Ingredion Inc (INGR) 2005 Q2 法說會逐字稿

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

Thank you, Susan. Good morning and welcome to the Corn Products second-quarter 2005 earnings conference call. It is an open conference call simultaneously broadcast on our website, www.cornproducts.com, and the charts for our presentations can be both viewed and downloaded from our website. They are available about 50 (ph) minutes ahead of our conference call and those using the website broadcast of this conference call are in listen-only mode.

Today Sam Scott, our Chairman, President, and Chief Executive Officer; Cheryl Beebe, our 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.

Let’s get 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 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 and reconciliations of non-GAAP numbers from this presentation are also available on our website, www.cornproducts.com.

Chart three, the agenda. Today after this introduction Cheryl Beebe will present the financials relative to our second 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. Starting on chart five, summary income statement for the quarter ended June 30, 2005, net sales for the quarter reached $596 million, up 4% or approximately $24 million from the same period last year. Gross profits at $90 million is down 2% or $2 million from last year. The gross profit margin dropped to 15.1% from 16% last year, but showed a positive recovery trend from the 2005 first-quarter gross profit margin of 12.8%.

As expected, corn costs in this quarter were lower than last year and better than first quarter. Energy costs year-over-year rose 23% with the biggest increase in the North American business and the main contributor to the decline in gross profit margins year-over-year. While we hedge natural gas costs in the North American business on a yearly basis, we are seeing the effect of the step up in natural gas costs.

Operating expenses are $39 million, down 2% or $1 million from last year. Operating expenses as a percent of net sales is 6.6%, compared to 7.1% last year for the same quarter on lower variable compensation expenses. Other income for the quarter was $1 million versus $2 million last year. Operating income is $52 million, down 3% from last year or $2 million. Net financing costs at $9.5 million are up about 1.4 million, of which 1.2 million is related foreign exchange losses.

The effective tax rate for the second quarter of 2005 is 35.1% versus 30% for the same period last year and 33.5% from the first quarter of 2005. The effective tax rate moved this quarter due to anticipated income mix.

Minority interest for the quarter is 1 million versus 2 million last year, reflecting the 100% ownership in the Company's South Korean business. Bottom line net income for the quarter was $26 million, down from 29 million last year, but up from $17 million in the first quarter.

Diluted earnings per share of $0.35 are down $0.05 last year's $0.40. Weighted shares outstanding on a diluted basis were 76 million shares, up from 74.4 million last year and down approximately 0.5 million from the first quarter, reflecting the stock repurchased during the quarter by the Company.

Turning to chart six, net sales by geographic segment, we see North America's net sales at $366 million and they are up 1% or 3 million versus last year. South America's net sales at 142 million are up 8% or $11 million from the same period a year ago, and Asia/Africa's net sales are up 12% or $10 million. In total the Company's net sales increased approximately $24 million or 4%.

Turning to chart seven, net sales variance analysis, we see North America's net sales growth of 1% is coming from volume growth of 4.9%, price and product mix decline of 5.5% and a 1.6% favorable impact from the Canadian dollar. Coproduct values and higher freight costs impacted pricing across the region.

South America's net sales growth of 8.5% is derived from a favorable exchange rate impact of 14.4%. The volume declined 1.7% and price product mix also declined 4.2%, again due to lower coproduct values.

Asia/Africa's 12.2% net sales growth came from volume growth of 3.9%, price mix of 0.5% and a favorable exchange rate impact of 7.8%. In summary, net sales for the quarter were driven by a 3.2% increase in volume and the favorable exchange rates of 5.4%, which more than offset the negative price mix of 4.4%.

The next chart, number eight, operating income by geographic segment, we see North America's operating income at $21 million, down 3 million or 14% from $24 million last year but up $18 million from the first quarter of 2005. The mix of earnings is being driven by the recovery of high fructose corn syrup 55 sales in Mexico.

South America's operating income at $22 million was down 9% or $2 million. Asia/Africa's operating income is 16 million, up 21% or 3 million. Total Company operating income for the quarter was 52 million, compared to 54 million last year despite a 23% increase year-over-year in energy costs.

The last earnings chart for the quarter, chart nine, is the estimated source of diluted earnings per share for the quarter ended June 30, 2005. The negative $0.05 is broken down to changes from operations with reduced EPS by $0.02 for the quarter, $0.10 for margin declines offset by a positive $0.04 increase for both volume and currencies respectively.

Nonoperating charges reduced earnings per share for the quarter by $0.03. The change in financing costs was a negative $0.01. The effective tax rate change was a negative $0.03. Minority interest contributed a positive $0.02 and the higher shares outstanding reduced the number by $0.01. Fully diluted shares outstanding are 76 million, up roughly 2.2% from 74.4 million last year.

I am now turning to chart ten, a summary of income statement for the six months ended June 30, 2005. Net sales for the six-month period are up 4% over the last year; gross profit at 163 million is down 23 million from last year or 13%. Margins are at 14% versus 16.6% last year, down 260 basis points for the reasons discussed in the first- and second-quarter reviews.

Operating expenses at $79 million are down 2% from last year. Operating expenses as a percent of net sales are 6.8% versus 7.2% last year. Other income is up by $1 million. Operating income is 87 million versus 108 million last year, down $21 million. Operating income margins are roughly 7.5% versus 9.6% last year. Net financing costs are up 1.5 million on slightly higher interest rates and foreign exchange losses. The effective tax rate is 34.5% versus 33% last year.

Minority interest is 2 million this year versus 5 million last year and again reflects the increased ownership in the South Korean operations. Net income for the six months is 43 million, down 12 million from last year's 55 million. Diluted earnings per share is $0.56 versus $0.75 last year.

Looking at the cash flows for the quarter, chart 11m, cash flow provided by operations is $84 million versus 4 million last year. Net income was 26 million versus $29 million last year. Depreciation contributed 26 million, up approximately 1 million from last year. Working capital contributed a positive 37 million in the quarter. The working capital improvement for the quarter is a combination of lower raw material costs, improved collections, and a positive reduction in the margin account activity.

Cash invested in the business was 36 million versus 19 million last year. We invested 34 million in fixed assets, up from $16 million last year. We spent 3 million to purchase most of the remaining minority interest in our Thai (ph) operation.

Cash used for financing activities was $28 million. Debt decreased $14 million. Dividends to CPO shareholders were 5 million and the share repurchases amounted to about 9 million.

Looking at the key ratios for the year, chart 11, we see a return on capital employed decreased for the last 12 months from 7% to 5.6%, reflecting our lower first-half 2005 earnings. Debt to capital ratio is 28% and an improvement versus 30.7% last year. Operating working capital increased to 227 million from $217 million last year. Operating working capital as a percent of net sales remained basically the same at 9.8% versus 9.9% last year.

The debt to EBITDA multiple increased slightly from 1.9 to 2.1. Net debt, debt less cash was $424 million versus $433 million last year for a change of $11 million.

This concludes the financial presentation. I will now 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 am now switching from chart 12 to 13. -- sorry, chart 13 to chart 14. Chart 14 is the currency update. First of all, our definition of newsworthy. We discuss only those currencies in our top six countries that changed by 5% or more versus the U.S. dollar and currencies in the smaller countries must change by 10% before they are highlighted. The list is alphabetical by region.

For companies with a European focus, they would discuss the recent strengthening of the U.S. dollar as the story. Obviously our world is somewhat different. In our major business currencies -- countries, Canada, Brazil, and South Korea, currency it is firm during the quarter and because it makes sense to track recent currency movements, it is notable that of our majors both Brazil and Mexico are stronger since the close of the first quarter in March of this year. Among the smaller businesses, Columbia's currency continued its recent strengthening run as well.

Chart 15, second quarter 2005 in aggregate. In total net sales were up 4% in the quarter and earnings were off 12%, but improving from Q1 of this year as we forecast earlier. As can be seen in the graphic, this quarter was the Company's second strongest Q2 in history and last year's Q2 included a $0.03 per share gain from the change in our tax rate.

In North America, the U.S. and Canada shifted the results curve from the big dip in Q1. The solid performer was again Mexico with a major gain operating income because of strong HFCS sales to the soft drink industry.

In South America, we continued to deliver very good results. And in Asia/Africa, as we have now had four quarters since delivered corn costs into South Korea took off like the proverbial rocket last year at this time, having this big cost run behind us led to a very strong quarter for the region and confirmed our earlier statements. And I will speak more to that later. All in, we believe we made an important turn during the quarter.

Chart 16, North America, operating income for the region was down 14% to $21 million on record for the second-quarter net sales -- and a record for second-quarter net sales of 366 million. Volume was up 5%, driven by the major resumption of the HFCS shipments in Mexico. After our difficult first quarter this year the $18 million bounce back, though expected, was certainly encouraging. Again Mexico was the leader plus we saw the improvement in the U.S./Canada portion of the region.

On the cost side, net corn costs were better than both last year and last quarter. Despite firming prices for coproducts, they were still significantly below last year, particularly corn gluten feed. Already hedged energy costs will remain high and the related freight costs are high as well. Our U.S. effort to pass along increased freight costs to our customers is getting underway and as importantly we are incorporating this cost element into our go-to-market plans for next year's contracting as well.

In Mexico, global newswires contained numbers of stories about the favorable interim ruling from the World Trade Organization, the WTO, on the U.S. trade case brought against Mexico for the tax on HFCS sweetened soft drinks. As we understand process, the preliminary ruling could come out as early as August or perhaps September. Thereafter the balance of the formal process could continue into later this year or early next. Meanwhile the protections remain in place for the several soft drink bottlers to continue to buy high fructose corn syrup and our business is very good with good margins. Beyond HFCS for soft drinks, the rest of our business in Mexico as it has done throughout this entire several year period continues to operate well.

Chart 17, South America. After a multiple quarter run of increasing operating incomes versus the prior year's corresponding periods, operating income declined by $2 million or 9%, as Cheryl mentioned. Sales increased again, another second quarter record, but volumes were off slightly as our customers were affected by the region's strong currencies. Exports for them became more difficult and their overseas competitors can land product more competitively in South America. Also energy and raw material costs were higher as well.

Having said that, we are still running at a six-month rate that is very similar with last year and we remain confident for our future in this extremely important region. Part of this confidence comes from the developing strength of our better margined ingredient business, which has its base in South America. And Jorge Fiamenghi, our leader for the region, announced at the analysts portfolio manager meeting in May that we have initiated expansion in Brazil for both specialty and basic ingredients.

Chart 18, Asia/Africa. Last quarter we said that we expected our Asia/Africa region would lead the Company's earnings growth this year. Clearly results from Q2 began the process of proving our point, a great quarter, both in comparison to last year and the first quarter of this year. In fact, continuing the sequential string of improvement during the most recent three quarters.

South Korea starting with the second quarter last year was the principal cause of last year's 12% drop in operating income for the region. Korea's weaker performance had been primarily caused by the coincidence of a 40 plus% run-up in world corn costs in the spring of 2004 plus the troubling of ocean freight costs at the same time, which dramatically changed the raw material economics for our business in South Korea.

Now that we have lapped that problem, we are very pleased with the recovery delivered by South Korea and its impact on the rest of our Asia/Africa performance. Overall the region, as Cheryl noted, enjoyed stronger volumes, currencies, pricing, and product mix.

As I said at the top, based on the turn in South Korea and our other operations performing as we expect them to, Asia/Africa will lead the Company's earnings growth.

Chart 19, 2005 outlook. We continue to expect a 7 to 15% increase over last year's $1.25 GAAP earnings per share. This guidance calls for our North American region to deliver a better second half of 2005 than our second half of last year, when Mexico restarted its HFCS to the soft drink business again, and that was in Q4 where it had principal impact on our results. However by years end we expect that both the U.S. and Canada will have operating incomes lower than last year's results.

On the very positive side, Mexico should provide very strong operating income growth based on the current business climate. And finally our standard North American caveat, that we have said over and over since 2002, we believe that a long-term solution to the Mexican HFCS tax problem will be better for all concerned. The U.S. Government's WTO case clearly looks good going forward and the NAFTA arbitrations filed by the major HFCS producers including ourselves with the largest claim, continue to advance within the NAFTA process. A final resolution of this intense cross-border issue will be best for all.

The rest of our world looks quite favorable in 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 nutraceutical facility and the nutraceutical product family, the prebiotic fructo-oligosaccharides ingredient that we acquired last year from GTC, we expect to complete that by year's end in Canada. And we anticipate continuing gains from our in-company development in the ingredients area. Net-net, we expect that 2005 will have the reverse image of 2004 where we had a stronger first half last year. This year we expect that our second half will be stronger than our first.

Now, Sam, Cheryl, and I are open for your questions and I turn it back to Susan.

(OPERATOR INSTRUCTIONS) David Driscoll, Citigroup.

Congratulations on a nice recovery from the first quarter. I wanted to speak with you a little bit about North America. Dick, did I hear you correct in saying that your outlook for the second half specifically for the U.S. and Canada was for an improvement versus the year ago second half?

That is correct. But it would still be less -- the year total would still be less than last year's total.

Very good. I understand. I wanted to then ask in the quarter you had I think indicated that North American net corn costs were below the year ago second quarter but yet operating profits in the U.S. and Canada were down. Can you describe the factors that then offset the benefit of that favorable net corn costs comparison?

Basically the same as we talked about in the first quarter. We had substantially higher -- although the energy numbers were hedged, they were substantially higher than they were last year. We talked about the fuel surcharges that we related to you last year and volumes were off slightly from last year as well. So that combination certainly offset what it was we were looking at in we gained from coproduct credits.

Then a little bit about the volume side. This is one where I think you said -- what was the North American volumes overall including Mexico?

UP 4.9%

Okay, so then North American -- or sorry -- U.S. and Canada volumes were down. Is that specifically in the sweetener markets? Were you seeing strength in dextrose and other products?

Part of it is a mix of coproducts that were in the quarter and that was a major piece of the volume shortfall -- or down. Some of it was within the sweetener area as well. We have not broken out by productline but the sweeteners as a general category, they were off slightly. But that is reflective of what you have heard from the beverage companies and the Corn Refiners Association and publics (ph) as well. So we were not too surprised at that. The mix in the coproducts was just a matter of whether or not it was a wet or dry theme. Sometimes those numbers can vary a bit in our number so we have to make sure we clarify that for you.

Overall, Sam, do you continue to expect that utilization rates in your U.S./Canadian businesses will continue to improve; i.e., a lot of clients ask me questions about the sweetener market specifically and not taking into account some of your other products, dextrose and some of the other products that you make. But can you just reaffirm for us that it is your expectation that utilization rates in the United States and Canada will continue to improve over time? Is that a correct statement?

Let me answer it a little differently than saying it is a correct statement, David. I think what we're seeing is very little growth in the sweetener markets in the U.S. and Canada. They are flat to upper percent in total. You have a whole composite total of sweeteners. We don't see any new capacity coming on stream and in fact we have seen the reduction of capacity where possible on our part and where we can track it on the part of our competitors. Given that scenario, one could assume that the market should continue to tighten on utilization going forward as long as it continues in that fashion, yes.

That was very clear. On South America, we saw margins come down quite a bit from where they were in the first quarter. I am not quite clear on how I should think about this business for the second half of the year. And I think also, Dick, you made a comment that Asia/Africa was going to be the source of growth going forward. I don't know if you meant that to be a long-term comment or if you meant that to be a 2005 comment.

It was 2005 versus 2004.

So then the expectation I would have then is that your --

Well, also long-term. I just realized it also long-term but the specific comment was for 2005. But long-term we definitely see Asia/Africa as our growth regions. But go-ahead with your question.

It would be correct in assuming then that South America would be roughly flat this year on profits?

We have not said that, David, but we did say we expect it to be a good year. With what happened in South America, we've had higher corn and higher energy costs as we said, so the margins are down somewhat. And with the currency being as strong as it is, that is part of the reason the volumes are off slightly. So we expect South America to continue to produce very solid results. But again, we expect that Asia/Africa will lead the growth this year for the Company. And it's obvious, not only are we, but the world is saying that Asia/Africa -- or Asia, not Africa -- but Asia is going to be the growth vehicle for businesses in general and we expect to see opportunities there that will be able to allow us to grow our business.

I would not dispute the idea that Asia is a good source of growth. I would have thought though that South America would continue to be a good market for you and a good growth market.

It will be. There is no question about that. We expect to see South America being a very strong ongoing marketplace. We expect to maintain the position as Jorge said at the analyst day, we are growing both our ingredients business as well as our commodity based business down there. But based on the size of that business as compared to the size of the Asian business, the growth would be easier for us and in fact will be a greater percentage as we look at Asia.

That was helpful. On the margins again, one more kind of follow-up question here. The 15.5% margins in South America, down from I think 19.1% in the first quarter, you said that was due specifically to energy and corn costs in this quarter as different from the first quarter. How do you see that then trending out over time? It has been my experience after watching the Company for years that when you see those higher costs down there you are able to recover your profitability and I would think that your margins would improve. Is that a reasonable assumption?

We don't see any basic change in how we operate that business going forward. So we have generally been able to deliver that kind of a scenario, David. We'd expect to continue to work in the same basic way.

I have two more quick questions. Corn prices have rallied very significantly due to bad weather conditions within the Eastern Corn Belt. Can you comment on what this would mean for your business? I would argue that this suggests a better scenario for the coproduct values which net-net is a positive for your business in the second half.

It certainly should reflect better coproducts. It also reflects higher corn costs in those areas. We have to buy corn going forward. It will rally the overall corn market worldwide. So the coproducts will be better and we could see some corn cost increases in other parts of our world.

Would you expect those corn costs to be offset by pricing actions or is this on balance, are you trying to say it's a negative?

I think as a general rule we get pricing through but as we said before, it generally takes a little bit of time to get that through if in fact we get impacted. We are sitting here in July right now with corn and I think last year at this time corn was about the same price as it is today. And it obviously came down substantially from this point in time. So I don't know where corn will go from here but certainly if it stays high, it will have an impact on us in some parts of our world where we have not hedged it fully and we will have to pass that through.

Just one final question on Mexico. Are you aware of any negotiations currently going on between the United States and Mexico? Is there anything that is actually public in terms of not necessarily a deal but are the two sides talking is what I'm really curious about?

The only conversation that I am aware of that are going on, David, are still the industry negotiations which I've talked to you about -- you and the street about for the last year plus. And since I have been talking about it for a year, obviously not a whole heck of a lot has been accomplished in those negotiations but they still continue. I think they will continue at a -- I won't say an increased pace -- but perhaps a more intense pace with WTO having made a preliminary ruling anyhow.

But those will continue and if in fact the industries are able to reach some sort of agreement in the minds of the participants, those agreements or those recommendations will be taken to the respective governments and the government will have to negotiate a final solution.

Very good. Thanks a lot, everyone. I will pass it on now and looking forward to the back half of the year. Thank you.

Christine McCracken, FTN Midwest.

Just wanted to expand a little on your expansion into the ingredients business. You'd obviously highlighted it at the analyst's meeting and talked about it again today. Can you help us put some parameters around the size of this business or the market that you're targeting?

I'm not going to give you the size of it, Christine, but obviously what we said last year was we were starting to move more toward ingredients. And we started investing some capital dollars in ingredient facilities in Latin America to supply both the Latin market and some other parts of our world. What Jorge presented at the last meeting, the analyst's day, was a broad range of markets to which we have been able to introduce some of our existing products as well as some new products we're developing. And we're working with some of our customers to develop with them ingredients and product they have either today or into the future.

The nutraceutical business is an investment that we made in Canada. We have the rights to that products throughout all the Americas and a little bit in Australia and New Zealand, which doesn't really count a whole heck of a lot. But those businesses do take some period of time to develop because the testing for most of the products on the human side is expensive testing. But we are, as we said before, we are looking to grow that part of the business. We are transferring products around the world and testing both in North America and Latin America and that is how we expect to grow. So stay tuned, but I can't tell you the size of it right now.

All right and in terms of I guess from your perspective the margins in this type of business, I assume they are considerably higher than your core processing business?

I'm making that assumption to, Christine, and I'm hoping we're both right.

Fabulous. Then just to expand little on David's question relative to the corn outlook, obviously you are in the core of the drought area and you are probably at this point looking at a smaller corn crop. Can you talk a little bit about possibly how this affects your North American business relative to the rest of the world? You talked about obviously the impact on the rest of the world, but in essence, you are looking at probably higher corn costs in '06 if the crop does turn out to be a little smaller.

That is true and it depends upon -- the corn number will be for next year would be dependent upon how the gross corn and net corn tie together, Christine. So obviously I can't say for sure it will be higher, but if gross corn goes way up, even net corn is not going to offset it. So it could be higher. As we go into next year, we have already absorbed in this year fuel surcharges, energy increases. If we have corn to go after it means that next year the prices of our products need to go up and certainly we're doing right now planning on how we approach the marketplace next year to be able to handle the increased costs that we have already. And then corn would be an additive to that if in fact it would be the case. But basically what it says is the value or the price of our product has to be higher than it was this year.

At a minimum at least you have that visibility around the crop early enough that you should be able to recover a lot of that increase.

That visibility, the energy visibility as well as the fuel visibility. Dick mentioned in his prepared remarks that we have put fuel surcharges out into the marketplace already this year with the hope to be able to recoup some of those charges. But certainly to advise our customers that they are there, they are real, and we have to go after them next year.

And in terms of energy obviously you have mentioned that you do have some protection and I will take a stab at trying to find out at least how long that might -- I guess extend if you could give us some kind of visibility around that?

I don't know if we said how long. We said we hedged for the year obviously and I think that that would answer the question for the most part in North America, the U.S./Canada part of North America. In other parts of our world we have various contracts tied into cogeneration operations that we have but we have never commented on how long they are for or what kind of contracts they are.

Fair enough, thanks.

Christina McGlone, Deutsche Bank.

I wanted to follow on one of David's questions. In terms of coproduct credits, it seemed like historically when corn costs would rise there were coproducts credits. But now it looks like there is a disconnect and that corn gluten feed prices are not really following that trend. I guess from the competition from DDGs? And that is a real problem looking at net corn costs in the future. How does that -- do you expect that disconnect to continue and then how can you manage through that environment?

The feed piece of the coproduct credit is the smallest part of it; however, it is also the larger volume so it will definitely have an impact on us. The DDGs are having an impact there. If we see significant drought continue where corn numbers go up significantly, I expect DDG prices will go up as well because there's going to have to be some sort of a feed out there.

Meal and oil however should continue the way they have historically and perhaps even more so. And with the problems that we're seeing on the soy complex today, that could be even more positive. So you are very right in your comments on the impact of DDGs against corn gluten feed. The other two products shouldn't (ph) reflect well based on -- if in fact corn stays high and continues to grow.

Okay and then next question. Because the WTO decision came out later than I think originally was expected, it now looks like assuming that (indiscernible) appeals, that the appellate decision won't come before the end of this calendar year. At least that's what our sources are suggesting. So if this drags into next year, how does that -- does that change your outlook for Mexico? What sort of incremental are we looking at in terms of Mexico given the strength of this year and if the decision is not finished by the end of this calendar year?

I can't talk about the incremental to that, Christina, but I think what we see is if in fact the decision is not made by year-end, we believe that our customers that have Amparos (ph) will continue with those Amparos. There is no reason to believe that would not be the case. There is no guarantee to that either. But I believe it is the case. Certainly the Mexican Government is going to have to decide how they deal with tax and the WTO ruling. And they will take the appropriate action. I don't know if they will be appropriate action -- but they will take action on whatever they are going to do to determine whether or not they make a change or they continue with the tax until the final ruling comes down.

And I agree with you, on the timing, it looked like, as Dick said, it could be by year end -- it could be early next year and the early next year -- the law has been determined upon what the tax would be. So we have to wait and see but as we go forward, as I said we do expect that the customers will have the Amparos.

Okay, so it is not like the Amparos would expire by the end of this year?

Not unless something changes.

Third question, Cheryl, what is your guidance for the tax rate for '05 given the jump in the second quarter versus the first quarter?

I would anticipate that we would be looking at 34.5%, all things being equal. But as the second quarter showed, if there is a change in anticipated income mix, then the number of countries that we do business in, we could see another change. But all things being equal, 34.5%

Last question, in South America, the volume decline, you said that was mainly because of the strength of the currencies but I guess Colombia has had an impact in the past. Is that recovering or is that still a drag on volumes?

Colombia is running reasonably well. I'm hesitating because it has not had that much of an impact. It is a smaller piece of the business. The two largest businesses there are Brazil and Argentina and Colombia can be a factor but it's a small factor, Christina. I think that what we have seen has been the strength of Brazilian currency particularly has been the longest between our capability to export as well as our customers capabilities to export, we have seen a volume impact there.

Okay, thank you.

John McMillin, Prudential Equity Group.

I guess you get better numbers when plants aren't frozen -- but it's been a year of weather. I just think the idea that is being presented not so much by you but by others that a drought if it were to continue would be good for your company. If you look at the history of even when it was with Best Foods, droughts historically have not been good for your business the following year. Isn't that correct?

I don't think droughts are good for anybody, John. So I am not of the mindset that a drought is good. What I think we have said historically is higher corn numbers within a range are better for us than lower corn numbers because it gives us the impetus to move pricing. If you have a out of the range scenario, I don't think that is good for anybody and I am not looking forward to it if that were to happen although we will manage our way through it. You are right, we did not have any freeze-ups during a month of June in our North American business and I was very happy to see that.

And you don't really control your destiny as the number three or four player. The other players are making excellent money selling ethanol. I guess you saw what Cargill did or is doing in terms of expanding its ethanol. Don't you see what's happening here that they don't need sharply higher fructose prices? Some of your competitors don't need that. Isn't that essentially correct?

No. I think if you are in business, you are in business to make money. If in fact any of our competitors are in there as a not-for-profit in a segment of their business, that is a different ballgame and that is a very large segment of their business. If you look at ADM's corn refining business, Cargill's corn refining business, they are substantial businesses for those companies. And for them to determine they just don't want to make money, I don't see that as being a long-term viable --.

They each made significant investments with the purchase of the two competitors into 2002.

We could play out your scenario, John. It just doesn't work for me and I think based as they have made money in ethanol, we said right along that our expansion plans were going to be into areas of the world where our margins were very solid margins. And year in and year out our international business has done that for us. So I am not unhappy with our model and I certainly don't believe that those guys are just going to sit there and lose money for the sake of losing money because they are making money in ethanol.

Are they losing money?

I don't know if they lose money but if in fact numbers were to continue to go up and they played it out perhaps the way you were talking about it, certainly Cargill publicly stated that they had cost increases that went through in their business that was substantial and it costing them.

ADM has stated that they are not returning the cost of capital and we know that numbers are going -- the costs have gone up for them. We believe they are going up for us. We know they have natural gas facilities and are buying natural gas. So in all those scenarios, their costs have to have gone up and unless they have some magic powder that sells product at higher numbers than we do, I don't think that this year has been a year on the corn refining side where profits have been what I would like them to be. And I don't know where they are but I would guess that if we see cost increases going forward in a market scenario that has tightened, I don't know why with or without ethanol profitability they would not look to move pricing.

But why would Cargill make this decision as you steadfastly refuse to even consider it?

I cannot answer why Cargill makes any decision, John. I don't mean that negatively. That's their management call and we have our management plan we have shared with the street what our strategy is. Obviously we have gone through it with our Board of Directors. We as a management team buy it, the board buys it, and the investment community is going to have to determine do they support it or not.

Okay, thanks a lot.

Ken Zaslow, Harris Nesbitt.

Just to take a step back, which part of the world are you hedged with your corn costs?

We have said historically that we hedge North America, primarily U.S./Canada and the rest of it we are -- we hedge depending upon how far out we can pass the numbers through.

Okay, because that didn't come across in the beginning. I wanted to make sure I understand it. That means that right now whatever the corn environment is, that will not affect your results for North America for the next two or three quarters?

To any major extent, yes.

And certainly you have been able to pass on your higher corn prices in South America and Asia and Africa so there is no reason to believe any different going forward?

Sometimes there is a time delay in it but certainly what we have said historically is we can pass on increases in cost generally in those regions, yes.

I just wanted to make sure of that. For 2006, are you starting to opportunistically buy for your European operations in corn?

I'm not going to comment on that right now, Ken. When we start contracting, we will start buying but I won't go into whether or not we're contracting on that or not.

Typically you contract between August and September and you tend to anticipate it in July and August. Is that not a fair historical look?

We -- I think we said we generally contract our Canadian business August through December really and we will take a anticipatory hedge depending at the time we think the harvest has been identified and we know what the numbers are. But it is not a July or August or whatever period. It is when we have enough fix on where the harvest is going to be and typically when it breaks, we track that on a regular basis.

Great. In terms of -- you said in the commentary that there is a reverse image of North America in terms of the margin structure relative to last year.

It's just the strength of the first half with last year and the strength of this year is the operating earnings are going to be stronger in the second half this year whereas last year they were weaker in the second half.

In the beginning of last year the margins were 6.6 to 7.1%. Is that a reasonable way of thinking about your earnings in the back half for North America or is the image just not really that reversed?

We said it is going to be stronger in the second half of this year than it was in the first half of this year and we don't give details about forward-look on margins.

All right. Just because -- I just saw that in the first half of last year, margins were between 6.6 and 7.1. So I didn't know if that was what you were implying.

No, we just said it's going to be a stronger second half than it was in first half obviously because we had the big blip in Q1.

Did you hedge your currency exposure?

We do not hedge currency, Ken. We've hedged transactions if we have them. But as a normal -- not as a normal rule, we just don't as a practice hedge the currency because of our position in the markets and the fact that for the most part the products we're dealing with are dollar based anyhow as we go into most the export markets that we deal in. So we do not do that.

The only reason I asked was because in the first quarter you only had a benefit of about $0.03. This quarter you had a benefit of $0.04, yet the currency was much more in your favor this quarter than last quarter. So I was just trying to get an idea of why didn't you have a bigger impact on your currency during this quarter? For example, Canada in terms of 9% relative to last quarter was 2%. Mexico was 4% versus -- I'm sorry, 9% versus 2%, 4% versus -2% for Mexico. Brazil was up 19% versus 8% for the last quarter. So I would have though your currency would have helped you a little bit more during this quarter.

The currencies on a translation basis, Ken, helped the South American numbers, the net sales numbers, by 14.4%. And the Asian/African, the quarter versus last year the currencies are 7.8%. So the 4% of total net sales grew by 5.4% of that was due to the change in the exchange rate.

Okay, great. Thank you very much.

Stephen Weiss (ph), (indiscernible) Capital Investment.

Nice job. Sam, I have a couple of questions for you regarding the buy side of your business. A lot of your competitors over the last year have been recently implementing strategic initiatives for just raw material cost. And a little further by establishing a better line of communication and collaboration with the supplier base. Maybe just if you could provide some color to us today on the call as to what you are planning on doing to reduce your material cost even further by establishing a better line of communication with your suppliers?

Steve, I don't know (multiple speakers)

Your corn costs or your energy costs.

Well, obviously on corn, we just buy it on the market so there is not a lot we can there other than just buy it as effectively as we can. Obviously we try to use as little of it as we can and get the best yields we possibly can get out of it because if you get more starch out of a kernel of corn, the more you get out of it, the better off you are. But our yields -- we've been doing this for a long time so it's not like we can improve the yield substantially.

As we look at most of the other supplies, we have the supply chain focus as everyone else does. We're looking at what we can do as far as taking cost out of the system on the variable products within that variable cost that we deal with. We have to look long-term at the freight side of the equation which is going to be a piece of it that we has to deal with. But if we have scenarios where we can partner with the growers in some of our international markets we do. Certainly in Pakistan, we have that relationship. We are working with our corn growers in Mexico to see what we can do there to overall reduce the overall cost of the product. But we are doing what almost everybody else out there is doing, trying to reduce the cost of the supply side of the equation with all different types of suppliers.

What are some things you have in mind concerning freight costs? Obviously that has been a big initiative on your plate. What have been some of the things you are trying to do to reduce your freight costs since it is so big?

Obviously we're trying to pass some of them on, because obviously the fuel costs are going to be there but we're looking at how we load the vehicles, how we take care of the vehicles, how we schedule the vehicles. If in fact we can get customers to take products in the middle of the night, it's a lower-cost to ship than it would be if we were shipping it in rush hour because obviously the truck is not burning as much fuel. So all of those are things that we look at to see what we can do to take the overall cost out of the system.

Are you also taking into account like backlog credits as well?

Obviously.

Thank you very much. Good job.

(OPERATOR INSTRUCTIONS) George Nissan (ph), Merrill Lynch.

Did we lose a call?

He just disconnected sir. I apologize. David Driscoll, Citigroup.

I just had a couple of quick follow-ups. John brought up an interesting question and I just wanted to explore. He was I think mentioning something about Cargill and their plans to expand ethanol. Correct me if I'm wrong but their expansions in ethanol are dry mill ethanol expansions. Is that correct?

As far as we know, that is correct.

And so the point out there for people who may not be familiar with this, dry mill ethanol expansions are a completely different business than what way you do with wet corn milling. Is that an accurate way to say it?

That is correct.

All right. So then so net-net, if somebody like Cargill decides to move into dry corn mailing, something you don't do, maybe I thought John was going after this and maybe I'm not sure what his point was. The other question then is also in terms of John's other point on droughts, $2.70 for December corn certainly is a spike up but it is my impression that using the word drought here might be an overcharacterization of the current situation. In '96, the last time we had a drought, we had $5 corn. So it is not my impression that the entire U.S. corn crop has gone down the drain. It's only -- certainly concerns have increased and we're seeing December corn at $2.70 but at this point, I am not overly concerned that we are suddenly going to run out of corn. Do you have a different impression on the corn crop?

No, David, what I have found is that if doesn't rain on LaSalle Street in Chicago where the Board of Trade is, the corn numbers will go up. Having said that, Chicago is having a real live drought. It is as dry as bone in Chicago. We track as you might guess the conditions of corn around the growing areas and certainly there are some places that are having an excellent growing season. Nebraska and Iowa are doing exceptionally well right now. Minnesota is doing well. Wisconsin is looking good. Ohio and Indiana are fair to medium. Illinois, the northern part of Illinois is in a real drought scenario at the moment.

So as I said earlier, I think this time last year the corn numbers were about the same thing as they are today. The amount of good to excellent growing areas was a little higher than it is today but certainly we're going through the pollination stages right now. But as you said, the number is at $2.70; we're not at $5.00. We do have some good growing area. We don't have a drought throughout the entire corn crop. But we're in the weather market right now and every year at this time we're having a conversation very similar to this, too much rain, not enough temperature, too little rain. I have been in this business now for 32 years and I have not seen one growing season where there hasn't been some sort of a weather scare.

Those are great comments. One question for Cheryl. I don't think anybody brought this up so far but I believe you did repurchase some stock; about $9 million you mentioned in your prepared comments, Cheryl.

That is correct. We repurchased approximately 0.5 million shares.

Can you give us some comments on your thoughts about share repurchase going forward? I am certain that we will get this question from folks.

David, as we said at the May analysts meeting as we take a look at all the opportunities that are out there for the money that we have to invest, we have a very strong balance sheet. You can see the cash at $119 million and the net debt at 424. So we have available funds to repurchase and we will continue to look at the repurchase of our stock as a viable alternative to create shareholder value.

And as we said before, David, the Board authorized a stock buyback in January of this year and it was 4 (ph) million shares. We had purchased of that as Cheryl said about 0.5 million. So ongoing we will continue to evaluate that. We won't comment on what we're going to do with it but it will be one of the options as well as investing in our business in other parts of the world.

Thanks a lot, everyone.

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

Thank you all very much and we will talk to you soon in the future. Thanks so much.

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