sources of raw materials and so on, but it was important. It is-- but it's basically done. So the excess inventory, the more expensive inventory is out and the new inventory we have been buying and are buying at the lower rate is at the new exchange rate, so we think that this issue of the expensive inventories that we bought early in the year last year with the higher exchange rate, this is flushed out of the system.

Yes David?

Yes, go ahead.

David, something we could give you a little bit more of a feeling in terms of number is that we believe that the-- the hedging errors on the inventory during the year probably cost us about $50 million.

5-0 for the year?

5-0 for the year. We certainly hope not to repeat those.

Most of that was in the quarter?

No. That was spread out during the year.

Okay. Just thinking about fertilizer and how long it can continue to be weak, I mean, I guess I saw an estimate that the Brazilian crop might be 58 million tons this year. You're forecasting a flat year after a down year and after a flat '04. How long can fertilizer continue to be weak?

Would you expect-- I know this is hard in February here to say what plantings will be, but would you expect acreage, soy acreage in Brazil to be flat this fall?

The-- the weakness we are expecting is more related to the exchange rate. If the exchange rate weakens, obviously the farmer gets a much better farm economics and he would probably plant more. So the question is much more how it will look like, especially for the larger crops, soybeans, corn, cotton, sometime in June, starting in June. That's the critical point.

Now for the crops that are going to be planted in the first half, the outlook is good. Coffee and sugar cane is doing well, so we do not expect any issue there. So we will have to wait until-- to see the-- because you remember most of our business, probably two-thirds of our business, is in the second half of the year. We'll have to see as we move into the year, but we are obviously being cautious at the beginning of the year.

Now to your question, we believe that latest, in 2007, this should be back in trend line. I always like to remember-- remind people that we need something like 10 million tons of additional soybeans worldwide and if the excess stock is something like 20 million tons, you need-- after one year you really have to get the growth again. And there's only so much that can be produced in U.S., only so much that can be expanded in Argentina. So Brazil will have to come in. Even if the exchange rate does not recuperate, the commodity prices would make the difference for the farmers.

So latest, in 2007, we think we are back to trend line.

Okay. And then you recently made your second acquisition in China, your first I think had been in June. Are you seeing a rationalization take place there yet? Any consolidation or any plants that are shutting down? Or was this more a one-off opportunity?

I would say that it's a-- the general picture is that there is, obviously, excess capacity. We know of plants that have been built and have never been operated-- never have operated, because they are in the wrong places. So we have chosen these two ones very specifically on location and price and we have been-- this was a real special opportunity. We have been looking for opportunities for quite a while and we are very happy with the location and with the prices we are paying.

And we will continue being-- looking for more opportunities, but you have to be very, very careful in China to find the right place. Especially location is extremely important. So over time, you might see more acquisition because we see the advantage of having a complete, integrated chain. The first one we have a partner. The second plant we will own alone, so it is very important that we control the whole chain. So we will continue looking for more opportunities.

Now the margins, despite the excess capacities, have been in the last month, in most of the plants that are operating, have been decent. So that gives you an idea that despite the excess capacity, location is key and that's very important.

Great. Thank you very much.

Thank you, Dave.

Our next question comes from David Driscoll, Citigroup Investment Research.

Good morning, everyone.

Good morning, David.

Good morning, Dave.

So clearly, Alberto, I think you're trying to get the message across that the quarter itself was really very negative. You're showing a loss here in the fertilizer business and, if I understand it correctly, this is really to deal with the inventory losses that you've taken because of the real. Is that the appropriate way to look at the fertilizer business for the quarter?

Well, Dave, you remember, we look at it yearly. So when you look at the year, it was pretty lousy for fertilizer. When you look at the reduction in operating profit, I think 80% came from the lower earnings in fertilizer. The third quarter was difficult, the fourth as well. So we look at it as a complete package and so not so much on the quarter.

Obviously, the last quarter was especially tough because we wanted to get all the restructuring done as soon as possible, whether cutting of the-- shutting down the plants, idling facilities, the layoffs, we want to move fast so that we are ready for the-- for the new year.

So I think overall agribusiness and edible oils, you could argue that we're kind of in line. We had some issues, I would say, in Eastern Europe which we do not see that we will have this year. We had some issues in Brazil, also on agribusiness, which we don't see this year with the cost cutting. So I would not-- we do not look at so much as a quarter, we take a more longer term, which is-- a view, which is quite natural.

I guess my point was simply that fertilizer in the quarter was negative and that just seems like a highly unusual result for that business.

Yes. But what is-- you're right, but you have to see-- let's take it the way we look at it at the whole second half. We started the year with an inventory expecting a normal demand. As we said, we made mistakes on the hedging. We estimate it at around $50 million. Then at the same time, our expenses were higher and all these inventories had to go out of the system.

So we had a squeeze. The dollar margins were a little bit squeezed. We had also lower margins because of some of our hedging. We had more expensive-- it's not the quarter. It's the whole-- the whole year was like this, but obviously, especially the second half.

And then your statement about the inventories being 20% lower at year end, are you really trying to tell us that this high-cost inventory has been fully worked out of the system and that in first quarter of '06 we start from a fresh base again where the fertilizer business will revert back to more normal-type margins?

Yes. That's the point. And I think that's also the point in the industry. I think when we look at around-- we obviously do not see all the balance sheets, but I think everybody in the industry who has suffered, more or less most of them have done the same-- the same thing.

Two related questions. And, Alberto, if you could take the first part and, Bill, if you could take the second part, it relates to the farmer health in Brazil. Alberto, I'd like to hear you assessment on the Brazilian farmer. Specifically, I want to refer to soy-- to soy farming. And then, Bill, if you could talk to us about the fact that you have substantial advances to suppliers and that's a-- it's a big number for you and there's been a lot of questions that I've been getting in terms of the credit quality of your loans.

If you could talk to us about your historical experience with these and kind of what you forecast for us, I think the investment community is really-- is really desiring to know what you see.

Let's start with the general farm economic picture. The-- first of all, the outlook for 2006 is a little bit better than 2005. For the farmer -- I'm talking now about the farm economics -- the farmer's bought all the inputs in the beginning of last year at a higher exchange rate. So when they sold their crop at the lower one, they really were squeezed.

Now when we look into next year, what we are seeing is that the inputs that will be bought are at the lower exchange rate and we hope the exchange rate stays the way it is. So naturally the farm economics-- the economics for the farmers are a little bit better.

That's one point. The second point is that what is very important is that there's a big crop, especially a soybean crop you are mentioning, is in the soil and they will harvest the crop and they will sell it. So this will be the-- this will be the important factor because the inputs were already paid and now they get to sell their crop. So this will give them the liquidity to look for the next year.

So overall, we are worried, but the big crop is out there and it's starting to be harvested and by selling the harvest they are paying down their debts in fertilizer and also their advances.

Credit is something that we've been very focused on. Certainly at-- in last year and we're continuing to be very focused on it. We did a complete review of the advances to farmers portfolio at the end of the year with our internal audit area. We also had them take a look at our fertilizer receivables portfolio to make absolutely certain that we were comfortable on the level of provisions that we had versus those portfolios. And we are comfortable.

We generally take a conservative approach to-- to provisioning, but our long-term experience in terms of recoveries is-- is quite good in those portfolios. Our usual loss ratios over time are in the low single digits.

Now let me remind you that we do take collateral in order to support both the farmer advances and also a significant piece of the fertilizer receivable. That collateral is in the form of land and also in the form of the crops and we usually have a significant over-collateralization and we are able to execute on that collateral and monetize it. We have good history doing that in Brazil.

And, as Alberto said, probably the most important factor when looking at farm credit is that the source of repayment because the source of repayment is the crop. And so we know that the crop has developed well. We are expecting a good harvest in Brazil this year and so the funds will be there to repay the advances.

So while we are paying a lot of attention to it, I don't think we expect any unusual surprises in that area in 2006.

Maybe one final question. Your tax-rate guidance for 2006 is-- I think it's far better than what many of us on the outside here were modeling and so the-- it looks like it's a significant benefit to your '06 numbers. I've already heard questions this morning from folks that are asking about this, but can you-- can you contrast that with the idea that you're expecting the real to remain flat, which is certainly not what Citigroup's own economists here are projecting it to devalue and I'm heard many other folks say the same. And you're also expecting your fertilizer volumes to remain flat, which also seems rather pessimistic.

So, Bill, Alberto, could you-- could you kind of put things together? Because I think folks will have a tendency here to focus solely on this tax rate as the company being aggressive, whereas it seems to me that you've been rather conservative in a few other areas. Do you feel that way or is it really not-- or is it really not that?

I'll let Bill answer this, but let me give you one view, my personal view, on the exchange. We probably did-- last year we also believed and were convinced that we would see a weaker real and we did not prepare well enough for a stronger real. We will not do that mistake again. So although we believe that it should get weaker over time, there should be a convergence to the purchasing power parity, but we are not counting on it. So that's why we are taking a more conservative look.

Yes. Specifically, with regard to the tax rate, as I mentioned in my formal remarks, we think that our longer-term structural tax rate is between 23% and 28%. And that's because we have-- we've significantly increased the efficiency of our capital structure by restructuring our Brazilian businesses and also restructuring our European businesses after the acquisition of Cereol.

Now we are expecting that we will have a better, lower, effective tax rate in 2006. The guidance is between 18% and 22% and the reason for that is that we are hedging some foreign exchange tax exposures, particularly related to Brazil. Those hedges are already locked in and so we already have a good sense of what the results of that should be and we believe that those results are independent of the movement of the real, whether it-- whether it strengthens or whether it weakens.

So if I were to sum this up, it seems to me like the business model here -- and, Alberto, you've referenced those 15 variables that are constantly changing here. The environment in Brazil does not really seem all that favorable for the company. The tax rate is going to be somewhat of a help next year, but net/net the company is performing rather well in a-- what looks to me like another difficult environment in 2006. Would you agree with that characterization?

I think so, yes. To be honest, I'm quite proud of how the people reacted to the problem in fertilizer and also in Brazil, reacted fast, when you think about the shutdown of plants, layoff, restructuring. The changes in the hedging we did I think it was a little bit slow. It could have been faster, but it's done. So I feel comfortable about that.

And we have to remember, also, we're talking a lot about Brazil, especially because of fertilizer because our fertilizer business is in-- mainly in Brazil, a little bit in Argentina, but I'm-- I'm quite comfortable how we are doing in North America, in Canada and U.S., how things are evolving positively in Europe with the new plants that are coming on stream. I feel good about it.

We have to be, obviously, careful with Brazil, but I'm much more comfortable looking into 2006-2007. I think we are much better prepared than we were last year. And, as I said before, I-- I'm more convinced than ever that the fundamentals are very strong.

Well, thank you for allowing me so much time and let me pass it on now. Thank you.

Thank you, Dave.

'Bye-bye.

Our next question comes from John McMillin, Prudential.

Good morning.

Good morning, John.

Good morning, John.

Somebody needs to transfer me to Rome, Susie, because--

Just on the fourth quarter taxes, I mean, I think, Bill, you said the tax rate was going to be 10% to 14%. Now, as I kind of work through my model, this $0.81 or $0.82 operating per share number that you had, I mean, half of that earnings came from tax benefit in the quarter. Is my math correct?

It was a significant amount of the earnings in the quarter came from tax benefits. Absolutely.

So in terms of what changed between your October guidance of 10% to 14% paying taxes, between the final number of you getting some kind of $0.40-$0.50 tax benefit, what changed?

Well, there were some things that we were working on, but we did not have certainty that they were going to come into the year. Those items were, one, the liquidation and repatriation of the equity of this offshore holding company. That was dependent on getting a ruling from the IRS and we got that ruling in the fourth quarter and then we had to have it completely reviewed by our auditors and our external advisors and that only occurred late in the-- late in the quarter.

So if you didn't get that ruling, you would have had lower earnings than what came out in line with everybody's expectations?

Yes. If we didn't get that ruling, the $77 million would not have come into earnings.

The-- at the same time, we had a gain on sale, which was on a transaction which was completed in the fourth quarter. While we were working on that transaction, there was no certainty that it was going to close in the fourth quarter and so we did not build it into any of our guidance the same way we did not build any of the benefits from the liquidation and repatriation into our guidance.

And the restructuring charges -- we were in the process of implementing our restructuring plans and quantifying exactly what that was, so we did not know until late in the end of the quarter exactly what the amounts were on the restructuring charges. So, again, we did not build those into-- into our guidance. So those-- those items were unknown items at the-- at the end of the third quarter when we established guidance.

Okay and you do lay things out well in the tax-- in the press release. Just to be clear, you're not saying-- you're saying that the industry, Brazil industry fertilizer will be flat, not that you'll be flat. Is that correct?

That is correct. In fact, because of our market position, we may-- we may get some-- some benefits. Usually in difficult conditions, the stronger-- the stronger market participants improve their position and I think we believe that may happen in Brazil, both in the agribusiness sector and in the fertilizer sector. In fact, we have seen that occurring in 2005, which-- which doesn't help in the immediate situation, but for the longer term, we think it is important.

I just-- I've gotten a lot of calls today talking about kind of like a day of reckoning when your tax rate normalizes. And I know you're not Sara Lee and I know there's a lot of things different and I know with your statement at the end that you project your growth rate of 10% to 12% off this base with a low tax rate, but do you see-- just-- it's just hard to know how much of these tax benefits are sustainable. I think that's the thing we struggle with. I guess that's more of a comment than a question, but if you want to comment to my comment, I'd appreciate it.

Well, what is interesting is that I think more and more companies will have the same situation. I just came back from the World Economic Forum and talking to other CEOs, one of their concerns is as the business is expanding into-- more into India and to China, Eastern Europe, they are concerned about some of the volatility on their tax lines, on some of their foreign exchange.

But I think we will see this more and more with many, many more companies. And people are concerned about it. And I think we are seeing it very strongly in our case.

I agree with what Alberto is saying. This is, unfortunately, just the nature of having large operations in the emerging markets. That's where the growth is and that's where the best margins are, so we have to go there. We have to operate there, but it does mean more volatility, particularly on the tax side.

And the ability to manage these taxes is actually critical to your competitive advantage. It has to be a core skill of the company and we believe that we manage them reasonably well.

We take a very conservative approach to it. We know that there's a lot of uncertainty that surrounds it, so whenever there's any question about collectibility of these taxes we reserve it and then we-- we do our best to go after it in the courts, to talk with the governments, to encourage them to change laws. And we have a fair amount of success with it.

The difficulty is that it is unpredictable in terms of timing. You just can't-- can't predict it. It depends on when courts rule. It depends on when a government decides to come with different administrative rulings. It depends on changes in law. But every company that has significant operations in emerging markets has the identical issue.

This is why we're trying to give you a sense of what our structural tax rate is by saying that if you look at between 23% and 28% for the long term and key things off that, then you should be in the right place.

Yes, I just-- I just have trouble giving you benefits of $0.60 of $0.50 in your 2006 guidance from an abnormally low tax rate. I think that's kind of what the market is saying is that your earnings guidance of $4.30-ish is not real with these kind of tax benefits.

Well, there's no question that our numbers in 2006 are being helped by a lower tax rate. I think we're quite clearly saying that 2006 is a recovery year for us. We still are going to be a bit below trend line in terms of where we think we should be in average annual EPS earnings and it is because of the fertilizer business. Taxes is helping to offset that.

Now it's-- the tax benefit that we expect in 2006 is not something that's dropping out of the sky. It is because of some actions that we've taken in hedging our exposures, but, even so, we know that that is something below the long-term trend and we're trying to make sure that people understand that.

Thank you for answering my questions.

We'll go next to Christine McCracken, FTN Midwest.

Good morning.

Good morning, Christine.

I just wanted to follow up on fertilizer, only because you are looking for kind of a, I guess, a flat year in terms of sales. But given the just completed buying of those raw materials, it seems like you should see a rather nice rebound in margins in '06, assuming, again, the currency situation stays somewhat normal. Is that fair to say?

Yes. We are-- we did not buy all the raw materials for the whole year. We have some stock and we have-- we buy it as we go into the season. But you are right, we do think our margins will come back to normal, the dollar margins, but also we will not be affected by the higher inventory cost that we had in-- because of the inventory situation because we bought it at a higher exchange rate in the beginning of the year. So we think our margins will expand in fertilizer.

And assuming the real weakens at all during the second and third quarter, could that be a benefit for you, going forward, given the recent strength of the real?

It could.

Okay. And just in terms of the mining expansion, can you give us some idea of when that might come online? Is that more of a fiscal '07 event or could you see some of that benefit in fiscal '06?

No, we will see it in fiscal-- in this year, 2006. We basically finished the expansion, so instead of importing materials, we are going to supply our own needs with the-- with our-- the production from our own mines. We will see the benefit already this year.

And in terms of the other benefits from the restructuring that you outlined, I guess, earlier in the press release, can you talk about-- I think you highlighted $60 to $80 million in benefit. Is that something that you expect to be spread throughout the year? Is this more back-half weighted? Could you comment on that?

The restructuring is substantially done at this point. There will be a little bit more that will be done in the early part of this year, but most of the big things have been taken care, and so we expect to see the benefits spread evenly through the year.

Okay. And you talked about, in terms of the demand for your product being very strong, I think specifically for meal and oil. Can you talk about whether or not you've seen any impact from the foot-and-mouth outbreak from Brazil or AI in various parts of the world on demand for meal, specifically? And I think some of that might be offset just by some of the growth we're seeing here in the U.S., but can you comment on that?

The-- as far as I know, the foot-and-mouth disease was with cattle and we are not a very large supplier to the cattle industry, with the exception of dicalcium phosphate. So our-- the livestock industry, especially, is pork and poultry and we are seeing good demand.

What we have to remember, also, is that, obviously, the bird flu is always a concern, but at the same time, it also has a positive effect because what you are seeing is professionalization or better handling of how they are raising the livestock and that means more consumption of corn and soybean meal. So at one end you see a little bit of-- you might see some temporary drop in some parts of the world, but at the same time, you're seeing a longer term change in how they raise the livestock.

So we are seeing-- we are seeing the good demand on the meal side. And on the oil, we have the additional benefit that, because of the expansion of the biodiesel industry in Europe and we are seeing expansion of the biodiesel in the United States, so there is a new demand, there is like a step-up demand in oil. So-- which has a positive impact on our industry.

And in terms of your interest in biodiesel, you obviously have some exposure. Can you talk about whether or not you see this as a major growth avenue for Bunge, specifically, or is this something else to participate in in kind of a measured way.

We-- you probably have seen that we joined forces with a large operator from France, Diester, and we-- for Europe and we're expanding production. We are building, together with them, a biodiesel plant next to our crushing plant in Mannheim, Germany, and we see-- we are exploring, obviously, other opportunities in different parts of the world. We will look at it, together with them, where we can expand in Europe, but we are doing it in the form of a joint venture.

And the benefit is really-- you could divide it. Part of it is the investment, but the other part is also that we have these plants-- these biodiesel plants close to our crushing plants, so you-- there is a double effect. We're obviously, also, investigating in different parts of the world, but most of our focus is really on-- when you see our $500 million in CapEx, is to make our existing business stronger.

Just to amplify on what Alberto is saying, the biodiesel is very significant for our business and although the returns on investments directly in biodiesel are attractive, it's even more significant because the feedstock for biodiesel is, of course, vegetable oil. And so the increased demand for vegetable oil means that we should see higher crushing margins in-- particularly in the softseed industry worldwide. But it also affects soy crushing margins and so we think that it's bullish for our oilseed processing business all around the world.

I'll leave it there. Good luck, Susie.

Thank you.

Our next question comes from Christina McGlone, Deutsche Bank.

Good morning.

Good morning.

Good morning.

Bill, can you quantify the impact of the liquidation of fertilizer inventories in the fourth quarter?

No, I'm afraid I can't, Christina. We don't have a solid number on that. It was a-- it was a material effect.

Obviously, when you look at the results of fertilizer in the fourth quarter, being as bad as they were, a big piece of that was the compression in margins related to-- related to this exchange effect on inventories. But a part of it was also the hedging errors that we made earlier in the year that were having an impact in the-- in the fourth quarter and part of it was just the fact that you had an inventory overhang in the country and so we were trying to reduce our inventories at the same time as other people in the industry were trying to reduce their inventories and so pricing power in the industry generally in Brazil in the fourth quarter was-- was not very good with the farmers.

And so it's hard to separate all of those items and say exactly what the effect of each one is-- was, but cumulatively, the effect was for a very difficult fourth quarter.

Well, with that inventory reduction pretty much done, is pricing power-- are pricing-- is pricing stabilizing or coming back?

We think so.

Yes, we believe that the situation for the industry as a whole in Brazil is a much more aligned one in terms of inventories. We think inventories are aligned with the actual demand that is being expected during the year and so we think we should see normal relationships in terms of pricing power with customers.

Okay. And, Alberto, in the past you had talked about break-even levels for Brazilian farmers at like the $3.50 per bushel level for soybeans. And I'm wondering, given the strength of the real now, where has that break-even level moved to in terms of soybean prices?

To be very honest, I have not seen the new calculation with the-- with this exchange rate. But I would probably just add another 20% because of the appreciation, plus/minus. But-- so the break-even point is higher now. It's probably some time-- some place above $4.

Okay, so--

So they are-- those farmers who are not too far from the coast, they are fine. So you are too far from the coast, obviously you have to think about all the logistics cost. So overall, this is an average when we talk about $3.50. So-- but it is-- it is still in a reasonable area. It's still in a reasonable area, but the exchange rate is a significant effect.

Okay. And then if we-- if we're talking about a 58 million metric ton crop in Brazil, are you starting to see farmers let go of their old crop beans because of lack of storage ability?

We-- the harvest is starting in the northern part, so the pattern is normal to perhaps they're keeping, a little bit, their crop to themselves. So it's a little bit early. Early February is really-- we do not have a clear trend yet. It's too early.

Okay.

The real harvest starts really strongly in the beginning of March.

And then you talked about the Argentina crushing environment being weak. I mean, given that Bunge has a large position there, how-- how do you expect to manage it through it and how long will that last? And then maybe you can also comment, I guess it's having an impact on Europe and how that's going to affect you in Europe?

Yes. The-- our comment about Argentina is we have a couple of new plants. We also expanded. We have now-- we operate now the largest crushing plant in the world in [inaudible] and there is a little bit more capacity than-- the capacity utilization should be a little lower. This is being-- this is being offset by shutdowns in Brazil. So the less-efficient plants in Brazil had to shut down. We talked about two. There are other ones, also, in the country. You also have seen diminishing of soybean crushing in Europe, so the two ones who will be offset by the increase in Argentina is Western Europe and Brazil.

At the same time, the demand continues growing at 5%. So probably we should be in line with the capacity utilization sometime in 2007. So we will have headwinds this year in Argentina. Let's see how well we manage it through.

Okay. And then last question, for Bill, in terms of the guidance, are there any sort of one-time items that you can see right now, like any VAT recoverables or reverses or anything like that?

Not that are built into the guidance. I think it is likely that during the year we may well see some-- some recoveries on taxes because we have a number of tax cases that we are-- are pursuing, but the timing of those is completely unpredictable.

Oh, good, and they're not built into the guidance?

They are not built into the guidance.

Okay. Thank you.

Our next question comes from Leonard Teitelbaum, Merrill Lynch.

Good morning.

Good morning, Lennie.

Good morning.

When I left accounting, I thought I'd never hear the term “transactional taxes” again and I kind of wish-- it came too soon, Bill. Good luck to you on it.

I would also say that I think we've got a lot of people out there who are used to looking at U.S. companies with some international operations as opposed to international companies with U.S. operations. I think there's a-- this material that you put out, I think, is a good way to try and help weave our way through that. I just think it's going to take some time. I just encourage you to keep digging.

You had mentioned two numbers that I want to talk to a little bit. You talked about a $50 million in hedging, is that correct?

Hedging our fertilizer inventories.

Right.

We think that we had $50 million related to improper hedging.

Correct and then there was an $80 million cost. That $130 million, do you see that taking into effect-- I think you had it in Christine's question, do you see that taking effect in the first quarter and working it's way through or is it going to come in more of a bulk?

We see it evenly through the year.

Okay. Second of all, with the-- I don't want to call it the dumping, but the reduction of inventories in fertilizer, do you see the farmer having bought ahead or-- and, therefore, the pipeline, if you will is full? Or is it a more normal-looking pipeline for fertilizer in 2006?

In fact, I believe I that the pipeline is not that full because everybody was extremely careful from the credit point of view in selling. We believe that overall the pipeline, not only on the producers, but also with the farmers, is normal to below normal.

The numbers that you've given in guidance-- I'm sorry? Oh, the numbers that you've been giving in guidance, is that more of a-- that's a GAAP number, is that correct?

That's correct, yes.

All right. So that if there are tax recoveries or something, clearly, that would show up as that. Okay, now looking at the total company, what is your total oilseed production? Do you have that number?

I think we mention it, that oilseed crushing capacity is around 40 million tons.

Well, what I'm-- what I'm trying to get to, Alberto, is that I'm just trying to get what's your base of oil-- tons of oil produced? If one were to make the assumption that, whether it's biodiesel or something else, raises the profitability of oil overall and maybe that's what's built into the numbers here, that's got to have a tremendously positive leverage effect on your base of oil, because you've got to do what 12-15 million tons of this stuff a year?

Yes. But we include in our guidance our expectations. So if we see a better scenario, we include that in our-- in our view. So if you see something better, we have-- the same way we see it, it's included.

Maybe if this can help you, though, Lennie. If we have 40 million tons of crushing capacity, when you process soybeans about 20% of the bean nut is crushed is in the-- comes out in the form of oil. Softseeds it's usually about 40%. So of our 40 million tons of crushing capacity, probably 20% to 25% of that amount would-- would be oil production.

Okay. That's helpful. The following-- well, let me rephrase it. We're looking at biodiesel now as a real live industry, if you will, in Europe. And we're also hearing that everybody and their brother is trying to start up a plant over there. Do you see this as being a rational expansion? Or do we have any-- can you give us any numbers on what you think the demand might be, what your role in it will be and what the capacity is to meet that demand? Do you have any numbers on that?

So far the expansion has been rational, because people are following, very clearly, the directives, the European Union directives of the 5%, 5%-plus. It's not-- it's not a decision, but it's a directive. So now-- so people are being careful, especially the new government in Germany announced that there will be change in the tax structure. So I don't think there is a -- how would you say it? -- an exuberance in building of biodiesel capacity. We are following it very closely.

So we don't think there will be an over-capacity. And-- but biodiesel has its issues, as well. Obviously, at $60 per barrel, the vegetable oil price is competitive, but if there's a different oil price, we have a different situation. Also the governments are very careful about-- that not too much of the vegetable oil goes into the energy, because it has-- really this is to feed people.

And so there has to be a balance. We have to be very careful. This is heavily influenced by governments. That is why, also, we decided it's better to join forces with a very strong French player. Now everything looks exciting, but there were times in the past with lower oil prices and changes in tax structures in Italy. So it is not an easy business. So we have to be a little bit careful here and I think the market is reacting rationally.

Thank you very much.

You're welcome.

Our next question comes from Ken Zaslow, Harris Nesbitt.

Hey, good morning.

Good morning, Ken.

Good morning, Ken.

A couple questions. How much of the lower tax rate in 2006 is due to the Brazilian real hedging?

Most of it.

Okay, so basically what you lost-- what you're losing on the operations, you're gaining on the tax rate in terms of the Brazilian real. Is that a fair assessment?

I think-- I think Bill was talking vis-a-vis the long-term rate.

Vis-a-vis the long-term rate. That's correct.

The delta in 2006 versus the long-term rate.

Right. So-- Exactly, that's-- which is what people were probably expecting for '06 before you just gave the new guidance on tax rates. What I'm trying to get at, I guess, is the Brazilian real is obviously punishing your operating profits and that is being made up by a lower tax rate. So net/net, the Brazilian real penalty is really net neutral because you're making it up on the tax rate. Is that fair?

We've always felt that our ability to hedge some of these tax exposures was an implicit economic hedge of some of our exposure to the Brazilian real. Since we manage to the bottom line, we manage to net income and that's what our long-term earnings guidance is based on, we've always felt that our ability to offset some of the effects of the Brazilian real on operations through the-- through the hedging on taxes was an implicit economic hedge.

But you also have to see that it's not perfect, like we have seen in it in 2005. And when you go through the material presented on the web page, in 2004 it was also not perfect.

Okay. Seems pretty good for '06, I guess. How much of this $60 to $80 million will drop to the bottom line on the savings?

I think all of it.

Okay. So if you've got $60 to $80 million there, then you have hedging misfortunes of $50 million and then some sort of significant inventory loss, all that gets recaptured in '06 numbers. Is that a fair way of thinking about it?

Yes.

Just it kind of adds up to a lot of pennies. It looks like it adds up to anywhere between $0.80 to $1.00 just-- without even doing anything on your operations, so I'm just trying to figure that out.

In terms of basis on your soybeans, how did you guys do this quarter in terms of getting-- because there seemed to be a very favorable basis in the quarter. Did that help you or did you not be able to capitalize on that?

In which market, Ken?

The soybean complex.

North America? South America?

I was under the impression that you did more of a-- although you did it regionally, you kind of aggregate it up, so I was thinking about aggregate, but if you want to go into each of the regions.

I would say only that the crushing margins in North America are healthy, are normal. So we had very good North American business, but nothing's special on basis or something like that. So the crushing margin is the one we have seen pretty much in line with what we have seen on the board crush. So there have been good North American margins.

The softseed margins in Europe have been good. Obviously, it's the tail end of the crop in South America, plus some of the problems, normally this time of the year, the South American margins are lower. So on agribusiness, it was a-- it was a reasonable quarter.

Okay. And the edible oils in Europe were weak. I have-- you-- that's mostly the bottled oils, that's not really the crushing of the rapeseed oils?

It includes in-- our issues in edible is in Eastern Europe, especially Romania, Russia and Ukraine. In Russia we have a very large market share but we have to import the oil from different parts like Ukraine, Hungary and Romania, so to keep our market share, we are investing in it. So we-- until we have our plants on stream by the end of the year in Voronezh there will be pressure there.

And we had trouble in Eastern Europe, both in Ukraine and also in Romania because the seeds that were bought in 2004, they were very expensive and also, in Romania, although it's a much smaller effect, the currency moved against us so we had-- we had losses in Ukraine and Romania. And so when we look forward, we do not expect the same-- we expect a good recuperation in that area.

Okay.

Not yet in Russia, because we need the new plant.

And my last question is the fertilizer volume in Brazil being either flat or modestly up in the year for you guys, is that more because of the demand for fertilizer or is it because you guys are tightening your credit standards?

No, it's the demand of the market, clearly. We believe that we got a little bit of market share in 2005 and, as Bill said, probably we'll be able, because of our position, we will be able to, if the market is tough, to continue getting a little bit stronger. But the reason for the flat, it's all about the market.

Okay, great. Thank you.

Thank you, Ken.

Our next question comes from Tom Sleeter, Financial Network.

Thank you and good morning.

Good morning.

Earlier you explained a little bit about your exposure-- your credit exposure to Brazilian farmers. I was curious on what the effective interest rate is now running on advances to farmers and do you consider this to be a growing area of business in the future, i.e., the advances, not Brazil, of course?

We do not disclose the interest rates that we charge farmers in Brazil, however it is a U.S.-dollar-based interest rate, which is appropriate for Brazilian conditions. Yes, this is an attractive part of our business. Over time we expect that it will grow and it provides good returns to us.

Okay, thank you.

You're welcome.

We'll now go to David Driscoll, Citigroup Investment Research.

Hey, guys. I just wanted to do a followup here. Ken really hit this thing on the head, I think, but just to be really ridiculously clear about it, Bill, you're saying here that John gets on and he says that he has a hard time giving you credit for the tax event, but the tax event here is directly related to the penalty that your operations are suffering on the business line. Is that true?

A significant piece of it, David, not all of it. The items like the liquidation of the subsidiary, that is clearly not related to it.

I'm not talking about the fourth quarter events. I'm talking about going forward in 2006. So the fact that we have lower guidance here in-- excuse me, the lower tax rate, 18 to 22 versus the 23 to 28 long-term guidance, that's predicated on the fact that we've got a Brazilian real that's at 219 to the dollar and that's at a materially worse place than where this thing was not long ago and where most economists are projecting it to be.

So bottom line, the agribusiness line in Brazil and the fertilizer line in Brazil are experiencing much higher dollar-based costs because of that real and, at the same time, you're getting a benefit on the tax line because of the way-- because of where the real is. Is that fair?

You've got it, David. That's it exactly. We consider the-- what we can do on the tax line to be an economic hedge of the impact of the real on the operations.

It continues to be true on these calls that analysts are only looking at one half of this equation and I think it just seems to be odd that that keeps happening. I would encourage you to just keep talking about it and keep explaining to investors how those two lines are linked. Thank you very much.

You're welcome.

We'll go now to Leonard Teitelbaum, Merrill Lynch.

In the past you've kind of contrasted first half and second half of how the earnings were coming in and could you give us some kind of a-- how you see it now?

Sure. We think it's going to be a normal year where we'd experience about one-third of our earnings in the first half of the year and two-thirds in the second half.

Okay, thanks. And let me echo -- it's kind of the point I was trying to get to that David just said, I think there's a new skillset you're going to have to start to foster here in looking at this company because of where its operations are and I think it's good advice that you just-- what happens in one area has a counterbalancing effect in the other. I think you started that last year and I know it did good for some of the people and I'd just encourage you to keep doing it. Thank you.

We'll now take a question from John McMillin, Prudential.

Well, I'm glad Lennie's one old dog that can learn new tricks. Maybe I'm an old one that's struggling a little bit. Did you give the bad debt expense that you took '05 versus '06-- '05 versus '04?

No. We have not disclosed that. In our cash flow, you will see that there are amounts for bad debt laid out there. What that doesn't show you, though, is the relative shifts in the different businesses and there is actually a significant increase in bad debt expense in the fertilizer business built into that.

And I don't mean to play tit for tat, but you're basically acknowledging that some of your fourth quarter tax benefits were non-operating. And, Susie, I don't mean to play tattletale, but you didn't tell me that non of the tax benefits in '06 were non-operating. I mean, why should it be any different?

The-- if you take a look, John, at the reconciliation of the tax rates, which we've put out on the Internet, I think it lays out pretty well what the different elements were in the tax rate in 2005 and so I would encourage you to take a look at that and if you have any questions, give us a call back. In 2006 we have not built in any exceptional items into the tax rate guidance. It's all based on our normal operational activity.

I'm sorry if I'm the only one that cares about a 1000 basis point change in tax rates.

And that does conclude today's question-and-answer session as well as today's conference call. We do appreciate your participation. You may now disconnect.