Bunge Global SA (BG) 2007 Q2 法說會逐字稿

Good day everyone and welcome to Bunge Limited Second Quarter Conference Call. Today's call is being recorded. At this for opening remarks and introductions I would like to turn the call over to Mark Haden. Please go ahead.

Thank you, Operator. And thank you everyone for joining us this morning. Welcome to Bunge Limited's Second Quarter 2007 Earnings Conference Call. With me today to discuss our results are Alberto Weisser, Bunge's Chairman and CEO, Jackie Fouse, Bunge's Chief Financial Officer, and Drew Burke, Bunge's co-CEO of its Agribusiness segment who served as Bunge's interim CFO during the second quarter.

Reconciliations of non-GAAP measures disclosed orally on this conference call to the most comparable GAAP financial measure are posted on our website, www.bunge.com in the investor information section.

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 provision of the Private Securities Litigation Reform Act of 1995 including statements about the future financial and operating results. These statements are based on management's current expectations and beliefs that 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. Pertinent risk factors can be found in our SEC filed reports.

And now, let me turn the call over to Alberto.

Good morning, everyone. Bunge's strong second quarter earnings were driven by a good performance in agribusiness and outstanding results in our Fertilizer operations. We are optimistic about the second half of 2007 and our opportunities in '08.

While future prices for soybeans and grains have been volatile, industry fundamentals are solid. Demand for protein meal and vegetable oil continues to grow; however, in some cases it has been difficult to pass higher edible oil prices on to customers. We expect good global harvests with some exceptions in Europe and large crop plantings in South America. High future prices and acreage shifts in favor of corn in U.S. reflect the influence of current and expected demand from the bio-fuels industry. Higher prices are beneficial for farmers worldwide and particularly important in Brazil where they have largely offset the negative impacts of a stronger local currency and increased crop input costs. While soybean farmers in the country continue to face high debt levels and operating costs, the market is helping to return them to better levels of profitability. This has been reflected in the increased demand for fertilizer seen in the first half of this year.

In the past several months we have taken notable steps to enhance our business. We completed the first phase of our fertilizer mine expansion in Araxa, Brazil and established a joint venture with OCP in Morocco to produce fertilizer products that we will import into Brazil, Argentina and other Latin American countries. Last week, as part of our overall strategy to improve the efficiency in growth position of our business in Southeast Europe, we finalized the acquisition of an oilseed processing plant and a portfolio of edible oil brands in Romania. And today we announced the creation of a joint venture with Sinograin which manages China's central grain and edible oil reserves to build our fourth soybean processing plant in that nation.

Before discussing the results and outlook, I would like to welcome Jackie who joined us this Monday as our CFO. I would also like to thank Drew for the great job he has done as CFO since April. He will take you through the segment results and outlook now and then he and I will take your questions. Drew?

Good morning. Agribusiness had a strong quarter compared to a loss in the same period last year. Results benefited from improved oilseed processing margins and strong international marketing results. Our risk management strategies work well and recovered a portion of the mark-to-market losses incurred in the first quarter on our agricultural commodity inventories and forward purchase contracts.

Higher SG&A expense was largely due to personnel hires made in the first quarter to support growth in our product lines and the impact of foreign currency. Higher volumes and margins led to a strong performance in fertilizer when compared to the same period last year. The increase in volumes was almost entirely driven by product sales for soybean plantings which historically are purchased in the second half of the year. Soybean farmers accelerated purchases because of favorable agricultural commodity prices and concerns about increasing crop input cost.

Margins benefited from higher international prices for imported fertilizers and raw materials as products are priced in poor parity. Higher SG&A expense mostly resulted from an increase in incentive compensation costs. SG&A expense in the second quarter of 2006 included the reversal of a $12 million provision due to a favorable court ruling relating to Brazilian social taxes. Edible oil results declined primarily due to weaker performance in Europe which was negatively impacted by higher raw material costs that were difficult to pass on to customers and higher sales and marketing expenses.

In Brazil, stronger package oil results were driven by higher volumes and margins. Lower results in the quarter were due to higher raw material on operating costs in wheat milling. Interest expense increased due to higher average borrowings mostly resulting from the higher prices of agricultural commodities.

Foreign exchange gains incurred primarily on the net U.S. dollar denominated monetary liability positions of Bunge's Brazilian subsidiaries were $93 million in the second quarter of 2007. The Brazilian Real appreciated 6% in value against the U.S. Dollar in the second quarter of 2007 when comparing the U.S. dollar exchange rate versus the Brazilian Real at June 30th, 2007 versus March 31st, 2007.

These gains largely will offset foreign exchange losses on commodity inventories included in the gross profit. In the second quarter of 2006 foreign exchange losses of $50 million were the result of the effects of volatility in the value of the Brazilian Real against the U.S. Dollar during that period. Bunge's effective tax rate for the six months ended June 30th, 2007 was 25% compared to 9% for the same period in 2006. The increase in the effective tax rate was primarily due to increases in operating earnings and higher tax jurisdictions. Minority interest expense increased when compared to the same quarter in 2006 due to higher earnings at Fosfertil. Equity earnings of affiliates was lower mostly due to weaker results. A significant increase in commodity prices during the six month ended June 30th, 2007 resulted in cash flow used by operations increasing to $776 million from $440 million in the same period last year.

Now let me discuss Bunge's outlook and guidance for 2007. We expect solid performances in the second half of the year in our Agribusiness and Fertilizer segments which should more than offset weaker results in edible oils. Agribusiness should continue to benefit from good industry fundamentals. Strong margins should lead to a good second half performance in fertilizer although the traditional increase in sales volumes will likely be moderated because of the level of forward purchasing which occurred in the second quarter.

In consideration of this outlook, we are increasing our 2007 full-year guidance by $40 million to $630 million to $650 million, or $4.86 to $5.02 per share which includes an estimated $30 million gain or $0.23 per share related to expected gain on sales of assets; somewhat offset by restructuring and impairment charges. $8 million of such charges were incurred in the second quarter. This fully diluted per share guidance is based on an estimated weighted average of 129.5 million shares outstanding which includes the assumed dilution relating to our convertible preferred shares.

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

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Christina McGlone with Deutsche Bank.

Good morning. Alberto, you had said in your prepared remarks that the higher grain prices are offsetting the negative impact that the Real and higher input costs and I'm curious because we had such a drop in soybean futures in the past two weeks, is that still consistent -- have we basically seen the basis tighten in South America?

The reduction in -- I suspect you are talking about agribusiness and not fertilizer. And the bases in South America have improved. I don't know how you -- you asked the question. I imagine that --

I was talking about fertilizer. I mean, given the drop in soybean prices but the Real is still strong is our farm economics still consistent with what you said in your prepared remarks?

Yes. They are still very positive. Even in the northern part of Montegrosso the farm economics are very positive. So no worry there but we have to see where the commodity prices go.

And then in terms of the high commodity prices, how can we think about working capital and the ability to generate free cash flow to offset your working capital needs? Is there kind of a short-term capital crunch coming? How should we look at that?

Yes. When you think about June of last year, around -- before the increase in commodity prices, our inventories or our working capital - operating working capital, the way we look at it - was around $3 billion and if we take an average of soybeans, corn, wheat, on the main raw materials that we work with, they have risen from last year June to today something around 40%, so 40% to 50%, which means that just because of the increase in prices having the same amount of volume, the value of our inventories because we obviously purchased them more recently, went up by $1.2 to $1.5 billion. This oil goes through the cash flow statement. This is investments in working capital. So it has increased. We were prepared for it. We are prepared even for a higher increase. So from a liquidity point of view, from a financing point of view, there is no surprise. There is no problem about it. But if the commodity prices were to stay at the higher level, obviously the margins have to expand to pay for the higher financing cost of them.

And then in terms of China, we've all been hearing about their reproductive disease there and I'm curious how -- obviously soybean meal demand has dropped in China but the demand for the meat is still there so I think it's just a repositioning of meal demand maybe to the U.S. and possibly Brazil. So, in total, given your asset footprint, how does that affect Bunge?

The immediate impact is that China imported less soybeans. It did not import a significant amount of meal. And the -- there might have been a little bit more exports of meat. So overall the impact would be that there is less pressure on the traditional beans. You could argue that this was one positive component also of why the crush margins are very solid. So overall the reduction of the bean imports from China probably had a neutral effect, perhaps slightly positive, on the rest of the operations worldwide.

And then last question, how is the energy crisis in Argentina affecting you?

It is, obviously, a concern. The first reaction is that it is more expensive and it is also more disruptive to operate because we don't know exactly when we are told to shut off the plants. But I think we -- the team is managing it quite well and overall the industry is perhaps not so much affected because there is some over capacity. And, anyway, most of the competitors have reduced some of their crush because they are still some over capacity in the country so you can manage around it. So I would say we probably, despite being a nuisance and more expensive, I think we will be able to manage through it without any significant negative impact.

Was that more of a July issue or did you see anything in June?

It has been going on -- it has not been so well known by most but this has been -- the whole year it has occurred but in June it was strong and July, as well. Obviously, now we are expecting the winter session in South America and a lot of the gas is needed for the heating. So it's perhaps a little bit stronger -- we feel a little bit more -- we have it -- in July/August we will feel it a little bit stronger. But it is not -- we are not seeing major disruptions.

Thank you.

We'll take our next question from Michael Piken with Cleveland Research.

Actually, it's Christine McCracken.

Hi, Christine.

Good morning. Just wanted to kind of revisit Christina's question on -- specifically on the outlook in China. I'm wondering, have you seen any real change in demand for your exports into that market yet?

Yes. Only in terms of beans. We have exported less beans into China and the whole industry. And on oil the demand is normal; it's the same. So what we are seeing is just an impact on the bean side.

And is that out of South America or North America?

Both. It is both. But mostly South America at this moment.

Alright. And then just on farmer economics you suggested that they are still very good and yet, with the sell-off I wonder at what point do farmers reconsider, I guess, their decision to plant soybeans? Is it your opinion that that kind of decision has already been made and they'll go forward despite the price? Or at what point is that -- what's that breaking point?

It is very difficult to say exactly because every farmer has a different situation but we expect it to be something more than Montegrosso would start to be where they are on a breakeven covering their costs, some place around $7 per bushel, so there's a long way to go. But it is also very clear to the whole farmer community that with the expansion of the corn production in U.S., the South America will have to expand on soy. So there is -- the farmer, in fact -- the limiting factor at the moment for farmers to expand is us giving credit to them. The whole input industry - crop chemicals, combines and fertilizer. So if we would let, the farmers would plant more but we are being very careful because we have to remember they're still two years of difficulties for the farmers. There is still some bad debt out there that has to be digested. So it's probably more a question of credit to the farmers than we don't see more plantings.

And then just in terms of your fertilizer outlook, I think on the first quarter you were looking for, I think, 9% increases in volumes for the year and obviously you're running well ahead of that. I guess, have you reconsidered what your outlook is for the year in terms of volume growth on fertilizer or is there just still too much uncertainty to adjust that number?

It is early and especially we have seen, as we have mentioned in the prepared remarks, that most of the increase in the second quarter was to soybean farmers which clearly isn't a case of anticipation; but we have -- we don't have an estimate from the fertilizer association but I can tell you that internally we think it's going to be more than 10%, probably something closer to 12%, will be the fertilizer volume growth in '07 versus '06, taking the whole year.

Alright. I'll get back in the queue. Thanks.

We'll take our next question from Robert Moskow with Credit Suisse.

Thank you. Congratulations. I'd like to know, Alberto, you said that the limiting factor is how much you decide to lend in the fertilizer business to the growers in South America. I wanted to know, what is the tipping point for you? When do you decide whether to be more aggressive in your lending given that the economics are getting better in the future?

Good morning, Rob. We take it on a case by case situation. So we have around 60,000 farmer customers and we look at it -- it's a very diligent operation with each individual farmer. So it's more a question of seeing how they are repaying, what is the history and obviously there is a kind of a relatively efficient Dunn and Bradstreet type service inside Brazil. We want to be careful that if one farmer is not repaying another crop chemical supplier that they don't want to use us to finance their expansion. So we also look very carefully at -- we don't -- that it's not too much of an expansion like we have seen in 2003/2004. So it's a very, very balanced situation. But basically, at the moment, it's more to make sure that all these farmers first pay back all their overdue debt.

How much do you have currently outstanding in terms of just outstanding loans and then roughly what kind of an interest rate do you get on those loans?

We -- Mark can you help me?

The outstanding receivables --

In June is around $756 million. And the bad debt reserve is 23% of that $170 million. So on a percentage basis it has -- (inaudible) last year it is still high but it is a little bit misleading. The quality of the receivables has improved because the existing farmers -- the existing business is, despite the higher prices, they are paying back faster. So although the bad debt provision is still very high, and in fact they increased it a little bit in this quarter, the quality of the whole portfolio is improving.

The $756 million, that seems lower than what it was maybe a couple of years ago. Is that correct?

The total amount of accounts receivable? No, it must be higher.

The receivables are higher.

Receivables are. Yes. And bad debt is significantly higher.

And then last question, you mentioned to some degree the extent to which your working capital has risen because of the price of the underlying crop inputs, but that -- your total assets have grown from $12.4 billion a year ago to $18 billion today. And I think you had mentioned about a billion of that was due to higher values of crop. What's the rest?

There is -- I talked in general about the operating working capital but there is, obviously, the significant impact is the appreciation of the Real. Over the last couple of years the Real has increased and has raised value so when you convert all the permanent assets, they convert to a higher dollar amount. You can see it in the equity in the CTA. It's over $1 billion there.

Then there's also one issue that is always a little bit irritating is that especially on the other current assets and other current liabilities, you have to show them separate but in reality we look at them next because these are the different derivatives that we use for the hedging. So as our business is growing, that grows. But you have to look at it as -- it should in reality be seen as a net number.

So I would say it's business -- the volume in general increased, price increased, but also the Real.

And does this -- with the Real being such a big driver, does that mean anything to the long-term goal you have of 9% to 10% return on net assets? Does that goal still make sense just as much as it did before?

In makes our life tougher but we still think that we can earn our 2% above cost of capital which means, as you have seen in the past, very drastic measures inside Brazil to reduce costs and which has also meant that the crushing in the country has not expanded. It has been -- the processing of the business has not expanded so much. The expansion has come first from Argentina and secondly in China but we also have improved our efforts in southern Europe so -- but sooner or later the processing will have to expand also in Brazil. Most of the expansion of the processing has been to the domestic market, not so much to the exports.

Now in terms of fertilizer, it has meant that because of the strong Real, the farmers need a higher commodity prices and that's exactly what is happening. So you need the higher commodity prices to cover the higher costs.

Thank you very much.

We'll take our next question from Ken Zaslow with BMO Capital Markets.

Hey good morning, everyone. If I look at your fertilizer margins on a per metric ton basis, it's actually getting close to 2004 levels. Then everybody kind of put the view that it was the Real or the weak Real then that kind of helped your margins. Why do you think that the margin structure is as close to the, on a per metric ton basis, close to the 2004 level and do you expect it to stay around this level? Is there deceleration on the back half of the year?

I think the main reason of this -- the very high international prices, as you know that Brazil in reality is a price [take-up]. The prices we use in Brazil are the same as being used internationally so the global demand has been strong and the supply has not expanded in the same pace so the prices are strong internationally. And in the second quarter we also benefited because a lot of the sales were to the soybean farmers which use phosphate so probably it's one of the reasons the margins are a little bit higher. But I would suspect, Ken, that taking the whole year, the margins will not be in the same level as they were in '04.

And you assume 12% growth for 2007 for fertilizer. If I looked at 2008, and I understand your caution on 2007, the 12% is clearly above trend, is there any reason to believe '08 is not also above trend type of growth in fertilizer? Would there be a slow-down or is there still room to grow even after the 12%?

We have not done yet all our estimates and business plans for '08 but we would say on the long-term we expect a growth rate of 5% to 7%. We might still see in '08 a little bit more recuperation because the world will need more soybeans from Brazil and as we have U.S. growing more corn because of the ethanol, we will need more wheat. There is a real shortage of wheat worldwide so we need acreage in Eastern Europe for wheat, we need in South America and Argentina for wheat so we will still -- we expect that there might still be in '08 a little bit more, a little bit above average. But we have not done yet the detailed supply demand analysis and we are not ready yet with our business plan. We will see this later in the year.

Also, I suspect there could be a little bit more demand next year because we assume that the farmers are digesting their bad debt and paying down their old debt. So there should be a better credit worthiness on some of their customers.

And isn't there a lot of land left that's just laid fallow that could actually be expanded without clearing the land? Because 2004 or 2003, I forgot which year it was, we're not even back to that number yet for 2007 in terms of acreage.

Right. I think the difference is what you are going to see is perhaps less new area but more converting pasture because we have to remember the Real where it is, the internal logistics have become very expensive. So you really have to be very efficient and look at the logistic component more than you had to use -- look at it in '04/'05. So what we are seeing is we see especially on our fertilizer business, the fertilizer for pasture business is growing which means that the farmers are trying to be more efficient on pasture and making land available from the pasture for agricultural. So we probably will not see a significant increase in acreage new land but it's probably more conversion of pasture and other areas to crops like corn, soybeans and even some wheat.

And just two last questions. You indicated your first phase of your fertilizer mine expansion -- can you remind us what the growth in terms of the capital, not the capital spending per se, but how you look at the expansion over the next two to four years on the -- on your capital spending for the fertilizer issue?

Well, the first phase of our [Rizhao] mine expansion is finalizing. It will be up and running in July. So this is a 10% increase. The second phase which will be finished by the end of next year is a 30% increase and obviously there is some expansion also in the Fosfertil area, but not these very large expansions that we have talked in the past because, obviously, of the difficulties of the farmer. But we are revisiting that and by the end of the year we should be finished with a study. You remember we talked about a $400 million or $500 million expansion especially in the Fosfertil. We should by the end of the year know about that -- how we would do that. But in the meantime we are helping to serve our customers, our farmers, by -- with a joint venture in Morocco, the OCP joint venture, which should be up and running, the first phase of it, by the end of next year, as well.

And my last question is on edible oils. You are right now at a annual run rate of about $40 million. The last couple years you've been about $100 million. $60 million is not something to sneeze at so my sense is, what are you guys doing to get it back? And will it be back at that $100 million level by 2008 or is it something that is broken?

We have two major areas of trouble which is North America and Europe with the high stocks of oils in U.S. and the very high prices of edible oils; it's very, very difficult to have good margins here. So we are under pressure on the margin side, especially in the food service area to restaurants.

The second one is in Europe where it has been very, very difficult to increase the prices - has been very difficult to increase the prices to the final customers. We are making progress but as you can imagine, the retail is very reluctant to accept it and we -- so there is an issue. We still expect some trouble in the second half of the year but obviously eventually we will be able to pass on all the necessary price increases. We will not be completely finished by this year.

The second component is we continue to improving our footprint and we still are not the lowest cost operator in Europe. I think it is very important our plant in Russia to be up and running; the Veronezh plant, obviously, has been delayed. There's a big boom in Russia for investment so it is not very easy to get all these contractors to build the plant. So we expect the Veronezh plant to be up and running by the end of the year so this should have a significant impact in terms of efficiency. You heard, also, what we're doing in Romania and Bulgaria. We have shut down some plants and we have finalized an acquisition that should -- we will go in southeast Europe from six plants to three. This will significantly improve our footprint. But with these two movements, we should be the lowest cost operator in Eastern Europe that will improve our margins. And, obviously, we are also making some improvements in North America. But can -- we expect to be back, hopefully, in '08 on trend line in edible oils. But the main component, the main component, I would say two-thirds of the shortfall is that we're having a hard time to pass on the increase in edible oil costs.

Thank you.

We'll take our next question from Diane Dicler with Merrill Lynch.

Good morning. Just a question, I may have missed this in your prepared comments, but did you quantify how much of the hedge was reversed in the second quarter?

We expect -- obviously it is very difficult to pinpoint how much it was. We have a huge amount of transaction volumes that we ship contract and we do not keep track of each of the individual ones that we had in March. But overall we expect our estimate is that we probably recuperated one-third of the mark-to-market losses.

And that was, just to refresh my memory, $85 million total?

Yes.

And did anything change about how much of that $85 million you think you will be able to recuperate? I know you said on your previous conference call you didn't think you would be able to recuperate all of it but has that changed at all?

No. It is exactly as we expected in our last call. It is working out fine the way we expected.

And then the other question I had, really, getting back to the fertilizer business and the gross margin per ton, obviously, very impressive volume number but also impressive margin number and I -- somebody, I don't remember who, somebody asked about really you're seeing kind of level of profitability from that segment that we haven't seen since 2004. When you had basically what you often refer to as kind of an above trend or above normalized kind of level of profitability. Is that -- are we getting to a point where that's becoming the norm and that's how we should think about it in terms of gross profit per ton or operating margin or however you want to think about it because of the demand picture that you see in South America and what you've seen in terms of international pricing?

I would see that a more normal baseline would be 2003 in terms of margins and '04 we had also some windfalls like normally when the prices are rising we have some older contracts on when we buy the raw materials and you have some -- you pick up some extra margins as the prices are rising. And I would say on the margin side we have to see how it closes until the end of the year. It might be, probably, the margins are a little bit higher this year than normal and because, again, a situation of rising prices.

Now I suspect that we will see -- we are optimistic about the general view in terms of volumes. The additional demand that the biofuels created, not only in the case of the U.S. with corn, ethanol from corn, but it is also the ethanol from sugar in Brazil and other parts and the biodiesel in Europe, this has created an additional demand for crops which is positive for the logistics for the inputs for the fertilizer and we see this as something that will stay and that's why we have a step-change situation and so that's why I mention also to Ken that we might still see next year a little bit (inaudible) above the trend line increase in volume but then we should go back to a 5% to 7% type of growth rates in South America fertilizer consumption. The margins should come back to a more normalized level probably like they were in '03.

Well, I just asked about it because I remember asking in the first quarter call about inventory build. Did you have any inventory build? And you had indicated that you thought you were pretty lean on inventory.

Yes.

This would obviously be pricing driven and volume driven, not the fact that you are sitting on low cost inventory.

Exactly. I think a very good point is the volumes -- volume inventories are very low, very lean, we are very careful about it. But obviously you have some contracts on the input so on the pricing it's more a question of the right pricing -- acquisition pricing for the inputs.

Thank you very much.

We'll take our next question from Vincent Andrews with Morgan Stanley.

Good morning, everyone. I understand your points on the increase in commodity costs and obviously the Real appreciation from a working capital perspective but I'm just wondering if separately -- if there is anything that you guys are working on or that you think you can work on to improve your overall working capital performance assuming that there's no change in commodity costs or the Real going forward?

Yes. We are working on that. We are assuming that we will have higher commodity prices for awhile because of the additional demand from biofuels. So we have a taskforce looking at all of our balance sheet items that can be pruned and improved. We are also looking at specifically (inaudible) working capital, accounts receivable, accounts payable, inventories, what can we do that our cash cycle is reduced? In fact, our cash cycle is reduced already in this quarter or in June vis-a-vis last year so we are seeing already improvements. We are using less days of working capital but we are looking at all kinds of other items like how we can collect faster taxes that we have out. They are especially in Europe and South America and so we are looking at opportunities -- how can we prune our balance sheet?

Vincent, we're also taking a look to make sure that on the transactions we're doing that the margins are high enough to provide a return at the higher commodity price levels. So it is just not that we're making our business and pricing decisions based on the profit margin but also the return on the assets tied up.

Thank you. That's very helpful. Just separately, we've obviously seen corn prices come down from their peak earlier, I think, in late February largely due to the huge supply response in the U.S. which we all know has pushed soybean acres outside of the U.S., can you articulate your view of what's going to be different with soybeans from a supplier response perspective? Obviously you've already discussed the fact that the farmer in Brazil, in particular, is hamstrung by how much money yourself and other crop input companies are willing to loan him but what else is different about soybeans from corn in terms of the supplier response we should expect?

I think the difference in the case of soybeans is that last year we still had the highest level of inventory ever. So we -- although the inventories are being drawn down worldwide on soybeans, we still have by the end of September we are going to have a normal level of inventory stocks. So that is why you are probably seeing where also the price for the soybeans are on a per bushel basis. So we probably will have to see another expansion next year to keep -- not let the inventories go down. So the trend for soybeans, I think, continue being positive.

Thank you very much.

We'll take our next question from Pablo Zuanic with JPMorgan.

Good morning, everyone. I'm just trying to fine tune my normalized earnings for your company two or three years out. And I guess a couple of questions there -- on the fertilizer front you say that you look at 2003 profit margins. I think they were about 12.5%. But isn't it fair to say that if we're able to resolve the Fosfertil situation favorably and as you expand your mines in Brazil that structurally you should be able to have higher margins than what was normalized in 2003?

It's a good question. I cannot answer it immediately here. But we see, in general, we have to obviously assume when we look into the future exactly the way we are at the moment. And I think the retail business is growing similar to also our [nutrient] part. In reality, the retail has been growing a little bit more because the expansion of the mines have not kept pace with the expansion of the consumption. So Brazil is importing more than it used to. But I don't really have to -- we'd have to look at it -- perhaps you could talk to Mark later on this.

No, that's fine.

When we have time to look at it.

Another question, maybe you have given this before, but you always give a guidance of all the fertilizer volume growth, but what about in agribusiness? Can you give us some (inaudible) in terms of how we should think in terms of total volume? I realize that you are blending volumes from crushing as well as from trading, but just roughly how should we think of long-term volume growth in that division?

We are thinking in terms of volume growth over the next five years of 6% to 8% per annum.

In agribusiness?

And 3%, around 3% to 5% on edible oils and foods and on fertilizer 5% to 7%.

Right. And one last one, and maybe this was -- I hope this was not answered before, but edible oils, what type of normalized profit margin should we think about there? Or should we just stop where -- what you have right now which is around 3%?

It is clearly low where it is now. Probably last year is the more normalized one. Although we should still see -- after we do all the improvements to our facilities we should see probably a better margin than last year. I don't have an exact target, you know.

Thank you. And just one last one for me. Can you give us any update on your views on biodiesel? It would seem to me from the last quarter biodiesel prices haven't changed much but, obviously, soybean oil prices have moved up, economics have worsened. What's the outlook there? What has to happen for things to improve there?

The -- what we are seeing is that with the high oil prices the margins have been squeezed in the biodiesel area and it's one of the reasons our strategy and investment in this area is to be a participant, a minority participant only, because we are going to see volatility in earnings in this biofuel area. And -- but we expect it to continue to be successful and -- but at the moment the margins are quite low in biodiesel, not only U.S. but also in Europe.

That's fine. Thank you.

They should come back.

We'll take a follow-up question from Christina McGlone with Deutsche Bank.

Thanks for taking a follow-up. Alberto, recently a private forecaster had taken Brazilian acreage up 7% and I think acreage in Montegrosso up 8%. Does that sound reasonable to you?

Sounds a little bit high. The -- what we are seeing is more in the 5% area. But it depends on who it is. It might be right. So we are more counting on something around 5% expansion.

For total country and Montegrosso?

Are you talking about just soybeans or everything?

Just soybeans.

Just soybeans. No. I think it is probably a little bit lower. Probably more like a 5%.

Thank you.

We'll take our next question from Christine McCracken.

Good morning. Just a follow-up on your outlook for the weakness in food service, edible oils sales and food services. I was wondering, can you provide any more color on that? Is that tied to the trans fat ban or is that something just on price?

I would say it is more -- overall, the milling business is doing fine. Where we are struggling a little bit more is on the edible oil side, especially in North America and Europe, but probably more in Europe. I would not say it's related to the trans fat issue. It's more high -- in the U.S. it's high inventories and rising prices and in Europe it's only rising prices which is very difficult to pass on to the retail.

We actually have a very nice offering of products for trans fat free and trans fat reduced products that food service and food processors will take advantage of. So we are very well prepared for the trans fat trend and should be one of the leaders in providing products for that.

So what did you mean by your difficulty in selling into food service in North America?

In food service it's margins. It's all about margins. It's the very high volume, the very high inventory that all the oil processing industry is sitting on and there is just not enough power we have to raise the prices. So the margins have contracted. They have been tough already for the last 12 months. So we first have to reduce the inventory which is starting to reduce. Also some of them is being sold to the biodiesel industry, very little is being exported. But we first have to reduce the high levels of inventory, oil inventory.

And as some of that biodiesel capacity comes on you'd expect that to get worked down?

That should help. Yes.

And then just on the impact of the current freight rate environment. Can you talk about how that might have affected your business given the escalation that we've seen there?

Yes. The high inventory -- the very high freight inventories worldwide obviously has changed one component as we have seen in the first quarter which, where the customers are more spot, and there are a little bit less spot buyers at the moment so we are doing some forward business, especially to Europe but they are not completely back in terms of like the traditional pattern where they would buy more forward because the ocean freight curve is inverted so the future freight rates are lower than they are today. So we -- obviously it affects the business. It also affects the cost of the inputs into the Brazil so it has overall, I would say, that is the only real significant change we have seen at the moment. The demand is solid.

Do you think that as we come out of this season in North America with this huge corn crop that that could tighten freight availability if, for example, they start storing or moving -- storing grain on these boats or -- do you think that will affect rates at all going forward? Is the futures market maybe underestimating what might happen?

I don't expect on the ocean freight but we could expect inside the U.S., we could expect higher rates and tighter, much tighter situation.

How would that affect your business?

It will affect everybody, not significantly, but it will make the movement of the grain a little bit more tighter. We'll have to work very efficiently to move it inside the country so I think that will raise the rates, the internal rates.

And then just one final question. We've been reading a little bit lately about these [vat] refund changes in China, specifically on veg oil. Is that going to impact your business at all?

To be honest, I don't know about it. Let me check. We'll come back on that, Christine.

Great. Thanks.

We'll take another question from David Driscoll with Citigroup.

Good morning, everyone. Congratulations on the results. Alberto, can you just tell me what is imbedded in your forecast regarding the Brazilian Real exchange rate?

We are taking basically the Real where it is, Dave. I think it is at $1.86 today.

Would you also say that with the tax rate coming in in the mid-20's that this is not the type of thing that we've seen in the past when the Real has appreciated. We've seen it really come down substantially as an offset. Could you kind of describe why it didn't happen this quarter?

The main reason is the very high profitability of fertilizer. So really we continue having the benefits of all of our different strategies in terms of how we can reduce our tax rate. But the profitability of fertilizer was quite high. So I would say, Dave, we are probably more on the normal situation now. Last year it was a little bit -- the last two years it was compounded because of the lower earnings in fertilizer but also some struggling with Alimentos. It's probably more normal where it is now. But we continue with our strategies to reduce our rates, tax rates; but you might remember that I think our long-term guidance is around the 25% rate.

(inaudible) this year.

But we are probably more on a normalized basis now.

I understand that. If I could kind of just tease out one detail. Are you saying that your strategies against the Brazilian Real to hedge it were effective and that you saw a substantial headwind on the operating side? You saw a substantial benefit on the tax side? But those things are obscured in the amalgamated or the consolidated results because of the strong fertilizer earnings?

Unfortunately, when you do the hedging that we did over the last two, three years, against the -- to protect us against the appreciation of the Real, not all of it can come into operating profit. Some of it we, obviously, show in gross profit. But some of them are reflected in the tax line, as we said, we have not found another way to do it. But overall, I think we have protected the Company in terms, from the earnings point of view, against the appreciation of the Real and so it is in the tax rate. But I think we have shown different scenarios.

Also when you have fertilizer coming back the way it has, that we would see the situation we have at the moment. 25% is a rate which is below the statutory rate even in Brazil which is probably around 34%, which means we continue being successful on reducing our tax rate there.

Final question is just on cash, soybean processing margins. Can you describe what you're seeing right there? It seems like those have changed rather sizably over the last several months.

On crushing?

Yes.

the crush environment is generally good. The margins in the Americas - North America, South America - are good. They are also quite good in Europe. They are a little bit weak in China because of the issue of the hawk issue, the hawk disease issues, but overall the margins are good.

Thank you.

That concludes the question and answer session today. At this time I'd like to turn the conference back over to Mark Haden for any additional or closing remarks.

Thank you, Nola and thank you everyone for joining us today. We'll see you next quarter.

Thank you, ladies and gentlemen and once again that does conclude today's conference. We do appreciate your participation.