Bunge Global SA (BG) 2010 Q3 法說會逐字稿

Good day, everyone. And welcome to Bunge Limited's third-quarter 2010 conference call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to the call over to Mr. Mark Haden. Please go ahead sir.

Thank you, Jennifer. And thank you everyone for joining us this morning. Welcome to Bunge Limited's third quarter 2010 earnings conference call. Before we get started I want to inform you that we have prepared a slide presentation to accompany our discussion. It can be found in the investor information section of our website, www.bunge.com under investor presentation.

Reconciliations of non-GAP measures disclosed verbally 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 Bunge's 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 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 are Alberto Weisser, Bungee's Chairman and CEO, and Drew Burke, Bunge's Interim Chief Financial Officer. I will now turn the call over to Alberto.

Thank you, Mark, and good morning, everyone. We are very pleased with the strong results of the third quarter where all of our businesses contributed positively. Our performance in agribusiness was a key driver and our skilled team managed risks and our global asset network well to serve customers in a volatile market.

We also achieved good results in sugar and bioenergy. We are very pleased with the significant contribution of Moema and that the integration is going well. Food ingredients also performed well. While fertilizer is not yet performing up to its full potential, we are making steady progress in restructuring this business following the sale of all Brazilian nutrients as of last quarter.

The transition to becoming a full distribution business is well on track. We expect performance based on our new model for this business to stabilize in the second half of next year. Our margin improvement efforts have been working well already, but operating costs and volume still need to be fine tuned as we adjust our footprint, commercial approach and also the sales force.

Looking ahead, demand for our core products is strong. Global soymeal demand is up 6% this year, and the USDA. is expecting growth of 7% for the next year, the '10-'11 crop year.

Similarly, global vegetable oil demand was up 5%, and the USDA is expecting growth of 5% next year. And importantly, not only do we see growth and demand from China, we also see it in Europe, Middle East, South America, and other parts of Asia. We are expecting price volatility to stay; our stable balance sheet will enable us to weather this kind of environment and serve our customers well.

With our strong team and our balanced global asset network we are well positioned to succeed and grow profitably. Now I will turn it over to Drew who will provide you with additional detail on our results.

Thank you, Alberto, and good morning. If we turn to page five, we will discuss the three months income statement from Bunge Limited. Volumes in the quarter were down 2% from the prior year, but the entire reduction and actually more than the entire reduction was due to our fertilizer business as we made the transition from a mining to a distribution business and had some effects to our footprint as we go through that process.

The volumes in our other three businesses were all up in the quarter. The segment EBIT was $340 million versus the prior year of $209 million. That $340 million includes $49 million of impairment charges. If you would add that back, you would have an EBIT of $389 million in the quarter.

Agribusiness performed very well. It does have an impairment charge in there of $22 million, so adding that back to $333 million increases to $335 million. Our grain and merchandising business had a very strong quarter and the oilseeds business was down a little bit from the prior year due to lower crushing margins.

Sugar and bioenergy reported earnings of $34 million versus the prior year of $10 million. In the $34 million is $26 million of mark to market charges related to a hedge of our industrial sugar business where we sold the sugars forward. We marked the forward sale to market. Under GAAP we cannot mark the sugarcane or the underlying physical inventory to market. So we would expect to recover that $26 million over time as those two items come back into line with each other.

The Moema Mills performed very well and our distribution business had a very strong quarter. The Santa Juliana and Pedro Afonso Mills came on later than we expected, so that reduced what we could have achieved in the quarter a little bit. But still the $60 million before the mark to market is a very nice performance.

Food and ingredients had a very strong quarter. If you add back the impairment charge there you would have $96 million in profits versus the prior year of $42 million. That was largely driven by our edible oils business in Brazil where strong demand for soybean oil allowed us to increase margins and earn a nice profit.

We also had a very good quarter in the wheat milling businesses, as we had inventories on hand before the run up in the wheat milling prices, which enabled us to achieve very good margins.

Fertilizer stabilized in the quarter and reported a profit. Margins increased and are at an acceptable level. The volumes were down versus our expectations, in part due to issues in the supply chain because we did not have certain distribution points operating due to the sale of the nutrient business to Vale.

The net income attributable to Bunge was $212 million; that does include $133 million of notables. The notables are $90 million for the early charges related to the early prepayment of some of our debt. The $49 million in impairment charges, and that was offset a bit by a $6 million gain of a wheat facility -- an idle wheat facility. When you add back all of those charges you have an earnings per share in the quarter of $2.26 versus $1.62 in the prior year.

If we move to slide six and take a look at the balance sheet. This is probably a stronger balance sheet as Bunge has ever had, so we feel very good about it. You will see that the shareholder's equity increased from $9.5 billion at the end of last year to $11.8 billion now. That is in large part due to the sale of the mining business where we achieved a $1.9 million profit.

We also received proceeds of $3.4 billion from that transaction. $1.5 billion have been used to prepay debt, and about $355 million have been used as part of the share repurchase program. You can see in the gross debt line, the reduction is about $500 million; that is because we have also had to extend some shorter term debt to be able to fund our working capital requirements.

You can see working capital increased in the quarter, primarily in readily marketable inventories. That increase was primarily due to the run up in crop prices during the year.

If we turn now to page seven, which is the cash flow. Cash flow from operations was $1.6 billion negative. The two portions of that are funds from operation. The reported funds from operations is $336 million. Included in that under GAAP requirements is $424 million related to the fertilizer transaction. If you were to exclude the impact of the fertilizer transaction, funds from operations would have been $760 million.

Working capital charges are about $2 billion negative. About a billion of that you see on the balance sheet because of the increase in working capital. A large part of the remainder that differs from the balance sheet occurs because of the way the -- because cash flow statements are traded monthly -- translated monthly and the real in particular has been very volatile during the year. So it has caused that number to come out higher than you would get the impression from the balance sheet.

Our capital expenditures are at $754 million which is in line with expectations and guidance. If we take an outlook for the rest of the year, we feel very good about agribusiness. The US harvest is progressing very well. Global trade and agriculture will be strong, and we expect very good margins in volumes in our grain business as we see product moving from the western hemisphere, particularly into Europe due to the crop issues there.

While there's still some pressure on crush margins they have been slowly moving up, and we have seen that to continue in North America as the harvest has come along. Demand for all our products remains very strong -- or remains strong.

On sugar and bioenergy, the market trends are positive. Demand for both sugar and ethanol is strong as well as the pricing. On ethanol, we do not hedge forward, so we will get the benefit of that pricing in the fourth quarter. We have hedged our sugar forward for the fourth quarter so we will get the hedge price versus the market price in the quarter.

There is some risk in our sugar and bioenergy business due to the weather problems in Brazil. As you all know, the crop has been damaged by the drought and we have projected the impact of that when we look at our numbers. But that is a situation that is still developing so we need to see how the crop turns out and what volumes that allows us to mill in the quarter.

Food and ingredients, we expect a solid performance in the fourth quarter and fertilizer should also have a nice quarter. The margins are holding steady at an acceptable level, and we should see more demand than usual because there was a delayed start to the planting in Brazil. And as we said in the announcement, we expect to achieve or exceed our full year guidance. Thank you.

With that now, we will turn the call over for questions and answers.

(Operator Instructions). And our first question will come from Christine McCracken with Cleveland Research.

I just wanted to ask on the planting delays that you mentioned -- clearly the crop is now getting into the ground. But I'm wondering, in terms of the fertilizer volumes for the balance of the year and the expectations around the safrina crop, if you can provide a little bit more color and how that might be impacted.

Yes. Good morning, Christine. The -- in the market volumes are up around 4% vis-a-vis last year, and we should -- we expect that the whole year should be around that amount. So there is probably some 7 million tons that still need to be sold in the fourth quarter which is a little bit above normal. And the reason is with the late arrival of the rains, the farmers had a little bit more time to start the planting.

Now, this should not affect soybeans, but it probably will affect the safrina. The winter corn -- there might be not enough time to plant the winter corn, especially in Mato Grosso. And, therefore, you also see the expectation that there will be a smaller corn crop in Brazil.

And probably a larger cotton crop given the run there. But on fertilizer, given the run in prices -- you had already pre-bought that, so you should get maybe a benefit. Are you able to pass along maybe higher prices?

We have changed the way we operate. Remember before we were much more open because of our phosphate mines. And we have changed the way we run our business and we have less opportunities on the upside, but also significantly less on the down side.

So we are running this business on a much more tighter business model from the margin point of view. And so we should see -- we could see some upside there on prices going up, but we are running it differently now. It's much more like a distribution business.

Sure. And just one other question, you talked about the strength in demand for soymeal, but when I look at margins for the livestock producers globally on the run up in corn, I'm a little bit more skeptical on the outlook for strength there.

Is it that you are looking just at a tighter overall feed environment, or is it that you see some stronger growth or a shifting in protein over to meal? And then just generally on the overall pricing, it doesn't seem like it is maybe as strong, it seems like the oil is carrying the crush. I was just wondering if you could provide a little bit more color.

We believe that the USDA demand has been relatively conservative because when you look at the demand in the quarter, the demand in the quarter was I think significantly higher than we're expecting for the whole year. There -- probably there are a couple of reasons why this strong demand on the meal side.

Number one, they are generally -- the inventory stocks of the meat producers have been down. So the pipeline is empty, and they have to fill it up. Another -- and margins have been good.

The second one is there is less competition from alternative meals, like there's less DDG's and rapeseed meal, and because of the very short wheat crop in Europe, many of the feed compounders that used wheat have to use soybean meal.

So there is a very robust demand up there for the next quarter and also for next year on the meal side. In addition, there's a strong demand also from oil. Because you can't ramp up -- you can't ramp up the -- as fast the production in palm and others we have less soft seed. So there is a strong demand for soy oil because you also have the additional demand of bio fuels.

Finally, you also have to remember that the US dollar is much weaker, so the impact in Asia and South America and in Europe on the higher commodity prices is much less for the end customer as we see it in US. But we also see some additional demand in the US. But here we are a little bit more skeptical.

Fair enough. Thank you.

Thanks, Christine.

Our next question comes from Ken Zaslow with BMO Capital Markets.

Good morning, everyone.

Good morning, Ken.

My first question is if I think about '07 and '08 where there were a lot of dislocation opportunities; was Bunge's balance sheet able to take full advantage of that? I'm assuming this time around it's not as advantageous as it was '07-'08, but your balance sheet is better.

So I guess can you reconcile how this environment will kind of shape up versus '07-'08 in terms of Bunge, not just the industry as a whole? Will it be better for you guys? Will it be in line? Just give some comparisons.

Well, we feel -- Ken, we feel very good where we are. Obviously, we can now serve the customers -- we can buy forward as with these high commodity prices the farmers are much more willing to sell their crops forwards. So we have much more room this time than we had in '07-'08. So we think we are in a very good position.

And also, we feel that this trend will go into next year, significantly into next year. They are -- there will be tightness in the supply, probably the whole of next year because, as we said, there might be less corn, there might be also issues. We don't know yet. But we aren't sure how good the crop will be in Eastern Europe. The planting has been a little bit more difficult in Europe, so we feel very good about next year and the position Bunge is in.

Second, your guidance, you meet or exceed your initial guidance, or I guess your second or third revision of guidance. My question is, are you trying at all to tell us what the fourth quarter is going to be? Are you trying to just -- what exactly are you trying to do with the guidance? Because it seems like next year you're not going to give guidance.

So are you just trying to wean us off the guidance? Is it more of a vague statement? Or are you trying to guide us related to the fourth quarter numbers? Can you just give us a little clue of what you are trying to say with your guidance statement?

Look, let me start and then Drew continues. We feel very good about the fourth quarter. So when we say that we expect to beat -- meet or beat and exceed that's a very clear sign we feel good about the fourth quarter. And it has been better than we expected since July and we also have a good view of next year.

But when we think about guidance, we want to give investors enough information to take a good decision. But we have struggled with the -- specifically with the EPS number. So we might move away from that in next year. So -- but we will give you enough guidance to give a flavor of how we feel the business is, and we feel very good about it.

I think, Ken -- I think if everyone goes as we expect, we do expect to exceed the guidance. As Alberto said, we are reluctant to try to put an exact number on it because, as history has shown, this is a business that moves quickly and to predict the earnings exactly is not very easy.

The reason we said meet or exceed is, as we pointed out, there are some risks, particularly some significant weather risks that we don't have a lot of control of that are out there. And if that situation worsens well beyond what we think, then the results will slide back accordingly. But I think we feel good about the quarter, we feel good about where our business is, and what we can earn if things play out the way we think they will.

Great, thank you very much.

Thanks, Ken.

And next we will take a question from Tim Tiberio with Chardan Capital Markets.

Good morning. I guess my question is around your cash flow profile. I guess, what are your thoughts about actually achieving free cash flow, positive status by year end? And then secondly, maybe you can just break down looking at the inventory increase, how much of that is related to a move in sugar prices and how much of that is due to the late start in the fertilizer application season?

Thank you for the question. We will not achieve positive free cash flow this year. You know, our goal is always to be able to fund our business from our internal operations. But we have the issue that our working capital can be quite volatile. We were projecting a much stronger cash flow for the year before the recent run up in crop prices.

But when crop prices run up like this, they do use up a considerable amount of working capital and we are very judicious to make sure we spend that working capital in areas where we are getting proper returns for the business. Most of the increase in the inventories has been price driven, but it's not solely sugar. It is also beans, corn, etc., so it's not limited to the sugar arena.

And, remember, this is similar to the situation that happened in 2003 and 2008. We buy this and as we sell these products and collect the money this all comes back. So it really means that next year we are going to have a very high positive cash flow --- we expect as the prices will not --- because we (multiple speakers).

(multiple speakers) depending on crop prices, yes.

Depending on crop prices. But as we collect them, obviously we will get all this money back.

So, we have heard instances of farmers being willing to sell forward more of their soybean supply at current prices. Is this requiring you to go out into the markets and I guess spend more towards the end of this year heading into 2011. Is that how we should look at it?

We don't disclose exactly where we are on our farmer purchases program. We clearly have targets for how much we want to acquire and those targets are partly related to the profit opportunity embedded in those purchases. So we take a look at the market and the returns we can earn on that in size our purchases accordingly. There's a certain range we stay within, but we can be at the lower or higher side of that range based on the opportunity for good returns on the transactions.

Okay, but I guess on the customer side, are you in a position where you can at least give us some color about -- not exact margin expectations, but directionally, are you still able to lock in some of those margins from the customer side? Or is that still open on the soybean side?

On occasion we can lock in the margins, but usually in a high price environment the customer are a little bit more spot than buying long term.

Okay. Thank you very much for your time.

Thank you.

Our next question comes from Bryan Spillane with Bank of America.

Good morning, guys.

Good morning, Bryan.

Just a couple of questions around the sugar segment. I guess the first question is just -- if we were to sort of strip out some of the startup costs, and I guess the mark to market losses, where do you think your profitability in sugar is now relative to the industry? Do you think you're sort of in line, or is there still room to improve relative to where the industry profitability is?

I would say that probably the quarter would have been pretty much in line, with one caveat is that we have the more depreciation than others because we have three new plants and therefore we have a higher depreciation. And also there might be still some adjustments on the integration.

So the integration is obviously going extremely well. We are very pleased. But we are getting close to where the above average companies are. So we want to be in the top quartile in performance. And we perhaps are not in the top quartile, but we are above average.

As the integration benefits -- is there still -- are there still more integration benefits to come and that's part of what will get you into that top quartile? Is that the way to think about it?

Yes, but it also -- demands also adjustments. So we will have to do investments which we are focusing into next year. A lot of the -- will be less capital expansion of our mills which we did already, but it is much more in core generation and agriculture investment, and fine tuning and integrating them better. So it's not only organizational structure, but it is also some of the investments.

On an EBITDA basis, I would think next year we will be very competitive, as Alberto said, amongst the top of the industry. Because we -- remember, we only brought some facilities on stream later this year. So they weren't running the whole year. I think that's where we will be. The only caution next year is what is the crop size and whether we will be able to fully use our capacity.

And then just in the quarter, can you give us some sense for how much of the profit was driven by Moema verses the trading business?

We don't disclose this necause obviously these businesses are very much linked and interrelated. But Moema performed very well. Obviously Santa Juliana and Pedro Afonso, as Drew said, not because they are very delayed in ramping up, and so the merchandising business was also very good.

Okay. And then just a final question, related to sugar, you had mentioned that you had some hedges for sugar in the fourth quarter. Any chance you can tell us what price you are hedged at?

We don't think we should say that.

I thought I'd take a shot. Thanks, guys.

Thank you, Bryan.

Our next question comes from Vincent Andrews with Morgan Stanley.

Thank you, and good morning, everyone.

Good morning.

Question, it looks like you have about $350 million left in your share repurchase authorization. Last quarter you made a comment stating how much you had bought after the quarter, if I'm remembering this correctly, and I don't see one of those types of comments in here. I guess my question is -- does anything about the higher commodity price environment make you more or less likely to complete the balance of that repurchase authorization in the near term?

No. The higher commodity price environment will not affect that. We had as a financial plan for the ongoing operation of our business that those always include the contingencies for commodity prices moving higher. And everything and in that financial plan is still working well. Meaning we have the capacity to handle this in the operation of the normal business, separate from the share repurchase program.

Having said that, we have repurchased about $355 million in stock. And if you remember, that's the same number I gave at the investor day, so we have paused the program, but it is not related to the run up in commodity price. That program has got, I don't know, 14 months, 15 months still to run. We feel we are at a point in a time where it's smart just to take a pause and wait a little bit and see what we do going forward.

Are you commenting then, maybe there's something on the M&A horizon to come?

We don't comment on that. I think we said we are very interested in doing transactions and we still are and are still active. So, that's always on our mind, and our financial plan also is allocated capital in ways to finance acquisitions if we have the opportunity. But that is something we would like to do. We don't intend to let that cash sit -- or that cash or financing opportunity sit idle for the long term.

Sure. But just to be clear, is there some other lever in here in that decision making process? Obliviously one can be the commodity prices, you said that's not it. Another could obviously be M&A. Is there some third reason why now would be a good time to pause the share repurchasing?

Just looking at the situation in total and how quickly we have gotten through half the program, we thought it was smart to take a break and see where we go next.

Fair enough. Maybe just lastly, Alberto, you obviously commented on USDA projections for demand for next year, and one can't help but read how robust Chinese demand for soybeans and soybean meal has been and will likely continue to be. And, obviously, earlier this year that kind of created a difficult time in the market.

As you sort of look forward, given that demand level appears to be sustainable and continuing to grow at that pace, are there any challenges either logistically or -- does that change anything about the overall operating environment? I'm not talking so much about risk management as I am talking about just the ability to serve that demand?

We don't think there's a real challenge. But we continue preparing ourselves to this. It is one of the reasons also we have -- we are building this very large state of the art terminal in the Washington State, north of Portland which is to deal with that demand, because it's going to be not only beans but there will also be more corn in the future.

So I don't expect -- I don't expect too much issues here. We obviously are considering -- we always have plans to expand, build one more -- expand our terminal in Santos, we have the expanded terminal in Argentina. So we are -- we don't expect too much of logistical issues there.

I think the question is probably more, how fast can the agricultural ramp up so the supply has to ramp up first. So from a logistical point of view, I think we are prepared for it.

And then maybe the last question just would be, do you have any thoughts on the internal Chinese production? I know you just mentioned you thought there would be more corn to come, in terms of from the US or I guess South America to be exported to China. But there are varying reports about production difficulties that China may or may not be having or have had in the last 12 months. Do you have any insight into that?

Not more than anybody else. But we understand that the corn crop was a good crop, so the environment was positive. But obviously, the demand for feed ration is going up. We have been seeing soybean meal demand up for the whole decade up 9% per annum year-after-year. And if you have soybean meal, you have to have the energy, the carbohydrates as well, and normally that's corn. So we think it is more a question of demand. Production should be okay, but I think the demand is outstripping the supply.

Thanks very much. I will pass it along.

Thank you.

We will take a question from Dianne Geissler with CSLA.

Good morning.

Good morning, Dianne.

I just want to ask a couple questions on your sugar business. You talked a little bit about the weather and dryness and its impact on total volume this year. Is there a lingering impact as you look into next year's crop? Could you comment a little bit on that, please?

There might be. You know, some farmers have expanded. Prices are good. So the incentive for farmers to expand is there. But there is some risk that the drought has affected some of the quality of the cane roots. It is very difficult to say, because obviously now is the rain season and we will see how it evolves. We really will only know exactly if there was a negative impact, and if -- how much sometime in late March and April. But there is a risk.

Okay. Thank you, and then your comments on being forward hedged in the fourth quarter, do any of those hedges extend into the start of 2011, or is it fourth quarter and then done.

Well, we prefer not to talk about our hedges any more.

Okay. And just your commentary on the cash flow, correct me if I'm wrong, but won't your cash flow, the amount of money that needs to go into working capital, stay even as long as crop prices remain high? And really the only way to have that positive cash flow come back to you is if crop prices roll off?

That's correct.

Okay. So as long as crop prices stay where they are today -- you're going to have a little bit of a build in the fourth quarter, because obviously they have run since the -- the way you reported the beginning of October. But presuming they stay at this level, then it would just be carried forward?

Exactly. And you ramp up. If they stay at this level there would not be an increase next year, but there will also not be a decrease.

All right. I just wanted to clarify your statement from before.

Yes.

Thank you.

You're welcome.

And our next question comes from Christina McGlone with Deutsche Bank.

Good morning.

Good morning, Christina.

I guess the first question. SG&A came in lower than I thought, and I'm wondering if it was because of FX hedges that were in place, hedges against the real, or if there are cost savings already flowing through or both?

First, is that the foreign exchange continued to go against us. But the reduction is mainly because we -- its cost reduction is not having any more the nutrients part of it, but this is also compensated that we have Moema in. So the positive picture on SG&A is -- I would say that some of the cost cutting is having an impact.

Okay. So were you hedged on the REAL in the quarter, Alberto.

We always have hedges in place on the real going forward. So yes, we had certain hedges in place.

And then what about for next year, how should we think about that -- with respect to the real.

I don't think we disclose what our hedges are going forward.

Okay. And then one thing I wanted to talk about was the US's winter wheat crop is off to very bad start relative to history. I am wondering how does that affect -- now we have a situation where you have short wheat in the Black Sea region, maybe shorter than expected wheat in the US, maybe better in Argentina. How does that affect Bunge's ability to do well given your footprint? Does that give an opportunity or is that a threat because you will be merchandising less wheat out of the US?

We are larger -- when we talk about grain we are larger in corn and barley and in Eastern Europe in wheat. So I would say -- obviously, it is also stressful when you have these dislocations, but by having the large footprint and that continues expending, we hope that we will be able to serve our customers. And normally in these situations, margins tend to expand.

So there's a limit to this, Christina, so -- but I think -- I think we have to -- somebody said it correctly, the usual situation is to have dislocations. And is the exception is not to have. And that is one of -- the importance of having scale and having the global network. So I think that is exactly -- that plays to our strength. But there is a limit. So we obviously are also worried about -- we can't see too much of lack of supply here.

Okay. And then, Drew, you mentioned you had wheat inventories in the third quarter that helped wheat milling. Do you still have wheat in inventory now for the fourth quarter or have those been used up?

We would always have wheat in inventory. But a substantial part of that benefit would have occurred in the third quarter, because we buy wheat on an ongoing basis and we have now made purchases since the run up.

And the last question. Alberto, can you talk about -- you talked about crush margins in North America, but maybe just the other regions and China is now taking soybean oil from Argentina. Is the outlook in Argentina better? If you could go around the world in crush margins.

The only real issue we had in the quarter with crush margins was North America. I think generally around the world they were not extremely good, but they were normal. So -- but we also have to remember that now the South American crop is starting to end and the crushing will diminish as we -- normally the fourth quarter is a weaker quarter. We still process and crush, but now comes the northern hemisphere. And so -- and the margins, we have seen some improvement in the margins in North America.

And how about Europe?

Europe the margins have been normal, and obviously we have had some issues with the smaller crop in soft seeds. But the margins are good at the moment.

Thank you.

You're welcome.

And next we will take a question from Robert Moskow with Credit Suisse.

Thank you. Maybe you touched on this before, Alberto, but I'm just wondering in general in this rising price environment, whether you are seeing your customers acting any differently? Are they more anxious to buy lock in forward contracts, or not? Or are they kind of sitting on their hands thinking that prices are going to fall?

Normally when prices are rising they go a little bit more spot, and the same is not only in the US, but it's also in Europe. But at the same time, we don't see -- as you saw from Drew's comments, our volume is up despite the rising prices and the demand is strong. So the pattern is a little bit different than instead of buying forward they go spot. But the volume demand is strong, is robust.

Okay. And as I look into fourth quarter -- just wondering, is there anything in third quarter that you think, as I look in fourth quarter, that makes for a tougher comparison in fourth, anything seasonally, or anything I should consider one time benefits in third as I compare the two quarters?

Comparing it to which quarters?

Well, if I look at fourth quarter, is there any reason to believe that it couldn't be just as good as third quarter? Like third quarter was a good quarter, so -- ?

It can be. You have as we indicated, fertilizer probably could be -- there's a chance that it is stronger than the third quarter. But normally on sugar and bioenergy it is weaker because it's seasonality. On agribusiness we come into the northern hemisphere, it should be very strong, but the southern hemisphere tapers off. And so fourth quarter could be similar to our third quarter.

But it is very, very difficult in our business to see exactly by quarter. We will only know by the end of the year if there was some shift of business from the fourth quarter to the third once it is over. But probably in the future because we don't have the mining business anymore, so the fourth quarter and the third quarter should in the future look a little bit more similar.

And then lastly, kind of a similar question for 2011, you point to like ten different things that can go right or wrong in a given year. Maybe you have 13 now that you have sugar. I'm just wondering like just the big drivers that you think for 2011.

The first one obviously is the ramp up in sugar. Maybe the second one is the easy comparison in second quarter when you had the hedging loss, I suppose, or whatever you want to call it in the second quarter of 2010. Are there any other big things I should look at? Maybe soybean meal growth again? Anything else?

Yes. Let me talk about '11. But before I say that, it was not hedging loss in the second quarter. We just did not have a robust enough early program of buying from the farmers forward. So we struggled and we had a little bit less volume and a little bit less margin.

Right.

So the -- and the second one is the most volatile business we always had in our portfolio was the mining business. So there should be hopefully less volatility in the future.

When I look 2011, we look at it positively. We think agribusiness, the environment is positive. It is constructive. Demand is there, as we mentioned, for different reasons. Soybean meal is strong, not only into China but also into Europe, also into South America and Southeast Asia and the weak dollar doesn't affect our customer so much.

Also the substitution because there's less wheat in Europe which is used a lot in feed compounds. They will not have the wheat, so they will have to use more soybean meal. So demand should be strong in oil as well, because we have a little bit less soft seed and palm, and other oils can't ramp up as fast. So the soybean oil demand and soybean meal demand should be good.

So agribusiness should be positive. The grain environment continues problematic so it should favor the large companies that have access to more origination and better logistics. So agribusiness picture is positive.

Food and ingredients I think is -- should be also positive next year. And sugar and bioenergy we will have a full year with not so many of the issues we had at the beginning because of acquisition and ramping up of some of our plans.

Perhaps the only caution is what Drew said, and we mentioned two other comments on the sugar side. There is a question how big is going to be the sugar cane crop. And obviously there's always weather. But overall we have a positive view about '11.

Thank you very much.

Thanks, Rob.

And now we will take a question from David Driscoll with Citi Investment Research.

Thanks a lot. Good morning, everyone.

Good morning, Dave.

Alberto, it is very nice to see such strong results from you guys it's been a little bit of a tough run, but you look like you are back. First question would really come on North American crushing. I know you made a few comments here, but demand in my opinion looks like it has been stronger than what people have expected. Does this mean that margins should be better than what you expected just a few months ago?

We have always asked you these questions and I feel like three months ago you were a little nervous about what was going to happen in the fourth quarter because of the timing of having plentiful supplies of beans in both the northern and southern hemispheres and what that might do to capacity utilization rates? Can you comment upon that?

I think you are right. We were a little bit more worried before, so the environment is more constructive and margins are better than we thought. Both in the merchandising and the grain origination, distribution and also a little bit better in oil seed processing. You are right.

On the --. Go ahead, please.

No, that's it.

On the trading side, would you say that the third quarter is the biggest beneficiary for the kind of trading profits related to the wheat disruptions from the drought in the former Soviet Union? it's not to say that the fourth quarter would be bad, it's just to say that the strongest period where the disruption was the most acute would be in the third quarter? Am I thinking about that correctly?

I don't know that I would come to that conclusion, David. The markets have continued to be pretty volatile. The dislocations are still there. And there's still a lot of the fourth quarter to play out here. So I don't think it's clear to say that the third is -- I forget what term you used. But the third is more important than the fourth. I think we need to wait and see here. But there's certainly been volatility and dislocation in the fourth quarter too.

And continues. We expect it also to continue into next year. Because we will see volatility in the next year. There are too many issues on the supply side.

I agree with that, and certainly it seems like it's very difficult to understand whether or not we're going to have adequate supplies of crops just given all the shortages.

Moving on to sugar, just a couple of follow ups here. I have heard some comments from some of your competitors that owning gas stations and distribution in Brazil if you own ethanol plants is a positive. I must admit that I don't truly understand this, and I want to take your temperature on this particular issue. Do you need to acquire gas stations or distribution assets to otherwise enhance your existing ethanol production within Brazil?

I don't think you need to own gas stations. But it is -- we are studying it, if it makes sense to be in one way or the other involved with the blending part of the business. And so this we don't know. And Brazil is changing, and we have to see how this model evolves.

But clearly not owning gas stations -- I don't think that is something -- this is not something -- not even for the energy companies. Mostly they don't own it. It's owned by private individuals or small -- other like franchises. But similar to the US and the ethanol distribution business, as these businesses are changing, the ethanol business in Brazil is growing dramatically, so it is worth looking at it.

And my final question on sugar, it does come back to the hedges. In the press release, and I know you don't necessarily want to comment on this, but you did write something in the press release here about the sugar and bioenergy section having a $26 million mark to market on contracts that relate to hedging a portion of the 2011 sugar production. Can we assume that's something like less than 25%? If you could just give us even that much it would be helpful.

I don't think we want to comment on what the coverage was. Where you're right is that we have a $26 million mark to market charge. Some of that will come in the fourth quarter, some of that will come by next year as the hedges expire. We don't want to comment on exactly how much we are hedged. You have to realize, that is also in this situation a number that will move as the crop size moves.

I appreciate that. The difficulty on our side of it is trying to understand what sugar price to put in there. Because if you've hedged the first couple quarters then the curve is backward dated. Then -- I feel like there's a very large chance of error on our side of the fence.

Yes. I understand. The one thing I would say is about 60% of our volume is ethanol which is unhedged and we don't hedge it forward. And then in some of our sugar is based on a constant Canna formula, which is also kind of natural hedge a little bit. But I think that is as much as we want to say about what we are doing with forward hedges.

Thank you.

And also what -- just think about it when we talk about hedges, is we want to protect ourselves on the down side, on the lower side, or lock in higher prices. So it is a very, very -- this changes every day. So what we want to have is -- our target is to have profitability of 2 [percent] points above cost of capital.

So all the time we are looking at, let's protect ourselves on the down side. If the prices are attractive and we don't think they will continue increasing, let's lock in some margins. This is very, very commercial and the decisions are taken daily. So it is very difficult to talk about this.

Thanks for the comments and nice results today.

Thanks, Dave.

Thank you.

And our last question will come from Gabriel Kim with Wellington Management.

Good morning.

Good morning.

Do you guys have a sense for the CapEx budget yet for next year and how much you expect to spend in sugar?

We're still making all the final decisions around the precise numbers by segments. So I don't think I want to give you segment numbers. I think the capital expenditure budget for next year will be slightly above this year's from what we are seeing so far. But we are still in the process of coming into the final numbers.

But we do -- I did see it at the beginning of the call, so I can repeat it, we don't need at the moment to make -- next year we don't need to do any major expansion on our capacity on the mills. Most of the investments are around cogeneration, agriculture, and now improving the footprint so that all eight mills operate better together.

So it's the consolidation of the integration. So these are the lower hanging fruits of investments for very nice improvement of the business. So that's what we are focusing at the immediate moment for next year.

And the cogeneration, do you have a sense or a goal for how much megawatt you want to be able to sell?

We want to -- I don't know if we -- to be honest, I don't have it here with me. But we want to have a nice and high participation of cogeneration. We think that the whole package of selling sugar and having flexibility in sugar is both the raw sugar and the white sugar. Ethanol, both hydro and hydros, bio materials, and cogeneration.

The vision we have here is for all of our mills to have the right participation. So whenever we can, we will ramp up our cogeneration to the maximum we can. Because that gives the best structure for each of the mills with the lowest cost to operate and also the right mix from the EBITDA from an earnings point of view. So you will see us doing more in cogeneration.

And then my last question is just on the merchandising and trading of sugar and ethanol. What's the general philosophy there? Are you really just merchandising and trading your own stuff? Or are you trying to catch third party orders as well.

We do work with others as well. We have -- you might remember, this is a business we bought from Tate & Lyle. And the volume, I think in the appendix of the presentation shows that it's around 5 million tons. So you see our production is around 1 million tons.

And the philosophy here is that as we have logistics, as we have expertise on origination, as we have expertise in destination, let's leverage these expertise plus the fixed cost and also buy sugar and ethanol from smaller mills or others who don't have these infrastructure, and that's exactly what we know how to do. And sell around the world. So it's not only our own.

Is it more sugar or ethanol?

At the moment it is more sugar. Mainly sugar. But we are improving also -- because let's say ethanol at the moment, most of the ethanol has to be sold inside Brazil, because of the huge amount of pent up demand. But we do sell ethanol in the US from third parties.

Thank you.

Thank you.

And that does conclude our question and answer session for today. At this time I will turn the conference back over to Mr. Haden for any additional or closing remarks.

Great. Thank you, Jennifer, and thanks, everyone, for joining us today. We will see you next quarter.

Thank you. That does conclude today's tell conference. We do thank you all for your participation.