CF工業控股 (CF) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 CF Industries earnings conference call. My name is James and I will be your operator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Chuck Nekvasil, director of investor relations. Please proceed.

Thanks you, James, and good morning, ladies and gentlemen. Thank you for joining us on this conference call for CF Industries Holdings, Inc. I'm Chuck Nekvasil, director of public and investor relations, and with me are Steve Wilson, our chairman and chief executive officer, Ernie Thomas, our senior vice president and chief financial officer, and Dave Pruett, our senior vice president, operations.

Yesterday afternoon, CF Industries Holdings, Inc. released its third quarter results. As you read our news release posted on the investor relations section of our website at www.cfindustries.com and as you listen to this conference call, please recognize that both contain forward-looking statements thin the meaning of federal securities law. All statements in this call other than those relating to our historical information or current conditions may be considered forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the Safe Harbor statement included in the new release. Consider all forward-looking statements in light of those and other risks and uncertainties.

Now let me introduce Steve Wilson, our chairman and chief executive officer.

Thanks, Chuck, and thank you all for joining us this morning.

Yesterday afternoon CF Industries announced third quarter net earnings of $723 million, or $0.13 per common share. That compares to a reported net loss of 91.4 million, or $1.66 per common share on a pro forma basis, in 2005's third quarter. Of course, you will make your own decisions on how to factor in or out the several unusual items from a year ago, adjustments related to derivatives and other anomalies that affected our reported results in the two third quarters.

However, from my perspective, CF Industries' performance in this year's quarter compares reasonably well to a good 2005 third quarter. Net sales were up 5% thanks to a significant increase in phosphate sales and to nitrogen revenues that slightly surpassed 2005's total. Volumes increased substantially in both of our segments. Average selling prices increased in phosphate and, as you might expect in the declining natural gas cost environment, prices declined significantly in nitrogen. The lower natural gas costs helped the company maintain positive margins in the nitrogen segment.

Admittedly, the third quarter on third quarter comparisons are complex for a number of reasons. The third quarter 2005 loss was a result of unusual items related to the company's August 2005 IPO. You'll find a reconciliation of those and other adjustments in the selected financial information statements that accompanied our news release.

Beyond that, the two third quarter's reported results were significantly affected by our natural gas hedging activity and the related accounting treatment of natural gas derivatives. The impacts were a reduction in nitrogen gross margin in this year's third quarter and an increase in last year's third quarter. In just a minute, Ernie Thomas will walk you through the quarter's results and, as I said, I believe that our reconciled results, if you will, compare well to a good 2005 third quarter.

Now a bit of color on the third quarter results. As you know, the third quarter is typically an in-between quarter. The second quarter's planning driven demand has been met and the fourth quarter's post harvest fertilizer application hasn't begun. This year's third quarter saw continued moderation in natural gas prices. That decline, expected given the near record amounts of natural gas in storage and a hurricane season that proved many forecasters wrong, had a number of effects.

As we pointed out in the release, it encouraged many customers to stay on the sidelines. They assumed, correctly so far, that falling natural gas costs would produce lower nitrogen fertilizer prices. Those lower prices also had the effect of reducing nitrogen fertilizer imports. Exporters found that the net back opportunities in the U.S. market were significantly less than those available in offshore markets.

Third quarters declining nitrogen fertilizer price environment also tended to discourage, or at least postpone, placement of orders under our forward pricing program. I'd like to expand on that point just a bit. We developed the FPP in mid 2003 to manage some of the margin risk created by the volatility of fertilizer prices and natural gas costs.

Since going public in order to help you model our business, we've reported FPP sales for the completed quarter, along with a snapshot of bookings for future shipment. However, FPP order levels are not, as some people have suggested, a [price sheet] for future demand. They are more an indicator of expectations concerning future trends in product pricing and product availability.

Let's look back at pre-hurricane 2005. Fertilizer buyers saw a forward NYMEX strip indicating rising natural gas prices. And many of them assumed that nitrogen fertilizer prices would continue to rise along with natural gas prices going into the fall of 2005. In that environment, buyers used the FPP as part of a business strategy to reduce exposure to rising prices and assure supply in a strong market. As a result, we sold approximately 70% of our nitrogen and 36% of our phosphate under the FPP in 2005.

But in 2006, once we worked the post-hurricane disruptions to the system, customers saw a NYMEX strip suggesting falling natural gas prices. In that type of market, their strategy became one of deferring commitments until closer to the time of delivery to take advantage of what they anticipated to be lower future fertilizer prices.

While FPP nitrogen shipments declined from 68% of last year's third quarter nitrogen shipments to 28% of this year's, total nitrogen volume for the quarter actually increased by 17%. Our FPP order book is really an indicator of customer sentiment, not future demand.

Shifting to our phosphate business, we enjoyed sizeable improvement in volume, average selling price and gross margin compared to 2005's third quarter. Sales increased 16% to $117.5 million and our gross margin was $16.2 million, up 47% from last year's third quarter total.

We achieved an important milestone in our phosphate business recently by obtaining the development authorization extension from the Hardee County Board of Commissioners. As we have pointed out in our SEC filings, we have approximately 16 years of recoverable phosphate rock reserves permitted by local state and federal authorities at our Hardee phosphate complex in Florida. But mining and reclamation beyond 2011 are subject to extension of our local development authority.

We have now received that authorization, extending the mine's termination date from December of 2011 until December of 2029 and currently have proven reserves to continue mining through 2022 in Hardee County at current mining rates. We view fully permanent phosphate rock reserves as a key value driver in this industry and the extension is welcome news for the company and its shareholders.

We also announced two capital expenditure projects yesterday, projects very much in line with our philosophy of continuous improvement in our operations. They address two questions we regularly hear from investors, what are you doing to cope with North American natural gas costs and what can you do to increase capacity in your phosphate operations. We've spent a great deal of time during the last year discussing major projects, such as the potential joint venture in Trinidad and the possible conversion of a portion of the Donaldsonville complex to petroleum [inaudible] feedstock.

But there are also opportunities to make smaller but meaningful focused investments that provide continuous improvement in our operations. These are two of such projects. In all, I believe we achieved good performance in this quarter as our business level suggested that the North American fertilizer market has shaken off its doldrums.

Now Ernie Thomas will provide more detail on the financials and the complexity of the quarterly comparison.

Thanks, Steve. Good morning, everyone and thanks for joining us on today's call.

Our financial highlights for the quarter were as follows. Total revenues increased by 5.2% against 2005 to $378 million. Total tons shipped increased by 15.4%, total tons produced increased by 16.8%, as noted in our release. We were able to operate at near capacity levels throughout the quarter except for periods of normal maintenance. Our average realized gas prices decreased by 8.2% at Donaldsonville and by 29% at Medicine Hat.

In connection with our hedging activities, we incurred a non-cash mark to market pretax loss of $13 million in the quarter as a result of falling gas prices. This compares to a $14.1 million pretax gain a year ago, or a $27.1 million swing on a year-over-year basis. All of our current natural gas positions support future product sales with fixed margins.

Our net cash position improved by $22.3 million against the prior period, with a total of just under -- over $152 million. We've declared our regular quarterly divided of $0.02 per share payable on November 30th. Net earnings for the quarter were $7.3 million versus a net loss of $91.4 million last year. As many of you may recall, our third quarter results from a year ago included a number of unusual items, primarily related to our initial public offering. These items totaled just under $114 million on an after-tax basis, as detailed in our release. Excluding these items, our results from a year ago would have been $22.3 million in net earnings on an adjusted basis compared to the $7.3 million net earnings in the current period.

Our [inaudible] margin for the quarter declined by $30.2 million compared to last year, due mainly to the $27.1 million negative swing in our gas derivative adjustments and to lower nitrogen selling prices, which together more than offset the positive effects of higher phosphate selling prices, increased volumes and lower natural gas costs. More specifically, nitrogen selling prices decreased by $28.3 million while phosphate prices increased by $7.5 million.

Increased volume in the current period improved our gross margin by $9.6 million. In addition to the mark to market impact mentioned earlier, our realized gas cost declined by $16.5 million, including realized losses in the current period of just 1.7 million versus realized gains of 0.4 million in the prior period.

Our SG&A costs decreased by 4.5 million in the current quarter to 13.2 million. The 4.5 million improvement primarily reflects the elimination of IPO related costs that occurred in the prior period. We're still expecting our SG&A costs to be in the 50 to $55 million range on a full year basis.

Cash flow from operations totaled just over $100 million for the quarter versus 89.4 million a year ago. Inventories increased by 39 million, reflecting our normal build of the fall season. This additional investment was more than offset by increased customer advances of 78.7 million related to our forward pricing program. Our adjusted free cash flow, which does not include changes in customer advances or in other working capital items, totaled 29.3 million for the quarter, down 9.2 million from the prior period.

Our financial position and liquidity continue to be strong. As of September 30th, 2006 we had cash and short-term investments of just over 305 million and we had just under 200 million in credit available under our senior credit facility, which was undrawn.

In summary, we are pleased with our overall performance in the quarter given the failing market conditions. We were able to increase shipments significantly versus last year and improved our overall financial position.

Thanks, Ernie.

We're cautiously optimistic about prospects for the fourth quarter and next spring. As we said in the news release, most of the key drivers affecting the fertilizer market are pointing in the right direction today for a normal fall season and a strong spring.

We're seeing strong crop prices that should encourage farmers to increase planting over last year's levels. Forecasters are talking about perhaps 83 million to 85 million corn acres being planted next year compared to 78.6 million this year. Significantly increased corn demand for ethanol coupled with low grain stocks are adding to the impetus for increased acreage. Fertilizer prices have moderated, which means that farmers should resume normal fertilizer application rates.

And not withstanding the recent spike in prices, natural gas costs are substantially lower than a year ago. Obviously weather, natural gas cost spikes and other unexpected developments could negate the effects of the macro environment, but for now we're feeling positive about the balance of this fertilizer year.

Before I open it up for your questions, I'd like to make a few comments regarding the company's long-term direction. Our management team and Board of Directors has spent considerable time in recent months reviewing the global landscape of this industry in light of our current position and capabilities and I believe our capabilities are considerable.

As you well know, that global landscape has undergone a lot of change since we went public. We recognize today that we are a relatively small regional player in a global industry, exposed to both the level and volatility of North American prices relative to those in other fertilizer producing regions. From the work we've done, it's become clear to us that in the near term we must continue to be nimble in our approach to the marketplace, but longer term our strategic imperative is that we must become a significantly larger player with a different risk profile.

As we implement initiatives to grow and to diversify, we will seek to capitalize on our core competencies and to extend our reach in ways that complement our current business mix and our market footprint. Among other things, we will look to diversify our sources of supply to emphasize investments that generate cash from sources other than North American natural gas-based nitrogen production and to reinforce our strong position in distribution and logistics, all while exploiting opportunities to improve existing operations.

We have developed and are still expanding a list of projects and initiatives with potentially attractive returns. We'll share more information about them with you at appropriate times. Importantly, I believe that we have the financial capacity and the management capability to grow and diversify our business successfully, which should lead to increased shareholder value in the years ahead.

With that, I'll open the call to your questions. James, would you please explain the Q&A procedure?

Yes.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of David Silver with J.P. Morgan. Please proceed.

Yes, hi. Good morning.

Good morning, Dave.

Hi, Dave.

I guess let me just start out with a question about your phosphate business. I guess the gross margin of 16 million is -- now, I don't know if you have record going back so far, but I was wondering, has it ever been higher than $16 million?

And maybe more to the point, when I compare the production rates, shipment rates, take a quick look at production costs, it doesn't really seem like the benchmark margins available to you in the third quarter were dramatically different than they've been for the last couple of years. So I guess I'm wondering, is it operational efficiency, is it export versus domestic sales? In your opinion, what kind of added to your results this year compared to maybe recent quarters and compared to maybe kind of the benchmark industry trends?

Well, there were several questions in there. Let me go back to your first one and that was whether there was -- whether this indicated a record performance. I can't answer that, Dave, for a couple of reasons, we don't have the information available and in connection with our IPO, we made some changes in our inventory costing and so forth. So I'm not sure they'll be apples-to-applies. So it would be unfair for4 us to be touting a record, even if this number happens to be higher than it might have been in the past.

In terms of our performance, I don't have any wonderful pieces of insight. Everything is working well. We had certainly smooth production, both at the mine and at the chemical plant. If you remember, I think it was a year ago we talked about running into some areas of our mine where we had some more work to do to recover rock than we felt was the -- kind of the ongoing profile. We're past that and we're mining in areas of our property, which are, on a relative basis, easier to get to than we had before.

In terms of our approach to the marketplace, we do the blocking and tackling every day. We look at opportunities domestically and export and to the extent that we have flexibility, to try to take advantage of the best opportunities.

Okay. I would like to ask you a question about your discretionary capital projects that you announced. So in terms of phosphate, I was wondering if you could maybe identify where that discretionary spending is going to be? In other words, where's the bottleneck in your overall production process that you identified that will allow you the additional production?

And also, if you could give us some sense on the nitrogen side of the efficiency gains that you expect in the two units that you're going to be upgrading?

Dave, I'd like Dave Pruett, our senior vice president of operations, to address those questions.

Sure, Steve. Good morning, David. In Plant City, the new evaporator's going in to the phosphate complex, I think it's the [B plant], and that's where that increase will be. Our bottleneck is evaporator capacity and we're adding a sixth unit in that plant. In Donaldsonville, the expected gain from the improved compression is about 0.5 MMBtu per ton of ammonia.

Okay. And just one last question. So, Steven, I'd like to maybe pick up on your final comment about how the company might change over the longer term. But you mentioned several things getting away from non-North American natural gas but building on your core competencies, capabilities, et cetera. It sounds to me like offshore nitrogen is a possibility, but we know you're working in Trinidad and some other areas. Are you indicating that maybe -- that maybe you're going to be considering other options other than the existing project in Trinidad or how should we think about that just qualitatively?

Well, I noted in my prepared comments that we have a list of projects and initiatives and that that list is undergoing scrutiny on a regular basis and is, in fact, expanding. We have our eyes and ears open to the wonderful world of fertilizer and so where we find opportunities we'll consider exploiting them.

Okay. Thanks a lot.

Your next question comes from the line of Charlie Rentschler with CF Industries. Please proceed.

No, I'm not with CF Industries. I'm with Wall Street Access.

I didn't think we offered you a job, Charlie, but we can talk about it some day.

Thank You. I'm flattered. Listen, following up on the previous questioners questions, not to be smart aleck about it, but your two capital projects that you announced for 21 million, I don't know how that breaks down between [D-Ville] and Plant City, but in terms of D-Ville, it seems you're just waving at the problem rather than addressing it. I guess that's kind of what you're saying, but as I -- as I pencil what I feel to be the ROI from the petroleum coke project there, I mean even at today's gas prices it's pretty -- it's pretty whopping. And I know you can't comment a whole lot, but can you give us some idea as to when you think you might be at a point with your strategic planning that you can draw a line in the sand and say, here's what we're going to do, folks? I mean is this -- are we a year from this or six months or three months or what?

Well, Charlie, let me address the first part of your question or observation and that is the capital projects. The split in the 29 million is about 9 million in Florida and 12 million at Donaldsonville. That's the rough split. And the question of why would you put money in two plants in Donaldsonville when you have a pet coke opportunity, they are not conflicting.

Okay.

We have four ammonia plants at Donaldsonville.

Right.

The two that we are considering for conversion to petroleum coke are not the two that we are upgrading...

Okay.

...the project.

That's good to hear.

So our plan if petroleum coke proves to be the right course of action is a diversification play, not an abandonment play...

Okay.

...if you will, because no one really knows what the future of natural gas costs will be in the U.S.

With respect to petroleum coke project itself, we are actively pursuing this with outside parties. We have noted on past calls that the technology has proven that we are an excellent fit for a project and the work that we're undertaking is really focused on the economic arrangements, sources of financing and those sorts of things. And I'm not comfortable putting a timetable on it because I'm not in control of when that timetable might be met.

Okay. And as a follow-up, unrelated, could you give us some information about Medicine Hat and the -- what we're reading about the low wheat stocks caused by droughts in Australia and Argentina and other places? But what kind of an opportunity does that present you folks up there? I guess you're kind of [standing athwart] that wheat buildup there in Canada and the Dakotas?

Charlie, I'll take a stab at this and if I'm not addressing your question, please redirect me. We operate Medicine Hat and we take two-thirds of the output from that complex. Traditionally, the fertilizer that comes from our share of Medicine Hat services the northern tier of the U.S. That's just the way it evolved through the years. A portion of it remains in western Canada but it's a relatively modest portion at this point in time.

I think our play with respect to opportunities in wheat are basically the northern part of the U.S.

Okay.

And the global factors you're talking about are still at play there. We're talking about higher acres being planted to wheat next year. I think [Doan] came out this week with 61.2 million acres expected to be planted in wheat. That's an increase over a year ago. In addition to -- everybody talks about ethanol and corn. The direction with respect to wheat is the same; it's not quite as -- not quite as well publicized as ethanol. We serve the Dakotas. That's our market -- that's our area of market strength for the wheat crop.

Which is not insignificant.

It's not insignificant. There's a lot of land up there.

Thank you for -- thank you.

Okay.

Your next question comes from the line of Marshall Reid with Bank of America Securities. Please proceed.

Morning, everyone.

Morning, Marshall.

Morning. First on nitrogen, volumes were surprisingly strong last quarter. Can you just talk about how sales progressed through the quarter and do you think we should expect to see some impact from the slow [inaudible] season at some point maybe this quarter?

Well, we came out of the spring having been, I think as an industry, disappointed with the degree of planning and the amount of fertilizer put down. Perhaps a bit more inventory in the system than one would have hoped, but not a huge overhang. But we had the normal seasonal slowdown and the need to get product out in the hands of customers. And it's just a period of the year when margins are usually squeezed and this year was no exception.

The fall, I think demand is pretty strong this fall. There've been some weather challenges in the last week or so, particularly in the area a little south of where we are. In Illinois, it's wet. We've had some good early movement in the northern art of our trade territory, so I think things are set up reasonably well for the fall, assuming that we get this part of the country dried out.

Okay. Looking -- just looking at international nitrogen markets, and several plants have already started out this year, I think we have a few more large plants scheduled in Iran and I believe in China. So what's your read on the timing of those plants and do you think they could set the international balance maybe into oversupply there?

Well, there are a couple of aspects to that whole balance question. It's our understanding that the plants that were expected to come on line in Iran, and I believe there are three of them, have had startup problems and our intelligence suggest that they are probably 2007 start -- let's say the capacity won't come in the market until sometime in the first half of 2007 because of those startup problems.

This whole issue of trying to predict when a surge in urea capacity will hit the market and how it might hit the market has proved to be challenging, not just for analysts but also for participants in the industry. I like to say around here that we predicted three out of the last zero downturns in that product line because we haven't been able to predict the timing ourselves.

There are -- other factors that are at work globally relate to what might happen in reaction to this increased capacity. Just this week there was an announcement that the gas costs that Russia will be -- the gas price that will be charged by the Russians to the Ukrainians is going up about 30 to 35% from around 3.50 an MMBtu to in the area of $4.50. That is a huge increase for -- in their cost structure and is likely to create some, perhaps a different pattern of dislocation if the increased capacity comes on and it's in excess of demand. So when I talked about the changing landscape in our industry, that's part of what's at work, is the Russians are not giving their gas away any longer.

Okay. Last question, on your outlook you've made several changes to your business model since 2004. Based on higher demand next spring, assuming sort of more stable product prices and natural gas prices, do you think we could see a return to maybe mid-teens nitrogen gross margins next year?

I wish I could predict nitrogen margins. We attack the margin opportunity every day in the way we price our product in the marketplace and I think we're -- I think we're nimble enough to be able to take advantage of opportunities when they arise. But with the big unknown of gas costs and the unpredictability of weather patterns and so forth, I don't think I'd venture a guess in that direction.

Okay, great. Thanks.

Thank you.

Your next question comes from the line of Steve Byrne with Merrill Lynch. Please proceed.

Hi. I was wondering if you're looking into the opportunity to co-fund one of the proposed LNG terminals offshore in the Gulf of Mexico as an alternative source of relatively low cost gas?

Well, good morning, Steve. We've looked at LNG in as many ways as we could think of in terms of whether we might participate accurately in a project as an [off taker] or whatever and there are a whole range of things we've explored to date. None of them have risen to the level of being attractive to us as an investment opportunity.

Okay. And, Steve, given the outlook that you have for grain fundamentals in the U.S. and nitrogen prices have started to tick up, I was wondering if you're getting a little more aggressive in terms of margin expectation in your forward purchasing price? Are you either backing off on it or intentionally trying to secure higher margins in that given the more favorable outlook?

Well, we approach the nitrogen market in particular every day based upon the circumstances that are in front of us with respect to each month going out under our forward pricing program and we watch the trends in prices that are available through market intelligence that are being displayed by others. We are -- we are certainly as aggressive as we can be and we have to balance the desire to improve our margins with the necessity to take decent business when it's in front of us.

So we're making adjustments, sometimes several times in a day, based on the combination of gas cost outlook and the fertilizer market dynamics. We're certainly excited about the demand opportunities in front of us for the next year or two given all the corn that's likely to be planted and we have every intention to take full advantage of that.

I presume one change in the market here recently that probably affects your forward purchasing program for phosphate is the mosaic [faustina] outage. Is that changing your outlook for margin expectations in the fall?

I'm not sure that it's a significant percentage of capacity that it would affect that. We look at the whole situation in combination and it's hard to assess what impact a single event might have on the market, particularly for internationally traded products like [inaudible].

Okay. Thank you.

Your next question comes from the line of Brian Yu from Citigroup. Please proceed.

Morning, Steve and team.

Morning, Brian.

Brian.

When you talk about the hesitancy in the distribution channel to build inventory, can you expand on this a little bit? Is it phosphates, nitrogen or both? And can you also discuss your own channel inventories relative to, say, historical levels at this point of the year?

Well, we're very comfortable with our inventory level given the demand that we see lying in front of us. We have approached our inventory levels in a pretty disciplined way and we have very good real-time information in our own system. We monitor it every day.

With respect to -- I'm sorry Brian, your first question was about -- ?

The...

[inaudible-microphone inaccessible]

Yes, is it phosphate nitrogen or both of the [nutrients]?

Well, I think clearly the macro factors in nitrogen are more of a challenge for buyers because they've seen declining prices and they've seen generally declining gas costs, and then in the last couple of weeks there's been a spike up. And so as tough as it is for us to make our decisions about how much to produce and when, it's tough for our customers to decide when to pull the trigger and make a commitment because they'd obviously, like everybody else, they like to buy low and sell high. So there's -- it's a -- it's just an analytical challenge and an intuitive challenge for everybody involved in this commodity business.

Okay. And then with respect to the value of various import terminals, barges and pipeline access, what are your thoughts on potentially benefiting beyond just volumes next year, i.e. can you see pricing power in distribution or is there enough capacity there that this is unlikely to occur?

Well, Brian, just a short answer to that and maybe we could talk about this more offline if you like. We talked about this in the past. It depends on the product you're talking about. Dry product, for example, which is easy to move by any mode of transportation and can be stored basically anyplace that has a roof over it, there's not a lot of pricing power associated with distribution assets.

On the other extreme, ammonia requires specialized transportation equipment, it requires the ability to get ammonia into that transportation on the front end, and it requires a storage and distribution system on the customer end. In that case, our [inaudible] ammonia terminals are very valuable assets.

If you look at the pricing differentials historically between mid Corn Belt ammonia and New Orleans priced ammonia, you'll see by and large very significant differentials and that's an indication of the value of a distribution [logistic system].

So it's fair to say that there is a possibility that we could see the value of the ammonia distribution increase next year and beyond just in volumes?

Depends on how the spring evolves, if we have great weather. Sometimes it -- all it takes is a weather system that sits over a certain part of the country for a couple of weeks, it can mess you up. We're very -- the factors are set up for this to be a good to excellent spring. And if we could control all those uncontrollables, I'd give you a firm prediction. But I can't do that.

Thanks, guys.

Thank you.

And we now have a follow-up question from the line of David Silver with J.P. Morgan. Please proceed.

Yes, hi. Steve, I'm going to ask you, maybe try to come at the fourth quarter outlook that you've touched on, maybe I'll come at it from a slightly different angle. But in your outlook comments, I believe you've talked about running each of your major facilities at capacity right now. And if I'm not mistaken, I think that's qualitatively different from what happened certainly last year but also even the year before that. So is -- would we read into your decision to kind of operate at high levels here that the fourth quarter outlook is significantly better, let's say, than in an average year?

Well, just for a bit of historical perspective, and I think I'm correct on this, 2004 I believe we were probably running at high rates. Whether we were running everything at capacity I don't recall, although I think we publish information about our production historically and we can check on that for you.

Okay.

Last year our decision to cut back on production was related to the economics of production versus purchasing and so what we did was meet demand, which was, as I recall, pretty good last fall. We met demand with a combination of production and purchases.

And as a reminder, even in a normal year when we run our facilities basically at capacity all year, we're still a buyer on the margin. And we're in this position intentionally. We would prefer to be able to take our purchases up and down as markets fluctuate.

So I guess that's a longwinded way of saying that I don't think there's anything necessarily unusual about our view about this fall compared to a year or two ago other than of course we [don't have $13] [inaudible].

Okay. And then maybe just one last question, but you talked about the opportunities coming up in the spring and your intention to take full advantage. From your folks inside or for whoever else you rely on, do you have a projection or a range for planted corn acreage in the U.S. next year? I mean are you closer to 80, 85?

I mentioned in my prepared comments that a lot of forecasters are in the 83 to 85 million range. Doan came out this week at 84 million acres.

So that 83 to 85, you're kind of saying that's as reasonable a view as -- ?

That's what it feels like right now and our ear to the ground in the field suggests that that's reasonable.

Very good. Thanks a lot.

Thanks, Dave.

Your next question comes from the line of [Justin Evans] with Sonoma Capital. Please proceed.

Hey, guys. How are you?

Hi, Justin.

Sorry if my question's already been addressed, but I joined the call late. I'm going to ask about my favorite topic with you guys, capital allocations. Have your thoughts changed with respect to stock buyback or at least an authorization?

Have our thoughts changed? I would say our thoughts have not changed. We have a significant and growing list of essentially attractive strategic initiatives and projects that we're looking at and obviously we need to keep in mind anytime we make an investment that we have the opportunity to invest in our stock at any time and we would not be prudent stewards of our investor's capital if we did not consider that. It's in front of us and in our thinking on a regular basis.

Got you, got you. And just I guess it kind of goes back to the question of what kind of returns are we getting on your huge and growing cash balance? I have to assume they're kind of low risk, low interest returns, right?

Well, we invest our cash balance in money market instruments, if that's your question.

It's been an ongoing concern, as you know, and it's just -- it feels like it's been kind of dragging the performance a little bit because it's -- we're not getting great returns on that substantial part of the company's capital.

We understand that point of view I think pretty well, Justin.

Okay. Well, that's all I had, guys. Thanks.

Thank you.

There are no further questions at this time. I would now like to turn the call over to Steve Wilson.

Okay, well, just to wrap up, I think our third quarter was a reasonably good quarter. We thank you for your interest and we look forward to speaking with you at the end of the year. So long.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.