Ingredion Inc (INGR) 2005 Q3 法說會逐字稿

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

Good morning and welcome to our third quarter 2005 earnings conference call. It is an open conference call simultaneously broadcast on our website at www.cornproducts.com. The chart for our presentations can be both viewed and downloaded from our website in they're always available 15 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 Chief Financial Officer, and I will conduct the call.

We will indicate as we move from chart to chart so that those using our chart from the website can follow along with us through the presentation.

I have now 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 those forward-looking statements and Corn Products is under no obligation to update them in the future as or if circumstances change.

Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in today's press release can be found on 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 reconciliation of non GAAP numbers from this presentation are also available on our website at www.cornproducts.com.

Chart 3, the agenda. Today after this introduction, Cheryl Beebe will present the financials relative to our third 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. I am starting on chart 5, summary income statements for the quarter ended September 30, 2005. Net sells for the quarter were $612 million, up 4% or approximately 25 million from the same period last year. Gross profit is 87 million up 5% or 4 million from last year. The gross profit margin remained basically unchanged at 14.3% versus last year's 14.2. Net corn costs were favorable this quarter versus last year. Energy and logistics costs negatively impacted the margins year-over-year.

Operating expenses are $38 million, up 3% or 1 million from last year. Operating expenses as a percent present of net sales are 6.3%, basically unchanged from last year. Other income for the quarter was $3 million and includes a $1.8 million gain on a land sale in Malaysia.

Operating income is $52 million, up 13% from last year or $6 million. Net financing costs are 9 million versus 8.3 million last year. The effective tax rate for the third quarter of 2005 is 45%, reflecting the impact of adjusting the estimated annual effective tax rate from 34.5% to 38% during the quarter. The change in the effective tax rate is a result of a change in the mix between estimated domestic and foreign income, and the Company's current inability to absorb all of its foreign tax credits.

Minority interest for the quarter is approximately 1 million, unchanged from last year's 1 million. Net income for the quarter was $23 million versus 24 million last year. Diluted earnings per share of $0.31 is down $0.01 from last year's $0.32 or 3%.

Weighted average shares outstanding on a diluted basis were 75 million shares, equal to last year's, and reflects the impact of the 1,250,000 shares repurchased during the third quarter of 2005.

Turning to chart 6, net sales by geographic segment. We see North America's net sales at $373 million were up $2 million from last year. The favorable impact from Mexican sales of high fructose corn syrup 55 in the quarter helped to mitigate the lower coproduct values and higher freight charges on North America's net sales.

South America's net sales at $155 million are up 12% or $16 million from last year and Asia Africa's net sales are up 9% or $7 million at 84 million.

In total, the Company's net sales increased approximately $25 million or 4%. Shipping and handling costs for the quarter were up 11%.

Turning to chart 7, net sales variance analysis, we see North America's net sales growth of 4/10 of a percent is coming from volume growth of 2.1%, price and product mix decline of 3.2%, and a 1.5% favorable impact from the Canadian dollar. Again, lower coproduct values and higher shipping costs impacted the net sales across this region.

South America's net sales growth of 11.7% is derived from a favorable exchange rate of 17%. Volume declined 3.4%, price and product mix also declined 1.9% in the quarter. Again, lower coproduct values and higher shipping costs impacted this region's net sales.

Asia Africa's 8.9% net sales growth came from volume growth of 4.1%, a price mix decline of 1.6%, and a favorable exchange rate at impact of 6.4%.

In summary net sales for the quarter were driven by a 1.1% increase in volume, a -2.7% change in price mix, and a 5.8% change from favorable exchange rate.

The next chart, No. 8, operating income by geographic segment, we see North America's operating income at $23 million, up 2 million or 10% from $21 million of last year.

South America's operating income at 23 million was down 3% or $1 million. Asia Africa's operating income is $14 million, up 64% or 6 million. Corporate expenses were $8 million versus $7 million last year. Total Company operating income for the quarter was 52 million, compared to $46 million last year, despite a 27% increase in year-over-year energy cost.

Operating income as a percent of net sales was 8.5% versus 7.9% last year.

The last earnings chart for the quarter, chart 9, is the estimated source of diluted earnings per share for the quarter ended September 30th, 2005. The Company gained $0.05 from changes in operations, $0.05 from currency values, $0.02 from the increased volume offset by a -$0.02 in margin.

Nonoperating changes reduced earnings per share for the quarter by $0.06. The effective tax rate change was a -$0.07, again the 45% effective tax rate for the quarter versus $0.33 last year third quarter, and the change in minority interest contributed a penny.

I am now turning to chart 10, summary of income statements for the nine months ended September 30th, 2005. Net sales for the nine-month period are up 4% over last year at 1,765,000,000. Gross profit at $250 million is down 20 million from last year or 7%. Margins are 14.1% versus 15.8% last year. Operating expenses are 117 million, are down 1% from last year.

Operating expenses as a percent of net sales are 6.6% versus 6.9% last year. Other income at 6 million is up 4 million from the same period a year ago. Operating income is 139 million, down 9% or $15 million from last year. Operating margins are approximately 7.8% versus 9% last year. Net financing costs are $28 million versus 25.8 million last year. The effective tax rate for the nine months is 38.5% versus 33% last year. Minority interest is $2 million this year versus $7 million last year and, again, reflects the increased ownership in South Korea. Net income for the nine months is $66 million, down 13 million from last year's 79 million or 17%. Diluted earnings per share are $0.87 versus $1.07 last year.

Looking at the cash flows for the quarter, chart 11, cash flow provided by operations, is $39 million versus 17 million last year. Net income was 23 million versus 24 million last year. Depreciation at $27 million is up 2 million. We used 5 million in working capital for the quarter versus $29 million last year. Cash invested in the business was 29 million versus 20 million last year and was invested in our fixed assets.

Cash used for financing activities was $35 million. Debt decreased $3 million. Dividends to CPO shareholders were 5 million and we spent the remainder to repurchase shares in the quarter.

Looking at the key ratios, chart 12, we see a return on capital employed decreased for the last 12 months from 7.1% to 5.3%, reflecting our lower 2005 earnings and the change in the tax rate. Debt to total capital ratio is 27.8%, a slight improvement versus last year's. Operating working capital increased to 261 million from 206 million a year ago. Operating working capital as a percent of net sales increased to 11.1% from 9.1% last year on higher raw material inventories across all three regions.

The debt to EBITDA multiple increased slightly from 1.9 times to 2 times. Net debt, debt less cash, was $447 million versus $440 million last year for a change of 7 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 our outlook for 2005. I am now switching from chart 13 to chart 14.

First of all, the currency update chart 14. First of all, our definition of newsworthy again is that we just got (indiscernible) only those currencies during the comparable quarters in our top 6 countries to change by 5% or more versus the US dollar. And currencies in the smaller countries must change by 10% before they are highlighted. The list is alphabetical by region.

Clearly, we have seen a fair amount of currency movement this last quarter. Of our top six countries, four had currencies of significantly appreciated versus the U.S. dollar. Argentina and South Korea obviously less so. It has, however, been a double-digit upswing for much of our South American base.

As we have mentioned in the past, a downside to superstrong currencies is that imports can become a way of life in a country with an appreciating currency. And this can affect demand for domestically manufactured products, at least for a while, and exports can be slowed -- both ours and those of our customers.

The intriguing feature of this quarter's comparison is the binary nature of it. Either currency is appreciated considerably or not much at all. Also interesting to see for those who routinely follow events in China, the floating of the ramimbi (ph) against the basket of currencies China monitors, clearly hasn't accomplished what almost every other country wanted. A significant strengthening of the Chinese currency.

Chart 15, third quarter 2005, in aggregate. In total, as Cheryl said, net sales were up 4% in the quarter while earnings were off by 3% to $0.31 a share. This quarter featured the catch-up for taxes as our expected effective annual tax rate shifts to 38.5%. This meant that for third quarter, that our tax rate was 45% as we brought our year-to-date taxes into line for the annual rate.

In North America, the solid performer was again Mexico with a major gain on operating income because of the sizable increase in shipments of HFCS to the soft drink industry. The U.S. dealt with the Argo boiler problems and more on that in a moment. And both the U.S. and Canada had to contend with higher costs, brought on by the energy run-up as well as somewhat slower volumes.

In South America, we continue to deliver very good results, delivering close to last year's performance. And in Asia Africa we have continued our strong rebound.

Chart 16, North America. Operating income for the region increased by $2 million to 23 million on record third quarter net sales of 373 million. The region's approximate $2 million increase in sales, with 2% increase in volume and the 10% improvement in operating income, were all driven by HFCS shipments to soft drink customers in Mexico, importantly returning our Mexican business to income levels not experienced since 2001. And that is truly good news.

Q4 of last year was the quarter that first displayed the impact of the return to HFCS in Mexico. The headlines on the trade front continue to be favorable as well. First, because of the ongoing drumbeat from the WTO against Mexico's tax on HFS sweetened -- HFCS sweetened beverages and, the most recently announced, the 250,000 ton swap of Mexican sugar exports to the U.S. in exchange for HFCS exports from the U.S. into Mexico. And this news was heartening.

While the countries are still working out the details and it is unfortunate this agreement is only for one year, it should be a step in the right direction. The balance of our Mexican business is performing well.

Shifting north to the U.S. and Canada, as we projected in our press release and conference calls, continued pressure on pricing, primarily in corn gluten feed as well as absorbed freight increases, have had an unfavorable effect on pricing. Volumes are down and as we pointed out on September 22nd our boilers at Argo have been less reliable in the third quarter, increasing maintenance cost and enforcing us to buy more expensive natural gas for a backup boiler for that plant.

Furthermore, as we have stated repeatedly and as any significant user of natural gas in any industry will attest, overall natural gas costs have been higher this year over last particularly affecting our Canadian plants where we do not burn coal as our primary source for energy. As we have stated in the past, all U.S. corn refiners have always used natural gas to dry a number of products we all make -- starch, gluten meal, gluten feed and so forth.

Thankfully, Corn Products U.S. plants, unlike some others and excepting our mixed several quarter problem at Argo, our plants use coal and other solid fuels as their primary energy source.

Chart 17, South America. Net sales increased by $16 million during the quarter, due to the continued upward trajectory of several of our South America countries' currencies. However volume was down and from the same root cause, those very same strong currencies. As mentioned during my earlier discussion our customers, and to a degree our Company, becomes somewhat limited in our abilities to export products against weaker currencies. As anyone who has followed our Company or followed these economies, they will have seen that events and trends change over time and we believe that our very solid business position, our strategy, and our long-term prospects continue to be very strong. In fact, as can be seen from our geographic breakdown, South America operating income is off about only 3% or $800,000 against a very tough, record-setting comp with last year's third quarter.

So we believe we delivered very good quarterly results in this region. Like the rest of the world, energy costs are up and primarily because of weak coproduct or byproduct prices in our animal nutrition area, net raw material costs are up as well.

Our recently announced expansions in Brazil are underway for both specialty and basic ingredients.

Shifting to chart 18, Asia Africa. We have stated a number of times that we expect our Asia Africa region would lead the Company's earnings growth this year. Clearly results from the third quarter make that point well, even when the gain from the landfill in Malaysia is excluded. A strong quarter.

Starting in the second quarter of 2004 last year, South Korea 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+ % in world corn cost in the spring of that year plus the tripling of ocean freight cost at the same time, which dramatically changed the raw material economics for our business in South Korea.

Now that we have left the problem and costs are more normal, our bottomline recovery delivered by South Korea and its impact on the rest of our Asia Africa performance has been evident. About the only missing element in South Korea has been the ongoing slowness in the domestic economy. But possibly even that appears to be improving now.

So there it is again. We continue to project that Asia Africa will lead the Company's operating income growth in 2005. We believe our positions are solid and that there is considerably more room for growth in our future.

Now on chart 19, 2005 outlook. We reduced EPS guidance to $1.16 to $1.22 versus last year's $1.25 as of our September 22nd press release. In North America, we expect that the U.S. and Canada will deliver results lower than last year. On the other hand, we also believe that the boiler problems will be temporary and expect that they will be resolved with the installation of our new coal-fired boiler with its anticipated start up during the third quarter of next year at our Argo plant.

We believe that the financial assumptions used for the balance of our U.S. Canadian operations during this year should deliver results consistent with our updated guidance.

Mexico, happily, should have a great year with an excellent operating income turnaround continuing through the rest of year, though at a slower rate since we are lapping the HFCS gains in Q4. The rest of the Company should do well, led by Asia Africa. As Cheryl said, our estimate for this year's tax rate is now 38.5%.

Finally, as we noted in our September 22nd press release and further commented in today's press release, the situation in Canada is not resolved. Over the coming months, we expect to learn more about whether and to what degree the Canadian government will impose counterveiling (ph) and anti-dumping duties on U.S. corn. Year's end appears to be the likely timing for the preliminary decision.

We are doing all that we can to minimize what might be a very difficult problem for our Canadian plants. Already dealing with even further increasing energy costs that, in an earlier era, would not have been imaginable. And now our Canadian plants face the potential of duties on U.S. imported corn that could raise the cost of all corn in that country and mean the closure of one or more of our plants there.

As we've said however in our September 22nd press release quote "the Company does not believe that the potential imposition of duties would have a negative effect on the Company's consolidated operating results on an ongoing basis, excluding the impact of any potential restructuring activities that may occur." We will comment further as more information becomes available.

Sam had a comment.

Yes. Before we go to questions and answers I think all of you are aware of the fact that Mr. Vandervoort has announced his retirement at the end of this year; and this is probably going to be his last call unless I can entice him to come back from his cruise as scheduled for January of next year during our conference call.

Likely. Likely.

I don't think that is going to happen. As all of you are aware I believe, when Dick took over the the job of IR he had little to no experience in the IR area and he learned it by doing it. He got us through many IR changes, and changes in the rules of Investor Relations and did it well. He raised the bar for Corn Products and, for my opinion, he raised the bar for others that follow in this field.

He gained the respect of many -- hopefully most, if not all -- of our investment community. Dick has worked for Corn Products for 30+ years and Dick and I have worked together personally for 25 of those years.

He will be missed by our Company particularly his sense of humor -- which, at times, is questionable. His booming voice which will be heard will not be heard throughout the corridors of our offices going forward. And the 30+ years of experience that he has had and the knowledge that he has of our business. I want to thank him personally for the experiences that I have had with him. And on behalf of all of Corn Products employees worldwide, I want to thank him for them as well.

So Mr. Vandervoort, thank you very much. We appreciate it. Keep up the good work.

Okay. Thank you.

With that, Jake, we will open up for questions and ready to take any questions you have got.

(OPERATOR INSTRUCTIONS) John McMillin, Prudential Equity.

Good morning and good luck, Dick. Cheryl, what's the fourth quarter tax rate assumption?

We are assuming the 38.5%.

It will still be up versus last year?

Correct and last year in the fourth quarter, John, the fourth quarter had the impact of taking the nine months from 33% down to 30%. So I think the fourth quarter last year had an effective tax rate of 7% for the quarter.

Okay.

Soak this year the comparison will be based upon the outlook -- 38.5% versus 30% -- which is the effective rate used last year.

Year-over-year.

Year-over-year.

Sam, say that if duties are put on U.S. foreign (inaudible) Canadian business clearly with (technical difficulty). And even if you close those plants down it seems to me you have some lost income as a company. Do you seem to be implying by your statements that you (indiscernible)?

That's correct.

Can you explain that?

Excuse me?

Can you explain that?

What we're seeing, John, we believe if the plants go down obviously with the increase in energy costs we have experienced this year and experiencing going forward as well as the shifting of the business that we look to do, we believe that we can maintain the income at about the same level we've experienced in the past. We are not obviously looking to shut the plants down. If we can keep them open, it would obviously mean that we are going to do better than what we're saying we're doing right now (MULTIPLE SPEAKERS)

Are you saying that whatever income you lose in Canada you'll make up in North America?

That is basically what we're saying. Yes.

In U.S.?

Yes.

How do you know that?

Well, we're projecting that, John. We have certain things we can control internally; and we certainly believe that that is the case. Otherwise we would not be saying it.

I'm just trying to understand it.

I can't give you the specifics of it but I can tell you that is what our beliefs are right now, going forward.

Sam I've heard some multiple sources that more than one foreign refiner has sent out letters or notices they are fostering customers, asking for 20+ increases in HFCS 55 for calendar 2006. Can you discuss that?

Those price announcements have been sent out. We have also sent out announcements to the customer base. Part of the reason for it is, obviously, the increase in the cost that all of us are experiencing but certainly all I can speak for are increases in cost. And those announcements are in the market today.

That is for all products not just high fructose corn syrups.

Yes. All liquid sweeteners.

Just to understand your cost base a little bit more and how it might compare to competitors, if it -- let's do it on a dry basis where the stuff is sold for whatever it is $0.10. Let's say your costs are close to that $0.10, could you just give me a rough breakdown what percent of your cost are for foreign and then energy? Rough percentages?

We've not given the energy costs out ever before. We said that our net foreign ranges from 40 to 60-ish percent, depending upon the year. But we have not given out the percentages of energy cost, but as Cheryl made comments in her prepared remarks the energy numbers are up significantly this year over last. And we are projecting next year over this.

(OPERATOR INSTRUCTIONS) Ken Zaslow with Harris Nesbitt.

I guess the first question is just on operational issues. We are coming into the winter now. You've surprised us a couple of times with freezer in Canada, boilers in Argo. Is there anything we should be thinking about that might -- rain, sleet, hail, whatever that might impact operations over the next six to 12 months?

It's been flooding on the East Coast so I can't comment on that but as far as I know right now, the temperature in Chicago is going to be 70 degrees today. We are not forecasting anything. However we did make, obviously, the comments with respect to the boilers on the 22nd of September. We have made the world aware of that issue. But there's nothing in the cards right now that we can foresee or predict. It is going to be problematic going forward.

So operational everything seems sound right now?

Operationally everything seems sound right now.

In terms of natural gas, to what extent are you hedged not on the outside the Argo plant -- I understand that you are buying gas, obviously, on the stock market. But outside of that, how long are you hedged? Are you hedged through the winter?

It depends upon where you are asking the question about but in the U.S., we hedge on an annual basis and we are not hedged through the winter now.

In terms of the corn hedging side of it, how -- to what extent have you been evened hedging throughout the summer into the now? Or have you let it ride a little bit longer than average just because corn price is coming down?

I'm not going to talk specifically what we've done but as I've told you before our policy is, we have an anticipatory hedge and then we hedge business as we book the business. So obviously we are a little early in the booking process and I won't comment on how much we've hedged, if any, on the anticipatory.

In terms of Canada you are already locked in with high fructose corn syrup contract. Is that not true? I think this is a time a year I know that the U.S. takes a little longer but Canada is largely done?

I'm not going to say where we are in Canada but we are -- we generally start contractings back in September and it runs through October, November and early December.

David Driscoll with Citigroup Investment Research.

Dick, certainly I would like to wish to the best on all your future endeavors. Thanks for all the help over the years.

Very good. Thank you, David.

Sam, did I hear you correctly on the question about natural gas? Forward coverage, that you said that you are not covered for this winter in the United States?

That's correct.

Can you give us an update on the boiler project just in terms of is there any chart chance that this thing can come online in the second quarter? And if not, maybe what I guess I think a lot of us would really appreciate is your confidence level that this project will come online at least in the third quarter, as I think you are advertising right now?

Right. David, we are doing everything we can to move it up. I don't want to forecast now that that is going to happen. I am confident it will be on in the third quarter -- hopefully very early, but we are working with a date that's in the third quarter right now. We have assigned all that we can to it to push it forward. We are prepared to spend money to push it forward if we can. But right now all I can say is it is a third quarter schedule.

I think John was asking a fairly important question here on the price increase and really the environment that is going in for the U.S. contracting season coming up. I, too, have seen the same numbers that John was quoting - the 20% price increases on liquid sweeteners. Just curious, can you just characterize for us how you really view this environment in terms of your experience at the Company over a long course of time. How do you feel about the Company's ability to get price increases going into this quarter?

I guess what I'm really driving at here is we have heard that the Company has tried to get price increases in the past, the industry has tried to get price increases in the past and has been unsuccessful. What is your assessment of the strength of the case this go-round?

Let me not assess the strength but let me just give you the facts. We have, all of us have waited for an announcement that would allow high fructose corn syrup to go into Mexico. That announcement is now there and it is cleared for the fructose to go in. One of our competitors recently announced the closing of a plant effective January 1st that produces high fructose corn syrup and other products, but primarily fructose, and represents a reasonable 1 to 2% share of the marketplace on that productline. Maybe a little bit more than that.

We have announced the possibility of having to close down facilities in Canada depending upon what happens with the raw material going into that country and we've talked about the increases in costs that we experience. We've also shared with you the fact that, in the U.S., we believe that we are more on a solid fuel system than our competitors would be on a percentage basis. That would say, therefore, as we look at our numbers and energy increases, gas increases and others, that we should be competitive or on the more than competitive side of the cost structure in the U.S. as it relates to energy costs. So given that scenario, David, the price increases out there are hoping to cover the cost increases, as well as are reflective of the change in the market dynamics that exist today.

This then goes right into the concept of share repurchase. So when we look at the topline growth of the Company, I mean, I think it's been quite good. I think that the way you report your segments of course with North America having this U.S. and Canadian bloc versus the Mexican area, it sometimes -- I think it is hard for people to see really what is going on within the numbers and how much one area has been doing poorly versus another area that has been doing well. I suppose that I'm really trying to drive at here is, it appears to me the Company is in a better situation than it has been in for quite some time, just on an -- almost on an industry basis in the United States. With that thought, assuming you agree with that, would it not be logical for the Company to continue to step up and do significant share repurchases. And I do obviously note that you did something like 1.25 million shares in the quarter.

We' did 1.25 million shares of the quarter and I think 1.7, Cheryl, for the year? 1.7 and change for the year. David, we will continue to evaluate that on a regular basis as we do all other investment opportunities and dividend payouts. And I won't comment on what we will do going forward but it's something that we will continue to look at.

Could you just at least give us a flavor here of your assessment? I mean, you would agree with make that if the environment is getting much stronger and your outlook is positive, I mean, I think a lot of folks out there have been very concerned about the problem that occurred in the first quarter and then again the boiler issues. And so that appears to give you an opportunity on the stock. If really the environment is as good and if third quarter things turned back around again, it would stand to reason that you have a limited time period in order to actually make some fairly significant repurchases at good prices.

David, I don't mean to be blunt but, basically, we are going to evaluate that along with everything else. We have to look at the opportunities we have in other places as well as the opportunities to buy back. And we will evaluate that on an ongoing basis.

Cheryl, can you give us just a quick comment here on the tax rate? When we get into 2006, if I make the assumption that the new boiler comes online during the third quarter, is it proper to assume that all else equal, the tax rate should revert back to where it was previously before this boiler problem came up?

It is the ultimate forward-looking statement, David, in terms of the estimated annual effective tax rate for 2006. If the pricing holds in the U.S. Canadian market and the income level, the shift back to domestic and foreign and our ability to observe those foreign tax credits comes back, then I would say we are in the historical range of 33 to 36%. It is based upon an annual. It only changes if there is a change in the circumstances that would change our full year outlook.

As Cheryl said at the last meeting, David, our long-term expectations are that we would be in that range certainly after the business stabilizes. And next year is the question mark as to when the boiler comes on, the other issues that relate to the U.S. business.

(OPERATOR INSTRUCTIONS) Christina McGlone, Deutsche Bank.

It looks like things in Mexico are really shaping up and if Congress doesn't include the tax in the '06 budget, what do you think the incremental benefit would be in terms of EPS? It looks like Mexico has been a fairly substantial contributor this year.

I think we've basically said we are back to where we were before and any incremental either way is going to be dependent upon our cost factor and what product we can put out of the plant and what the prices are that we can get for it. Certainly we are selling the volumes that we sold before through the (indiscernible) that our customers have. So I think it is reasonable to assume that this is going to be business continuing on and we will get whatever incremental we can get out of that.

If we go back to the analyst day, George (indiscernible) had talked about the ability of South America to pass through higher costs. I think this is the second quarter -- maybe even the third -- that price mix has been negative in the region. And I want to understand that better. I know there might be a lag, but why hasn't that region been able to pass on higher net corn and energy costs?

We will continue to work on doing that but when you have lower volumes and we do have some competitors down there, it's not quite as easy to do if, in fact, those volumes are limited on sales because of the exploit capabilities. As well as the fact that the major exporting industries that we have are some of our higher price products right now, so we have to look at that market stabilizing. We expect that it will. Georgy and his team are working to pass increases through as well and we will continue to do that.

But as Dick made the comment in his report, we are within striking distance or extremely close to what was an extremely good quarter comparatively -- well, not extremely good. It was a record quarter by far last year and we had a pretty good quarter again this year for third quarter in South America.

The balance between currencies and price is always in place over time so we had a much stronger currency and the price mix obviously. Is weaker. That has been the historic trend over the six, seven years that we have been publicly traded. But these things always tend to move in tandem.

Then I read reports that tapioca prices in Thailand are up a lot because of demand for ethanol production. And I know last year that impacted the Asia Africa region. Would that be an impact this year?

The tapioca prices are up primarily because of the drought that occurred in that country, Christina. I have not heard anything about the ethanol but the drought was severe. The worst drought that they have had in gosh knows how long. That seems to be alleviated. We are getting the tapioca roots in now. They have been delayed -- actually, we were having problems getting them in throughout the course of this year but we are getting them in now. So that we expect that that should continue to move forward and with all things being equal and no major drought situations, the routes should be coming through for us in that region. But we're not saying a shortage as a result of methanol.

I guess the last question is housekeeping. Cheryl, big gain on the land sale in Malaysia. Did that fall in -- in the segment operating profit, was that in Asia Africa or was that in corporate?

If you are looking at the top-level income statement it is in other income. When you go to the regional breakouts, it is in Asia Africa.

Ann Gurkin. Davenport Securities.

Wonder if you could help me understand, in Brazil the volume was up 3%. Is that primarily due to currency or is there a shift and what farmers are growing?

I think we are saying it is primarily off as a result of the currency issue and that our customers nor we can export products -- not that we can't but it's reduced, because of the straining of the currency. And we are seeing a volume reduction primarily reflecting that.

Brazil is still a net exporter of corn and that -- we don't expect that to change.

However again with the currency issue being what it is, the corn exports could be reduced to some extent. Hopefully over time that will benefit us because then we have a lower raw material cost in country.

Do not think farmers shift production to crops set of less expensive to grow due to the higher fuel cost, fertilizer cost, whatever?

I think that Brazil over the last two years has been cultivated more and more land, both for corn and soybeans. They have been growing and going to the Amazon, doing landfill projects and everything else to be able to create greater crop volumes. They have two crops a year and as Dick said, they are an exporter of corn, anyway. So I don't think that is going be an issue at all.

And then, Cheryl, can you give us capital spending, capital spending forecast for this year and next?

We haven't given one for next, year. We said this year was going to be about $170 million; and we said the big increase this year was primarily due, exclusively due to the coal boiler at Argo.

(MULTIPLE SPEAKERS) spending will continue into next year as well but the big bump was this year.

John McMillin. Prudential Equity.

The currency gain of $0.05, I guess surprised me that you still had that much left. I guess some of that comes from Brazil? I'm trying to go through -- what's the kind of outlook, if currency rates hold. Pretty much those currency profits I would think would be slowing or stopping or reversed?

I guess, John, if it stabilizes we think the marketplace will start to reflect the volume movement, because it will stabilize in the country. We see Brazil, the forecast there is the currency is going to weaken somewhat. However that has been the forecast for the last year and it hasn't happened. We have seen the weakening of currency over the last year in Korea. Canada has strengthened, Mexico has strengthened but, again, we don't execute the business based on currency. If the currency is weak, we tend to see stronger volumes and as a result, we see better pricing in the region. When currencies are very strong it comes in that way. So I won't say it's a hedge but it certainly give us an opportunity to go either way.

I guess my point is, I just -- I saw $0.07 of currency gain in the first half and then I just saw $0.05. Most every company, international company I follow is getting less foreign currency gain. And I'm just trying to understand it.

They are very Eurocentric in many many cases and the U.S. dollar versus the euro has been unfavorable. I mean it has obviously strengthened recently but we don't have anything in Europe. So a lot of companies have a lot of business in Europe.

Our currency comes from the biggest impact is Brazil, Canada and Korea. And we had a strengthening of the Colombian peso. Year over year, you can't look at today's rate but if you look at the average of the third quarter 2005 versus the average of 2004, you'll see that there was a significant strengthening of the Brazilian real, the Colombian peso, the Korean wan and the Canadian dollar.

I think that that mix is a bit unusual for most companies in those three countries.

Yes I'll agree with that. Just trying to understand going back to my questions dealing with Brazil. Clearly the country is not on the strongest of (inaudible) to handle in '04. I guess the currency has been very strong. You want a strong Brazilian real or would you prefer it weak? Or doesn't it matter?

Well I guess it to some extent it doesn't matter. Ideally I would rather see if something's weaker than it is today because we do have a stronger economy in general down there then. So that helps us and it helps the Brazilian country and the -- overall the economy. But as I said earlier to some extent we have a hedge because of the way our business runs but, ideally, we'd like to see the economy running stronger in their exports.

They were really cooking when their real was 3-ish. And they were exporting strongly and they could compete very effectively with Argentina. They can compete with the rest of the world. And we saw our business a lot stronger down there on the part of our customers than we see today because they cannot export as well.

So ideally we are fine if it weakens. But we can survive obviously and do well when it's strong.

My last question. As you pointed out the tax issue in Mexico has become almost irrelevant to an injunction some of the major bottlers have gotten. Is there any potential that those injunctions might be lifted or stopped as you look at 2006?

If I could answer the Mexico question right I think I would done it a while ago. I really don't know. Right now the negotiations that have taken place between the governments would indicate that things should be okay. The Mexican government had the right right along if they wanted to take the empowers away from those customers. They haven't done it this year and now they have negotiated an agreement with the U.S.

So from our perspective now, without having any inside information and believe me, nobody has any inside information on the Mexican government. I don't see any reason for it to happen but that is not saying you can't.

David Driscoll.

I just had a follow-up question regarding ethanol. Sam, in the past we've had a number of conversations about the fact that Corn Products doesn't produce any ethanol and there's been questions about whether or not you should do it. I want to revisit it now given that we have petroleum prices at markedly different points than in the previous periods when we had this question out there. By my calculation and it is just rough here, but it looks to me like you can have something like a one-year payback on an investment into some finishing capacity that I suspect would go at your big plants in Argo. Have you done these calculations? And what are your thoughts as to the desire to do this and really tighten up the starch market even further in the U.S.?

David, the 12-month payback is about right. Our numbers would show it's between 11 and 13 months. So I would say that your estimate of it is right. We will continue to look at it and evaluate it as everything else along with your other questions of stock buyback. Where do you put your money? Certainly we have to look at all those alternatives being ethanol, the continued growth in other parts of our business geographies. Stock buyback and all of it, so that on a continual basis and let me assure you, we look at all those things to see where we want to be whether or not we invest in it going forward.

(technical difficulty) time would be far less maybe within 12 months. Am I somewhere in the right ballpark?

You are in the right ballpark.

Look forward to hearing more about it.

Ken Zaslow, Harris Nesbitt.

You said during your comments that the coproducts were down year-over-year. The outlooks because of the comps look pretty favorable going over the next three to 12 months going forward. Is that in your idea the same outlook that I've -- is that your outlook also? And how quickly does it go through your income statement? Is it immediate or is there any sort of delay?

Is that on the coproducts alone, Ken, you are asking or is that just in general?

Coproducts. Just the coproducts. Corn gluten meal, corn gluten feed and corn oil. They all look, with the exception of corn seed, they all look like they are going to be significantly positive over the next three to 12 months. On a year-over-year basis.

Just one comment. You remember that of the coproducts streams, corn gluten feed is by far the biggest single one and that will continue under pressure, probably in perpetuity as more and more methanol capacity comes on with their byproduct called (indiscernible) dry grains so we are going to see continued pressure on the corn gluten feed. As to gluten meal and corn oil, we would guess that they would probably stay firm, given what we are looking at in competitive crops.

And they flow through pretty quickly.

Thank you very much.

There is no futures market so that's the basis for the flow through quickly comment.

(OPERATOR INSTRUCTIONS). Without additional questions I will turn it over to your host for closing remarks.

Very good. Thank you everybody. I will make no forward-looking statements with regard to my future other than I am planning a hell of a good one. And I certainly have appreciated working with all of you. It has been a really fun ride and thank you all very much and I will be around. Bye-bye.

That will complete your conference for today. Thank you for your participation and have a wonderful day.