Ingredion Inc (INGR) 2005 Q1 法說會逐字稿

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

Thanks, Susan. Good morning and welcome to the Corn Products first-quarter 2005 earnings conference call. During this conference call, we will provide additional substance for both our April 5 press release as well as provide our normal detail for our quarter's performance. This is an open conference call simultaneously broadcast on our website, www.cornproducts.com. The charts for our presentations can be both viewed and downloaded from our Web site and they are always available about 50 minutes ahead of our conference call. Those using the website broadcast of this conference call are in listen-only mode.

Today, Sam Scott, our Chairman, President and Chief Executive Officer, Cheryl Beebe, our Vice President and Chief Financial Officer, and I will conduct the call. We will indicate as we move from chart to chart so that those using our charts from the website can follow along with us throughout the presentation.

I've shifted to chart 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 our first quarter. Following that, I will present the business review and comment on our 2005 outlook. Sam, Cheryl, and I will be available to answer questions after the prepared portion of the call. Cheryl?

Thanks, Dick. Good morning, everyone. Let's get right to the numbers. Starting on chart 5, summary income statement for the quarter ended March 31, 2005, net sales are, for the quarter, $567 million, up 3% or approximately 17 million from the same period last year. This is despite a major decline in coproduct values. Coproducts account for almost a quarter of the Company's net sales. You will hear more about coproduct pricing in Dick's review. Gross profit, at $72 million, is down 23% or $22 million from last year. The gross profit margin dropped to 12.8% from 17.2% last year. This reduction in gross profit is almost solely attributable to the significantly weaker U.S./Canadian business results.

As mentioned in the Company's April 5 press release, this is the part of the business that was hit with higher corn and energy prices. Adding insult to injury, the business was also saddled with higher freight charges and had a number of power problems, which resulted in higher manufacturing costs. Again, Dick will add some color to these remarks. Operating expenses are $39 million, down 2% or 1 million from last year. Operating expenses as a percent of net sales are 6.9% compared to 7.3% last year for the same quarter.

Other income for the quarter was $2 million versus zero last year. Operating income is $35 million, down 35% from last year or $19 million. Financing costs at $9 million are basically flat with last year. The effective tax rate for the first quarter of 2005 is 33.5% versus 36% for the same period last year. The effective tax rate is benefiting from various local countries reducing their statutory tax rates. Minority interest for the quarter is $1 million versus 3 million last year. As a reminder, the Company acquired the remaining minority interest in its South Korean business at the end of last year. Bottom-line net income for the quarter was $17 million, down from 26 million last year. Earnings per share of $0.22 are down $0.13 from last year's $0.35.

Turning to chart 6, net sales by geographic segment, we see North America's net sales at $344 million are up 1% or $5 million. South America's net sales at 141 million are up 3% or 5 million from last year. In Asia/Africa, net sales are up 9% or 7 million. In total, the Company's net sales increased approximately $17 million or 3%.

Turning to chart 7, net sales variance analysis, we see North America's net sales growth of 1.3% is coming from positive volume growth of 4.8% and negative price mix decline of 4.7% and a favorable impact from the Canadian dollar of 1.2%. The negative price mix decline is coming primarily from lower coproduct value. South America's net sales growth of 3.4% is derived from a favorable exchange rate impact of 7.1%. Volume declined 1.7%. Price and product mix also declined 2%, again due to lower coproduct value. Excluding coproduct values, pricing would have been positive in this region. Asia/Africa's 8.9% net sales growth came from product price mix increases of 9.4% and a favorable exchange rate impact of 7.1%, which offset a negative 7.6% decline.

The next chart, number 8, operating income by geographic segment. We see North America's operating income at $3 million, down 21 million from last year or a minus 88%. The drop in earnings is driven by the significantly weaker U.S./Canadian business results. The increase in high fructose corn syrup sales in Mexico helped to offset these weaker results. South America's operating income at 27 million was up 15% or $4 million. Asia/Africa's operating income is $13 million, down 19% or 4 million on a combination of the shortfall in Korea's volume and higher-priced raw material costs. We did see a slight abatement of the raw material costs in this quarter as compared to last quarter for Korea.

We also appear to have turned the corner and are back on track with three successive quarters of improvement in our operating income. Total operating income for the quarter was $35 million compared to $54 million last year.

The last earnings chart for the quarter, chart 9, is the estimated source of diluted earnings per share for the quarter ended March 31, 2005. Changes from operations reduced EPS by $0.16 for the quarter, $0.20 for margin declines offset by $0.02 in both volume and currencies. Nonoperating charges added a $0.03 increase. The change in the effective tax rate was worth a penny. Minority interest contributed $0.03 and the higher shares outstanding reduced the number by a penny. Fully diluted shares outstanding are 76.5 million shares, up from 73.4 million shares last year. Bottom-line earnings per share amounts to $0.22 for the first quarter.

Looking at the cash flows for the quarter, chart 10, cash flow provided by operations is $29 million versus 75 million last year. Net income was 17 million versus 26 million last year. Depreciation is $26 million, up 1 million from a year ago. Working capital increased by $35 million this year, primarily related to reductions in accounts payable and accrued expenses, along with a swing in the margin accounts.

Lower taxes and compensation expenses along with corn payments drove the accounts payable and accrued expenses decline. Cash invested in the business was $23 million versus $14 million last year. We invested $20 million in fixed assets, up from last year's 15 million. We spent $3 million to complete the remaining purchase of our 25% interest in our South Korean business. Cash used for financing activities was $9 million. Debt decreased $13 million. Dividends to CPO shareholders were 5 million and the exercise of stock options was 10 million versus 4 million last year.

Looking at the key ratios for the year, chart 11, we see return on capital employed decreased for the last 12 months from 6.6% to 5.7%, reflecting our lower first-quarter 2005 earnings. Debt-to-total capital ratio is 29%, which is consistent with the previous year. Operating working capital increased to 245 million from 211 million last year. Operating working capital as a percent of net sales also rose one percentage point, reflecting higher inventories and lower accounts payable and accrued expenses. The debt to EBITDA ratio increased slightly from 1.9 to 2.1. Net debt -- debt less cash -- was 459 million versus 424 million last year, for a change of $35 million, reflecting a reduction in cash of 17 million and an increase in debt of 18 million. This year's number is reflective of the 60-plus million we spent to buy out the South Korean minority partner at the end of 2004. This concludes the financial presentation. I will turn the call over to Dick.

Thanks, Cheryl. I will review the quarter from a qualitative standpoint and then provide -- and quantify our outlook for 2005. I'm now switching from chart 12 to chart 13. Chart 13 is a currency update. First of all, our definition of newsworthy -- we'll discuss only those currencies in our top six countries that changed by 5% or more, and currencies in the smaller countries must change by 10% before they are highlighted. Again, this quarter, the U.S. dollar is probably the story as opposed to other countries' currencies. In countries where we operate our larger businesses -- Canada, Brazil, South Korea -- currencies firmed significantly. Among the smaller businesses, Colombia's currency continued its recent strengthening run as well. All other currencies stayed within a fairly static range and there was obviously little movement after the quarter closed.

Chart 14, first-quarter 2005 in aggregate. Total net sales were up 3% in the quarter, but earnings were off 37%, as described initially in our April 5 press release. We endured a tough quarter, due to problems in the U.S. and Canada. A portion was expected, but as I will describe in a few moments, some of it clearly was not. The solid performance within North America came from Mexico, with a major gain in operating income as HFCS sales were much higher during this year's first quarter than last year.

Our strategic business balance again proved very valuable this quarter. In South America, we had another growth quarter, with excellent gains in operating margins. And as to Asia/Africa, while our results were less than last year, we delivered, as Cheryl said, our third consecutive quarter of stronger results on a sequential basis as our raw material situation is improving, and that confirms our earlier statements.

The other consideration for this quarter is that, despite the problems we faced, this quarter was actually our second-strongest first quarter over the last five years and, in fact, as can be seen from the graph, it was second only to last year's incredible first quarter. The comp was definitely stiff.

Chart 15, North America. The next several slides detail the quarter. First, the aggregate comments. Operating income was down 88%. The volume increase came from Mexico, with our substantial expansion of HFCS sales. As to inputs, both energy and net corn costs were up. Corn prices were higher this year versus last year, and coproduct pricing was down across the region.

And now to the details. Chart 16, North America, U.S., Canada. As background, in 2004, the North American performance was up 100% over 2003 -- the absolute definition of a tough comp. However, reviewing the situation by component, we had two distinct sets of increases -- the major ones, net corn costs and natural gas, and two lesser issues, freight surcharges and, most unusually, a spike in manufacturing costs.

First, looking at net corn, they were up, mostly driven by the decreases in coproduct values. Coproduct values can be directionally tracked from any number of public sources. For gluten feed, year-over-year prices were off about 35%, somewhat more than expected, and the sixth quarter in which they have declined, though more sharply during the last two quarters. Gluten meal also dropped a similar amount -- the fourth consecutive quarter of price declines for gluten meal. Corn oil was off 8%, but appears to be firming versus last year's pricing as we head into the second quarter.

The timing of our corn purchases, while included in our expectations for this year, also contributed to the drop versus last year's not probably repeatable performance. In Canada, contracting is normally completed earlier than its counterpart in the U.S., typically during the third and fourth quarters. Therefore, corn hedged in Canada to support our contracts there was purchased early and at higher cost than what could have been purchased later. Furthermore, for many years, we have, within limits, as outlined in our 10-K, routinely purchased corn earlier than the normal contracting period -- usually, as in 2004, to our benefit. This year, that was not the case. To no one's surprise, and included within our planning for 2005, natural gas was dramatically more expensive than last year. And though we don't disclose actual hedges, as publicly reported, natural gas was up, on average, about 30% over 2004.

Worse than natural gas in terms of raw percentages, and unexpected in our calculations, the average crude oil price per barrel is up more than 40% versus last year, and with a like impact on diesel fuel. Since January, it peaked at 40% above that base. Unfortunately, freight surcharges have been measurable as a deduct to 2004 results. Clearly, another target for customer recapture.

In the manufacturing cost arena, first a comment. In the six-plus years since Corn Products has been publicly traded, and before that as well, the only public comments about manufacturing expenses have been about cost reductions. This quarter is clearly off-trend. However, they did occur, tied mostly to a series of freakish power problems at several plants in the U.S. and Canada, and with no discernible link other than, very loosely, weather. But we'll be 100 years old next March, so we've been through a few winters, many much tougher than this one. These problems have reduced our production rates, caused lower-than-normal fixed-cost recovery and increased spending to recover from them. While there are no guarantees in life, we believe we are over them. And finally, yes, we know winter will be here next year. We believe we have taken steps to handle those things that are within our control, although some of them were not.

Switching to chart 17, North America, looking at Mexico. And now, for something mostly different, to paraphrase Monty Python and betraying my age. Let's speak of things south of the border. A really great quarter. Our HFCS plant is operating at excellent rates. Clearly, the customer mix and other factors are different than in 2002, before the tax on HFCS sweetened soft drinks was levied. But life is a heck of a lot sweeter with HFCS than without. The operating earnings impact has been very positive, despite both higher-cost energy and higher-cost corn, because we've had to purchase more expensive local corn to support the increased volume. Our expectation is that the higher running rate for HFCS will continue for the foreseeable future. The rest of our Mexican business is on target for the year.

Chart 18, South America. The strong fundamentals of our South American business enable us to deliver another quarter of major operating earnings gains -- this time, 15% over last year's first quarter. And our South American team generated the highest operating margin since we became a publicly traded company. Region-wide, volume was down by 2%, with a gain in Brazilian volume, short of offsetting the decline in Colombia. Despite the global sag in coproduct prices, we completed the South American quarter with raw material costs that were somewhat better than our expectations. We have enjoyed another quarter with an aggregate positive currency environment. Our commitment to the higher-value portion of our ingredients business got its start early in South America and continues to grow, not only within South America but as a global resource for the rest of our Company and our customers.

As we have said, based on our historic 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 exactly as we would order it if we had the opportunity, but we delivered another very strong quarter in South America.

Chart 19, Asia/Africa. Operating income was down 19% for the quarter in Asia/Africa. But, importantly, our results were up 41% from Q4 2004, and even more since Q3 2004, as noted in our press release and in Cheryl's comments. Net sales increased by 9%. As Cheryl noted, our currencies, pricing and product mix in the region were all positive, making, especially in the pricing arena, continued headway against the raw material issues we had to deal with throughout much of last year.

South Korea, as we have said for the past several quarters, was the primary cause of this quarter's regional volume shortfall -- a fact of its slow domestic economy, which actually saw a 0.6% GDP uptick earlier this year. Hopefully, a harbinger of better times to come. However, the larger issue in South Korea has been those raw material costs, which we believe are now completed on a comparable basis. Last year's first quarter featured the lowest raw material costs for all of 2004, and we will now start to lap (ph) those high costs with what we expect will be lower-cost corn this year. We anticipate that the outlook is quite positive for Asia/Africa on a going-forward basis.

And in China, our joint venture, Golden Far East Modified Starch Company, is now a fully licensed corporation with our management team in place -- now a business, so small and getting underway.

Now, chart 20, 2005's outlook. We're calling for a 7 to 15% increase over last year's $1.25 GAAP EPS. This guidance calls for successful adjustments after our first-quarter U.S./Canadian events. We believe we've done that. We expect to begin the recovery in the second quarter in this part of our world with better corn costs over the balance of the year, the resumption of more typical manufacturing cost performance, but with Canadian results being off from last year. Finally, and primarily as a result of the first quarter's problems, we project that margins and return on capital employed will dip slightly for the year in the U.S.

In Mexico, from what we know now, our 2005 should be significantly brighter than 2004. We expect the legal actions that have enabled a number of bottlers to buy our domestic-produced HFCS should continue in place. However, as we have said since 2002, we believe that a long-term solution would be better for all concerned. And the U.S. government's WTO case is still going forward, as are the NAFTA arbitrations filed by the major HFCS producers, including, of course, ourselves.

The rest of our world looks good to us for 2005 and we expect, this time around, that Asia/Africa will lead the growth track. In short, we expect another good year internationally.

A few words about ingredients. We expect to complete construction of our Americas capacity for the prebiotic ingredients by year's end in Canada. And we anticipate further gains from our in-company developments in the ingredients area.

Finally, a comment about the recent news regarding corn gluten feed. Friday, April 15, 2005, the European Commission announced that until an accredited laboratory develops a testing protocol to detect the presence of Syngenta's non-EU-approved Bt10 corn hybrid, which has been planted on less than 1/10 of 1% of U.S. corn acreage, that U.S. corn gluten feed exports to Europe have been banned. And corn gluten feed is a byproduct of the corn refining process. At this point, Syngenta has issued a press release indicating that they will have a testing protocol, quote, within days. Corn Products International is taking steps to deal with this situation. If the ban is temporary and resolved in the next several weeks, the impact on the Company's earnings is expected to be minor.

Chart 21, the portfolio manager analyst conference. And now, the commercial for this year's event. We are planning a noon meeting in Manhattan on May 25, luncheon beginning at 11:45 and the conference beginning at 12:30 sharp. All the usual suspects from our side will be in attendance -- Sam, Cheryl, and the three J's -- Jack Fortnum, Jorge Fiamenghi and Jeff Hebble, and I will be there as well. We hope you will, too. Invitations are out and we look forward to getting your RSVPs. If you didn't receive an invitation, please give me a call and we will get the information to you posthaste.

Now, Cheryl, Sam and I are open for your questions. Susan, if you could take over.

(Operator Instructions). Christina McGlone, Deutsche Bank.

I guess, Sam, my first question would be, in terms of the manufacturing issues and the power problems, why weren't you able to say a few weeks ago what the problem was? Even if you couldn't quantify it?

Christina, some of those problems continued throughout the quarter. A couple, in fact -- one happened after the press release that we talked about. But we just felt that that time was not appropriate to say specifically what they were. We said they were manufacturing. We didn't want to go into specific detail at that time until we could have an opportunity to talk to them and clarify exactly what they were, as opposed to putting a press release out that would have been two paragraphs on what the problems were. They were, as Dick said -- his quote was freak. They ended up being problems that were beyond our control, to some extent. We have made some changes in the organization to make sure that they are within our control as best we can. They were kind of a freeze ball (ph) thing that happened in two of our plants and another problem that happened in a third. Unfortunately, they took us down, and when plants of our size go down in the winter, the cost of unfreezing and debottlenecking the problems that exist are major. And we just did not -- and this was a long answer to your question -- but we just did not feel it appropriate to talk to them at that time as opposed to today.

And it seems like now it's largely behind you, but maybe until next winter. Could we fear that this could happen again?

Well, no, Christina. As Dick said, we've been operating these plants for a long time. A couple of things happened that were unique. Some of them we have -- as I said, we've made some changes to make sure that they don't happen again. It's embarrassing to sit here and talk about manufacturing problems in front of an audience, but some of those were things we couldn't control. Some of them we perhaps should have controlled, and we're working on taking care of that. We have had situations, as you know, where we have had winter freezes, we've had winter storms, we've had power outages before, that we have been able to control a lot faster. This one, on top of the other issues in the quarter, was why we pinpointed it and pointed it out.

And then is there any way that you would quantify the benefit from Mexico in the quarter and what you expect for the year?

What we have said in the past is we have tried not to give exact numbers. But let me give you some color around that. The Mexican business is running very well. The utilization is high on our fructose capacity down there. As Dick mentioned in his prepared talk, our costs are up in energy as a result of natural gas, obviously. We have cogeneration at that facility, and back in 2002, numbers were a lot lower than they are today. Our corn numbers are up, primarily because we're buying some local corn down there, which is more expensive than imported corn. We're having to buy that to support the fructose production. We also have a limited customer mix, which is obvious -- two things. Number one, it does not provide us the opportunity to spread out the business, and number two, I don't want to quantify the amount because it just puts on the table exactly what's there with that customer. I will say it's not at the level it was in 2002 because of the increased costs that I talked about. But I will say it's very very positive for the business and the business is running at very substantial utilization rates right now.

And in terms of a more permanent solution, I guess a preliminary decision is due any day now from the WTO. Do you have any sense on what they're going to come out with?

There was a decision. It was supposed to be in April. It has now been delayed till May for no reasons having to do with our case, just something going on in Washington, and I don't know what that is. The preliminary decision is due in May. Our input, or the input that we have gotten is things are going along well, but I can't say that that's a fact meaningful of any sort. If the May ruling comes out as expected in May, both sides have a chance to challenge the ruling if they want to appeal it. But under any set of circumstances, we expect the final ruling to be in place, that if it's favorable to the U.S. and favorable to us, it will be in time before the Mexican Congress goes into session and before the tax would be reinstated.

And maybe could you characterize the sentiment in Mexico? Say it does come out October, November, the final ruling. It's in favor of the U.S. Do you feel that Mexico is willing to comply with such a ruling?

I know there's still a lot of conversation going on with the industry solution to the problem. And there is, in my belief, there's still a possibility of getting an agreement to bring sugar into the U.S. and fructose down there. So I think Mexico -- we won the WTO case before. They found a way around it. I think this time we're getting closer to 2008, and both sides know that something has to be resolved. So, I am cautiously optimistic that something in the way of a permanent solution will be set some time later on this year, I hope.

Christine McCracken, FTN Midwest Securities.

Just to follow on the earlier line of questioning. Can you talk a little bit about the current outlook for sugar in Mexico? I've seen -- I guess Mexican sugar prices have been coming down in the past several weeks. I'm wondering at what point does it become more economic for these bottlers to switch back to sugar? And are there significant switching costs?

Well, no, there are no significant switching costs, Christine. I think certainly we have found that high fructose is a very very highly competitive product in any sugar environment, for the most part. And I don't think we're going to see sugar prices get down to anything that approaches where we push against fructose to take fructose out. Certainly, the sugar price went up substantially when fructose was taken off the table. I expected that it would perhaps come down somewhat, if for no other reason the fact that fructose is on the table and captured part of what was being demand for sucrose before.

So we expected that. We're dealing with it. I think that there have been all sorts of reports on the sugar crop in Mexico this year. They've been, in my opinion, overstated. We've seen numbers that were substantially higher in past years that have come back down to a more realistic level. However, having said that, as I said, we're producing fructose now, so there has been some substitution already. But we're prepared for what happens in the marketplace and believe we can compete in any environment down there.

Fair enough. And then, just in terms of -- I guess you're contracting in Canada for corn. Can you talk a little bit more -- this is kind of the first time you've talked, I guess, more specifically about how you buy corn in Canada. Can you talk about the contracting period up there, and possibly more specifically about when contracts are set?

Yes, as Dick said, typically contracts in Canada start earlier than in the U.S. and are generally finished before year-end. They are on an annual basis for the following year, but they are done early. We have historically started contracting as early as late July, early August in Canada, perhaps a few outreaches even before that time. But the bulk of the business is done late third quarter, early fourth. And as a result, our corn purchases are earlier than would be the U.S. corn purchases on a normal basis. And as it turns out, this year, that impacted us negatively. Last year, that impacted us positively, because obviously corn was lower at the time we contracted the 2004 pricing, and went up. This year, it was high and we contracted for 2005 pricing and it went down. So it is earlier, it is annual, and it -- we tend to hedge as we do it in the U.S. on our corn buying.

That will continue to affect you through the next contracting period?

The corn prices (multiple speakers)

For the rest of this year (multiple speakers)

Yes, for the rest of this year that we bought will continue to affect us, yes.

And then just finally, there has been a drought in part of Brazil. Has that impacted your raw material supplies at all?

We have -- no, not from a supply point of view. We have seen corn costs start to escalate a bit in Brazil. But there's still plenty of corn available for use. As you know, there are two crops down there. The second crop is generally the smaller crop. But that one's looking reasonably good. But we have not had any kind of problems with supply of corn, no.

(Operator Instructions). John McMillin, Prudential Equity Group.

If life is sweeter, I can't see it. But just -- your plants don't have much cogeneration systems in place. Is that right?

In the U.S., we don't have cogeneration -- that is correct. Well, (multiple speakers) we do have cogeneration, but they're not gas. I'm sorry.

Say that again?

In the U.S., all three have cogeneration systems, but they are not gas. Canada is all on gas and Mexico is gas. But the U.S. is cogeneration with coal, coke, or woodchips.

And Canada's natural gas cogeneration and our Mexican -- one of our operations has cogeneration as well.

Does this put you at any bit of a disadvantage in this energy environment in the Canadian facilities?

We think the Canadian facilities, like some of our competitors who are on gas also, have a disadvantage in all gas operations now, because gas is so high. We what we have to do in Canada is to work our way through that. Those cogeneration facilities worked well for us before, but in this last year or two, we've had higher energy costs there. We believe that some of our competitors operate gas cogeneration facilities as well throughout the U.S. Others have coal. But we think our mix between the two businesses is reasonably consistent with the industry.

Just as a general comment. When you hedge wrong, as you did this year in Canada, you tell us about it, but when you hedge right, you don't tell us about it. And I think some kind of balance in your disclosure would be appreciated, particularly given all the speculation that was going on in your stock last year tied to Mexico and other stuff. And this kind of just gets to this February 22 press release, where -- I just don't understand what happened between the timing of that press release and, six weeks later, the timing of the early April press release. You sought to combat any negative sentiment in your stock by stating that your U.S. margins would be up. And just if you can give us more color in terms of the timing of the plant problems and so forth. What happened after that press release, and why did you feel so compelled to issue that press release?

John, let me answer the first thing with respect to the hedge in Canada. The hedge in Canada was not a bad hedge. The hedge in Canada was hedged as we always hedge our products as we book the business. So the timing is -- and we've said to the street consistently -- that if in fact we have fixed-price businesses, we hedge the business at the time of the contract. That was done in Canada every year, and it was done again this year. So it was not a bad hedge. Unfortunately, the price of corn at the time of the hedge was higher than I would like to have seen it and you would perhaps like to see it also. But it was not a bad hedge.

With respect to the February 22 press release, we have been asked continually by everyone, including you, as to what our prices have been and what we see in our marketplace with respect to high fructose. And we typically do not answer it until we are for the most part completed. At the point in time we went forward with it, one of our competitors had put out an announcement as to where they were, and we felt obligated at that point in time to come out and say something about where our pricing was. Since that time, obviously, fuel charges have gone up substantially. We've gotten hit on those things. And the reason for the press release in early April was primarily to reflect the problems that we'd had in our operations, some of which had happened prior to the February 22 press release, which we felt we could absorb; most of which -- many of which happened after that time. And because of that, and because of where we were at the April 6 time, we felt obligated to go to the marketplace and let you know that we were going to miss.

Now, as we said in that press release, we knew beforehand our goals and our numbers reflected that our quarter would not be as strong as first quarter last year. When we found out that we would not be on what we were expecting our business to perform -- the level we expected it to perform at, we felt an obligation to go to the street and tell you where it was. We also said in that press release that we would give full detail of what was going on today. And, today, I believe we've given you as much detail as we can on what has happened in our business, the way we're planning on fixing those problems, what's happening in the rest of our world and basically what happened in the manufacturing -- some of which, I've fallen on my sword and said we missed it. We screwed it up. There were problems. And we've made changes to fix those.

(Operator Instructions). David Driscoll, Smith Barney.

Sam, just a statement that I want to make here. I agree with a number of the other questioners here that the April 5 press release was very disappointing. I think it opened up a number of negative topics, but provided little information. I believe this put a lot of your investors in a very difficult position over the last few weeks. And consequently, in the future, I would strongly recommend that you provide updated 2005 guidance, or whatever year it is, when you are issuing such a press release so that the correct context can be seen. A number of people have already asked this stuff, and I just reiterate that if you had a sense that the manufacturing problem was an isolated incident, that is incredibly important information, and in the absence of that information, people always assume the worst and they assume things are going to be ongoing for a long period of time. And I can verify this because of the conversations I had with many of your investors. (multiple speakers)

David, thank you. I think, obviously, we will have learned from what happened in the April 5 press release, where we've gotten input back, and Dick has spoken to a number of people all day that day and since. And we did it with the best intention. We tried to put in the wording in that press release that it was a one-time issue with respect to the manufacturing. But, in hindsight, obviously, from the comments that I'm hearing today, we have to rethink what we did.

Now, to a couple of questions here. The U.S. and Canadian stuff, I'm a little bit confused here on some of your comments on the corn purchases. A number of questioners have already asked about Canada's corn purchases. But I'm confused why no one is asking about U.S. corn purchases. It seems like your statement on February 22 was that U.S. operating margins would be up. You only had a low-single-digit price increase, so my conclusion from February 22 was that corn costs for the full year 2005 in the United States were going to be down. Was that the right conclusion for the February 22 release, and maybe even more importantly, is that still true for 2005 in the U.S.?

The corn numbers for the U.S. should be flat to down slightly for the year. In the first quarter, they were up substantially because of the comparison. And then last year's numbers were the lowest we had in North America and in the U.S. for the first quarter. This year, the first-quarter numbers, I hope, are our highest, and they should be our highest going forward. The hedge that we did in the U.S. business -- the anticipatory hedge that we did, which we've alluded to numbers of times in the past -- we did early. In hindsight, I wish we had done no anticipatory hedging and we had gone forward with numbers in January. But we have stayed consistent with our hedges at about the same time every year for the last 10 years on the anticipatory side. And that business was hedged this year -- well, in 2004 for 2005 as well. The numbers on average for the year, though, should be flat to down slightly on corn.

Then the comment I would give you is that I pay very close attention to corn prices, and you indicated that gross corn was in fact higher in the quarter than the year-ago period. This is something that I think was very very hard for those of us on the outside. Gross corn prices in December and through the first quarter are substantially below the year-ago levels. So, obviously, the only way that the Company could have had higher gross corn costs is if you purchased it much earlier in 2004, which is unknowable by those of us on the outside. My question here is, if you knew this the whole time, why wouldn't you just give us a little bit of guidance here that first-quarter numbers were going to be such difficult comparisons?

David, we have historically given guidance at the end of the first quarter and consistently we will do it. If we are on track with what we expect the business to be, we will continue to give guidance at the end of the first quarter. What we did here was, because of the fact that we saw a problem, we came out prior to that to announce the problem. And you've already said, and others have said, that you wished that we had given guidance at that point in time. We elected to still wait till the first-quarter conference call, and that is when the guidance did come out. But our historical norm -- and I think you folks have all seen that, particularly since I've been in this position -- has been to give the guidance at the end of the first quarter.

I would only say to you on this point that I think that if you outlined a recipe for volatility in your stock, Bunge, another company that has hard earnings to predict, back a couple of months ago gave us guidance and said that their quarterly pattern was going to be substantially different this year than last year. They didn't give specific numbers, but at least they gave a heads-up to those of us out there that we needed to be careful about that quarterly pattern. And I would just ask you very much so to try to give us that indication, because again, I don't think this was predictable unless people knew exactly when you purchased your corn, which you never tell us.

David, we will certainly take that under advisement.

On -- just moving onto a question here on the guidance, you indicated that the nine months -- the next -- 2, 3 and 4 Q’s for '05 would improve collectively -- that nine-month period would improve collectively over the nine-month comparable period a year ago. Can you make the statement that the quarters themselves, each quarter is going to be better, or is that not true?

We are saying the nine months in total, with the comp we have for second quarter, I'm not going to say definitively we will be better by each quarter, but obviously, from what we are saying, the nine months will be better by a reasonable amount from what you're seeing here.

Okay, so sequentially, it's better, but year over year, you're not going to say it's going to be better?

I'm not going to say it will be; I'm not going to say it won't be. I'm saying that right now as we look at it, with the second quarter being as strong as it was last year, it's a tough comp, but it's close.

And just two more questions. On the energy surcharges you alluded to in your comments, that you would pass these on to customers, is that -- can you give me some more detail here? Is that something that's near-term? It is something that takes a long time to do? What kind of resistance do you get from your customers on this topic?

Well, it's near-term in that we're trying to do it now. We're going to start immediately, and have started in some cases already. It is very tough to do because, just like anybody else, when you've got a contract out there, people don't want to have anything done. There are some ways of reducing it that do not necessarily mean you pass on an increased cost. You just do things a little differently. And in some instances, we have to go forward with the increased cost, because the numbers are substantial that are hitting us right now. And if you look at the forecast going forward for diesel fuel, it's going up even further. So we are in the process of putting together a program to go to the market. We expect to -- obviously, we'll get some resistance. But we expect to be successful to some extent in putting this through. And we will push for it, David. It's going to take a little bit of time. Obviously, we can't go tomorrow and get it tomorrow. And it will probably fluctuate based on what happens with the diesel fuel costs in the marketplace. But with the projections I've seen that are out there in future positions, I think it's fair to say that we're not going to see too much in the way of dropping of fuel charges going forward. It's going to probably be escalating. So we have to figure out how to recoup that.

In North America in the quarter, your operating income was $3 million. My best calculation here for Mexico is that the incremental earnings on operating profits from your fructose plant, it was 5 million, 8 million, something on that type of magnitude. That would suggest that the rest of your U.S. and Canadian businesses actually produced a loss in the quarter. Is that correct?

I think it's fair to say that those two businesses did not show a profit. Correct.

That's a major turnaround from anything we had seen in the past. Again, I'd only say, Sam, that this is an incredibly tough quarter to swallow because of how trends were going before, and then suddenly you see these businesses turn around. I think I speak for a lot of different clients out there in that folks are having a tough time here understanding really what the direction of the business is. Is the U.S. and Canadian business -- what direction are we on in these things? Are we going to see improving results, or what is really happening here? And do you feel confident that operating margins in U.S. and Canada ultimately in the next few years are really going to materially move up?

David, we've said that before, and I think the answer to that question is -- not I think -- the answer to the question is yes. We're giving guidance for the rest of the year, and that guidance would indicate that we expect the U.S. and Canada to turn around substantially from where they were in the first quarter. As we go forward, we have said that we expect to see low-double-digit growth in the business on a compounded basis, obviously, but going forward, if you look at the last nine months of this year, we're suggesting that that would still be appropriate as a statement and we're still holding by that going forward. So our expectation is yes, that the U.S. and Canadian business will turn and improve. Obviously, we were not pleased with the results of our first quarter. We did expect, as I said in our goals, the first quarter would be a tough quarter with a tough comp and the numbers would in fact be off from last year for the Company. As it turns out, the U.S./Canadian business in the first quarter really took it on the chin. We will take that. And I expect that you folks have expressed your concern and dismay of what we have done in the first quarter. I am extremely unhappy with what happened in our business in the first quarter, and we will correct it. I expect going forward that the businesses will perform. I think that we still have a solid business in the U.S. and in Canada. And we will work on turning those businesses back around this year and moving forward into next year.

And sorry -- if I could just follow with one final point, can you tell us whether or not you intend to start to repurchase some stock?

As you know, we have a program that was authorized by the Board for 4 million shares, and that was done at the end of last year. It's an investment option that we will look at as well as all the other options and we will look at it strongly. But I'm not going to comment right now, David, on it, but certainly, it's available to us and we will look at it very seriously.

Eric Katzman, Deutsche Bank.

Maybe a bit of a longer-term question. I think maybe John and David kind of touched on this. But some of your competitors are obviously much bigger and are integrated in that they own railcars and barges and other forms of transportation. And because they are integrated, they may have a longer-term competitive advantage if we continue to see such volatility on transportation costs, which I think is a fair characterization over the last few years. How do you think that that affects the Company? And is it just a domestic issue, or is it a global issue? And do you think that you have to have a look at your transportation and logistics capabilities for the long term and may have to put some capital in there to maybe insulate yourself from what appears to be just a volatile environment for the foreseeable future?

Eric, I think that certainly with 70% of our business being outside of the U.S., I don't believe it is an issue that is something we have to look at as just a U.S. problem. Energy costs going up are going to impact everybody in the world, including our competitors that are in the logistics business. They're going to have to deal with them, as do we. I believe we will be able to compete very effectively throughout the world in which we operate in the area of logistics. I certainly believe that our competitors are feeling some of the same pressures we are in the U.S. marketplace right now on logistical energy costs and will probably be looking to do some of the same things we're looking to do. Certainly, they have substantial investments in that part of their business, and I agree with you that as they invest in those things, they may do things a little differently than we do. And obviously, if they run them well, they should have some sort of return on the logistics part of their business. Our investments will go into growing other parts of our business, and I think that we can do that just as well as they will do their logistical thing. I don't believe we are at a disadvantage long-term. I think we had a problem in this first quarter and had some issues we have to deal with going forward, but I think we and they, all the time, will try to recoup most of the energy costs that are coming forward.

And it appears there are no further questions at this time. Mr. Vandervoort, I will turn the conference back over to you for any additional or closing remarks.

Thank you very much, everybody, and appreciate your attention on the call. Have a good day.

That concludes today's conference. Thank you for your participation.