Ingredion Inc (INGR) 2003 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Corn Products fourth-quarter 2004 earnings release conference call. This call is being recorded. At this time I will turn the call over to Vice President of Strategic Business Development and Investor Relations, Mr. Dick Vandervoort. Please go ahead, sir.

Good morning, and welcome. It's an open conference call simultaneously broadcast on our web site, www.CornProducts.com. Charts for our presentation can be both viewed and downloaded from our web site. They are available 60 minutes ahead of every conference call, and those using the website broadcast of this conference call are in listen-only mode. Today Sam Scott, our Chairman, President and Chief Executive Officer, Jim Ripley, our Chief Financial Officer, and I will conduct the call.

We'll indicate, as we move from chart to chart, so you can follow along this presentation. I've shifted to chart two, the forward-looking statement chart. 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 or 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 10-K and subsequent reports on Form 10-Q or 8-K.

Finally, statistical and financial information is available on our web site, www.CornProducts.com. I'm on chart three, our agenda. Today after this introduction, Jim Ripley will present the financials relative to the fourth-quarter and the full year 2003. Following that, I'll present the business review and comment on our outlook for 2004, and then we will be available to answer questions after the prepared portion of the call.

Thank you, Dick. I am on chart four, the financial table slide. Dick will be reviewing the fundamentals of our business in a few moments. Our financial statements are attached to our press release. I will briefly review the quarters' financial results, and then concentrate on the year end financial statements. I am now moving to chart five. Chart five is a summary income statement for the quarter. Net sales for the quarter of $542 million increased 15 percent as the rebound of prices and volumes in our South American business continue.

This combined with good results in North America and Asia were the highlights of the quarter. Improved exchange rates for the Canadian dollar, the Brazilian real and the Argentine peso helped contribute to a 7 percent positive exchange rate impact on sales for the quarter. Higher volumes added over 4 percent and a better price mix added over 3 percent to sales for the quarter. Gross margins improved to 17.2 percent from 14 percent reflecting improved margins in the key areas of our business, primarily the United States, Argentina and Brazil.

The margin improvement came from better price mix as well as our cost reduction program. Operating income at 51 million is up 9 million or 12 million if you exclude from last year's results the gain we had from the termination of our joint marketing company with MCP. About a quarter of the $12 million improvement is coming from the added volumes and approximately half from the higher exchange rates with the remainder from operating margin improvement.

Our business in the United States is showing very good improvement over last year on cost reductions and somehow from higher prices including better byproduct prices. Our actions in Mexico to reduce costs and find an alternative outlet for our production capabilities is also helping. The South American recovery is a big part of the story for the quarter. Higher corporate expenses include corporate governance costs, including insurance, legal and higher bonuses for all bonus eligible employees.

Financing costs (technical difficulty) dollars or 15 percent from last year. This is associated with reduced borrowings. Minority interest at $2 million is lower than last year. This represents the purchase of the minority interest in Argentina earlier in the year. Our tax rate remains unchanged at 36 percent. So the earnings per share is up 21 cents for the quarter to 67 cents per share. This improvement comes from the growth of the business and the improved margins and exchange rates.

I am now moving to chart six, which is the summary income statement for the year. Net sales for the year of $2.1 billion increased 12 percent from 2002. Gross margins improved 15.5 percent -- increased to 15.5 percent from 13.3 percent in 2002, primarily reflecting improved product price and better sales mix. Operating income at $174 million is up $21 million or $29 million excluding the unusual income from last year's results. This reflects the improved economic conditions in South America, continued improvement in North America and continuing growth in the Asia Africa where this result includes the cost of transferring our tapioca production facilities from Malaysia to Thailand.

Our business in the United States reported very good improvements over last year on cost reductions and the help from higher price mix. Overall volumes contributed about one-third of the improvement for the year while margin improvements added about two-thirds. Financing costs for the year is up $3 million or 6 percent. Debt reduction offset by higher interest rates is the story. We have paid down our debt substantially over the last 30 months, which was our high point, about $816 million. This was following strategic investments we had made over the prior three years.

Total debt is now $550 million versus $756 million at the end of 2001, while net debt is $480 million. This represents an $84 million reduction in net debt since last year and $309 million since our high point in the second quarter of 2001. During 2003 we continue to focus our intention on cash flow as we fine-tune our capital expenditure program and push forward with our working capital management project. We focused on our strategic growth initiatives and invested approximately $130 million in growth, including $82 million which went into CEP, or capital expenditures.

Minority interest at $10 million is down $2 million versus last year. Once again, this represents the purchase of a minority in Argentina. Our tax rate for the year at 36 percent was unchanged from the previous year. Earnings per share is up 34 cents per share to $2.11 per share, including the unusual income last year, or if you exclude the unusual from last year, it is up 48 cents per share. The 14 cents net unusual income includes 6 cents that we realized in the fourth-quarter of last year, as well as 8 cents from the sale of our enzyme division, net of cost in the first quarter.

I am now moving on to Page 7, which is our net sales by geographic segments. North American sales were up 9 percent. South American sales were up 23 percent. This is after being off 9 percent the year before. Asia Africa sales increased 11 percent following a 7 percent increase in 2002. I am now moving on to chart 8, which is the analysis of the net sales variance. For the total company, sales dollars improved by 12.4 percent. Of the improvement in sales, 2.5 percent comes from higher volume, and 9.1 percent from price mix improvements while eight-tenths of a percent change came from currency changes.

In North America, sales were up 9.1 percent. Overall price product mix was up 6.7 percent while currency was up 2.3 percent. Volume was flat in the region on a year-over-year basis. In the South American region we saw sales increased 23.3 percent after a decline of 8.8 percent last year. This reflects a 6.9 percent volume increase and a 22.4 price mix improvement. The currency impact was primarily in the first two quarters of the year as currencies recovered later in the year.

In the Asia African region sales increased 10.6 percent, 7.1 percent coming from volume growth and the remainder coming primarily from currency gains as price mix was relatively stable. I am now moving on to chart nine, which is the geographic operating income analysis. Operating income is up 13 percent or 20 percent including the unusual income from last year. North American operating income is up 21 percent.

The improvements in the U.S. Canadian business were offset by the impact of the loss of HF 55 sales in Mexico and the lower value of the Mexican peso, however, improved product mix brought the total Mexican operation above last year's levels. South American operating income increased 42 percent following a decrease of 14 percent in 2002. Improved economic conditions in Brazil and Argentina, including a reversal of some of the currency declines of the past led the improvements in this region.

Asia Africa operating income increased 1 percent following an 18 percent increase the year before. Higher volumes were offset by the startup costs and transferring our Malaysian production facilities to Thailand and some margin slippage in Korea. The corporate expenses are higher than last year due to the increased corporate governance costs which I mentioned before and higher insurance rates. I am now moving on to chart ten, which is the earnings per share analysis for the year.

Last year we earned $1.77 per share for the year. This year the net is $2.11 per share for a 34 cent per share improvement. Excluding last year's 14 cents net from the sale and disposition of businesses less cost, the improvement year-over-year is 48 cents per share. Net changes in operation resulted in 50 cents per share improvements. Higher operating margins and local currencies added 26 cents per share of this. Higher local currency pricing included better byproduct recurrence, and of course our continued cost reduction programs.

Higher volumes added approximately 21 cents per share. Currency improvements added 3 cents per share. Once again this was Argentina, Brazil, and some improvement in Korea. Non-operating items decreased by two cents per share. Increased financing costs reduced earnings per share by 4 cents. Higher interest rates, which reflected our fourth quarter 2002 refinancing led this decline. However, as I mentioned before, as our debt continued to decline all year, this helped our earnings.

Lower minority interest added 4 cents per share while more shares outstanding reduced the per share earnings by 2 cents. I am now moving on to chart 11, which is our cash flow. We generated 236 million positive cash flow from operations during the year versus 206 million last year, a 30 million improvement year-over-year. The improvement primarily came from higher earnings. Our cash flow from operations show net income contributing $76 million versus $63 million last year.

Working capital contributed $49 million versus $65 million the year before while depreciation is $101 million versus $103 million last year. We invested $130 million in the business. Eighty-two million was used for fixed asset investments to grow and protect our production base. For 2004 we expect to spend approximately $90 million for capital expenditures. In 2003 we spent $48 million, primarily to purchase minority interest. We have utilized a net $73 million of our cash flow in financing activities, $58 million was used for debt reduction while $14 million was used to pay dividends to our shareholders.

Finally, we generated a $34 million increase in our cash on our balance sheet versus a $29 million decline the year before. I am now moving to the final financial chart, which is key ratios, chart number 12. Our return on sales is 4.1 percent versus 4 percent last year and 3.5 percent in 2001. Return on capital employed is 5.9 percent versus 5.2 percent the year before. Our target to return on capital employed is in the 8 to 10 percent range.

Let me remind you that when we calculate our return on capital employed we follow a conservative approach by adding back our cumulative translation adjustments. This year that was approximately $340 million of additional capital. Our debt to capitalization ratio is at 31.6 percent versus -- excuse me -- 30.4 percent versus 35.6 percent last year and 38.8 percent in 2001. Our target remains to be in the 32 to 35 percent range. Working capital to sales is at 11.9 percent, the same as last year and around our target of 12 percent.

The year before -- excuse me -- in 2001 our rate was 17.2 percent. We show an improvement in our trade working capital, which excludes the cash which I mentioned before in our short-term debt. Also our cash conversion cycle continues to improve, and we will continue to drive for better utilization of our capital in this area. Finally net debt, that is total debt less cash and short-term investments, is at $480 million. In 2002 the net debt was 564 million, and in 2001 $691 million. I will now turn the presentation back to Dick Vandervoort for more details on the business.

Thanks, Jim. I will review our fourth quarter and full year 2003 from a qualitative standpoint and then provide some comments about our outlook for 2004. I am now switching from chart 13 to chart 14. Chart 14 is the currency updates. Please note that while Jim was talking about currency changes over the entire year I am looking at currency changes as you will see on this chart, for fourth quarter versus fourth quarter. First to describe the chart, I have listed our countries in the first column.

In the second column, I have listed the average currency values for the fourth quarter of 2003. The third column shows how the fourth quarter of 2003 compares to the same quarter in 2002, as I mentioned a moment ago. And because currencies are a moving target, in the fourth column I have shown the difference from Tuesday's close versus the average of the fourth quarter, and I probably should say sometimes currencies are a moving target.

This time they are not quite so moving. Now the content. The Canadian dollar firmed significantly in 2003, up 16 percent versus the average value for the fourth quarter last year, and like most currencies with no significant change since last quarter as can be seen in the last column. In Mexico the peso weakened versus last year, and since has firmed slightly, although last week it declined somewhat but it is still somewhat higher than it was at year end. As to Argentina and Brazil, their currencies as of now completed their recent revaluations during the fourth quarter of 2003.

Their currencies rebounded significantly from the lows of about four to the dollar in 2002. Unfortunately, the Colombian peso continues its multiyear decline but recently has firm. Their currency problems result from both internal concerns and the situation next door in Venezuela. The Asian currencies changed little, though all have firmed. In Korea's case that has actually slowed their export driven economy. Chart 15, fourth-quarter 2003 in aggregate.

I will make a few comments about the quarter and concentrate most of my time on the year as both stories are similar. A very strong quarter, as Jim has described it. GAAP earnings increased by 46 percent and when compared to last year's fourth quarter without the additional earnings per share from the dissolution of our joint marketing company earnings increased by over 67 percent.

As we said in our press release, all of our major numbers showed significant improvement led by South and also North America with strong recovery in Brazil and our Southern cone (ph) business and excellent performance from the U.S. and Mexico. Cash generation, as we've been describing for some time now, was strong, and we use the cash generated from our ongoing working capital project to reduce our net debt of $548 million at the close of 2003's third-quarter to $480 million or $68 million in the quarter alone.

So we made progress both year-over-year as Jim described and sequentially, as well. All in all a great quarter setting an all-time record at 67 cents per share. Chart 16, 2003 in aggregate. As I said a moment ago, I discussed the year just concluded in greater detail and as you can see on this slide wherever there is an asterisk, we set a performance record. As we reported, our earnings were $2.11 per share, up 19 percent over last year excluding the gains on the sale of our enzyme business and the dissolution of the joint marketing company, left the applicable charges for each, our earnings increased by 30 percent versus the prior year on record sales of $2.1 billion.

Looking at important cash measures, operating cash flow for the company increased by 15 percent to $236 million or $6.52 per diluted share. Free cash flow improved by 20 percent to $153 million or $4.23 per share, and our EBITDA was $275 million or 7.60 per share. With our performance in 2003 we believe we are gaining on our goal to generate earnings that cover and subsequently exceed our cost of capital.

Chart 17 is North America 2003. Operating income in 2003 was up 21 percent to $68 million as both our Mexican and U.S. businesses delivered marked improvement in their results, particularly in the U.S. Specifically as to Mexico, unlike 2002 when the tax was removed for four months and we were able to ship significant volumes of very profitable HFCS to the soft drink industry, the tax was in place for the entire year of 2003. Clearly the balance of our Mexican business performed very well.

While I will speak more to the bilateral trade discussions momentarily, they have continued through the end of last year and are pressing on into this year. Shifting to the U.S., we delivered our best operating income since becoming a publicly traded company. And we did this against the backdrop of declining beverage demand but with overall industry volumes up slightly according to data from the Corn Planters Association.

As we have stated repeatedly, our corporate goal and most specifically for our flagship operations in the U.S., is to generate earnings that return and exceed our cost of capital. We took another significant step in that direction stateside achieving the gains both from the market pricing side as well as the cost side in 2003. But until we get there, and thereafter, we'll need more.

Chart 18, South America. While life is loaded with things good, bad and indifferent, and we've performed very well in bad and indifferent times, there has been lots of good happening in the lower half of the Western Hemisphere. As mentioned during my comments about currencies, there has been significant economic improvement in Brazil and Argentina as their gross domestic products are growing and currencies have revalued as confidence returns.

In Brazil, interest rates have been reduced several times by the Central Bank, and the current account balance has turned positive for the first time in about a decade. For us, sales are up 23 percent as Jim mentioned on a 7 percent volume increase. A significant portion of that was in Argentina, the largest country in our Southern Cone business. As a result, operating income grew by $24 million or 42 percent, a dramatic turn after last year's strong delivery. However, there continued to be economic concerns in the Andean region from the political prices in Venezuela. Perhaps to belabor the obvious, we are really very pleased with the performance of our management team and all of our people in South America for such a terrific year.

Chart 19, Asia Africa. While operating income increased by only $780,000 for reasons Jim has mentioned and I'll further discuss in a moment, key indicators for our Asian business were solid, with sales increasing by $26 million to $278 million on a 7 percent volume increase. Sales in this region are roughly four times what they were ahead of our becoming a publicly traded company. The growth in operating income in this region has outpaced the sales growth.

Our results were negatively affected by the transfer of our Malaysian facility to Thailand, the late startup of our glucose channel in Thailand, and the subsequent startup issues involved with it, all of which we believe are behind us based on our improved performance during the fourth quarter. Our new glucose channel supplies world-class quality product for that part of Asia.

In Korea, the economy slowed, and we had some increases that we were unable to pass along in pricing. However, having said that, 2003 was our second best year in history in that country. The good news for Pakistan is that we just completed our best year in history there, again. The local economy is strong, something that has not always been the case, and our second plant is expected to start up later this year.

I'm now shifting to Chart 20, the first of our two outlook charts. As we look to 2004, we expect to improve our performance and set another earnings per share record. Given that we are still contracting our large U.S. business, we are not in a position to quantify our expectations. We do anticipate that corn and energy costs will be higher for many of our businesses around the world, and in those markets like the U.S. and Canada where prices are typically set annually, we hedge our raw material against the sale of our products.

On the plus side, however, we should also see some benefit from higher byproduct prices, as has already been evidenced in the cash markets with year-end 2003 gluten feed and meal quotes, up over 35 percent from 2002 levels. In fact, meal values have increased since year-end, but feed has declined. All in, net corn costs should be up slightly in 2004.

More specifically now by region, in North America we expect our U.S. earnings will improve going forward, though at a slower pace than last year. As I said, 2004 contracting in the U.S. is still underway, so we are too early to put numeric approximations to the outcome. As to the tax on HFCS sweetened soft drinks in Mexico, negotiators representing the U.S. corn refiners, corn growers and the sugar industries on both sides of the border, as well as all of their lawyers, are continuing the dialogue in search of a solution. Clearly, this is a complex and highly charged issue between our two countries, and at this point we are still in the stay-tuned mode. As to our business in Mexico, we expect a better year in 2004, but have not assumed a resolution to the tax issue in our expectations for the year.

Chart 21, the final outlook chart, completing our comments as we look forward in South America, our strong business is in an improved environment and should perform well. However, 2003's torrid pace won't be repeated. Also, as you may recall, the recovery and gains in 2003 started slowly and gained momentum. The year-over-year quarterly operating income gains in 2003 were 18 percent and 36 percent in the first two quarters sequentially, whereas the final two quarters generated a greater than 50 percent improvement over 2002. I realize it is difficult to say that 18 and 36 percent is slow, but compared to the last two quarters, it's obviously slower. Therefore, our comps should get progressively more difficult as the year goes on.

For Asia/Africa, our operating income expectations are stronger for this year. We anticipate that our Thai business, having turned the corner in the fourth quarter, should provide increased operating income, and we expect our Pakistani business to continue to thrive and are planning for our new plant to start up this summer.

Now Sam, Jim and I are open for your questions. Mike, if you'd take over.

(OPERATOR INSTRUCTIONS) Christine McCracken with Midwest Research.

You had a very nice quarter and congratulations. Looking at your North American business specifically, clearly you had a slight benefit from currency. Looking -- you've made some operational improvements this year. How much of a benefit, I guess, were coproduct credits this quarter? Is there any way to break down, I guess, how the North American business really came together?

Coproduct credits were stronger in the fourth quarter and, in fact, continued strengthening through the year, although corn oil had pretty much played itself out early in the third quarter. It was pretty well matched from there forward from the prior year. Gluten meal and gluten feed firmed, but we probably were hitting on all the cylinders because we had obviously good pricing in the head products as well. I don't think -- we don't break that kind of thing out, but I think they all contributed. Obviously, we took a good jump earlier in the year, and that was based on the major product sales with sweeteners and starches.

Also, Christine, we had pretty good values in Mexico in the fourth quarter as that economy started to heat up a little bit, with the U.S. economy starting to show some signs of life, as well as decent volumes in Canada. The U.S. volumes were pretty flat, as Dick said and as shown in the press release, but I think it was cost reductions. I think we did get some benefit from the coproducts as you mentioned. I think we saw some volumes in some parts of our world, and the quarter came together very nicely.

Were higher energy costs at all an issue for you, or have you -- had you sufficient coverage in the fourth quarter and might that be an issue for you going into '04?

We had covered in the fourth quarter as we had mentioned earlier, and into '04 we are hedging as usual. Obviously, the hedge could be higher and probably will be higher as a result of energy costs going up throughout the year, but we were hedged in fourth quarter.

Okay, and then just in terms of looking at -- you're probably not willing to talk about the contracting as it is ongoing, but maybe just to look at the general situation as it stands today with higher energy and corn costs, it seems to me that you would be in a pretty good position to negotiate for higher prices, but at the same time you had a negative, I guess, decision in Mexico, despite the fact that's an ongoing situation.

And then I am hearing from some of the bottlers that, in fact, pricing is going to come in with not much of an increase. Can you give me maybe just a -- put it in context for us and tell us why you wouldn't be able to get higher pricing?

Christine, I will be as polite as I possibly can in answering this question, but the answer is that I'm not going to comment on that. As we do every year at this time of the year, I am not prepared to make any comments for obvious reasons, and you framed the question very, very nicely. I just have to frame my answer the same way, no comment.

Can't blame a girl for trying.

That's right, you've got to give it your best shot.

Fair enough.

CS First Boston and David Nelson.

Congratulations. I guess my questions were similar to Christine's in that the variance with your performance to my model was also in North America, but since Christine explored that. Dick, you did cover South America. How much of the improvement there was really related to the macro -- you alluded the economic improvement down there -- but also to your management performance? Is there any way to separate those out? And are there new products or innovations coming in Argentina and Brazil that could lead to even faster growth going forward?

I'll just talk about last year and let Sam take it from there. But the macro indicators were clearly positive, but we fairly dramatically outpaced those. The economies were turning up and from a low bottom. But I think our business positions are very strong and our management team is very well experienced, and so we had all of that kind of going for us. Tonnages were very good. So that definitely helped as well.

David, I think you hit all the issues. We had better pricing across the board. We did have good volumes and big sets of volumes from the economy turning back around. The cost reductions were in place. We had more stable energy situations. It was off of some things we did in our plants. I think, overall, things were starting to come together. We do have a couple of new products that are coming out in Latin America and will move throughout the world, but some of those (indiscernible) second half of last year.

So we are just seeing the benefits of some of the work we've done. There's been an awful lot of work down there to strengthen that business in both good and bad times, and it came together pretty well in the fourth quarter of last year.

Okay, thank you very much.

John McMillin with Prudential Securities.

If a girl tried, can a boy try?

Try real hard. I'm going to see how I can frame a different answer.

Well, it's out there. Jeff Canter follows all the beverage companies. The bottlers are admitting to a low single-digit price increase. If you talk to all of them, that's basically the consensus, low single-digits. So it's out there, and you've got to be 80 percent through. So I know you don't want to be the first to talk about it, but you've got to understand as good as these numbers are, they are somewhat irrelevant, given the driver in '04 to this. So you really -- I don't know, I guess you can sit and wait till it's completed, but I think not to comment on it is -- I mean, it is basically done.

John, you're right. Christine can try and you also, and I agree with you. I think that it is difficult not to comment on it, and we are very tempted to do so, but we can't, we haven't; we'll be consistent with that. I think that you're right, last year, 2003, was a good year, and so what have you done for me lately is the question on the table. We've tried to give some indication we expected 2004 to be better than 2003, but can't quantify it until we get it done, and I think you know the reason for that. Because we've had a situation in the past many years ago where we did, and the last small portion of the business went one way or another and it can have a major impact. So we're going to wait till we're finished, and then we'll give you an answer as soon as we can.

But we have tried extremely hard to be consisted in giving good guidance over the last couple of years. I think we've gained some credibility in the eyes of most of our investors, and the intent is to continue doing that. So we will take the hit by not giving it now, but when we give it, it will be right.

And just strategically, to the extent the better margins in the corn refining process go to products like ethanol, do you feel disadvantaged?

No, I think that we have seen ethanol both high and low. And when ethanol margins are very high, obviously, we don't share in the gain. When they're very low, we don't share in the pain. That was pretty good for just coming up with it off the spot.

I didn't know you could sing.

When I'm cooking, I'm cooking. However, I think what you've seen in our results this year, in this last quarter in Latin America and Asia, is what we've said consistently, that we will give up the ethanol issue to be able to grow where we're strong. And that growth and the focus on those areas seems to be paying off right now.

Okay. Again, if both you and ADM starts earning your cost of capital, I might well retire because I won't be able to recognize either one of you.

John, we're giving it our very best shot. It's getting closer, and as Jim said in his comments, obviously we're taking a very conservative approach to our cost of capital calculations. But it's moving in the right direction, and we've (indiscernible) our bonus to it. So we've got hard work to do and we're going to keep on doing it.

Congratulations on the quarter.

Thank you very much.

David Driscoll with Smith Barney.

Good morning everyone. I'd just first say that I don't think the fourth-quarter results were irrelevant. I think the fourth-quarter results were indicative of trends that we've seen for many, many quarters now in your guidance, that '04 is going to be better. It's better than not being able to tell us anything. But kind of with that statement, I would then want to switch over to something specific. On January 12th, we saw the USDA Crop Report come out and a material upward move in the quarter market. The question that I have for you is that historically, you have told us about your hedging practices. And what I am most concerned about is that were you properly hedged according to whatever contracts you had signed at whatever prices prior to that crop report, or was there a hit on the 12th when the corn prices suddenly shot up because the USDA revised their numbers so significantly?

As we have consistently said, David, we hedge when we book, so that piece of business that was booked at that point in time was hedged. That goes for the U.S. and for Canada. Anything that was not booked at that point in time was not hedged. Around the world, as we have said consistently also, we do not hedge our business because we can move prices through. As a result of the upward price in corn on January 12th, we have some work to do going forward. And as we've said also, it takes time to push those numbers through. But that part of our world has not been hedged before, it was not hedged this year, and we have work to do to move the numbers forward.

Very good. That was an important question. In terms of just a detailed question on corporate expense, it was up in the quarter. I believe you said it was up because of bonuses. Can you just give me an idea, is this the kind of run rate that we should look at, or should we kind of think about something lower that we'd seen in the last three quarters when we just want to think forward? I'm just trying to get a sense of why that number was so much larger.

Included in that item, aside from what happened in the corporate area, we did see some increases because of increases in our business. So as we grow, we have more general and administrative expenses. We also earlier in the year wrote off some bad debts, primarily in Argentina and Brazil, from the economic problems that had occurred before. And there were some obsolete assets that we also wrote off. So I think as we are going into next year, we should not see this type of increase at all. We are probably at the high point right here.

Let me further answer that question, David. My desire was for that bonus number to get bigger and bigger, and the only way that will happen is if our numbers get better and better. So as much as I did not like seeing the corporate expenses go up, our performance in 2003 did not warrant a bonus payout that was even close to target. As a result, we didn't get it.

2002.

2002, I'm sorry. 2003, the numbers were good numbers. They did match or exceed our goal, and as a result the payout was there for everybody. That bonus number is inclusive of all bonus-eligible people in the company, and that is probably somewhere around 300 odd people.

That's a fair statement. So if I characterize it, I would say that -- you are just saying that we are going to see that number move up. If we do, that is going to be basically because op income in all your segments was very good. So net-net, we should all be very happy to watch that number rise.

We have said we will pay ourselves if, in fact, we deserve it, and that is the intent. If we don't hit the numbers, the numbers are not going to be there. We saw a falloff in our long-term bonus plan at the end of the year, substantial falloff that had an impact on us, and it cost a substantial amount of money in the month of December.

Kind of a high-level question here is that I think that the view across the street is that you talk a lot about not earning your cost of capital, but I would like to kind of maybe delve into that a little bit. And Sam and Jim, if you would jump in here on this question. When you think about the three areas, Asia/Africa, South America, those two areas are returning their cost of capital, whereas you are not in North America. So I would make a key distinction that it is my impression -- tell me if I'm wrong -- that what we are trying to do here is see that improvement in North America, but the other areas are excellent.

But because North America is so large, it dominates a lot of your conference call. So the follow-on question to that if I am correct there is that you're still kicking off a tremendous amount of cash and the question is you've got cash -- your total debt to cap is down, I think, at your target level. The question being is what do you do with that cash going forward. If you've got 90 million in capital expenditures and if I just drop off 90 million from your cash (indiscernible) from operations from this year, that would put you at something like $4 per share in cash generation. This is a big number. You increased your dividend by 20 cents.

So talk about return on -- excuse me -- weighted average cost of capital in the different regions. And then if you could take us through what's going to happen with that cash, because it seems to me like we have some very positive stories to talk about going forward with this company.

Let me take the first part of your question which is the cost of capital, and we are not going to give region-by-region returns on our cost of capital, but your comments were basically correct. And one has to remember that our Mexican business is significantly underperforming because of a lack of fructose sales. So as we see that come back and we do believe there is going to be a solution, that should give us a real boost in our cost of capital. With that, I'll turn it over to Dick.

And the other point that Jim made about the $340 million in currency translations that we add back to our asset base, that slaves our result by probably 1 percent to 1.5 percent, just in terms of what our effective return on capital is. So we do it a very conservative way, because it's the realities of our business.

And we hold ourselves to that conservative way vis-a-vis our bonus numbers as well, because our target for our bonus is done the way we do it, not the way it's done on the street, David. A couple of things. Number one, just to correct one thing, you said our dividend was increased by 20 cents; it was increased by 20 percent.

I'm sorry, that's what I meant.

I wanted to clarify that so that everybody was right there. You're right, we're generating a lot of cash. We have opportunities to grow this business. We've identified Asia/ Africa of the world as an area we are going to grow in. We've said we have some new products coming out of Latin America. We bought larger positions, the minority positions in some of our businesses. And as I've said year-over-year, the intent of our business is to get the debt paid down, stabilize things, gain credibility in the marketplace, and then grow the business.

I think we've paid our debt down to our targets. We are even slightly below our target on debt to total cap. We have generated cash as a result of some of the things we've done in the organization, and now the next phase is to grow the business. We will share that with the outside world. Obviously, part of it has been shared already with Pakistan and Thailand. We are looking in other parts of Asia because they're interesting to us. We are looking at ingredients coming out of the business; we've talked about that. And there is just more to come.

If we keep tracking the way we are, the intent is to continue growing, and we will share that with the world as we get further plans ahead. There's a little bit more to it than just my talk.

But you can't give us any guidance on just your basic thoughts on dividends? I mean, right now, I believe your yield is still right around 1.4 percent. So that would kind of be in line with the S&P, but I think below many of the other food manufacturers.

Correct. We see ourselves with opportunities to grow a little better than most of the food manufacturers, so we don't necessarily classify ourselves with them. The opportunities for us on a geographic basis because of our growth outside of the U.S. is substantial. We want to capitalize on that. I won't comment on future dividend payouts because that's something we discuss with our Board first, and then announce something going forward and we just put one through. But we will continue to look at that, and we look at the opportunities to grow the business.

And maybe an observation and a question, if you can answer it, I continue to think that the street is somewhat confused by really what your volume growth prospects are in those other regions and then collectively as a company. The more definition that you can give to us about the projects that you allude to in Asia and really what they mean in terms of a volume growth for the company overall, I think would be extremely helpful to the understanding of Corn Products.

I agree with you, David, and we are planning on having an analyst meeting in May at which point in time we hope to be able to share some of our strategies going forward of what our intentions are.

Nice quarter and thanks a lot.

Reza Vehabzadeh with Lehman Brothers.

Your debt levels, you already met your target as far as leverage ratio. Do you expect to continue to use cash to pay down debt?

Yes, we'll use cash to pay down debt until we see other opportunities for growth. So yes, that is correct.

I think, as I said to David Driscoll, the intent here is to grow the business but to stay within the ratios and targets we've set -- or the targets we have set, not the ratios we've set. So obviously as we can't continue to generate cash we have acknowledged the fact that we will probably take our capital spending up somewhat this year, not huge, but up about 10 percent based on the numbers that Jim presented, and we will look at opportunities to grow to business. If we don't find those opportunities we will look at paying down debt. But we will manage the business within a range and then grow it as we best can with the opportunities that present themselves.

On the working capital, obviously a lot of improvement in the last two years. Are we in the fourth quarter here or the third-quarter?

We believe we can constantly make improvements, obviously not at the pace that we've seen. We saw a very high pace in 2002. It slowed somewhat in 2003, so I think we can not show those very high levels of improvement, but as we look at all the nooks and crannies of the business, there are still improvements out there that we are going after.

But we are getting close to third and fourth quarter. I mean I think as the business grows we're going to see the ratios of working capitals stay in line but the working capital itself has to increase somewhat as the business gets bigger. So as Jim said, we still see some opportunities. Some of our countries are probably world class and first in world class, and some of our countries are not that far along. So we will obviously work on those that are not with a model inside the organization that can help us improve.

I see. And then on Mexico obviously the fructose business is still struggling. What else worked in Mexico? Can you just recap Mexico for 2003 as far as the other products?

Sure. First off, we have been focusing on getting Mexico's cost down ever since the fructose issue happened because it was important to us and we had to do that. Secondly, we did have some, in the beginning of the year, the economic situation in Mexico had slowed down substantially, pretty much following the U.S. trends because Mexico tracks fairly well with the USDA.

But the U.S. economy started to show signs of life in the second half and Mexico's economy did as well. So we saw volumes pick up. We saw stronger numbers going through in the efficiencies that we are running the plant with really started to take hold.

You mentioned mix improvement in Mexico during 2003. Can you just comment on that again?

Basically we wanted to shift our grind where we could within the plants that made it and more to the higher priced products because as I said the economic situation justified it. And that is pretty much the mix shift. It was not a huge shift, but it was where we could. You ship it over and made the higher value products, the more specialty oriented type products.

Got it. Thank you.

Karen Lamark with Merrill Lynch.

Nice quarter. With respect to the operating expenses, if you exclude the write-off of the bad debts and the absolute assets, etc., but I'm assuming there is higher corporate governance and insurance costs. Can you give us any sense of a run rate either in terms of dollars or percentage of sales for 2004?

There is hesitation on this end.

Our target is to run at 6 percent or below. That is our long term target. We did see -- everybody knows insurance rates, primarily because Sarbanes-Oxley, in the (indiscernible) area have gone up substantially and they are still going up, but not to the extent we've seen in the past. Also we've had to do a number of projects, particularly documenting our internal controls for '04, is referred to.

That project continues into 2004. So we will see a lot of these costs continuing. Obviously not the bad debts and we're not going to characterize how much that was. Our goal is to get to 6 percent or below for our operating expenses.

One of the things, Karen, with respect to some of the numbers we saw, we had locked our insurance, much of our insurance for a period of time, and got hit with a fairly substantial increase this year because we had had it locked on a multiyear basis going into the year. And with all the Sarbanes-Oxley changes that took place, we took probably as large a hit as most people did out there on a percentage basis.

That should moderate, but it is not going to go down anytime soon unless things stabilize in the outside world. As Jim said, some of the other numbers are higher, but we're working on that, and one of my goals this year is to make sure we bring that number down. But as we said at one of the earlier questions, my drive is to try to keep exceeding our goal so the bonus numbers get larger and larger, and I think all of us will be happy if that happens.

So as an ongoing number, we can't give you one right now. But we are working to keep that number as well as we possibly can, and this year we have got hit with a number of things that brought it higher than any of us wanted to see.

Okay, that's fair. Also on high-fructose corn syrup contracts, can you at least give us a sense of the timing of when you expect to complete the contracts and whether or not you plan to announce something or give us a little bit more guidance about the year?

That's another kind of a form of the same question. It's a little different. We have seen contracting go as late as the end of March. We've seen it completed as early as the beginning of January. Obviously, we're sitting here at the end of January and it's not done. I am hoping that it's done within the next couple to few weeks, but I can't guarantee that. It depends on pulling triggers and how things come in. And certainly our intention would be at the end of the first quarter to give it, but if we get contracting finished, we may come out at that point and tell you where we are.

Okay, and then lastly, obviously the cash generation has been terrific. And as it has been pointed out, you have paid down the debt, CAPEX is coming down. Can you give us any sense of whether or not a dividend hike or even a share repurchase are on the table? And maybe prioritize that relative to some of the growth opportunities you identified.

They're always on the table. Are they a priority? As I said before, I think if we have growth opportunities, we will pursue them. That is what we are trying to do in the organization, because we see those opportunities out there, and if in fact we can operate effectively, we can capitalize on those. The dividend hike was because of the cash generation. We hadn't done it before, and we will continue to review that with the Board. The share repurchase will be something we will look at as we always do, but if we see the growth opportunities, we will pursue those first and continue to grow the earnings per share where we can. So I don't know if that prioritizes it for you, but it gives you my thinking on it.

Great, thank you.

Eric Fehl (ph) with Tanza (ph) Capital.

My question have actually been answered. Thank you.

We have no further question at this time. Mr. Vandervoort, I'll turn things back over to you.

Thanks so much. Everybody have a good day.

That concludes today's teleconference. We thank you for your participation. You may now disconnect.