Ingredion Inc (INGR) 2004 Q4 法說會逐字稿

Good morning everyone. Welcome to the Corn Products fourth quarter earnings release conference call. Today's call is being recorded. At this time I would like to turn the call over to Vice President of Strategic Business Development and Investor Relations Mr. Dick Vandervoort. Please go ahead.

Thanks Corinne. Good morning and welcome to the Corn Products fourth quarter 2004 earnings conference call. It 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 are always available about 60 minutes ahead of every 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; 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 from the website can follow along with us through the presentation. I've shifted to chart two, the forward-looking statement.

Our comments within this presentation may contain forward-looking statements. Actual results could differ materially from those projected in those 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 also available on our website, www.cornproducts.com.

Chart 3, the agenda. Today, after this introduction, Cheryl Beebe will present the financials relative to the four quarter and full year 2004. Following that, I'll present the business review, discuss the plethora of unusual items this quarter and year and recap them, and then comment a bit on 2005. Sam, Cheryl, and I will be available to answer questions after the prepared portion of the call. Cheryl.

Good morning. This has been quite some quarter. The Company closed two manufacturing facilities, announced a stock split, and we had a change in the Company's effective tax rate. The first two items were previously announced. So let me explain the last one, the effective tax rate change. At the end of the year, the Mexican Government passed tax legislation that has impacted our effective tax rate for the year, dropping it to 30 percent from 33 percent at the end of September 30 this year. It also had a favorable impact on an existing employee benefit accrual of $2.6 million, which we would not expect to occur again next year.

With that said, let me turn to the financial charts. Starting on chart five, summary of income statement for the quarter ended December 31, 2004, net sales are $574 million, up 6 percent or $32 million from the same period last year. Gross profit at $84.8 million is down 9 percent or roughly 8 million from last year. The gross profit margin dropped to 14.8 percent from 17.1 percent last year, primarily on higher raw material costs and slightly higher energy costs. As discussed in the 2004 quarterly earnings calls, we anticipated and discussed the higher raw material costs, especially in the North American business, so no real surprise. Operating expenses are 40 million, down 3 percent or 1.4 million from last year. Operating expenses as a percent of net sales, are 7 percent compared to 7.6 percent last year same quarter. We had plant closing costs of $20.8 million this quarter. Other income for the quarter was 1.2 million versus an expense of last year of $400,000. Operating income is 25.2 million, down 51 percent from last year. Adjusting for the plant closure, operating income would have been $46 million. Net financing costs are 8.3 million, down roughly $900,000 or 10 percent from last year, on lower average debt outstanding. As a result of various local countries' reducing their statutory tax rates, the effective tax rate for the full year 2004 again dropped to 30 percent from 33 percent used for the nine-months interim ending September 30, 2004. The $1.2 million of tax expense is the difference between the full-year income before tax of $145.1 million at 30 percent, or $43.5 million, and the nine-month results of 128.2 million at 33 percent, or $42.3 million. The difference is 1.2 million for the quarter. Minority interest for the quarter is $1.3 million, down 43 percent. Again, minority interest is derived from the minority ownership in Korea, Pakistan, and Thailand. Bottom line, net income for the quarter, reflecting the 15 million after tax charge for the plant closures and the effective tax rate change was $14.4 million, down 10.1 million from last year.

Earnings per share of $0.19 are down 44 percent from last year's $0.34. If I add back the plant closure, net income would have been up. Weighted average shares on a fully diluted basis were 76.1 million this quarter versus 73 million last year.

Turning to chart six, Net Sales by Geographic Segment for the Quarter Ended December 31. We see North American net sales were up 4 percent or $15 million. South American net sales are up 6 percent or 9 million and Asian-African net sales are up 12 percent or 8 million. Total Company sales increased $32 million or 6 percent.

Turning to chart seven, net sales variance analysis, we see the North America's 4 percent net sale growth came from volume growth of 1.4 percent; price and product mix growth of 1.5 percent; and a 1.4-percent favorable impact from the Canadian dollar.

South America's net sales growth came from volume growth of 3.2 percent. Pricing product mix declined 1.9 percent. Currencies kicked in a positive 4.8 percent for an improvement of 6.1 percent this quarter.

In Asia-Africa, net sales grew 11.9 percent despite a 1.1 percent volume decline the tough economic environment in Korea. Price and product mix increased 9.7 percent in keeping with the price changes to recover the higher raw material costs. And again currencies had a favorable impact of 3.3 percent. So, in total over half of the 5.8 percent growth in net sales came from volume, price, and mix. The remaining improvement was from favorable currencies.

That completes my review of the fourth quarter results. I will now review the full year.

Turning to chart eight, the summary income statement for the year ended December 31, 2004, we see net sales growing by 9 percent and reaching 2.2—almost $2.3 billion. Gross profit at 354 million was 9 percent better than last year. Gross profit margins improved to 15.5 percent. Operating expenses increased 6 percent to $158 million, up 9 million from last year. Operating expenses as a percent of net sales, are 6.9 percent this year versus 7.1 last year and included the increase from stock-based compensation and the additional compliance costs. Plant closing costs were approximately $21 million. Other income is 4 million including a minor gain on the sale of our investment in NSK versus an expense last year, which included the write-off of the Malaysian plant. Operating income was up 3 percent to 179 million versus 174 million last year. Net financing costs for the year were down by approximately $5 million to 34 million on lower debt outstanding. The effective tax rate for the year is 30 percent versus 36 percent last year. Minority interest at $8 million is down 2 million from last year primarily due to lower results in Korea. Diluted earnings per share for 2004 are $1.25 versus $1.06 last year, up 18 percent.

Turning to chart nine, net sales by geographic segment, we see the divisional breakdown of the 9 percent net sales growth. North America, net sales are up 7 percent reaching $1.4 billion. South American net sales hit $556 million, up 12 percent from last year. Asia-Africa net sales grew by 11 percent to $308 million. Strong solid performance against all three divisions.

The next chart, ten, shows the net sales variance. On a total Company basis, approximately 42 percent of the sales growth came from volume, 28 percent from price and product mix, and about 30 percent from favorable currencies. Volume growth was led by South America at 7.6 percent. North America had volume growth of 2.9 percent. Volume was flat in Asia-Africa. Improving pricing and product mix was strongest in Asia-Africa as they raised their prices to recoup the higher raw material and freight costs. North America has a favorable price/product mix growth of 2.3 percent. South America declined by 1 percent. Currencies were favorable through the three divisions.

Turning to chart 11, operating income by geographic segment, we see strong growth in North America, up 27 percent reaching $87 million. South America reached 98 million, up 19 percent from last year and a new record. Asia-Africa finished the year down 12 percent at 48 million. Corporate expenses at $33 million were up 2 million from last year or up 4 percent. Again, the plant closing pre-tax was approximately $21 million.

The last earnings chart for the year, chart 12, is the estimated source of diluted earnings per share for the year ended December 31. Changes from operation contributed 23 cents for the year, 4 cents for margin improvements, 13 cents from volume, and 6 cents from currencies. Non-operating changes added 16 cents. Lower financing costs contributed 4 cents; lower minority interest, 3 cents. The change in the effective tax rate was worth 13 cents. And higher shares outstanding reduced the number by 4 cents. Earnings per share before the plant closure amounts to $1.45. Plant closures net of tax on an EPS basis, was 20 cents, bringing the year's number down to $1.25.

Looking at the cash flow highlights for the year, chart 13, cash flow provided by operations is $166 million, down from $236 million last year. Net income grew to 94 million from $76 million last year. Depreciation is $102 million, up 1 million from last year. Working capital increased by $37 million this year, partially due to an increase in raw material inventories. Korea and Mexico have higher raw material inventories this year-end than last due to the business environment changes we have been discussing. We also had stronger sales growth this year of 9 percent. Cash invested in the business was 149 million versus $130 million last year. We invested 103 million in fixed assets, up from 82 million last year. We spent $65 million to purchase the remaining 25 percent interest in our South Korean business versus last year when we purchased the remaining interest in our southern corn business. The $21 million represents the sale and disposal of assets related to sale of our interest in a local Japanese corn refiner, NSK. Cash provided for four financing activities was $13 million. Debt increased 6 million. Dividends to CPO shareholders were 17 million versus 14 million last year. The proceeds from the exercise of stock options was $30 million versus $5 million last year.

Looking at the key ratios for the year, chart 14, we see return on net sales improved to 4.4 percent from 4.1 percent last year. We are making steady progress on the return on capital employed, which is now 6.6 percent versus 5.9 percent last year. Total debt to total capital remains healthy at 30.3 percent. Working capital increased to $287 million from $251 million last year. Working capital, as a percent of net sales, also rose to 12.6 percent versus 11.9 percent last year. This includes a cash balance of $101 million this year versus 70 million last year. Excluding the cash, working capital as a percent of net sales, actually dropped to 8.1 percent this year versus 8.6 percent last year. Net debt, debt last year less cash, was 467 million versus 480 million last year for a reduction of $13 million. Again, approximately $65 million was used at the end of December to purchase the remaining minority position in South Korea answering part of the question of what we plan to do with all that cash, which at the end of the third quarter, was $138 million.

To sum up the financial presentation, the Company had a very good year – strong earnings performance and a strong balance sheet. That concludes the financial presentation. I will now turn the call over to Dick.

Thanks Cheryl. I'll review the quarter and full-year from a qualitative standpoint and then provide some initial comments regarding our outlook for 2005. I am now switching from chart 15 to chart 16, which is the currency update. First of all, just to review our definition of what we think of as newsworthy, we discuss only those currencies in our top six countries that change by 5 percent or more. Currencies in all other countries must change by 10 percent or they are not highlighted.

Again, this quarter, the US dollar is probably the story as opposed to other countries' currencies. In the parts of our world where we operate – our larger businesses, the Canadian dollar along with other what are often called natural resource currencies, firmed at the high-end against the US dollar. It's also interesting to see how well the Brazilian real is doing against the dollar as Brazil is being recognized for both the strength of its economy and its country's leadership. The South Korean won followed the Japanese yen up. In our smaller businesses, only the Columbian peso beat our own report-worthy standard with its 12 percent move and continued strength. All other currencies stayed within a fairly static range.

Moving to chart 17, the fourth quarter 2004 in aggregate, we were pleased with our performance this quarter as net sales were up 6 percent for the quarter and our earnings per share exceeded our announced outlook once the unusual items are stripped away, which I'll discuss further in a minute. The shipments of HFCS to soft-drink customers in Mexico and operating income growth in South America contributed to our good fourth quarter. As we have said each quarter since January of last year, our fourth quarter would be and was our softest of the four quarters in 2004. Our strategic business balance again proved very valuable this quarter. The US business, as forecast throughout the year, had its highest raw material cost in the last half of the year. That continued for sure through the fourth quarter. However, as already mentioned above, we received a very nice dividend in Mexico with HFCS sales to the soft-drink bottlers in that country.

In South America we had a great quarter lead by Brazil with positive contributions from our southern corn business. As to Asia-Africa, we enjoyed better corn costs in South Korea during the quarter. But the domestic economy continues to suffer through the aftermath of the consumer under-spending caused by that nation's credit card bubble being burst. Pakistan did well with its new plant operating throughout the quarter and both plants running at very good rates. As we have discussed throughout much of this year, we have now seen the raw material cost problems subside in Thailand as well.

Chart 18, 2004 in aggregate. A very good year as earnings per share increased by 18 percent over last year as Cheryl has discussed. As noted in the press release, we had a number of not-so-typical events occur this year. To assist those who model our business from year-to-year and in fact, representing the way we track our business internally, we've included a schedule of the unusual items, both positive and negative after the financial tables in our press release. The crisnoss (ph) version of this is on this slide and shows how we get from last year's earnings to this year's starting from the pre-split $2.51-cent GAAP earnings per share. From 2.51 we add back the 39-cent charge for the two plant closures, Mexico and the Andean region. We then subtract the two foreign tax items, which total 30 cents, the smaller of which occurred during the fourth quarter, to reach $2.60 per share, or 22 percent over last year's results. In an earlier era when there were Latin words used to describe financial performance, we would have viewed this 2.60 as our operating base going forward. On a post-split basis, all of those amounts are divided by two as shown.

Back to GAAP reporting, on our net sales, virtually all from organic growth, they increased by 9 percent. Cash generation, as Cheryl described, was strong. In fact, our year end cash generation results were, in effect, reduced because the early payment of $65 million for our minority partner shares in our South Korean business. Again, by any reasonable measure, with or without that use of cash, a very good year for cash generation.

Then in December we announced the dividend increase effective today. Continued progress across the board, including another notch-up versus last year on our return-on-capital-employed performance, marked this year. And we were pleased to be again be recognized by Forbes Magazine in their Forbes 400 list of best-managed companies.

Chart 19, North America 2004 – now to the details and first in North America. Operating income increased by 27 percent. Regional volumes were up and led by Mexico as most of its ingredients segments performed very well. Then, as we stated last quarter, we regained HFCS business in Mexico as a number of bottlers bought our domestically produced HFCS and continued to through year end. Volumes in the US also increased during 2004. Price and product mix improved over last year led by both Mexico and the US. Operations in the region ran well. Assisting our Canadian results was the already-mentioned strength of the Canadian dollar. As to raw material or net corn costs, corn futures priced early in the annual US-Canadian pricing cycle were cheap, late in the cycle, far more expensive. The end result was expensive corn through the last half of the year. Regarding the other piece of raw material costs in net corn or net corn, are co-product values. During the fourth quarter, the market weakened dramatically for corn gluten feed and corn gluten meal with year-over-year published prices down 41 percent and 24 percent respectively at year's end. To date, corn gluten meal has continued to weaken, now off 36 percent from last year. We believe that corn oil, down 6 percent by year's end, may have seen the worst of its prior-year comps earlier in 2004, although is currently selling at a big premium versus soybean oil.

Adding to the mix are increased natural gas costs. The average cost of natural gas in the fourth quarter of 2004 was 34 percent higher than 2003. And of course, volatility rules that market. To the bottom line of North America's operating income, Canada and Mexico led the way in 2004.

Chart 20, South America. The strong fundamentals of our South American business enabled us to deliver another year of major operating earnings gains, this time 19 percent. Our overall 7 percent region-wide volume increase was again primarily generated in our important Brazilian business as well as in the southern corn. We've enjoyed another quarter with relatively stable currencies and of course, excellent operating margins.

We believe it is worthy of emphasizing what may be a step change in this part of our world, specifically in Brazil. Assuming that leadership in that country continues to sustain growth and maintain the balanced course they are pursuing now, their robust recovery could serve our strong business there well. Our commitment to growing the higher value-portion of our ingredients business got its start early in South America and continued to grow.

As we've said, based on our historical performance, our business model appears to be working very well. Unfortunately our small Andean area business is still dealing with a difficult environment. In sum, as I said last quarter, nothing in this world is ever exactly as we would order it if we had the opportunity. But we delivered another very strong year in South America.

Chart 21, Asia-Africa 2004 – operating income was off by 12 percent for the year in Asia-Africa. Net sales increased by 11 percent, as Cheryl noted. Our pricing and product mix in the region increased by almost 9 percent – substantial headway against the raw materials issues that we had to deal with. The weak US dollar then helped our returns. South Korea, as we have said for the last several quarters, was the primary cause of the operating income shortfall in Asia-Africa region. The slow internal consumer economy as opposed to the countries' export market – cars, electronics, etc. – really affected that environment. As we mentioned, in 2004 late in the year, we purchased the Corn Products Doosan minority partner – the last 25 percent of the stock that we did not own earlier.

Pakistan, both plants are running well. We've had very strong performance year-over-year once again.

In Thailand we've had very good volume gains. As Cheryl mentioned our whole Asian business had a very good year for volume. Thailand was definitely a contributor there. Finally we got to a better raw materials situation in that country after the summer month shortages. And since the tsunami that gravely afflicted much of Asia was much in the news, we can report that our business was not affected by that. In fact, we have had a number of efforts underway to try to help that country with our local operations there as well as contributions from the US employees.

In China, our venture is underway. We are fully licensed in that country as a company. Our management team is in place ready to get going in that market.

In Japan, as Cheryl mentioned, we sold an under-performing asset. It didn't fit our business model. As a result we now have in that most important region of ours, significantly more strategic freedom to implement our strategy.

Shifting now to chart 22, 2005 outlook. We are again not in a position to advise a quantified outlook for 2005. However, we can provide some directional comments about what we expect will be another solid year of EPS growth. In North America we look forward to another improving year. Annual contracting is underway in the US and Canada and, as usual, is one of the reasons we hold off advising more specificity now. Clearly we have higher energy costs to contend with on the cost side. Lower corn futures costs are being comprised by lower co-product values. We aren't returning our cost-of-capital. When we know more, we'll advise.

In Mexico, from what we know now, our 2005 should be significantly brighter than 2004. We don't have a crystal ball, but from what we can see now, we believe the legal that have enabled a number of bottlers to buy our domestically-produced HFCS should continue in place. In this kind of environment, we can't make guarantees, but we believe that we have a viable HFCS business in line with the differences that we know of since the last time we were able to produce it in that country – namely 2001. Those differences today include corn and energy costs, pricing, and of course, volume. Having said that, we are very pleased with the situation today, recognizing that a long-term solution would still be better for all concerned. The US Government's WTO case is going forward as are the NAFTA arbitrations filed by the major HFCS producers including ourselves. It's short and sweet for South America. We expect another good year. In Asia-Africa, expect to turn the operating income curve up and to the right again. South Korea, while still slow, should have better raw material costs this year. We expect that Pakistan will have a full year running its two plants and growing with that demand. Thailand should also have its raw material problems behind it. In the ingredients area, we look to our small acquisition in the pre-biotic business, JTC, to have some impact though small. We should continuing to make ongoing gains in our in-company developments in the ingredients area.

As Cheryl mentioned, our CapEx is going up significantly this year the largest single item being this year's investments in the $100-million-boiler we announced some time ago for our largest plant here in the Chicago-land area called Argo. This is the largest spending year for that project. On top of that we have growth and cost-savings projects elsewhere that we plan to invest in.

Chart 23, 2005 outlook. As I said, we not ready yet to quantify 2005. We expect after a very good 2004, to deliver an even-better 2005. As we stated last year at our portfolio manager and analyst conference, we believe that as we effectively implement our pathway strategy, 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 and 2005 is part of that track. Clearly going forward and doing it is key. We expect that we will.

Chart 24, the portfolio manager analyst manager conference – and now to the commercial for this year's event. We're planning a noon meeting in midtown Manhattan on May 25. All the usual suspects from our side will be in attendance – Sam, Cheryl, the three Js – that would be Jack Fortnum, Jorge Fiamenghi, and Jeff Hebble – and I will be there. We hope you will be as well. You should start to see some information about the conference in the next several weeks.

Now Sam, Cheryl, and I are open for your questions. Corinne.

+++ q-and-a

Thank you very much. (OPERATOR INSTRUCTIONS) David Driscoll, Smith Barney.

Good morning everyone. Congratulations on an excellent 2004. I'd like to start off with a basic question, but one I think is quite important. Excluding the high fructose corn syrup sales in Mexico, is the rest of the business performing in line with your prior expectations of that low double-digit growth? I.E., when we look out into '05 – I know you're not giving specific guidance here, but can you at least give us some basic statements. Is all the rest of this stuff performing in line with your expectations?

As you said, I cannot give you specific guidance. So I'll have to answer that question that basically we are comfortable with where we are right now. We had forecast the growth without Mexico. We believe we can continue that. However we have not finished the US contracting. That always has a major impact on our business in both North America and the totality of the business. I can't answer specifically. But we feel pretty good about the way the business is running. And we did throughout the year. Because as we've said before and as you've seen through the first nine months of the year, we did not have Mexico and the business was still going pretty well.

Right. Also to be perfectly clear on this, is the guidance that you gave a little while ago back at your other analyst day of low double-digit growth, did not include the benefits from high fructose sales in Mexico?

That is correct.

Okay. Then the next question I have is, in your last quarterly filing you had a statement that I want to read quickly. "In developing our estimates of cash that we expect to generate from our Mexican operations, we have assumed that shipments of high fructose to the Mexican beverage industry will reach levels beginning in 2005 that will produce revenues and cash flows similar to those achieved prior to the imposition of the tax." Can you tell us to date if that statement is still valid, i.e., that you still believe it and that it will be in your upcoming Q?

The answer is yes, we believe that statement is still true. It refers to the value of the total Mexican business, not just the high fructose corn syrup. When you do the valuation for your goodwill, you take into account the total cash flows.

When we said that, as Dick qualified it in his presentation right now, there are a number of things that are going to—could impact that. I shouldn't say will. Obviously the volumes have to get back to the same levels. We have to be comparable on corn costs. We have to have energy costs at about the same level and the pricing has to be there. Our expectation when we wrote that was those things when they happen, if they happen, would have us back to the same level, obviously.

Right. As far as I can tell from the corn cost side, net corn cost right now today is actually very good. Do you agree with that?

That's a relative term. If you are comparing it to 2001, you'd have to go back in Mexico and look at that. Obviously we don't know what corn we're going to be using in Mexico as we go forward. There have been a number of discussions around a number of things in Mexico including having to use some local corn and having to get some of the corn imported from the US. In 2001, all of our corn was imported from the US. The cost of corn in Mexico could vary based on a number of things for us.

Cheryl, could you give us a little understanding of the accretion related to the purchase of the minority interest in South Korean. I estimated it was about a nickel. Can you give me your best estimate?

It really is—I can't give you an estimate. The minority interest, if you look at the financial statements, the number comes from Korea, Thailand, and Pakistan. So to the extent that the businesses are performing better than 2004, it's not a straight number. Five-cents-plus is fine.

It's definitely accretive.

Then overall, when I do my math using your 2.60 base and I take that up 10 percent, that puts me at 2.86. If you add 65 cents from Mexico and some level of accretion related to South Korea, you suddenly are looking at earnings numbers of somewhere north of 3.50. Is there anything there that I am doing grossly inaccurately that you would be able to correct me on right now today before you give that full year guidance?

The only thing—I don't see you doing anything inaccurately. You've just made an assumption that we have said probably could not – might not happen. That's on the Mexican side. We said everything being the same, that would be the number. I think what I've just said to you is, everything is not the same. So the business could be that level. It could be less. And it could be more. But there are obviously impacting factors in Mexico that are not all as obvious today as they might be later. Energy, corn, price, and volume will all affect that number you put into Mexico.

Okay. Cheryl, just three quick ones. Interest expense guidance in '05. Did you give a specific CapEx number for '05? I apologize. I didn't hear it.

Yes, it did. It's actually in the press release. I didn't do it in my presentation. In the press release on the supplemental financial information under item 3, Capital Expenditures, we said that we anticipate $170 million.

CapEx and then – I'm sorry, interest expense, and then lastly, will working capital be a source of cash in '05?

I don't think it will be a source of cash as the business continues to grow. The guidance that we have given in terms of the key ratios is working capital as a percent of net sales between 10 percent to 12 percent. So to the—if the business is growing and we're having additional sales, then I would expect to see that percentage as an investment for working capital. I think we've extracted as much as we can generally out of working capital. We still continue to focus on it. We saw a run-up in corn costs last year. We've seen higher inventory levels at the end of the year for Korea and Mexico. I think from a cash flow standpoint, you've got the pieces. With respect to the interest expense, we disclosed what the debt is. Most of it relates to corporate borrowing. There is the 209 bond – 200 million at 8.45. There is the 255 million due '07 at 8.25. Then the rest is basically subsidiary borrowing. At the end of the third quarter in the Q, we said that rate was 4.8 percent. The thing mitigating the gross interest expense is 200 million is swapped. To the extent that LIBOR rates are moving, then we'll have less income coming in on those floating rates. So I would expect interest rate—interest expense to be rising in 2005 strictly from the change in US LIBOR rates.

Just to make it clear, we will stay focused on working capital. It's into what we look at. It's become part of the organization. So the ratios will certainly stay solid.

I would say thank you. Certainly from my seat, it looks like you are all doing a hell of a job. Keep it up.

(OPERATOR INSTRUCTIONS) Christine McCracken with Midwest Research.

I'm actually on the East Coast. (indiscernible) out this morning, I am sure you saw, commenting on high fructose pricing for the year and talking about at a minimum being able to at least keep margins flat to up slightly. Clearly you're not going to comment on pricing. Given the improvement in corn prices, could you go along with their outlook at least on margin?

I haven't seen their outlook. I can't comment on anything because pricing, obviously, is the determining factor as to what the margins are. Gross corn is down somewhat. It certainly has dropped more recently than it was earlier in the contracting season. We do some anticipatory hedge. We also lock some corn with the business we've done already as we do it. As Dick mentioned, corn products are down. Right now, I don't know where they said their contracting was. We are not done. Until we are done, we're not really going to be able to comment on it.

What about on your other starch products. Sweeteners – I think you mentioned a dextrose price increase in fourth quarter. Has some of that pricing been done? I think you were talking about something like a 5 percent increases on that side of the business.

Some pricing has been done on all product lines. No product line is fully – I shouldn't say that. I think our starch business is finished. For the most part, on the sweetener side, none of the businesses are fully finished. So again, the same comment would hold true across-the-board. We did issue a price increase announcement on dextrose back in October, I think it was. It might have been September or October. We're trying to push for that.

Fair enough. Energy prices for you. I can't remember. Have you commented historically on whether or not you do any hedging on that side of the business. I know you have some co-gen that reduces your exposure there.

Yes, we do hedge on energy in the US and in Canada and in Mexico. We have commented on that before. Obviously we like everybody else, no matter if you are hedged or not, are expecting higher energy costs in 2005.

Switching gears on Mexico, obviously it's a bit sketchy at this point without a lot of detail. Could you at least provide us with some kind of sales mix? You've talked in the past about your business not really—or a lot of your business wasn't necessarily—high fructose, now it seems to have come back. Fourth quarter, where are we in terms of mix on a beverage basis and then the remaining parts of your business?

What we have said prior to the business coming back on the beverage side, we were selling some fructose on a number of different applications, both 42 and some small amount of 55. The beverage industry in Mexico and in the US can use both 42 and 55 and does. Our capabilities have produced both, so our mix will be dependent on what the customer wants. But I can't give you any idea now as to what the mix is at the moment because it depends upon who is buying and what it is they are looking for.

In fourth quarter, though, it was some balance. Essentially I guess what I am asking is where are we now? Have we come back 50 percent? Have we got a lot more to go?

I'm not going to tell you what the utilization is. I think we have stated it was meaningful volume that came back. The come-back was in the beverage industry. The beverage industry can use both products. So, it was meaningful. I am not going to say what level it's running at. All the customers are not able to buy, which is what we've said also. We are looking now to continue to grow that business.

In terms of – I guess you had shut down those plants temporarily. Have you had any costs associated with bringing those back on line?

No. We only shut down the channel on the fructose facility. We shut down another plant in Mexico that was not a fructose-producing plant. That was in part of the write-off that we took in the fourth quarter. Basically, as far as the channel that produces fructose goes, that channel was in an idling position, which we have stated before and we could just bring it back up. Obviously you have to change resin and things like that when you are producing. But it was ready to run.

Perfect. Finally South Korea seems to be close to turning the corner. At least with lower corn costs or raw material prices, is that business – do you think we'll start to see better results there going forward?

We're looking for it. We have our fingers crossed also on the economics of Korea. Because Korea has been growing in general, but it has been mostly on the export side. The individuals living there have not had the benefit of that growth. We're starting to see that bottom out, we believe, and hopefully starting to turn around. Obviously the lower raw material costs going into that business will help us quite a bit.

And the raw material cost was the biggest part of the problem that we had in 2004.

Right. Raw material is a combination of actual corn costs as well as the ocean freight to get it there. That seems to have moderated somewhat. So the delivered cost of raw material into Korea will be down as we expect it to be down this year as compared to 2004.

When your prices get a little better, are you able to hold pricing? You have taken these price increases to offset that. Do you hold pricing despite the fact that your raw materials get a little cheaper?

We hold pricing as long as we can.

Fair enough. (multiple speakers)

Remember getting a cat out of a tree. It just holds on and holds on.

We're not greedy, but we do hold on as long as we can.

Good stuff. Thanks.

Cheryl Gdsilla (ph) with Prudential Equities.

Good morning. Regarding the HFCS sales that you're seen in Mexico, when that business dried up a couple years ago, you stated how much it cost you at the bottom line. Can you give any more color on what it might have added in this quarter? Also, how do those exemptions work for those particular customers? Is it something that has a temporary timeframe? Are there restrictions on the amount that they can use? What other restrictions might there be related to that?

I will not comment on how much it contributed to the fourth quarter, although I will say it was a meaningful contribution, which is what we said at the end of the third. We thought it would be. And it was. As far as the enfaros (ph) go, we know customers have them. We don't know exactly what they say. They do allow them to buy fructose. We don't know if there are any qualifiers on it or not. What we do know is that customers are buying at meaningful rates. Not all customers have gotten them. So I believe that they are different for each customer, but I don't know that for sure. Customers are not sharing that with us and we are not pushing them for it. All we do know is that they are buying right now. Our expectations are that they will continue buying for the better part of the year, unless something changes – before the year, unless something changes.

How widespread is the number of customers that are able to buy? Are we talking about a handful? Are we talking about something larger than that?

I'm not going to comment on how many. There are enough so that the business—the volumes coming through are meaningful. We also had customers buying product down there before. As I said, we were selling, not a large portion, but some portion of our volume before in Mexico. That was a mix of customers as well.

Okay. One other question related to the tax issue. Going forward is a 30 percent annual effective rate what you would recommend at this point in terms of making projections?

Probably not. If I look at what happened in 2004, the first tax rate change occurred in the second quarter where we went from 36 percent to 33 percent. That 3 percent change was driven by the Company winning a tax appeal in a local jurisdiction. The second tax change in December is a result of – and that goes from 33 percent down to 30 percent – is a result of statutory tax rate changes in various countries. All things being equal, I would say the first one was temporary and the second one is permanent.

That tax rate is going to be dependent on how much we make and where we make it as we go forward. We are not prepared to give specifics on it. But it should be lower than it was this year. Not lower than it was this year, but lower than it has been in the past. (multiple speakers)

It should be lower than the 36 percent.

Okay. Thank you very much.

Sam, can you hear me? It's John Mcmillin.

Yes, we've got you John.

Sorry to follow this up. Did you give a cap spending number? I've been doing some stuff with your neighbor Sara Lee. Did you give a cap spending number for this year?

For 2005?

Yes.

Yes. We said, it's about 170 million.

Okay. But that we should just do that for one year, basically. Is that (multiple speakers).

Yes. Basically, what we're saying on that is the boiler project is the largest thing we've done in a long time. We announced it awhile back. That is going to be – the major spending for that is in this year. We're taking that as an aside. The rest of it will be about – a little bit more than we normally do. But that's a one-year kind of a number.

Your earnings guidance for this fourth quarter, if you adjust for the two-for-one split, was something like 24 to 27. If you exclude the non-operatings, you're in the high 30s. This was the worst-kept secret in the world, that Mexico was back and that you were overdoing the fourth quarter. Why wouldn't you just come out with a press release when you knew the numbers or the range? Why would you just—that is my—why would you keep that guidance out there when you knew it was too low?

Well, John, I don't know that your numbers are right. We had said that we expected the number to be in the upper end of our range, which would have been about 2.65, 2.66. What we've come out with, all apples-to-apples, is going to be about 2.72. So we're talking about 5 or 6 cents. We said at the end of the third quarter that we expected the volumes to increase or to continue and if, in fact, they did that our numbers would be above that end of the range. So I think with what we gave you at the end of the third quarter and with what actually occurred, that the third quarter was pretty much where we said it was going to be and we didn't feel it necessary to come out with a press release based on that.

I guess I could debate it, but I'll let it slide.

Okay.

Just in terms of the impact of the tight sugar supplies in Mexico on the business in Mexico – because I guess you're not only getting volumes back in HFCS, you're probably getting pretty good prices as well. Just in terms of, as that sugar crop gets harvested, what do you think it's going to do to your business in Mexico?

John, I don't know. I think that the government owns half the sugar mills down there, so they are making money on the sugar industry and half of it's theirs. I don't know what they are going to do on the pricing side of it. The prices have moved up. We have seen that happen since fructose went away—or sugar. We've heard, as you have, of this huge profit that is going to be there. We've heard of that every year for the last five or six. They've been short sugar now for two and a half years. So I don't know what's going to materialize. I don't know if we're going to see the increases they are talking about or if, in fact, it will just be what it has been right along. We will run the business in the environment that we're in down there. We'll make the adjustments that we have to make.

I just feel, though, to make my final statement, if you quantify the penalty when you lose the business, you almost have to, I think in fairness to us, to quantify the benefit when the spigot gets turned back on. I know you don't what to do it in this quarter, but I think if you see my point.

I see your point. But I think the issue is, what we've tried to say is there are four variables that are affecting us right now that we can't quantify it. One is corn. The second is energy. The third is volume. The fourth is price. Until such time as the business stabilizes or we know where we are in those four areas, we can't give you a quantifying factor. What we have said is, it's meaningful. We've inferred that it's less than the 65 cents that it was in 2001, but we have not given you exactly what it is. And we've said that we have gotten volumes back on. But, John, when we can we will give you as much guidance as we can on it. Right now there are too many variables up in the air.

But you can't quantify what the business contributed to the December quarter?

No, no. I know what it contributed. I'm just not going to tell you exactly what it contributed right now.

But you tell me what the hit is. I think (multiple speakers)

I told you what the impact was when we lost it so that you some idea as to where it was. I've also told you that we had expected 2.66 in the numbers – 2.65, 2.66 and in fact we made 2.72. We said most of that was coming from fructose. So I've given you an idea as to what the volume—what the impact was in the fourth quarter. I am not going to tell you exactly what it is going forward because I don't know.

Fair enough. Okay.

There is one other point that probably a fifth in that cycle and that is we weren't doing nothing from January 1, 2002 until the fructose business got turned on. We were also working throughout the rest of our business to improve the rest of that whole entity. So therefore, some of that delta – we were already figuring out ways to make the business better. So that is another piece to it as well.

Great. Thank you.

Thanks John.

Christina Mcglone with Deutsche Bank.

Good morning. Dick, I noticed you stressed locally produced high fructose in your comments. Looking to '05, do you see any imports from the United States? If that is the case, would that help with this year's negotiations?

We're guessing the border is still closed. That's a pretty strong guess.

Yes. We don't think there is anything going in from the US.

Okay. And then, Sam, when would you know what type of corn you can use in Mexico?

We get quotas of corn on a quarterly basis from the Mexican government. They determine, by quarter, how much they are going to give us. So if in fact they were to give us the full allotment, that's one thing. We don't – we have not seen that over time—over the last couple of years. We just don't know when we're going to see it, or if in fact, we'll see that full allotment. We don't expect that we will.

Okay. Then how is pricing done in Mexico? I assume it's not a contracting situation like it is in the United States and Canada. Can you talk about that a little bit?

We have said before that most of our Mexican is on a – it's not a spot basis, but it a month, a week, or whatever. Basically that is how it is done in Mexico. Obviously there are some customers that want longer prices than that. We have – as customers get larger in that country, some of them do grain-related types of contracts. For the most part, it's unlike that US, as you said. It's not annual contracting that is priced and fixed. It is done on a negotiated basis throughout the year.

Okay. So it could be quite awhile before you really are able to quantify what the business is going to – how much of a benefit it is going to be. You don't know when you'll know about your corn costs. Pricing is done on a spot basis. Am I right about that? Or if you – do you think----

I'm sorry. Go ahead.

No. Go ahead.

I was going to say, certainly on the corn side of it, that is a variable that is going to be introduced and is introduced throughout this year. As far as the pricing goes, on some of it, we have – it's mostly spot. I can't quantify exactly how long it is. Some of it more than monthly. Some of it's less than monthly on the pricing. But that could vary. The volumes could vary as well depending on whether or not more people get enfaros (ph).

Will you comment at all on the WTO timeline? It looks like there should be – assuming an appeal – there should be a final decision maybe in October or November timeframe. Would you comment on that at all?

That's the date. November is actually the timeline that has been given. Any comment on it would be forecasting what the US government is going to do. I am not prepared to do that because we've been this road before. The timeline was not really followed as closely as we were given to begin with. The scheduled timeframe is November with a couple of dates in between that we have to have as benchmark dates. Those, I believe, are April and July. As we get into those dates, we'll be able to tell you whether or not we hit them. This is a government process and something that is pretty much out of our hands.

Okay. Then last question, last night it came across the tape that Mexico is going to lower import duties on sugar later in '05 for non-quota shipments from the US and countries not in NAFTA. Can you talk about how that would impact you or how that would impact high fructose pricing?

To be honest with you, I have not seen that. I don't know that it will have much of an impact on us at all. But that has to be played out, I guess. I have not seen it, so I don't know the details of it.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Christine McCracken, Midwest Research.

John took care of it. Thanks.

Okay. That looks like that is all the questions that we have at this time. Mr. Vandervoort, I'd like to turn it back over to you for any additional or closing remarks.

No additional remarks. It's 70 degrees today in Chicago. The palm trees are gently swaying in the breezes. You all have a good day. Thanks a lot.

That does conclude today's teleconference. Thank you everyone for your participation. Have a great nice day.