Bunge Global SA (BG) 2008 Q4 法說會逐字稿

Good day, everyone and welcome to the Bunge Limited Fourth Quarter 2008 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 your host, Mr. Mark Haden. Please go ahead, sir.

Thank you, Elizabeth, and thank you everyone for joining us this morning. Welcome to Bunge Limited's fourth quarter 2008 earnings conference call. Before we get started, I wanted to inform those of you who may not have seen it in the Press Release this morning that we have prepared a slide presentation to accompany our discussion of the fourth quarter results. It can be found in the Investor Information of our website www.bunge.com under Investor presentations.

Reconciliations of non-GAAP measures disclosed orally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investor Information section.

I'd like to direct you to slide two and remind you that today's presentation includes forward-looking-statements that reflect on these current views with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Bunge has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and encourages you to review these factors.

Participating on the call this morning to discuss our fourth quarter results are Alberto Weisser, Bunge's Chairman and CEO, and Jackie Fouse, Bunge's Chief Financial Officer.

And, now I will turn the call over to Alberto.

Good morning everyone. 2008 was a remarkable year and one of the most volatile in recent memory. Throughout it all the Bunge team performed well. Our employees produced record earnings of over $1 billion and cash flow from operations of $2.5 billion. They executed well, as exemplified by the strategic and prudent use of working capital during periods of record high commodity prices and kept a steady eye on the future by making new investments and creating new partnerships. For example, we are very excited about our new sugar and ethanol joint ventures with [Etocho] in Brazil.

In an industry that is dynamic to begin with, especially in such a volatile year, it is rare that everything will go right. We had a few setbacks in '08 but we start '09 in a strong position. The weak global economy will pose challenges but we have a solid balance sheet, comfortable liquidity, confidence in our team and optimism about improvements in the market.

First, periods of lower demand for our core products are generally short lived. These are staple products necessary to feed the world's growing population. We anticipate demand for soybean meal to improve over the drastic reductions seen in the fourth quarter when customers were reducing capacity, drawing down existing meal inventories and using lower cost feed ingredients.

Our estimates for the 2009 calendar year indicate soybean meal demand growth of about 1.5% when compared to 2008. We also expect demand for vegetable oils to increase about 4% in the calendar year although soy could continue to face competition from other oils.

Second, global commodity stocks remain tight and this reality is being exacerbated by weather issues in South America. Even with lower economic growth, the world will need additional supplies of crops. Current futures' prices indicate that the market will provide incentives for farmers to plant and should help encourage fertilizer use.

In addition, during periods of tight stocks there is always the possibility that changes in supply and demand will increase interesting opportunities for companies with a global presence and integrated operations.

During the year we will continue to take steps to lower costs and improve the efficiency of our asset network. We expect that the stronger US dollar should benefit the cost structures of our foreign operations. We're also investing for the long term in our core businesses and in complementary value chains, such as sugar. But we are managing our projects prudently in light of today's volatile conditions.

I will turn over the call to Jackie, who will discuss our quarterly and year-end results.

Good morning everyone, thank you for being on the call this morning. Moving on to slide three of the presentation, we start with some highlights from the income statement. The year of 2008 was a record profit and cash flow year for Bunge and we finished the year with EPS of $7.73, 30% growth over 2007.

The fourth quarter was characterized by difficult demand environment and we saw that particularly reflected in oil seed processing, fertilizer and foods where volumes all suffered. Fourth quarter profits were negatively impacted by lower gross margins across all segments, mostly due to lower per unit margins with the exception of fertilizer, which was volume driven.

Profits were also adversely affected by provisions of customer and counter party risks and negative foreign exchange on fertilizer, US dollar financing of working capital.

With respect to the effective tax rate, fourth quarter losses in fertilizer significantly impacted the rate for the quarter and for the full year, as we saw a major shift in income between higher tax and lower tax jurisdictions versus what we had seen up until that point.

We continue to drive structural tax planning initiatives, which brought some benefits in the quarter and which will bring benefits over the long term. And one should remember that, based on our financing approach, we have higher profits in Brazil and a higher tax rate when the real appreciates and the reverse when it depreciates with the latter being what we saw in the fourth quarter of 2008.

Moving onto the segment results, Agribusiness volume increased in the quarter was driven by grain originations, where some volume was pushed from Q3 to Q4 in North America due to the delayed harvest and also from additional corn originations in Brazil, as well as we saw the ramping up of our sugar business.

EBIT for the segment was impacted by lower per unit margins in general and by customer and counter party provisions.

For fertilizer, volume declines resulted from prudent management of credit in the soft market. These declines weighed on profits and EBIT was further pressured by declining prices and the negative exchange impact mentioned previously.

Our Foods business volumes suffered from soft demand in the quarter, which reduced profits, and results were additionally affected by high cost crude oil inventory and pricing pressure, which together squeezed margins.

Looking at some highlights of the balance sheet, our balance sheet and credit metrics are the strongest they have even been and our growth debt levels are about the level of those of 2003 while we are generating both higher profits and funds from operations.

The decline in operating working capital year-over-year was driven by efficient working capital management and lower commodity prices and our cash stock will decline by three days in gross debt by $1 billion.

With respect to cash flows shown on slide seven, even with the difficult economic environment we produced strong cash flow during Q4 of 2008 and record cash flow from operations for the full year.

The next slide, slide eight of the webcast presentation shows how our working capital usage fluctuates with commodity prices and how that impacts cash flow. When we look back over the past six years one can see how we navigated through rising commodity price environments and one can also see significant growth in funds from operations and that for the last six years combined we've generated funds from operations of $5.6 billion and have reinvested those funds in both working capital and CapEx as we've grown our business.

Another aspect in addition to balance sheet and cash flow, which is a key component of our financial situation, is liquidity. Our liquidity position shown on slide nine remains very solid and we enter 2009 in a strong financial situation.

In the fourth quarter of 2008, we were able to replace a maturing revolving credit facility, despite the difficult financial markets, and we repaid a $500 million bond maturity while maintaining more than adequate liquidity to support our business operations.

On the slide you can see that we had undrawn committed facilities totaling [$3.5 billion] as of 12/31/2008.

With respect to the outlook for 2009, we feel good that we will produce a solid year though the results will be heavily weighted toward the second half of the year. We think we've seen the trough in our industry and we expect things to improve as we move through the year. Reasons why we expect that improvement include soy meal demand, which we think will ameliorate over the course of the year coming off a very difficult fourth quarter of 2008, where we estimate that it dropped by about 9% globally.

In addition, we think the good farm economics will support fertilizer demands. As of right now the breakeven for Mato Grosso is about $8.34 and for Parana is $5.81. So you can see Brazilian farmer economics are good.

In general, we think low stocks use ratios will supportive for the sector and for us in particular the strong US dollar will benefit the cost structure of our international operations.

At the same time we recognize some head winds. Credit markets continue to be tight and this will affect farmers and customers. The overall global economic environment remains uncertain so we have to be somewhat cautious regarding demand in general. And then, specifically early in the year our profitability will be impacted by high cost raw material inventories, both in fertilizer and edible oils.

As to the numerical guidance, the range for EPS is $6.90 to $7.60 per share based on 138 million shares outstanding. Those are fully diluted guidance. We expect depreciation and amortization in the range of about $425 million to $445 million and CapEx of about $950 million to $1.05 million of which 30% or so is mandatory investment and maintenance safety environment.

We have some what lowered the effective tax rate guidance range to 22 to 26%. Previously it was 24 to 28% if you remember. That range considers basically stable currencies and compares to a 2007 number of 26%. As already mentioned, the 2008 of 16% was affected by the movement of the real.

Linking the EPS guidance to return on invested capital, return on invested capital is a key performance, a measure for Bunge. If we look back over our eight year history of returns, we can see that we've produced returns above our weighted average cost of capital in both good years and difficult years. 2008 was a record profit year for us and our ROIC was well above our internal target of two percentage points above weighted average cost of capital.

When we think about 2009 recognizing the challenging environment ahead, our guidance reflects an EPS range, which translates into returns above our weighted average cost of capital, with the upper end of the range being about 2% points above WACC in line with our target and the lower end of the range still being above WACC but a little less than two percentage points. Thus, we anticipate a solid performance for 2009.

With that, we will open the call up to Q and A. Thank you very much.

Elizabeth, we can go to Q and A.

(Operator Instructions) We'll take our first question from Vincent Andrews with Morgan Stanley.

I'm wondering maybe, Jackie or Alberto, if you could just help us and I missed the beginning of the call so I apologize if you did this already. But if you could just walk us through the counter party risk and the charge that you took and what that covers, where it is, how it happened, what you could do differently in the future to make sure it didn't happen again? If we could start there that would be great.

The provision was quite broadly taken on the portfolio of risk in that category. It covers accounts receivable defaults on sales to customers, which would include meat producers, biofuel producers, for example. It also includes forward sales defaults from customers and counter party risk on other transactions, such as right counter parties.

From a geographic standpoint, it was broadly the spread around the world including the US, Europe, Middle East and Africa, Asia, Brazil. It should be noted probably that farmer defaults are not part of that number so it includes current defaults as well as an estimate that can be thought of like evaluation allowance on forward business as well.

Can you give us a sense of what the current amount was?

Of that number, yes roughly 25% related to current defaults and about 75% to forward.

Okay and how would you characterize the potential ability for that to be a very conservative estimate, especially considering that, as far as I can tell, your peers, your competitors, have not taken similar charges?

Well, we're trying to be transparent about this and at any point in time when you take a provision obviously you look at the prevailing circumstances on some of the forward contracts that are included under consideration here. It would incorporate current mark-to-market types of figures so we think that, given the circumstances being as poor as conditions are in certain areas, that it's probably a fairly conservative provision but we think it's obviously an appropriate provision for the time. And, as we negotiate with these selected parties, again these are isolated incidences on specific accounts in the various domains and we're obviously going to try to get every dollar back from them that we can. So we will be negotiating hard.

Okay, and then if I could just ask a couple things around farmer credit, the first piece would just be-- you know, I've heard some speculation that when you look at the pattern of fertilizer sales in 2008, farmers bought very early at high prices, at high soybean prices and at different Real dollar exchange rates they weren't able or didn't through the course of the year sell as much of their beans forward as they would in a normal year, partially from a speculative perspective, partially from a credit perspective and, therefore, as they come into a difficult harvest they might be upside down from a financial perspective. Can you kind of characterize whether that is true or possible or how prevalent it is?

And, then the second piece of it I guess would be can you just talk about the farmer credit situation today relative to let's say three or four months ago and relative to six or nine months ago?

Yes I would characterize the situation for the farmers as very positive. When they bought the fertilizer last year, most of them locked in already the margins by selling their commodities. Those who have not done it are also in a good position because the Real devalued. So when they sell now their crops they will receive a significantly higher amount of domestic, the local currency.

And I think it is shown that the forward activities is solid. As we are at the moment we are selling fertilizer forward for the second half of the year. We are locking in also-- they are locking in the margins by also selling the grain. So the environment is quite positive for the farmer in South America. So we don't expect any issue there. We have been able to collect some of the bad debts so the environment is quite positive.

Okay and then just the current credit environment, has credit opened up at all?

The government has opened up a little bit more. The local banks also have done a little bit more, been a little bit more generous. We have kept our posture. The whole industry has kept the posture. The Agribusiness sector, the combines, the crop chemicals, all of us, we continue being as we were in '07, '08. We are being very careful but who has stepped in was a little bit more financing from government and a little bit more from banks. So at the moment we are not seeing any major issue. It is tight but it's moving.

Okay thank you. I'll pass it along.

Christina McGlone with Deutsche Bank.

I guess following on Vincent's line of questioning, you mentioned that farm economics are generally good and will spur fertilizer purchases, but my concern is that with basically wheat and cotton and corn acreage shifting in the US to beans that this benefit will really accrue to the US farmer and then by the time the Brazilian farmers are really buying their fertilizer in the major part of the year, July through October, that bean prices will be lower, farm economics will be worse, and we really won't see the pick-up in fertilizer volumes that maybe we expect. So I wanted to get your comments on that, Alberto, and also what kind of fertilizer volumes are you assuming in your guidance?

We think that it should be fine in the second half. For the South American farmers it's one of the reasons we are seeing the high commodity prices for soybeans and corn. There is-- there might be some pick up in the cotton areas and then some other areas for corn and soybeans in US, but we-- all our supply/demand analysis when we look also at the USDA numbers, we still see that the stock to use ratio is low. I think it will be not only the northern and the southern hemisphere, I think it will extend even into next year. So I think there will be-- there's a positive environment here.

So what kind of fertilizer volumes are you embedding in the guidance?

Look, it is so early in the year, but we are working-- the industry is working with a scenario of flat growth versus '08.

Okay. And then there's recent news we have I guess yesterday the USDA attach in Argentina reduced the bean crop estimate and CONAB today reduced the Brazilian corn and soybean crop estimate. And then you have China talking about drought conditions hurting their wheat and their ability to plant corn and soybeans. Do you foresee a kind of another dislocation scenario starting up again?

Could be, this weather issue in the southern part of South America, including Paraguay, Argentina and some parts of Brazil like [Organdy del Soul], we start feeling that the crop will be smaller than originally indicated. So everybody is starting to adjust. It's a little bit early because we still have the months of February but there is not enough rain. So we do think there will be-- there might be some issues.

And there will-- I think that, Christina, that basically there's every year some kind of dislocations that is placed in our advantage and that might be one of them.

Okay and then my last question, Alberto, can you just go maybe by region on the Agribusiness side what you are seeing in terms of crush margins, capacity utilization, what players are doing to handle the weakening demand situation? If you could just touch on your major regions?

Yes. We believe that North America will take a little bit longer for the demand to pick up. It might be soybean meal demand might be in the year be a little bit below last year, but at the same time we are having positive indications that the pricing in the livestock industry, especially in the chicken area, is improving. So it's positive. The herd destruction or the reduction has stopped, same as in hogs, so we have a first half probably will not-- first half of the year probably will not be so easy but the second half we are optimistic but we imagine that the meal demand will be below. We will not see a growth.

At the same time, US, the margins are better for exports because especially Argentina is not exporting so US is being able to benefit from some export markets.

Europe, we expect the demand to be around a little flat or perhaps slightly below last year but crush margins should be good in soft seeds and I also expect that the margins during the year should improve for soybeans. At the moment the margins are decent. The year should be difficult for Argentina because of the short crop. It should be very positive or let's say not very. Let's say positive. It's early to say.

For Brazil we-- and should be positive in Asia as well. So that fits a little bit the picture we are seeing with increase of soybean meal demand of 1.5%, which is a little bit different than USDA because USDA uses not the calendar year and uses a crop year from October to September and we believe that the fourth quarter of this year will be a good quarter.

We'll move on the Ken Zaslow with BMO Capital Markets.

I'm scratching my head a little bit here. ADM, you go back couple years ago there was a lot conversations with ADM of how they were always falling short of expectations and you guys were killing it. Now it seems like the reverse has happened. I guess the question I have on this is, you know, ADM and Cargill's results seem to be stronger than Bunge's on two fronts. One is on the crushing side as well as the credit side. Can you help us understand why there would be such a disparity on those two issues?

Look, we don't know how they operate. We don't know their numbers and I don't think it would be proper to comment on the other ones. The only very obvious difference, Ken, is that in the summer of this year in the US, especially in US, we were prudent, we were conservative. You have to remember that until June we didn't-- nobody was seeing any crisis and the situation we had was the commodity prices going up and up and up until we had this increase in our working capital by $3 billion in a question of weeks.

So, we were very careful. We were managing it very carefully and we had a book, a forward book in US, which was smaller than we usually have. So we didn't benefit this year so much from the very strong margins that existed if you booked it in the summer. At the same time, let's remember that we did benefit, especially in the Europe sequence in the Europe harvest, that we had a strong book in the end of '07 that benefited us in the first half of the year. So I would say you should see the two harvests together. I think all three Companies performed quite well.

Okay and what type of-- you know, on the risk management side, who's responsible for these defaults? It seems like it was a big number. I mean is there somebody who you kind of single out and say hey we got to change our risk management practices? And what level of confidence do you have that we're not-- we're done with taking write offs?

Look, I think two questions, two comments here. First of all, when you look we are 190 years in business and when you look at our performance over the last year, since we have been public the eight years, I think they speak for themselves that it's solid. Now obviously there are moments where perhaps we could do better, as usual. And perhaps overall in the whole book it is perhaps a little bit higher than usual. That's why we are highlighting it.

But it was also a dramatic drop in prices. When prices go up dramatically, often we in the industry have issues with farmers and when prices come down dramatically we have issues with customers and counter parties. Now in some of these areas we did not have, for example, in the case of freight, we don't have-- we didn't have in the past an exchange. We have now so this in the future should be less of an issue. So, but when you look around this issue in the freight area is pretty much all over in the industry, not only in our industry but in the steel, iron ore so I would say it is a little bit unusual but this affects many people in the industry.

What level of confidence do you have that we're not going to have a write down again?

Look, I think we're going to have it every year. As I mentioned when we-- this is part of our business. When prices go up farmers try to default. When prices come down and customers default, but we price into our business a certain amount of it. Now these kinds of situations are very, very unique.

Yes, I mean, Ken, we called it out because it is obviously somewhat higher than sort of the historical run rate and, given the characterization that I put it on how we took the provision in the portfolio to include both current defaults and the forward book of business, that's what drove it up under this particular set circumstances. I think in the future we would expect it to return more to normal levels, whatever normal is, but levels more in line with what we're pricing in to the business, but this particular quarter saw some unprecedented circumstances in certain areas and we wanted to be transparent about how we dealt with that.

And it will happen from time to time. You remember in '04 we had the issue with customers in Asia on counter party customers so this is part of the business. From time to time it will happen.

Okay and then another question is in terms of acquisitions any thoughts on a CPO? You both seem to have had your issues. Any reason not to revisit that?

Look, by the fact that we tried to merge last year shows that this is very much part of our strategy to invest not only in our core business but also in complementary value chain. We still-- we feel very, very positive about corn products. Nothing has changed. In fact, it probably made us understand it much better and think it fits to us. But look, this is the way life is. It didn't work last year. We have to be prudent this year but we will always be looking at opportunities in the future.

My last question, any issues with covenants or anything like that with your debt structure, anything that, you know, bumping up against anything that we should know about?

No. In fact, as I mentioned, the credit metrics are the best they've ever been. We've got a very strong balance sheet and financial situation, so no issues whatsoever.

Great. I appreciate it.

We'll go next to Terry Bivens with JP Morgan.

This is actually Jason English pinch hitting for Terry this morning. A couple of quick questions-- first, on fertilizer if I can, I just want to understand the FX offset here. You guys took a charge of $361 million on the financing side but the net FX that you report is $225 million. Is that $136 million difference essentially the offset you realized from the prior quarter hit?

Yes that's the recovery of prior quarter impact. That's correct.

And in the quarter.

And in the quarter, so yes you're constantly recovering as you go along, some of which would have related to the prior quarter and some of it recovered in the quarter itself.

So over the last two quarters I think you guys have taken a hit of around $630 million. You recovered $136 million now. Is it safe to assume then that you're carrying almost $500 million of accrued benefit into '09?

No it's significantly less than that.

What you-- you're probably referring to the $600 million. It includes the Agribusiness. The Agribusiness foreign exchange is immediately offset because we revalue the inventories. The inventories are valued in dollars so and that is immediately you see it in gross margins. So we highlighted the $225 million because this is the only one where there is a timing issue and that we will recuperate in-- during this year in the first and second quarter mainly.

You know, I am looking at the 270 hit from the third quarter and the 361 from the fourth quarter. I'm assuming what you recouped this quarter was a bit of a carryover from the last quarter.

Jason, it's Mark. It's think about the third quarter as being the 215 that we identified in the text and then in this quarter think about the 225.

Okay.

The [difference] on the segment data has already been recognized.

Got you. Okay well thanks; that's helpful. So back on fertilizer this quarter, we've got $136 million FX benefit offsetting prior 361. If I back that out of the gross profit for this quarter I essentially come up with neutral gross profit in the fertilizer segment, so sort of an FX clean, if you will, on the gross profit line. Two questions-- one, is that a fair way to look at it and secondly, why was if it is, why was the FX clean gross profit essentially neutral?

Well, you've got the 33% decline in volume for the quarter, right? So that's part of it when you compare back. Are you doing comps comparing back or are you doing just the absolute value for the quarter?

Just the absolute value, so I've got 135 of reported gross profit less the 136 FX offset.

But, you know, to your point the-- that's exactly what happened. The price, the international prices came down, not all of it. You have to remember we have two pieces of the business. One is the retail business and one is our own mines. So on the retail part of the business inventories were bought at higher prices and international prices were lower. So in some of them we really had losses and that's the explanation on the gross profit.

Thanks. That's kind of what I was thinking so essentially your inventory value was kind of close to what you were selling it at. I'm sure there were some other factors. But assuming that's the case and you're still, as you mentioned in your release, carrying some relatively high value, high priced inventories if we see further erosion in the market prices for this, could we be facing a write down issue?

Well, I mean it's a good question. In terms of how we look at that, we look at the portfolio of inventory. We look at it on an average cost basis that is still below market value. If you had a significant further decline in market prices the answer is that theoretically yes you could have a write down as the-- you know, we're monitoring that very closely. As of right now we think it's fine. The related issue is with respect to the first quarter profits and we know that we've got that higher cost inventory to work through during the first quarter and on the fertilizer side I think, even though we expect some improvement in prices over the course of the year, during the first quarter they are where they are and that will impact our profitability.

No the-- in the last couple of weeks or two weeks, fertilizer prices have come back. There has probably been a significantly de-stocking and we have seen already first shipments into India and so we believe that we don't have to make a write down because we don't see at the moment a further reduction in prices. In fact, at the moment we are seeing prices coming a little bit back. When I look at MAP-DAP it's something around $350 when the low as at around $300. And I think the market realizes that prices in the phosphate area have to be higher because for the necessary expansions probably they have to be closer to the $500 per ton for the industry to invest in it. Today a new plant, a Greenfield plan that will be necessary for the future demand, requires a price closer to $500 per ton. So we don't see at the moment further reduction in prices, quite the opposite. It's a small recuperation.

Okay that's helpful. Thank you. I'll pass it on.

Christine McCracken with Cleveland Research.

I wanted to actually follow up on those latest comments relative to in terms of expansion plans. We have roughly 50% or so I think of global phosphate production idled at the moment and I guess I am a little concerned that we actually, given some of the constraints around containment actually, end up in a shortage situation going forward. I am wondering can you just comment on where we are relative to that and if you have any concerns relative to kind of tight supplies, maybe not a concern, maybe it's your expectation relative to pricing.

The reason why we announced this expansion of our phosphate production was exactly the way we saw the global supply/demand. We do see that there is going to be a shortage so there is a need for additional productions so we-- and, as we are starting to see also the demand in grains and stabilizing and even if it is flat or slightly up this year, this all means we will need to have more fertilizer up and we also have to remember that the pressure on usage of water, the pressure of usage of land, it all means that we need more technology, not less.

So we have a-- we continue having a very optimistic view or not optimistic, a realistic view, that we will need more phosphate production in the future. Remember that until 2050 we have to double production of food and I am sure we will have to use less land. So this issue at the moment we see it a very, very, very short-term issue of-- and, in fact, we even think that there is some significant in de-stocking and the need for the additional phosphate will be necessary soon.

But just in the near term, Alberto, when you look at current run rates on production and where we are in terms of inventory of phosphate currently and the demand that you could see over the next 12 months, are you worried at all that the supply wouldn't be there for producer needs or is it that (inaudible).

I was not worried until a couple of weeks ago. I started to think about it because too much production or a lot of production was idled in US, in Morocco as in other parts of the world and we don't know exactly how much the inventories, how much the pipeline has been de-stocked. So we will see it over the next couple of weeks. There is a risk. I don't know how big it is but there is a risk for that.

Chris Bledsoe with Barclays.

Can you maybe just help me understand why historical ROIC is a more reliable metric for gauging EPS than another measure like historical profit per ton? The reason I ask is because you're basing '09 EPS guidance on a sort of historical range around your ROIC since your IPO but when I look at average profit per ton in that same period it implies an EPS level that looks to be well below the low end of your '09 guidance range.

Let me try it and I might need the help of Jackie. Look, I think one of the reasons why this is like this is that this is the most important bonus criteria in the industry, especially in the case of Bunge. Everybody is based on returns, so everybody is looking at it and if you-- if the returns are significantly higher you start seeing additional investments in capacity. If they are lower people shut down capacity. You saw we shut down two plants this year, so there is a very natural tendency to get close to cost of capital. The reason we think we have the competitive advantage and we are above cost of capital is because of the size, the logistical network, the ports and the way we operate it so we have some advantage vis--vis probably some smaller players but it is pretty much everybody thinks in terms of risk reward or is returns, so that is probably one of the reasons. So if we see something that is not returning we go after it and we start eliminating all the issues that are around it, so that's the way we run the business.

And just given the volatility that we sometimes see on the EPS side, we wanted to link those concepts as well so that when one thinks about our asset base and the level of profit that we expect to be able to generate on that in "a normal environment," whatever that is and then you look back at the track record, it makes a lot of sense from that standpoint. In any given year if you have highly positive circumstances they can push your returns significantly up, as we saw in 2008. As Alberto said, if that would last for any length of time then you would get capacity coming in to drive them somewhat back down and you could have a year where things are particularly challenging and the returns are a little bit lower than our target of 2 percentage points above WACC but so it's linking those two concepts to try to give more than one dimension on the way that we think about the profits that we should be able to generate on our asset base.

Just to follow up on that, I assume that in the last couple of years you had seen a pretty substantial increase in construction costs for your projects and the industry as well, which would then naturally require greater dollar returns in order to maintain what would be the kind of the same ROIC in percentage terms. So I guess I am just wondering why with so much investment in recent years why should historical ROIC hold up in the next year or two in a downturn if the denominator had risen so much on a per metric ton basis over that, over the last five years or so that you're using to-- or seven years that you're using to gauge the ROIC.

You know, these higher investment costs were compensated by other kind of components. Logistics is extremely important to us. You saw major expansion in Argentina. Argentina is probably the most efficient system in oil seeds. The same happened in Eastern Europe. All the plants we built in Eastern Europe, it meant that the smaller inefficient ones had to be shut down. They disappeared, so it is a qualitative change that we were able to do, compensate the additional investment costs. You have to add very important is the grain origination, the distribution, logistics, ports. It starts becoming part of a system and it was dramatic, the efficiency that we brought to the system by bringing more products from Argentina and expand-- and changing the whole system in Eastern Europe.

And then just for in the quarter itself, and I apologize if you already gave this, the ROIC for in the quarter and maybe if you have that kind of on a scrub basis excluding some of the non-recurring type of items that you've called out.

We look at it on the annual basis. That's the only way it makes sense so we don't do it just for the quarter.

Or even like on a trailing.

Trailing 12 months, that's the way we look at it yes.

And so if I am-- if I were an ag processor that had an acceptable ROIC, say in 2002 based on the average profit per metric ton in 2002, and I didn't develop, I didn't add any projects or invested capital during that period, then the ROIC or an average profit per metric ton would be acceptable to me but what you're saying is the industry has added to its cost base in recent years and that cost has gotten more expensive and, therefore, to justify continuing to operate at that, at the same levels, requires a greater profit per metric ton, which if not achieved you could-- you would see the industry back off of production rates.

Yes if I understood your question correctly, this one ag processor in '02 who didn't invest probably by now the returns would be below cost of capital and so I think I made-- gave the example, a similar one, here on the call in the past in the case of Spain. When we put together Bunge and another at that time [Sereole] facilities at the early '90s it was covering cost of capital. When we bought Sereole in '02 it was significantly below and we shut down four plants and built two new ones.

So you have to adjust; you have to improve; you have to move, so that's part of our business. That's why you're always going to see new plants in different locations and always it's all about more efficiency and linked to logistics, not always size. It's location logistics, so there has-- you will always see investments in the area. But it's probably more a little bit growth that the long-term the growth rate of this industry is 4% but you also see investments because of efficiency.

That's helpful. Thank you.

Robert Moskow with Credit Suisse.

Alberto, I wanted to know if you could comment a little bit about the sugar industry in Brazil? What we are hearing is that a lot of small processors are having a lot of trouble getting financing, that the financing costs when they can get it are incredibly high? And then there's a couple of properties out there that it sounds like you're still bidding on. What kind of competitive advantage do you have because your financing is lower than what the local players have? And if you do have that, is this the time to start accelerating the acquisitions that you're making in the region? Thanks.

Yes that's correct. The amount of credit now, not to the farmers, the credit to the farmers has been less affected but to the industry as your operator there is it is much tighter, so it has become a little bit more difficult. Also, the ethanol margins are lower and so some of the players in the industry are having a little bit more trouble and that means you immediately saw it that many of the expansions have been halted. So it is, the environment now is much more for a buyer than for a seller, so we are looking at it, like many others, but also we have to remember that the cost of capital has gone up so we expect higher returns.

So, at the same time, we continue expanding our mills, the two mills we bought and the one in the Greenfield so we are not stopping with that because similar to the previous question I think it is very important to have the right sized plant in the right place to have the lowest cost. So not everything that is in the market is interesting from a long-term point of view in terms of returns so the prices have to come significantly down if you want to pick up one of the less efficient plants.

So I think we have shown in the past we are disciplined. We want to continue being disciplined. There are going to be opportunities. We are on the lookout but we have to be careful. We have to be prudent with the current general environment.

Is that fair to say though that your cost of capital, even though it has gone up, it's still lower than say what a local player would face or do you think of Bunge Brazil's cost of capital.

Yes. Especially being a global Company, investment grade our cost of capital is significantly lower than the local market.

But we do also look at the projects factoring in the risk of the particular geography that we're looking at so it's a bit of a balancing act to get that right but--

It doesn't sound like you're seeing a lot of sellers like high quality sellers though. Are you seeing a lot of low quality sellers? Is that fair?

I would prefer not to comment. This is too specific but we-- I think we have now a very good team. It's a large team and we have much more insight than we had three years ago and we are-- look, we don't need to buy. If the opportunity is right we would but otherwise we will continue with our program. We are very, very happy with our decision to buy and build the ones we have and in northern part of Brazil in [Ninas] and in Mato Grosso too. I think it has validated our strategy. We are going to have a competitive advantage there now.

David Driscoll with Citi Investment Research.

This is [Cornell Burnett] with a question on behalf of David Driscoll. I just wanted to understand earlier I believe you indicated that the industry in Brazil is looking for kind of flattish growth in fertilizer volumes off of last year's weak base. Given that set of circumstances, what would give you confidence that we could start to see maybe somewhat of an uptick in fertilizer prices from current levels?

It is much too early to indicate what kind of volumes we will see in the year but we are talking about flat because we are considering all kind of things, credit, all kind of considerations. But you could make a case that the world would need a little bit-- would need more crops, so you could make the case that there might be more sales in fertilizer. And I would say also in terms of the prices, probably we have now a bias, especially in phosphate and urea and ammonia. There is probably an up bias on the upside. Obviously in the case of potash it is already at a high level but they have come down probably a little bit too much in phosphate and urea.

Okay and then just another question, you had indicated that you were seeing poor crushing margins in the US. You expect that to continue next year; Argentina should be weak because of a short of crop but you indicated that soft seed crushing results in Europe should be pretty good and Brazil should be fine as well. I just wanted to know what was driving things in those markets, in argentine-- excuse me, in Brazil and Europe?

In Europe is the-- it's the right supply and demand, the right let's call it [grape] seed, sun seed and the soybean that are needed. The soybean meal, we have a situation where the market is more or less in balance so you can have normal kind of margins. In the case of Brazil it is the countries continue growing. There is a very large meat industry domestically and Brazil has become a very large also exporter of meat, so you will continue seeing a good domestic demand. Brazil is becoming in the soybean meal area the markets domestically are expanding at 10% per annum. The meat industry because of as the country is getting richer and the lower income population is having access to more funds and eating more proteins. So this is a much more domestic situation of a good profitability.

And in the US I think you'll see a good second half, for sure a good fourth quarter but from now until then it will be a little bit more difficult because the livestock industry is suffering. But we think it bottomed and it's starting to look better, so for the next probably one, two, perhaps three quarters it will not be that easy but the fourth quarter is going to look healthy.

And we'll take our last question from [Steve Bern] with Bank of America.

Were the reductions that you saw in your fertilizer shipments in the year, and particularly in the quarter, in line with what you expect were lower application rates in your key end markets or do you believe application rates were even worse, given build-up of channel inventory levels?

We have on purpose reduced. Bunge on purpose has reduced its sales because we didn't want to have any credit issues, so we lost a little bit market share but everybody was careful so I would say that the yield will suffer. It is very difficult to say but everybody was so careful the farmers would have loved to buy. They really wanted it. They need it. The farm economics are fine so they could see how to make money but it was much more the supply side keeping it back, not the farmers not wanting to buy. So it's too early to say but we think there will be a yield issue in Brazil.

And so if the application rates were below normal once the inventory in the channel is worked through do you expect an increase in those application rates in 2009?

Yes and I expect a little bit more application rates and all the indications until now it's very early. January is very early but all the-- how should I say-- the mood it good between the fertilizer sellers and the farmers so we were very worried in December but it looks a little bit brighter now. We are a little bit more comfortable with the outlook.

And what would you estimate the current operating rates of your fertilizer manufacturing facilities?

They are very down. We shut down plants, blending facilities. We even, for the first time we even reduced the production of our mines. We don't want to have a build up of any inventory. We have probably from '08 three months of inventories. We want to work this down first before we do it but we will start producing soon so we will ramp this up.

And then just lastly, with the JV with OCP, how is the value of the rock transferred to the joint venture? Is that a cost or market value base?

It is at market. It is transferred at market. Obviously there are some special discounts because of volume and so on but it's basically on market, on a market level.

And that does conclude today's question and answer session. With that I will turn it back to Mr. Mark Haden for any closing remarks.

Thank you, everyone. Thank you, Elizabeth. We'll see you next quarter.

And that does conclude today's Bunge conference call. We thank you for your participation and have a wonderful day.