Ingredion Inc (INGR) 2003 Q2 法說會逐字稿

Good morning, everyone, and welcome to this, Corn Products second quarter 2003 earnings release conference call. This call is being recorded.

At this time, I would like to turn the call over to the Vice President of Strategic Business Development and Investor Relations, Mr. Richard Vandervoort. Please go ahead.

Thank you and good morning, and welcome to the Corn Products second quarter 2003 earnings conference call. It's an open conference call, simultaneously broadcast on our website, www.cornproducts.com. The charts for our presentations can be both viewed and downloaded from our website. They're available 60 minutes ahead of our conference call. Those using the website broadcast of this conference call are in listen-only mode.

Today, Sam Scott, our Chairman, President, and Chief Executive Officer, James Ripley, our Chief Financial Officer, and I will conduct the call. We will indicate as we move from chart to chart so you can follow along through this presentation.

I've shifted to chart 2, the forward-looking statement. Our comments within this presentation may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements, and Corn Products is under no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in today's press release can be found in the company's most recently filed annual report on Form 10K and subsequent reports on Forms 10Q or 8K.

Chart 3, the agenda. Today, after this introduction, James Ripley will present the financials relative to the second quarter. Following that, I'll present the business review and comment on our 2003 outlook. We will be available to answer questions after the prepared portion of the call. Jim?

Thank you, Dick.

Dick will be reviewing the fundamentals of our business in a few moments. Our financial statements are attached to our press release. I will review the quarterly financial statements, and then Dick will go into more details on the quarter.

I am now on chart 5, the income statement highlights for the quarter. Let me brief -- begin my presentation by reminding you that last year's second quarter included sales of HF 55 in Mexico, which were effectively stopped this year by Mexico's tax on soft drinks sweetened with fructose. Net sales for the quarter of $539m increased 11%. Operating income, at $42m, is up 6%. Earnings per share of $0.50 per share is off 4% from last year's $0.52 per share.

Dick will talk to the details of this in his presentation, but I will summarize the story very quickly. Basically, volumes are advancing, margins are recovering, and our cash flow remains strong.

I am now moving on to page 6, the net sales by geographic segment. North American sales were up 9%. South American sales were up 17%, and our Asia/African sales increased 13%, for the overall increase of sales of 11%.

Chart number 7 is the variance of our sales from last year's comparable quarter. For the total company, sales dollars, as I had mentioned, increased 11%. This is primarily price mix improvements in the Americas. Overall, total volumes were the same as last year, and currency had little impact for the total results. Looking at North America, where sales were up 8.7% despite a 2.9% volume decline, volume gains in most of the region's product lines could not offset the loss of fructose in Mexico. Price mix improvements added 11.9% to the total sales. Price changes were instituted to offset higher corn costs and energy costs and the weakness in the Mexican peso since last year.

In the South American region, we saw sales increase 16.8% from last year. This reflects a 14% improvement in our price vs. currency mix ratio. A 3% volume improvement reflects continued improvement in our business in Argentina, although there are still some weaknesses in the economy in this region. We have now made significant progress in the currency/price gap since this problem appeared in the first quarter of last year.

Asia/Africa region is up 12.7%, coming primarily from a 12% volume gain. Good gains in our base businesses in Korea and Pakistan were supplemented by new volume coming from our recently commissioned tapioca starch plant in Thailand.

I am now moving on to chart 8, operating income by geographic segment. North American's operating income is down 15%. South American operating income, however, increased 36%, while Asia/Africa operating income is up 4%. Higher corporate expenses reflect increased insurance rates and added corporate governance costs. This gives us a total increase in operating income of 6%. Dick will talk to the substance of these changes in his presentation.

I am now moving on to chart 9, which is the summary income statement for the quarter. Let me first note, and it's not on this chart, our SG&A expenses are up from last year. This is both the higher corporate governance and insurance costs which I mentioned before, as well as a change in our accounting for our joint -- previously joint marketing company. Those costs moved from the income from joint marketing company up into SG&A costs.

Let me move down now. Financing cost is up $3m. This is due entirely to higher interest rates as we refinanced our debt last year to a longer maturity, and this was done in June as well as later in the year. Total debt, however, is down $49m from last year at this time. Our effective tax rate remains at 36%. In the minority interest area, the acquisition of the minority in Argentina reduced minority interest, but this was offset by higher earnings in the minorities in our Asian business.

I am now moving on to chart 10, which is the estimated source of earnings per share changes from last year's second quarter. As I mentioned earlier, last year we earned $0.52 for the quarter. This year, the net was $0.50, or two cents per share lower. Net changes in operations gave us a 4% improvement in earnings per share. This came from higher volumes, which added about $0.03 per share, and $0.03 came from higher operating margins in local currencies. This is higher local currency pricing, offset slightly by higher corn costs and gas price increases, while in the manufacturing area we've continued to reduce our costs.

Currency declines cost $0.02 per share. This came from Brazil, Colombia, and Mexico, offset by improvements in Argentina, Canada, and the Asian area in total. Non-operating items impacted earnings per share as follows. Higher financing costs reduced earnings per share by $0.06. As I said before, the average debt outstanding was lower, but the interest rates were up from last year. There was no significant change in the minority interest impact on earnings per share.

I am now moving to our cash flow for the quarter. Cash flow from operations produced $68m, a positive cash flow. This includes $20m from the reduction of working capital during the quarter, partially reducing the first quarter build-up. Net income contributed $18m vs. $19m last year, while depreciation is at $26m vs. $28m last year. During the quarter, we invested $19m in capital expenditures, and a total of $43m was used in financing activities. 39 was used to pay down debt, and $4m was used to pay dividends to shareholders.

I am now moving on to chart 12, which is the summary income statement for the first six months of the year. For the first six months, we have earned $0.88 per share vs. $0.83 last year. Let me remind you that last year's first quarter included an $0.08 one-time gain from the sale of our enzyme business, less some restructuring charges.

I am now moving on to my final chart, which is key ratios. Return on sales is 3.7% vs. 3.8% last year. Return on capital employed is 5.3%. Let me remind you that our long-term target is still in the 8 to 10% range. Our debt to capitalization ratio is at 35%, down from 35.6% at the end of last year. Our target is in the 32 to 35% range. Working capital to sales, at 14.2%, improved vs. the 15.5% we reported last year at this time. Net debt - that is, total debt less cash and short-term investments - is at $588m vs. $620m last year at this time, for a $41m decline.

I will now turn the presentation back to Richard Vandervoort.

Thank you, Jim.

I'll review our second quarter from a qualitative standpoint, and then provide some comments about our outlook for the balance of 2003; and I'm now switching from chart 14 to chart 15, which is the currency update.

First, to describe the chart, I've listed our countries in the first column. In the second column, I've listed the average currency values for the second quarter of this year. The third column shows how the second quarter of 2003 compares to the same quarter in 2002; and because currencies are often a moving target, in the fourth column I've shown the sequential quarterly change comparing this quarter to the first quarter of this year.

And now to the content. As is reasonably well-known, the Canadian dollar firmed significantly this year, up 11% vs. the second quarter in 2002 and up 8% since the first quarter. It also leaked in recent weeks, falling back from $0.74 to close at about $0.71. In Mexico, the peso weakened vs. last year, but firmed from its first quarter lows. The peso is now close to its year-end level. Argentina's peso was firmer in the second quarter than it was during both the prior year and the first quarter of this year. In Brazil, the real was weaker than last year, as much of the Brazilian real's devaluation occurred primarily in the third quarter of last year. This year, the real firmed in the second quarter vs. the first. And finally, the Asian currencies were, in essence, a non-event, although the fact that tensions have been reduced to some degree in the Korean peninsula has helped the Korean won recover from its earlier-in-the-year weakness and volatility.

I have now moved to chart 16, the second quarter 2003 in aggregate. As we stated in our press release, we believe we had a solid second quarter, delivering $0.50 per share even with zero HFCS 55 sales in Mexico. Last year's comparison quarter featured slightly higher results, since for the entire second quarter, and for portions of the first and third quarters, the Mexican tax on soft drinks sweetened with fructose had been rescinded. Our net income decline came as a result of that tax and the million-dollar write-off of our plant in Malaysia, of which I'll speak more in a few moments.

The positive events in the quarter. Sales were up by 11% or $53m, with all three of our geographic regions participating. In South America, against the low performance last year, our operating income increased fairly dramatically. We delivered another fine quarter in our strategic growth region, Asia/Africa; and finally, across the entire corporation, we generated continuing cash generation gains vs. the second quarter of 2002.

Chart 17, North America. And now for the details. First, in North America, while operating income declined by $3m on a 3% volume decrease, both directly related to the Mexican HFCS problem, sales increased by $28m; and our pricing and product mix in total improved by over 11% against a minimal exchange rate decline, which featured revaluation into Canada and devaluation in Mexico. In the US, as announced earlier, we were well satisfied with our contracting this year, and results continue to improve. Clearly the goal, in ours as well as any other business, is to return and exceed our costs of capital, and we're still not there, but the direction is right. Furthermore, across all three of our NAFTA-spanning countries, we will continue to press for cost reductions and cost containment. It's also heartening to see that volumes in our North American businesses, above and beyond the Mexican HFCS problem, are running at good rates.

On Friday of last week, we also announced the replacement of three older boilers at our Argo plant. We made this decision as we now believe our US business has made substantial progress to achieve its costs of capital within a reasonable time frame with the improvements we have made internally in our cost structure and externally with current market developments. We see no reason that this should not continue. Furthermore, our current boilers have reached the end of their useful lives, and we plan to meet current and known future environmental regulations with the new boiler house. We project capital spending for this project over the next three and a half years. The US is a key component to our global business, and as such, must be kept cost-competitive. This investment will help ensure its competitiveness for a long time to come.

And finally, a last word about Mexico in our North American review. We have seen a significant increase in the intensity of government support to our cause by a number of senators and representatives joining the US trade rep's office in calling for its -- the tax's rescission. Progress is hard to judge at this point, but there are efforts in the political, trade, and commercial arenas to solve this; so I guess we would say, Stay tuned.

Chart 18, South America. As Jim mentioned, operating income increased by 36%, while sales increased by $17m on a 3% volume improvement. We believe those are strong fundamentals for any business, in that environment or elsewhere. The part of the world in which we operate our businesses is still pulling through some difficult times. However, in Argentina and Brazil, the two largest economies, currencies firmed this quarter over the first quarter, as the economic tone is far more upbeat than this time last year. With this quarter's results, we are comparing our performance to a weakened condition last year, as the economies of Argentina and Brazil were then struggling with severe currency devaluations, either already in place or just taking off, and the collapse of the economy in Argentina. Regional profitability is now on the right track. However, there are still some lingering economic concerns in the region, particularly in the Andean area from the political crisis portrayed in -- happening in Venezuela.

As to our business, as noted in our press release, with strong sales and even stronger results, we have regained the operating income in US dollars for Brazil, accelerated our improvement in the southern cone of South America, and accomplished it with good volume growth. As to the turmoil in Venezuela, it has affected some of our and our customers' exports to that country. This has had some dampening effect; but again, clearly, we are extremely pleased with the results from our South American region overall.

Chart 19, Asia/Africa. Operating income is up 4% on a sales increase of $8m and volume growth of 12%. All of our countries delivered volume growth, as well as our new facility in Thailand. As we said last quarter, the vital signs are very good. As our Thai tapioca plant is now on-stream, during this quarter we shuttered our small plant in Malaysia. This concludes the effort begun some time ago to convert our Malaysian business focus to import/export from manufacturing into and out from the ASEAN region with products and ingredients manufactured throughout our world. The plant closing resulted in a $1m write-off. All in all, this was another fine quarter for Asia/Africa.

And now to the outlook, Chart 20. In our press release, we quantified our earlier earnings guidance for 2003, calling for an 8 to 12% increase over 2002's gap earnings. In North America, this guidance is based on our expectation to deliver the third consecutive year of better results in the US, with a sharper slope to the curve than in the past as our improvement pace quickens. As we've said in the past, margins are still not where we want them; but we believe we're on the right track to meet and subsequently exceed our costs of capital within a reasonable time frame. In Mexico, clearly, our requirement is to execute well with the non-HFCS 55 business in that country. Furthermore, as we've said in this press release and in the past, our earnings per share estimate for this year does not assume that we will have resolution of the tax issue.

As we look forward in South America, it is currently their winter season, a normally slow time for our customers; and later in the year, our comp will against the time frame when we were making significant progress dealing with the devaluations of last year. So, our comparative 2002 toward the end of this year will be a bit stronger than what we've experienced this quarter.

In Asia/Africa, we look forward to completion of another very good year.

Now Sam, Jim, and I are open for your questions. Mark?

Thank you very much. Today's question & answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing star one on your telephone keypad. Once again, that is star one. We will proceed in the order that you do signal us. We will take as many questions as time permits. We'll pause just one moment to assemble our roster. Our first question today will come from John McMillin with Prudential.

Good morning, everybody.

Hey, John.

Good morning, John.

Sam, what odds would you put the Mexican that being the tax being lifted in, let's say, the next 12 months?

John, I can't -- I'd like to give you odds on that one, I really can't. We have -- I've talked and answered questions on that for the last year and a half, and I feel that I've been out hanging on that one. What I can say is there has been more activity over the last three months, with the [Finder's] Association meeting in Congress with different folks, with [Grassly] taking a strong position, with letters being written, with the caucus being [involved] to meet with Zelic to push him on this issue. What I don't know, and obviously that has gotten some traction -- what I don't know is what impact it's going to have in Mexico. We've seen the Mexicans do a number of things where they've just effectively said, you know, I don't care what you do, we're going to do something different. But they have listened, and we'll just see where it comes from here.

Okay. Thanks a lot.

Mm hm.

Our next question today will come from David Nelson, with CS First Boston.

Good morning.

Good morning, David.

How are you, David?

I'm well. The $100m boiler project. That's a lot of money. How are you going to pay for that or finance it? How you -- over what period do you expect to capitalize that? And does that reduce or eliminate your ability to reduce debt or repurchase shares?

Well, we're going to finance -- and depreciate it over about a 30-year period, David. The old boilers lasted for 50-plus years, so we're very comfortable with a 30-year depreciation on this. We will be able to finance it out of the cash flow of the business. We believe that our cash flow is generating enough, or we're generating enough cash, to be able to do that. It's been in our planning cycle for some time. We've elected to move forward on it now as a result of the business being stronger, because before the US really started to turn around, we had to look and decide whether or not we would do it, but we feel we're there. The business itself is, as I said, generating cash, so we'll be able to deal with it; and, you know, it's part of doing business in our business. I don't think that it's going to impact where we're going. We'll be able to continue to pay down debt. I know we still intend to grow the business as we go forward with it, so it's just part of doing business, and we're going to spend this over a three-and-a-half year period.

If spending it over a three-and-a-half year period, should I take CAPEX up to, you know, by 35 or 40m then, in '04?

No. We have not given any kind of guidance for '04 CAPEX, and we will as we get closer to the end of the year. As you know, for the last couple of years, we've been spending below depreciation levels. That will not go on, and we had not intended on it going on until we got the balance sheet back in order; and we're feeling that we have a fairly decent balance sheet right now, and Mr. Ripley has been very conservative and beyond that, we want to make sure we got it there, and I believe we're in pretty good shape and we will continue to strengthen it. As it strengthens, and as our cash flow gets stronger, and it has been getting stronger, we will look to raise our investing in the business; but I'm not going to give you a number for next year yet.

If I amortize $100m over 30 years, that's a little bit more than $3m a year. Do you expect more than $3m a year in cost savings?

It will be neutral to positive, yes.

Okay. And also this almost 3% decline in North American volume, was that entirely Mexico or did US fructose volumes go down also?

That was entirely Mexico.

Great. Thank you.

Thank you.

Christine McCracken, with Midwest Research, has our next question.

Good morning.

Good morning, Christine.

You know, we've gotten a little bit farther along now in the corn crop here in the US, and it looks like it's going to come in fairly large. Do you think that changes the outlook for high fructose negotiations at the end of the year, because you'll have a little less leverage? Or how do you view that?

Christine, we have -- I think, always, high fructose negotiations are based on utilization, where the grind and fructose channels are, as far as running rates go. Certainly, when prices have cornered down somewhat, you don't need as much as an up to get your profit margins up. You don't need as much of a price up. But I certainly believe that, as Dick mentioned in his comments, we are not where we need to be in the US business yet. So, there will be on our part a push for higher pricing still to recoup the margins, as we have not had over the last two to three years. The utilizations seem to be tight enough at the present time for that to be doable, and we're going to push for it.

Makes sense. And in terms of your natural gas exposure, come up in the past, hadn't really heard it during the call. Do you have any increased expense there? Is that a big deal for you?

As we've said in the past, for the most part, we have headed our natural gas for this year. In North America and other places, we buy it as we need to; and in other places, we don't necessarily use natural gas. Going into next year, we have partial hedges, and we will continue to look at that and see what is appropriate to hedge our position.

How much of your US, I guess, plant is run on co-gen capacity?

In the US, we have very little on gas. As we mentioned, we have coal boilers at Argo, and that's why we're replacing those, to avoid the variability and the cyclicality that gas introduces to our business, we have to run on it. Stockton and Winston are both co-generation. In Winston's case, it's coal and wood chips, and in Stockton it's coal.

Great. Thanks.

Mm hm.

Next is David Driscoll with Smith Barney.

Hi, good morning, everyone.

Hi David, how are you?

Not bad. I wanted to ask you, first off, on the earnings number here, you reported $0.50 but you have this $1m pre-tax write-off from the Malaysian plant. If I've done my math right, is that after tax about 1.8 cents a share?

That's just about right. Probably 1.832.

No, very good. I guess my point here really is simply that it then would look to me like on an [inaudible] basis you guys were 52 vs. 52. You were flat with last year, which I think is a good result with those problems in Mexico that you were facing in the quarter, so I think you guys deserve a little congratulations on that.

Thank you, David. That's why we had the headline in the press releases we did, because the numbers would reflect a down quarter, and we certainly didn't feel it as such.

You know, certainly, like I say, congratulations in order. You know, US business still needs to improve, but you guys are looking like you're doing that every year. I wanted to ask you a question here, then, on -- just to hear a little bit more about your working capital issues. So, in the second quarter, you guys took out 20m in working capital. Is this proceeding on to plan, and where can we really go from here? What kind of cash impact are we going to see on the [inaudible] cash flows for the rest of the year?

We are on plan for working capital, David; and as we've mentioned before in the conference call, we tied 20% of all of our bonuses to working capital with the targets that are set. We expect working capital, because our sales numbers are up, to be relatively flat as compared to last year; but that on a -- is a measurement basis if you look cash conversion cycle at percentage of sales, it'll be down. So that we are moving on track; we feel we'll have improvements going forward for the rest of the year; and it is something that we have been focusing on now for the last, probably 20 some odd months. And we've seen substantial improvements on the part of the whole organization. We send our folks that are responsible for this around the world to talk to the various operations and to help them, and share, and do some coaching on how to improve the overall numbers; and we've got some good results back from that.

Super. Next, I wanted to ask you about whether, in the United States in the second quarter -- so, it seemed to me when -- you know, just listening, from your results, that I think you guys just stated that the negative volume impact was all due to Mexico. This is -- what I want, what I was hoping you might be able to do, is shed a little light on -- Nielsen data for beverage consumption in just the United States, including Wal-Mart panel data, had the volume number down slightly, down about 1.6, 1.7%. Is that -- now, you guys are saying that the volume was flat. Could you talk to me a little bit about this and tell me what's going on in the United States, and where are we for total beverage consumption in terms of volume improvements? What's the target for the year? Is it going to be about one and a half percent, like I think you guys stated back a couple of quarters ago?

As you know, historically, we've seen the beverage industry grow anywhere from 4 to 5%, and that's probably 4 or 5 years ago, and it's been lowering that growth rate over the last 2 to 3 years. Earlier this year, I believe their forecast was about in that range. I have not read any recent forecasts saying they're dropping it from that level, but the first six months, certainly, have not come in at the 1 or 2% growth rate. What we've seen in our growth -- and we talk volume across the board, so it's not only the beverage area, fructose does go into a lot of areas other than just soft drink, so that as you're drinking your juices and some other areas and some of the distilled drinks and other products, we find ourselves selling more into those markets recently than in the past. As far as the beverage industry goes, David, I think we -- I'd like to be able to answer for them. I can't. I think you'll have to ask them where they see it happening. But we've seen our growth relatively okay, and basically flat, in that industry.

Okay. So, net, net. The cold weather that we saw in the second quarter did not seem to negatively affect you guys.

No, not particularly. We have some -- we are a regional player, as you know; and our stock [did plant] us in an area that was not that negatively affected by weather. Winston had a lot of rain, but people were still drinking soft drinks down there; and our Argo business was throughout the country and pretty good.

Super. When you talked about your SG&A, you said something interesting to me that I'd like you to expand on. You said that you've moved around from expense -- well, the joint marketing company, the expenses, have now gone into the SG&A line. You had insurance that was up, and then you had corporate governance costs. Can you kind of give us a little bit of detail here on where -- was the bulk of the increase in SG&A expense due to the joint marketing, the break-up of the joint marketing company? And then, what's this corporate governance thing? I don't exactly understand what you mean by that.

Dave, this is James Ripley, and I'll answer that question. First of all, what had happened when we were in the joint marketing company -- the sales force was in that joint venture, so their costs were being netted against the income and we were getting the net results, which appeared on our income statement as income from joint ventures. When the joint marketing company broke up, we ended up having the salespeople who came back added to our SG&A expenses; but that was offset by slightly higher margins, because now we were selling direct to the customers rather than through the joint marketing company. So that's just a re-classification. The other areas -- and I'm sure you've heard about it -- insurance rates are up for just about everybody for a number of reasons. Enron was one of the reasons. So we've seen higher costs in that area. Also, which has been reported a lot in the press, is for us to do a lot of the certifications we need to do -- and I talk about here our internal control certifications -- it's a costly matter, and audit fees are up as well. So, all in all, there's a little bit here and a little bit there; you add them all together -- I wouldn't say one is the greatest one of all of them; maybe the joint marketing is the largest, but not that much more than the other ones, as you add them up.

And 404 in the thing, Sawbase(sp)with respect to governance in addition, which Jim has said -- and it's part of what he said -- so that is a unique piece that is fairly costly for everybody, and it's been touted in the papers recently as being an expense that all corporations are going to have to deal with.

Yeah. And what we've elected, and even though the [SEC] has pushed back their compliance date by one year, we're still getting our certifications in place now, and getting it out of the way so we don't have to deal with that next year.

Okay, great. On the Mexican side -- I'd like to go back there for just a second and ask you -- could you just speak specifically to the lawsuit that you filed, and where we stand on that?

We expect to -- well, okay. The date is July 28, that either the Mexican government or the US government has to say yea or nay. We expect that by July 28, the government, the Mexican government's obviously going to say no. A non-response from the US government gives us the go-ahead, or a positive response from the US government gives us the go-ahead to file. At the moment, we have heard nothing back to give us indication that the government, the US government will stop us from doing so. And when we get the go-ahead, we will determine then when the appropriate time to take that lawsuit forward will be.

Sorry? No answer by the Mexican government allows you to go ahead irrespective of a US answer?

No answer by either party allows us to go ahead. A yes answer by either party allows us to go ahead. A no answer by both parties precludes us from going ahead.

I understand. Also -- can you also speak to what your accountants have said to you about asset write-down to those facilities? Where are we on that timetable? I keep thinking that one of these quarters, we're going to see a line in your press release announcing an asset write-down. I believe some of those 55 assets were reasonably recent additions to the Mexican facility; and so consequently, it's my impression that the book value down there is largely dealing with those assets.

No, no. We're looking at two areas. One is good will, because we do have good will on the books from our Mexican acquisition; and the other is the fixed assets, and the fixed assets are not a problem in all the calculations that we've done. The good will is a discounted cash flow and analysis of future cash flows. It's a long-term calculation; so we have to look at what's going to happen over the next ten or fifteen years, and will those discounted cash flows recover the value of the good will? And we're constantly monitoring that based upon what we're hearing on the political side. Right now, we're feeling we're okay, but we have to constantly monitor each quarter.

I apologize for taking so much time, but I have one more important question. The corn price issue that Christine was talking about -- you know, they've come down a lot. I know you guys do a lot of work hedging. You can't hedge your co-products. So, consequently, with the lower corn products and lower co-product prices, why would that not negatively affect your results in Q3/Q4, relative to what we all had been thinking maybe a quarter ago when co-product prices were higher? I'm assuming that these things should just track along with corn.

They could, David. We certainly have taken that into account in our thinking, and the numbers the guys have been -- they gave you, certainly has taken that into account -- if, in fact, it's going to have an impact. Right now, our meal numbers and all of our co-product numbers could be impacted by the reduction in corn. As yet, we haven't seen it in some. In others, obviously, we had a run-up in the return from the exported product to Europe when the euro went higher. It's back down now, but that's part of our business. We know it, we know how to run it, and we've projected it in the forecast we've given you.

And there are some things that are positive happening right now. This issue around fats in French fries and potato chips is actually helpful to corn oil. Frito and McDonald's have shifted to corn oil, so that adds more demand away from hydrogenated oils. So, there are a lot of things underway. And year-to-date, just looking at the prices that are quoted every day, all of -- thus far, all of the by-products are performing better than their counterparts last year.

Great. Thanks a lot for all the time.

Thank you, David.

And next we'll hear from Bill [Leechwood], Bank of America Securities.

Good morning.

Hey, Bill.

I just wanted to clarify your earlier remarks. Do you think the US high fructose industry will actually show volume growth this year?

I think what we're saying, Bill, is to this point, it probably is flat. The beverage industry had forecast earlier in the year, at the end of last year, 1 to one and a half, maybe 2% growth, and they have come out recently saying that they have not experienced that in the first six months. I think we're showing numbers that are relatively flat right now, and are still hoping that the weather comes around and gives us that 1 to one and a half percent.

But right now, you get flat for the year.

If I had to guess at the moment, I'd think that's a reasonable assumption, yeah.

So where does that leave us with projected supply and demand balance?

Same place we were going to last year. No new capacity; no new demand; shifting away from fructose to ethanol on the part of some of the players in the industry; a tighter grind situation; and an industry that's still not making the cost of capital, which needs to move forward on making that happen.

With fewer players than used to be around.

With fewer players than used to be here.

Right. So where would you guess the industry's utilization rate is right now?

We've said that the grind is probably in the upper 90's and probably approaching 100; but upper 90's is good enough. We've said that fructose utilization was in the low to mid-80's, and that's probably about -- well, right now, it's higher than that because we're in the summer months -- but that's the annual average that we're guessing is out there for fructose. But with grind allocation, because of the peak that we're sitting at on grind, it's relatively tight at the moment.

Okay. The last question I have -- if the Senate ever passes an energy bill, gas and oil production could double over the next several years. How do you see that affecting your business? I mean, is that a potential to raise corn costs and reduce your by-product credits on a longer-term basis?

It probably has the potential to do some movement on corn, although it's not that substantial. I mean, it's not going to have that much of an impact on the corn market. What we see on the impact of the business is a much tighter grind utilization that we've seen the last few years, which should firm up market situations and that would offset any -- more than offset any negatives we would see on the corn increase [inaudible] by-product [inaudible].

And you don't have any interest in getting back into ethanol yourself?

We have other opportunities. But let me finish on that one. I think most of the ethanol growth that we'll see will probably come from drymill operations; and as a result, it's not going to have that much of an impact on [core] product anyway.

Okay. Thank you.

Thank you.

As a reminder, if you would like to ask a question today, you can do so by pressing star one on your telephone keypad. Next we'll hear from Karen [LeMark] with Merrill Lynch.

Good morning. I've got a couple of questions. First, going back to the capacity utilization. Can you give us the year-ago estimates you've got for high fructose corn syrup, or is it about flat year over year?

It's about flat year over year, Karen, with no growth in the fructose side, right.

Okay. And also, the return on capital employed targets that you've got. What is or are the biggest contributors or opportunities? I mean, where's the biggest sensitivity?

The more money we make, the happier we are. And that's what it comes down to. We have looked at and have, in fact, moved on disposal of some of our assets. Last year, we got rid of the enzyme business. This year, the Malaysian business was not a substantial contributor, and we've decided to take that plant out and put a plant in Thailand. So, we're looking [in at] all sides. We've reduced our working capital by big bucks. We've said that before, I don't want to keep playing on it, but it's true. We've reduced our asset base by getting rid of things, and we've improved our profitability. But the big hit, the big leverage is making more money, more operating income and more earnings per share.

Okay. And lastly, with the gains that you've made in working capital and the pay-down of debt, can you talk about your priorities for cash, including maybe a dividend increase and acquisitions; and maybe the answers [to boiler], but I'd be curious as to your commentary on that. Thanks.

Well, two things. Number one, we will always consider dividend increases, and that's something we will look at and review with the board every quarter. Obviously, I stated earlier, we want to continue to grow our business. The boiler's a part of it, but the boiler's not all of it. We do believe that our cash generation allows us to continue to grow, and we intend to continue to grow; so that's how we plan on investing our monies, and believe we have significant opportunities to do just that. We have -- and I think I said this in either the last conference call, or the one before that -- we've set up our compensation to drive some of the things that we, and you as shareholders, want. We believe, number one, 20% [inaudible] to working capital. We've taken our long-term plan and taken half of it so it's tied to achieving the cost of -- the return on capital employed, so we're meeting or exceeding that; and that will continue to be part of our compensation. So the focus that we have as a management team is to push the buttons that are going to drive us to the performance that I think you would like to see and, certainly, we want to see as a management team, and our board wants to see. So that as we look at those things, we believe we're pushing the ball in the right direction.

Okay. And then just, can you comment at all on any intentions around acquisitions?

I would rather not. We will always look at those things, Karen; and as you know, we did the -- well, with the ventures, joint ventures, in Thailand, in Korea, in Malay-- in Argentina and in Mexico, we will look at other -- both reasonable size and small, but we're not going for any huge acquisition anytime soon, because we don't feel it's appropriate at the moment. We've wanted to digest all the other things so we had them running effectively. Our base business is critical to us. We have to have that foundation solid, and we're going to get those others running right. Argentina was a case in point. We bought it, and we've gotten it back on track. We will continue to do that, but we will look at opportunities for acquisitions or ventures around the world, and -- Stay tuned.

Thank you.

At this time, we have no further questions in the queue. I will now turn the conference back over to Mr. Richard Vandervoort for any closing or additional remarks.

Thank you very much, everybody. Talk to you all soon.

And that concludes today's conference call. Thank you for joining us today.