Ingredion Inc (INGR) 2004 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Corn Products Second Quarter 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 thank you. This is an open conference call, simultaneously broadcast on our website, www.cornproducts.com. Charts for our presentations can be both viewed and downloaded from our website. They're available about 50 minutes ahead of our conference call every time, 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; Cheryl Beebe, our Chief Financial Officer; and I will conduct the call.

We'll indicate as we move from chart to chart, so that those using our charts on the website can follow along with us through the presentation. I shifted to chart number 2, 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, 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 Forms 10-Q or 8-K. Finally, statistical and financial information is available on our website, www.cornproducts.com.

Chart 3, the agenda. Today, after this introduction, Cheryl Beebe will present the financials relative to the second quarter. Following that, I'll present the business review and comment further on our 2004 outlook. Sam, Cheryl, and I will be available to answer questions after the prepared portion of the call.

Cheryl?

Thank you, Dick. Good morning, everyone. As you can see from the press release, the company had a very fine quarter. Earnings per share rose 58% to $0.79 from $0.50 last year. This includes $0.07 from the change in the effective tax rate. Looking at charts five, we can see the quarterly income statement. On a net sales basis, we are up 6% versus last year. Gross profit in dollar terms reached $92 million, up 16% from a year ago. Margins are up 16% to 16%, or 130 basis points from a year ago.

Operating expenses at $40 million are up $4 million from a year ago, reflecting a combination of higher compliance and compensation costs related to performance-based variables compensation. As a percent of net sales, operating expenses are at 7.1% versus 6.7% last year. Other income and expenses were $2 million versus a negative $1 million last year, which primarily reflected the shutdown of our Malaysian plant.

Operating income is up 26% to $54 million compared to $42 million last year, due to a change in the company's foreign income tax expense. We benefited from a lower effective tax rate, dropping from 36% last year to 30% this quarter. We are expecting an effective tax rate of 33% for the year. We believe this change will affect only 2004. Minority interest remains unchanged at $2 million.

Turning to chart 6, net sales by geographic segment, we see the 6% change in net sales was driven by a 5% improvement in North America, a 10% improvement in South America, and a 5% improvement in the Asian-African region. Chart 7, net sales variance, provides the source of the improvement. In North America, volume improvement contributed 2% while price and product mix accounted for 2.3%, and currencies kicked in another 0.6%. In South America, roughly 78% of the 10.3% net sales improvement was driven by volume.

Volume grew 8.1% in the quarter. Pricing and product mix contributed 1.6%, and the currencies had a minor favorable impact, or 0.6%. In Asia-Africa, the volume was down 7.3%. The volume decline is mainly attributable to our South Korean operations. The impact from pricing and product mix is favorable 10%, and reflects the pricing movement to recover higher raw material costs in this region. Currencies contributed 2.5%.

In summary, for the total company, one-third of the net sales improvement in the quarter was driven by volume, and over 50% was driven by favorable pricing and product mix.

Switching over to operating income by geographic segment, chart 8, North American operating income increased 67%, an increase of $10 million. South America was up 19%, or $4 million, and Asia-Africa was down 11%, or $2 million. Corporate expenses were up roughly $800,000. The operating income margin for the quarter was roughly 9.4%, up from 7.9% last year.

Turning to chart 9, estimated source of diluted earnings per share, we see that almost 69% of the $0.29 improvement came from changes in operations, and the remaining 31% from non-operating changes. Margins and volume contributed $0.19, and foreign currencies contributed a penny.

Changes in non-operations contributed $0.09 over last year, of which $0.07 is from the change in the effective tax rate. $0.03 came from lower net financing costs, driven primarily from lower rates, and obviously the lower debt. Minority interests contributed a penny, and the increase in the shares outstanding accounted for a negative $0.02.

Looking at results on a six-month basis, chart 10, net sales are up 10% to $1.1 billion. Gross profit increased by 26%. Gross profit margins improved 210 basis points to 16.6%. Operating expenses at $81 million are up 14%, or $10 million from last year reflecting spending for our strategic initiatives. Again, higher compliance and performance-based compensation costs. Other income was up $2 million or $1 million, up $1 million from last year.

Operating income, at $108 million, is 38% higher than a year ago. Operating income margins are 9.6% versus 7.6% last year or a 200 basis point improvement. Financing costs on a year-to-date basis were $18 million, down 9% from last year, again reflecting lower rates and lower debt.

The tax rate dropped from 36% to 33%, again, driven by a reduction in foreign income tax expense. Minority interest was $5 million, down $1 million from last year. Finally, on an earnings per share basis, the year-to-date earnings per share is up 69% from $0.88 to $1.49, or $1.42 without the $0.07 from the tax rate change.

Looking at cash flow provided by operations for the quarter, chart 11, we see $29 million from net income and $25 million from depreciation. We invested 48 million in working capital for the quarter. The change in working capital was driven by inventory changes and receivable changes. Almost half of the change in inventory was from higher raw material costs and volume. Price, obviously the result of the higher corn costs in the quarter.

As mentioned in the first quarter call, our U.S. and Canadian businesses hedged their corn purchases as they contract in the futures market. During the first quarter, we had a positive cash flow effect from the higher corn prices. This is partially reversed in the second quarter as corn prices have declined. Cash invested in the business is in line with last year's spending at $19 million.

Dividends remained unchanged from the first quarter, no change in the rate at $0.12 per share. Gross debt increased by $39 million in the quarter, while net debt, gross debt less cash, only increased by approximately 10 million, supporting the seasonal change in working capital. Total debt at June 30 was $577 million. Net debt at June 30 was 433 million versus 424 million at March 31, 2004, and 480 million at December 31, 2003.

Chart 12, our performance metrics, we see the key ratios all have improvement. Return on net sales is up 5.4% versus 3.7% last year. Return on capital employed is 7.2% versus 5.3% a year ago, a 35% improvement. The improvement was driven by the improving operating income on a 12-month basis, a lower capital employed base, and the change in the effective tax rate. Excluding the tax rate change, the (inaudible) is 6.8%.

Debt to total cap is at 30.7% versus 35% last year. Working capital as a percent of net sales, excluding cash of $144 million and short-term debt of $98 million, is at 9.8%, down from 12% a year ago. Net debt at $433 million is down $155 million from June 2003. All in all, another good quarter.

I will now turn the call over to Dick.

Thanks, Cheryl. I'll review the quarter from a qualitative standpoint and then provide some comments about our outlook for the full year. I'll also talk a bit about our recently announced venture in China. I'm now moving from chart 13 to chart 14, which is the currency update.

First, the chart. I've listed our countries in the first column, adding China because of our newly announced venture, and even though the currency is currently a fixed rate to the dollar. In the second column, I'm now showing the cumulative monthly average currency values for the second quarter of 2004. The third column shows how the second quarter of 2004 compares to the same quarter last year. And because currencies can be a moving target, in the fourth column, I've listed today's close versus the average of the second quarter.

Final comment about the chart, aside from the absolutely lovely color scheme change, the result of comments about readability, since currency changes have been more gradual recently, I've set a color key. I will highlight currency changes of 5% in those countries where we have large businesses, and for smaller businesses those currencies will be highlighted only when they reach a 10 % or greater change.

Like last quarter's currency chart, it's again interesting to see the small amount of change during the recent quarter. And as to specifics, and they are obviously few, in North America and for the other major countries in our world, the only currency with the significant trading change was the Mexican peso, which was devalued by 9%. The currency in the two largest economies in South America, Brazil and Argentina, declined slightly, while Chile and, to a lesser degree, Colombia firmed as they did last year -- last quarter, excuse me.

In Asia, the Korean Luan appreciated by 4%, and the Thaibot was somewhat stronger as well. In our 15-second quarter in aggregate, as I said in April about our first quarter, this quarter was exceptionally strong, especially since we've had the proverbial arm tied around our back with regard to our business in Mexico, which I'll discuss shortly. Our comparative improvement track against last year's earnings has continued.

More good news, the business fundamentals were sound, and all divisions contributed to our 6% increase in sales. Getting back to the quarter, as Cheryl pointed out, all the elements were there, operating income, net income, and earnings per share.

Earnings per share for the quarter increased by 58%, which was before the $0.07 -- before the $0.07 reduction, would still -- before the $0.7 reduction in our effective tax rate would still have represented a 44% increase in earnings per share, which would also have made it a record quarter. And that was certainly easy for me to say!

Important metric, return on capital employed increased to 7.2%, as Cheryl said, a fairly dramatic improvement over last year of 35%. All in, a very good quarter.

Looking now at chart 16, North America, to the details. Operating income increased substantially as our business recovery continued. Regional volumes were up, and U.S. volumes increased roughly in line with the overall industry volumes per the U.S. Corn Finders Association data. I'm sure we'll have questions later about mid-calorie soft drinks, given all the ink that's been splashed and the marketing dollars that have been spent.

However, it appears that, thus far, soft drink volume is up a tad for the industry. So we'll see. For the sales variance charge, you've seen price mix improved over last year, led by Mexico, reflecting pricing gains against the cost of higher cost corn.

As to hedging, net corn costs, which are corn prices less byproduct or co-product prices, as noted in earlier releases, had been a very interesting and somewhat historic story this year. Although, unlike the last quarter, I will not talk about my centuries in the business this time around.

Corn contracted early in the annual U.S.-Canadian pricing cycle was basically much cheaper than the rest of the contracting done later. Late in the cycle it wasn't so inexpensive. As we stated earlier, much of that corn has now been consumed, so we are looking for higher cost corn as we go forward.

Subsequently, with all of our corn hedges in place, corn costs kind of took-off and, looking at the December 2004 corn futures, they reached a multi-year high at about $3.40 per bushel, resulting, among other things, in our corn futures margin account swelling and generating large cash flows, as Cheryl mentioned, and as we announced last quarter.

As we have seen corn values plummet to -- including yesterday -- 1 December 2004 corn futures have dropped by about $1.23 per bushel from the April high and the Labor Day weekend near-high -- the impact? Margin calls and cash out. Although, having said all of this, as hedgers, we have locked our position to protect our margins.

As to co-products through the end of Q2, Corn Blue to meal prices are substantially higher than last year's price. Corn Blue and feed prices are slightly higher, and corn oil prices have dropped below last year's price. General trend of co-products will be continuing declines.

Our plants are running well, and cost reduction continues its assist toward insuring our success. While there is no resolution to the Mexican HFCS issue, talks are ongoing, and we support them.

It wouldn't be a Corn Products conference call if we didn't advise our caveat. The progress we've made over the last several years is excellent, and as Sam said, very satisfying. However, despite the gains, this business requires additional progress on the selling and cost fronts to achieve margins that our shareholders expect from their investments.

Chart 17, South America. Strong fundamentals of our South American business enabled us to deliver another sequential quarter of major operating income gains. This time, a 19% increase. Clearly, the comps are tougher now. All the more impressive we register this quarter's gain. Volume increases were generated in our most important Brazilian and Argentine businesses, and operating margins continue to be very solid.

A quick look at the key geographies. In the southern column of South America, the economic environment is making ongoing forward progress, and we're very pleased. However, our gains are stronger than those are the underlying macrostructure. On the cost side, the government of Argentina has decided to return energy prices closer to the market. We have, therefore, seen our utilities costs increase in Argentina.

The macro side in Brazil, there's an improving business environment as well, and we delivered another strong performance. In the Andean region, it's still a tough place to do business but our business to continues to produce good operating earnings. In sum, nothing in this world is ever exactly as we'd order it, if we had the opportunity, but we certainly delivered a very strong quarter in South America.

Chart 18, Asia-Africa. We had a down quarter in Asia-Africa with operating income off by about $2 million, or 11%. Sales increased as a result of strong pricing and favorable currencies, while volumes were off in Korea.

The most unusual situation was Thailand, the world's leading industrial, as opposed to human consumption, producer of tapioca roots. Perhaps not unlike the thus far one-time event in the U.S. back in 1996 when corn was extremely scarce and prices reached unprecedented heights, roots were in short supply, which curtailed our production.

To our knowledge, the situation is unique and is expected to right itself as the next crop comes on in the next several months. Beyond that, we continue to add more products to our very efficient Thai operation and expect our Thai business will be back on its growth curve soon.

In Korea, we're able to pass along pricing covering the sizeable increases and corn costs that we mentioned earlier. These pricing adjustments were implemented sooner than we'd expected, contributing to the company's strong second quarter results. However, our company is operating within an almost bipolar macroeconomic environment in that country. Exports continue their rapid growth, while the consumer economy is very soft due to the excesses of the earlier credit card boom with huge consumer debt, now dampening demand.

Having said that, our business still generates very healthy margins. Furthermore, the government has recently indicated that consumer spending will revitalize as time goes forward. Always a question as to when time will actually go forward, but that is their expectations.

As to corn costs, now that corn prices have abated and inbound frailty costs have dropped, we expect that raw material costs will decline before year's end and should help our performance.

And finally to Pakistan, another great quarter. Our second plant is expected to commence operation in the coming months, and our outlook is, indeed, strong. In sum, a difficult quarter, but with the better view ahead.

Chart 19, 2004 outlook. Based on this year's performance to date, with the first half, two record quarters and our expectations from here, we have significantly increased our outlook for the year, even before including the tax rate gain. We are now calling for a 21% to 26% increase in diluted earnings per share, including the 5% coming from the tax change, versus our earlier outlook of 12 to 17% increase over last year's $2.11. We're very pleased that we feel that this increase is warranted for our business.

Beyond that, we continue to have confidence in our longer-term expectations for earnings per share as well. And at our analyst and portfolio managers' conference in May, we provided a strategic look at where we plan to take Corn Products. We stated then that we believe we will deliver low double-digit earnings increases starting from our base period in 2003 and continuing through 2008. We believe we're on track.

In fact, I took a look back for context of our outlook. From our first year as the publicly traded company through 2003, our compounded annual growth and earnings per share was 10.8%, including the painful, but really important, detour in 2000, which initiated the structural change in the industry.

This year, we have advised a 21 to 26% increase. Assuming we deliver what we expect, that would mean low double-digit, compounded earnings gains over the entire 11-year period, 1998 through 2008. Clearly, going forward and doing it is the key, but our track record suggests it's doable.

Now to some specifics for this year's outlook.

Chart 20, 2004 outlook continued. In North America, our outlook is based on delivering another consecutive year of improved results. Consistent with our earlier statements, our rate of gain will be slower in the U.S. as corn, hedged at the time of contracting, and co-product prices slows our bottom line increase some what. While we're not where we need to be with regard to margins, we believe our year-over-year progress will continue for the rest of 2004.

Our Canadian business will have a very good year. In Mexico, with our fundamentals and with more favorable corn costs, we will run our business as solidly as we can given the ongoing HFCS tax problem, and, of course, we'll support the solution track. In South America, we foresee excellent operating income growth, but as we've repeatedly said, there's no way to duplicate last year's huge increase. We will continue our strategic efforts with additional specialty ingredients, both for that reason and for the corporation as a whole, as well.

In Asia-Africa, 2004 will be a strong year, but definitely not a record year, but the combination of new plants, new geography -- more on that in a moment --more normalized raw material costs, and an expected economic recovery in Korea over time will all assist our future performance in this vital growth region.

Chart 21, the China JV announcement. We've established a manufacturing precedence -- presence in China by acquiring controlling interests in the new joint venture that will manufacture modified cornstarches for the Chinese market.

China, as we often say in probably in our own possibly arcane language, is one of the most understarch-refined markets in the world. We see a terrific opportunity to grow a new geography following our global business model. Our target? To link up with a strong partner with an efficient, excellent plan in the right location. We believe we've done that.

As to what it takes for a solid business, we believe there will be ample corn to supply the plant, as we're located in a major corn-growing region. The need for modified starches in China and the rest of that part of the world is very significant, so that the business will operate with both raw material supply and customer demand.

The JV's operating team is being supported by our employees, some of whom are from China and understand the market, so we can pursue our locally-orient -- locally-operated model. Our engineers have been on site since the day we announced the alliance. We believe that the plant is well located to serve both Beijing and Shanghai, as well as other Chinese and Asian markets, and the products we plan to produce in some cases have been made by us for decades.

Final strategic point, we believe that this is our initial step in China. We expect to grow our future business based on our time-tested model of getting in, getting operating, and getting those perhaps metaphorical feet on the street, so we can learn by doing. This appears to us to be a great opportunity. The approval process for the Chinese government is well underway, and we are confident of gaining their final authorization.

Now, Sam, Cheryl, and I are open for your questions, so Susan, if you would take over the call.

Thank you. [Operator Instructions]. And we'll take our first question from David Driscoll with Salomon Smith Barney.

Thank you. Good morning, everyone.

Hey, David, how are you doing?

Not bad. First up, congratulations on an excellent quarter.

Thank you.

Thank you.

I'd like to talk with you a little bit about the guidance. So when I -- certainly the quarter in the first half of the year has been absolutely fantastic, but when we look at your back half guidance, it looks to me like you lowered your tax rate, you kept your back half guide as indicated by consensus in my numbers basically flat.

So are you trying to tell us that the operations are going to weaken a bit in the back half, you know, because of this lower tax rate and then keeping those numbers constant, or are you just simply being conservative here?

Let me try to answer that question the best way I can, David. I think what we're saying is basically what we said last quarter, that we expected, and are seeing, higher corn costs in some parts of our world. We knew it was coming before, and we expect that we're going to be impacted to some extent by that.

The businesses are strong. We're seeing energy costs, as Dick mentioned in his talk, increase in Argentina. That was something we also expected, so we had given that as part of the forecast before. And what we're giving as guidance now is what we think is a realistic target for the second half of the year. Can we do better than that? I hope. Can we do a little worse than that? I hope not. But that's pretty much where we see it now.

And then a follow-up. Dick, I believe you said a few moments ago that margins, you expect in the U.S. and Canada, margins to continue to increase throughout the rest of the year, throughout the rest of '04. In 4Q '03 you had a very good quarter in your North American operations. The margins were, I think -- they are the best they've been in many, many quarters, better than first quarter this year, better than second quarter, the numbers you just posted.

Are you really saying to us that fourth quarter '04 will, in fact, be an improvement over fourth quarter '03 on an operating margin basis?

What we are attempting to say was that our margins will be stronger this year than last year. And if there was some confusion in that, Cheryl can talk some more to it, but we're going to have a better year this year margin-wise than we did last year, not sequential quarters though.

Okay, on a full year basis.

Right. Full year.

All right, Cheryl, could you give us some interest expense guidance here? What are you looking for, for the back half of the year? And then could you help me out on '05? I know it's little early but if you have any outlook there, I would appreciate that.

I don't think that we have an outlook given the fact that the interest expense will be driven by the average debt outstanding. Obviously, with the strategic plans that we have discussed, if we have opportunities out there, we execute those opportunities, the cash may get used. We have enough available credit, the revolver is un-drawn at $150 million, so, you know, your guess is as good as mine.

Well, I hope that's not true completely. But our intent, David, let me add a little bit of color to that. Our intention is to, before we do the investments, to keep driving down the interest expenses best we can. That will be maintaining the debt level basically as low as we can, but Cheryl said we are looking to the strategy required to invest the money. So as we see the right opportunities, the intention is going to be to invest in those opportunities. Our criteria, as we've said to you at the analyst meeting and continue to say, is those investments are going to have to return the cost of capital or else we're not going to do that. So given that, we think the tradeoff between increasing the debt and making the investment is what we have to do.

And David, if you look at the -- if I could tell you what the fed was going to do, if I knew what the fed was going to do, I could probably be a little bit more specific even though we tend not to get down to this level of detail.

But you're looking at $18 million for the half of year, you've got the debt numbers, there is no significant changes in the financing for the quarter. I think, you know, you can do a reasonable projection. If you believe the fed's going to raise half a percentage point, obviously our interest rate swap on our $200 million long-term bond will be impacted by that.

And then one fast final question, or I hope it's a fast final question. Corn prices have come down rather materially as of late. This certainly, or at least I think, it has an effect on your co-product pricing, but as I see it here, we've got a pro and a con.

The negative side is that you get lower byproduct pricing in the final two quarters of the year, but if we were then to look into '05 and these corn prices were to remain at these levels, you'd be facing a nice situation where your costs would go down. Can you comment on that, Sam, as to how you see it? Did I get it right? And, you know, do you like this corn environment?

You got it right, David. Certainly, if corn holds where it is right now going into next year in our foreign areas as well as domestically, we have a better corn cost scenario, albeit tempered somewhat by the current products dropping.

As we said in this announcement, in some instances, particularly U.S. and Canada, we had already hedged the corn, and some of our foreign affiliates, we have purchased corn out for a while to protect the run up, not buying huge portions of it, but locking some pieces of it going forward. So the impact this year is what we're reflecting in our guidance.

The go-forward position is pretty much what you just said. If, in fact, the numbers sit where they are right now, we have lower raw material costs, corn, for the most part, around the world, and that's not all bad.

The other -- the flip side to that, not totally flip side, but obviously we're looking at higher-cost energy throughout the world, so that obviously is going to get recovered.

Super. Thanks a lot. And, again, great quarter, guys.

Thanks, David.

[Operator Instructions]. And we'll take a follow-up question from David Driscoll.

Well, it appears the floor is mine.

We did so well, it's --

It's that transparency!

The naysayers didn't even want to come on the call! Bring us up to speed on Mexico. You know, we had a lot of things going on over the quarter. Meetings were happening in the U.S. You know, we really didn't hear very much out of it. This is an election year. There's a lot of, you know, all of that seems to weigh on whether or not U.S.-Mexico can solve this issue. Do you believe it's going to happen this year?

David, I can't comment on whether or not I believe it's going to happen. The conversations still go forward. I think you hit a very important fact with the elections going on, the negotiations are going on between the industries are a little bit ticklish because of various positions people are taking.

We continue to support them, as we always have. We continue to work in Mexico on a resolution as well. But, you know, progress has been made, but where it stands and when it will happen, or -- I shouldn't say when, assuming it will happen, I just can't say when, David. And this is one that I really wish I could give our investors an answer on, but with the way we are at the moment, I just can't say.

But the business in Mexico -- I think an important factor is there's been an awful lot of turmoil going on in Mexico, and people have had various results. Our business there still continues to improve, our volumes are solid, and compared to last year, slightly better, our prices are better. We have made adjustments in that business. We will continue to. We continue to focus on our costs and will continue to focus on that to improve that business.

As I've said to all of our investors, we will size that business appropriately for what we think the market in Mexico will bear over time. And certainly if fructose and when fructose, I hope, comes back, it will be even a much stronger business. What this has done to us is really -- we tend to think we're pretty good at running businesses anyway, but this has caused us to really knuckle down in Mexico and get it to a very fine performing business, even under the current circumstances.

And if I can go ahead and take another question on South Korea. Your comments here seemed to say that it was just simply a macroeconomic issue that their economy was weaker than expected, so that's really the effect on the business. I think you also had higher corn costs running through the business related to how they buy their corn, if I remember my facts correctly. You know, kind of going forward here, are you seeing any signs of improvement?

Yes, I think Dick mentioned it to some extent in his prepared text. We see corn coming off, and obviously the Mexicans -- the Koreans buy their corn in the fashion we described before, but they do not book all the way out, so we will see some advantages later on in the year.

The economic situation in Korea is known by all. It has -- it had slowed down at the beginning of this year and is continuing a bits off right now. But we are looking for improvement. The government in Korea is talking about improvement, so we're optimistic on Korea going forward, always have been.

The margins are very, very solid in that business, even with the volume being somewhat soft, so we think that going forward beyond this year, Korea will be and has been, historically, and will continue to be a major player as part of our growth.

And just one other comment. As I mentioned it, part of the strength in our second quarter results was the fact that we were able to adjust those prices in that market a little faster than we might have expected, so we got some kind of move up in our earnings help earlier in the year, which was obviously nice to have happen.

On a macro level, you know, related to your strategy and your analyst day presentation about becoming more of an ingredient company, is there -- did we do our major announcements already? I mean, you've got two big -- well, one big announcement with China, and then a smaller, but important, announcement with GTC. Are there other announcements to come in the near term, or is this strategy going to take, you know, several years to develop, you know, incrementally from where we are now?

I hope it doesn't take several years. There are other things that we're doing internally, David, that are part of the strategic thrust. Number one, in developing ingredients internally, we're doing that constantly. Upgrading the product line, we're doing that constantly. Our operations in Brazil are putting out new products and higher valued ingredients for you that we're supplying around the world today.

We have significant opportunities to invest inside the organization, to continue doing that with product suggestions coming from our technical people, our research people, our development people on a regular basis. So that's ongoing.

As to acquisitions or ventures, we will continue to look at that on an ongoing basis as we have with GTC and with China. China is going to be -- some of the ingredients, higher valued ingredients, as Dick said, they're product mixes or modified starch, but I would not consider that the high end. It's the medium end of the range.

But we do expect to be able to look at other opportunities and are looking at other opportunities right now, both for ventures, alliances, and acquisitions that will be coming out over time. I can't give you a calendar on that right now, and I don't know that -- unless somebody has something right around the corner they expect that most people can't. But let me assure you, we're busy working on what we said we were going to do at the analyst meeting. Throughout the world.

Great. Thanks a lot, everybody.

Thanks, David.

And we'll now hear from David Nelson with Credit Suisse First Boston.

Good morning.

Hey, David. How are you doing?

Did you say that about half of the increase in working capital was due to the higher ingredient costs?

The majority of the change in working capital was driven by inventory volume and price. And then the other piece was receivables.

That's (inaudible).

Corn inventory, David.

Raw material inventory, David.

Of course. You are Corn Products.

No, no, I meant raw corn for the most part, not finished products.

Right.

Raw material as opposed to the finished goods inventory.

Understood. Are there start-up costs in China that you're overcoming with this higher guidance of a magnitude you'd care to share?

We don't foresee any major start-up costs there, David. The operation that we bought into is in place. We see some things that we believe we can do and lend to it, as we have said, constantly as we go around the world, so we're not seeing anything major there.

It is going to take some time for the government to approve this. Our estimate is three months or less. We're into that period already. So we're expecting -- we're hoping, I shouldn't say expecting -- we're hoping to have approval by the -- around the end of the third quarter, beginning of fourth quarter, at which point in time we'll start doing some things in that business. But it's not going to be very costly for us to do what we need to do to increase the size of that facility.

Great. Congratulations on a great quarter.

Thank you much.

Thanks, David.

It appears there are no further questions at this time. Mr. Vandervoort, I'd like to turn the conference back over to you for any additional or closing remarks.

That's it. Thank you very much for joining us today.

That concludes today's conference. Thank you very much for your participation. You may disconnect at this time.