Ingredion Inc (INGR) 2006 Q1 法說會逐字稿

Good morning everybody and welcome to the Corn Products 2006 First Quarter Earnings Call. As a reminder, today’s call is being recorded. At this time, I’d like to turn the call over to the Director of Investor Relations, Mr. David Prichard. Please go ahead, sir.

Thank you, Christine, and good morning everyone. Welcome to Corn Products International’s 2006 first quarter earnings conference call. I’m David Prichard, Director of Investor Relations. Joining me today to lead the call are Sam Scott, our Chairman, President and CEO; and Cheryl Beebe, our VP and CFO.

This is an open conference call simultaneously broadcast on our website at www.cornproducts.com. The charts for our presentation this morning can be viewed and downloaded from our website and they are always available about 60 minutes ahead of our conference call. Those of you using the website broadcast mode for this conference call are in listen-only mode. Sam Scott and Cheryl Beebe will be making this morning’s presentations and they will indicate as they move from chart to chart so that those of you using our slides from the website can easily follow along through the presentations.

Now I have just shifted to chart 2 in our presentation, which is our agenda. Cheryl Beebe will present the financials for the first quarter with appropriate analysis and flavor. Following that, Sam Scott will discuss our 2006 outlook, comment on a few key issues and update you on our pathway strategy progress before we move to the Q&A period.

I have now shifted to chart 3, which is our forward-looking statement. Our comments within this presentation may contain forward-looking statements. Actual results could differ materially from those predicted in those forward-looking statements, and Corn Products International 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 this morning's earnings press release can be found in the company's most recently filed annual report on Form 10-K and reports on Form 10-Q and 8-K.

Finally, statistical and financial information and reconciliations of non-GAAP numbers from this presentation are also available on our website at www.cornproducts.com and, as you will see, are included as an appendix to this slide presentation.   With that, I am now pleased to turn the conference call over now to our Vice President and Chief Financial Officer, Cheryl Beebe. Cheryl?

Thanks, David. Good morning everyone. I am starting on page 5, Summary Income Statement for the quarter ended March 31, 2006. Net sales are a record $615 million, up 9%, or approximately $48 million, from the same period last year. Gross profit at $93 million is up 28%, or $21 million, from a year ago. The gross profit margin increased to 15.1% from 12.8% last year. These increases reflect significantly-improved performance throughout our North American businesses.

On a consolidated basis, net corn was favorable during the quarter; however, energy costs were up 26% from the same period last year. Operating expenses are $48 million, up 21%, or $9 million, from last year. The increase relates to higher variable compensation, including stock option expense, as well as the effect of stronger currencies, primarily in South America.

Operating expenses as a percent of net sales are 7.8%, compared to 6.9% in the year-ago period. Operating income is up 11 million at $46 million, or 31% from last year. Operating income margins for the quarter improved 130 basis points, 7.5% versus 6.2% last year. Financing costs are $7 million, down from 9 million a year ago, principally reflecting increases in capitalized interest, higher interest income and foreign currency translation gain.

The effective income tax rate for the first quarter of 2006 was 38.9% versus 33.5% for the same period last year. We are estimating the effective tax rate for the year to be approximately 37%, down slightly from last year’s 37.5%.

Net income for the quarter was $23 million, up 42% from last year. Diluted earnings per share of $0.31 is up 41%, or $0.09 from last year’s $0.22. Our weighted average shares outstanding were down approximately 1 million shares from the same period last year, reflecting last years repurchases.

Turning to page 6, Net Sales by Geographic Segment, we see North America’s net sales are up 10% at $376 million, or an increase of $32 million. South America’s net sales at 151 million are up 7%, or $10 million from last year, and Asia/Africa’s net sales are up 6%, or $6 million.

Turning to page 7, Net Sales Variance Analysis, we see North America’s net sales growth of 9.5% is coming from price product mix improvements of 6%, reflecting the first quarter impact of the low teen pricing increase we are expecting this year. Volume growth of 2.4% and a favorable currency translation benefit of 1.1% associated with a stronger Canadian dollar. South America’s net sales growth of 7.3% reflects a 10.7% appreciation of regional currencies, particularly the Brazilian Real, and a 3.5% volume growth partially offset by a -6.9% price product mix.

The price product mix decline mostly in Brazil was caused by the combination of a strong Real and concerns over the Avian flu and hoof-and-mouth disease which dampened exports in various industries as well as aggressive pricing by the tapioca starch producers. All of these factors put pressure on pricing in the short term. Asia/Africa’s 6.5% net sales increase reflects volume growth of 6.6% and a 2.5 % benefit from currency translation which more than offset a 2.6% decline in the price product mix category.

Turning to page 8, Operating Income by Geographic Segment, North America’s operating income rose to $24 million from $3 million last year, an increase of $21 million as earnings were up throughout the region. U.S. and Canadian businesses swung to profitability and Mexico’s income grew significantly. This result was achieved despite a 25% increase in energy costs in the region compared to the same period last year. South America's operating income of $20 million for the quarter declined 27%, or $7 million, primarily reflecting lower results in Brazil and Argentina. I’ve already discussed the reasons for the Brazilian decline. Argentina is incurring higher net corn costs and energy costs. Asia/Africa's operating income of $13 million was down 4%, principally attributable to a soft Korean economy.

Corporate expenses were up $3 million or 38%, mainly due to increase increased incentive compensation costs, including the expensing of stock options. The stock option expense was approximately $1.3 million for the quarter, and is estimated to be 5 million for the full year. Again, total operating income for the quarter was $46 million, a 31% improvement over the 35 million we earned a year ago.

The last earnings chart for the quarter, page 9, is the estimated source of diluted earnings per share for the quarter ended March 31, 2006. The improvement is 100% from operations, $0.04 from margin improvements, $0.03 from volume growth, and $0.02 from currency movement. Lower net financing costs added $0.03, which were offset by the impact of a higher effective tax rate. The first quarter tax rate is higher due to timing differences.

Looking at the cash flow for the quarter, page 10, cash provided by operations is 5 million versus $29 million last year. Net income was 23 million versus 17 million a year ago. Depreciation is up 2 million, at 28 from last year's 26. The working capital increase by $36 million primarily reflecting higher inventories. Cash invested in the business was 36 million versus 23 million last year, reflecting an increase in our capital expenditure, and includes the Argo coal boiler project. Cash provided by financing activities was $5 million compared to 9 million used in financing activities last year.

Debt increased 9 million during the quarter as compared to a $13 million decrease a year ago. We paid dividends of 7 million this quarter versus 6 million a year ago, and we received $3 million of cash from the issuance of common stock during the quarter, as compared to $10 million in the first quarter of 2005.

Turning to page 11, the key ratios, the total debt to total cap ratio is 27.4%, down from 29% a year ago. Operating working capital increased to 243 million from $237 million last year. Operating working capital as a percent of net sales was 10.1% versus 10.3% last year. The debt to EBITDA ratio also improved 1.8 times from 2.1 times. Net debt, which we define as debt less cash, was $448 million at the end of March, down from 459 million last year.

That’s it for the prepared financial remarks. I will pass the call over to Sam for the outlook comments.

I’m going to discuss our 2006 outlook, update you on several key issues, and then review our 5-year pathway strategy before moving to your questions.

Turning to chart #12, our 2006 outlook. We expect that diluted earning per share in 2006 should increase in the range of 16 to 24% versus $1.19 in 2005, which was our second best year ever. Our best year was $1.25 per share in 2004. Earnings in the second half of the year should be somewhat stronger than the first half we expect good revenue growth throughout 2006.

Importantly, our expected earnings per share improvement this year will keep us on track to achieve compounded earnings per share growth in the low double digits over the 5-year period 2003-2008, one of the financial targets we have committed to achieving. We also expect an increase on return on capital employed a key performance measure for our company.

Finally, we continue to expect capital spending of approximately $150 million in 2006, including costs connected with the completion of the Argo coal boiler project.

Turning to chart 13, our 2006 outlook by region. First, North America. Last year, we talked about expectations for a significant turnaround in our North American business in 2006. In fact, we do believe that most of our earnings per share growth this year will be driven by major North America profitability improvements. This should come primarily in the U.S. business, along with continued strong growth in Mexico across all its product segments. A key driver for this region of course would be the higher contract pricing in 2006 for our U.S. and Canadian businesses.

The installation and start up of our new coal-fired boiler at Argo, our largest facility outside the Chicago area, remains on schedule. I am pleased to report the successful completion of the important tie-in of this boiler this month.

Other key events include the expected first fire-up of the new boiler in July, followed by project completion by the end of September. We anticipate our 2006 operating income to be negatively impacted from these activities by approximately $10-12 million, which is incorporated in our EPS guidance, and was part of our original plan for this year.

Moving to a recent development, we are pleased with the April 18 ruling by the Canadian International Trade Tribunal that imports of U.S. corn are not injuring Canadian corn farmers. The Tribunal’s decision to cancel the duties of $1.47 per bushel on U.S. corn and provide for 100% refund of duties we have paid, plus interest. This ruling supports our position from the start that the duties were unfair and unjustified. This is good news for our company and particularly good news for our Canadian employees and Canadian customers in the long-term.

Turning to South American and Asia/Africa on chart 14, we do expect lower results this year from our South American region, which is admittedly disappointing after two record years. This is primarily due to market developments in Brazil, which is a twofold issue.

First, the stronger real is impacting the country’s exports in various industries, which in turn has reduced customer demand and caused pricing pressures. A second issue is more agriculturally-based. With global Avian flu concerns hurting poultry segments, and Brazil is the largest exporting in the world of poultry. This has led to an impact on Brazilian corrugating industry results. The result has been excessive starch and animal feed ingredients, including those from tapioca producers and dry millers. Our pricing flexibility has been impacted as a consequence. While we expect these conditions to persist this year, we believe the magnitude of the impact should ease in the back half of the year with the exporting market expected to gradually pick up. We have said before to you that we would prefer the Brazilian real were not as strong because of the exports impacted. Fortunately, we have an experienced management team in Brazil, and as we have done in the past with issues in South America, we believe we will successfully work through this situation well. Our solid position and excellent customer relations are strengths in environments like this.

We also have spent a great deal of time and money to position this business as an ingredient supplier, which should help to mitigate some of these pressures. As previously discussed, we have a number of expansions under way in Brazil.

Lastly, we expect some pressure in Argentina this year in the form of higher net corn and higher energy costs, which should ultimately be worked out over time.

In Asia/Africa we expect another steady performance in 2006. Pakistan, which performed well in the first quarter, is expected to remain a bright spot for the region, but our South Korean business continues to feel the impact of continuing softness in the local economy. Our focus in Asia/Africa remains on selected expansion and geographic growth.

I’ll conclude with an update of our five-year pathway strategy now, which we announced to the Street in early 2004 as our roadmap for creating greater shareholder value and becoming a larger, stronger, more profitable and more diverse company. Our mission - to be the premier regional provider of refined agriculturally-based products and ingredients worldwide.

Now, turning to chart 15, we are roughly midway through out pathway strategy which spans 2003 through the end of 2008. We are working to profitably grow Corn Products International to annual revenues approaching $3 billion by the end year 2008 and to meet or exceed 5 financial targets we announced several years ago.

In addition to Pathway 1, which is excelling at our base business, which includes our global cost optimization program and a profitability turnaround in our U.S. business, the 4 other pathways together formed a value creation proposition for us. And they are: selectively drive organic growth in the base business to expand the size and scope our value-added profit portfolio through geographic alliances and acquisitions; to grow our defensible businesses in new high-growth regions, notably Asia and specifically China and to become more of an ingredients supplier. We are evaluating and working on a number of projects across these 5 pathways and expect to continue improvements as carry out our actions and initiatives in 2006.

Turning to my last chart 16, I’d like to highlight some of the pathway strategy examples in new product introductions and developments for you. First, we expect to complete 3 new model 5 specialty starch channels in our [Vasinova] plant in southern Brazil in the first half of this year. This would give us greater flexibility to offer value-added products with food and industrial markets.

Second, as part of our ingredients focus, we have started up our new production channel in Canada, for short chain fructo-oligosaccharides, or FOS, which is the only such FOS facility in North America. This was part of our plan when we acquired GTC Nutrition in 2004. FOS is a functional ingredient used in a variety of sports drinks, soy and dairy products, and medical foods, among other applications. We currently sell FOS volumes in both North and South America.

Third, we have just signed a new 5-year geographically-exclusive supply agreement with the McIntyre Group under which they would market starch-based ingredients for Corn Products International to global personal care customers, specifically products with skin care applications. This supports our objective to provide products to new market segments.

And fourth, and a final example, is our introduction of a new exciting modified tapioca starch for the gluten-intolerance market for individuals with Celiac disease. The Celiac Sprue Association says about 1 in 133 people have Celiac disease, but only about 3% have been diagnosed. These means there are more 2 million undiagnosed people with Celiac disease in the U.S. alone. Perhaps some of your family members or friends have this condition.

Our product is called Expandex. It’s been initially well-received in the gluten-free market as a material providing better structure and texture to foods, as well as helping to create tastier and more moist and expanded products than alternative grains. We are working to provide this material to the major gluten-free markets and mixes, both to on-line companies and gluten-free specialty stores. This is in the very early stages of introduction, so it’s difficult to give you a sense of the opportunity, but Expandex is an excellent example of developing value-added products and ingredients for our company.

Finally, we recently announced the hiring the John Saucier, a former Monsanto and Solutia executive, the new position of Vice President of Global Business and Product Development, Sales, and Marketing. John is a strong addition to our senior management team. He will focus on expanding our value-added product portfolio and building our ingredients business globally.

In closing, when you add it all up, there are plusses and minuses to the year, but overall, we are optimistic about 2006’s prospects and opportunities to continue to pursue profitable growth and achieve our long-term financial objectives.

And now, I’d like to take your questions. Christina?

Thank you, Mr. Scott. [OPERATOR INSTRUCTIONS] And our first question will come from David Driscoll with Citigroup.

A couple of questions here. The first one is can you give us your thoughts on net corn costs in 2006 versus 2005?

The 2006 net corn cost in the first quarter for the total company was favorable. It varies by region. Obviously, the South American numbers are the opposite of the total corporation. For the 2006 forecast, the assumption is that the first half is more favorable than the second half, David.

But yet both, for the entire year, you expect net corn to actually be favorable in ‘06 versus ‘05?

That’s correct.

Slightly.

Slightly. Thank you. Can you quantify the expected year-over-year change in energy costs? I think this is one of the most important factors affecting the business this year.

David, we haven’t said what it is, but Cheryl did allude to the fact that we expect it to be up about 26%, which is a substantial amount.

26% was the first quarter and for the year?

It will probably run somewhere in that range.

Okay, alright. And then lastly, when you’ve talked about South America, why haven’t high sugar prices benefited your South American operations, particularly Argentina where you make high fructose corn syrup?

I think high sugar prices over time will benefit us everyplace, David, but in Argentina, the price of sugar is controlled. So it’s not a situation where the high sugar prices are being felt there. We certainly see them in Brazil, in other areas where we can substitute our products for sugar where possible, but some of that takes time, number one. The reformulation of confection and other products does not happen overnight, although people do try to move in that direction as quickly as they possibly can. As we said earlier in my remarks, that’s all well and good except for the fact that they can’t export the product. Then the demand growth is not going to be that substantial for it anyhow. We’re feeling the impact of reduced volume even with some of that substitution taking place.

Now, you have the ability to export out of Argentina, so I would have thought that even with a controlled sugar price in Argentina, the ability to export high fructose corn syrup to other markets would have created incremental demand down there. So your comments that cost pressures are being experienced in Argentina, it feels like a very unexpected result from kind of the macro factors that we’ve been looking at. And in the past, I remember not long ago when the Argentine peso had devalued back in ’02. Correct me if I’m wrong, Sam, but you guys had a really good performance in that business because of the ability to export with the currency being a real advantage at that time.

That’s correct, David, and the issue in Argentina is not a problem with export. Our volumes in Argentina are strong. We do not have the capability of exporting much extra product in Argentina right now. And with export fructose as you know, where being liquid is not the easiest thing in the world to do, so taking it out of that market and not satisfying the customers we have there is not the ideal business scenario. As I said in my remarks, and I believe Cheryl said in hers, we do expect that we will, as we have in the past, get these numbers passed through as we see higher corn and energy costs existing in those parts of the world, but it does take a little bit of time to do it and we are in the process of working on that right now.

So is it fair then to say that you’re experiencing higher costs there, you haven’t tried yet to pass those things through and so you’re not really giving that benefit to us in your guidance. You’re giving us more of a worst case scenario that says those higher costs negatively impact the business for all of those debts.

David, I am not going to give flavor to that comment. What we said was what happened in the first quarter, and we’ve given you guidance to the year as we projected going forward. I have also said that we have typically navigated our way through these kinds of issues in South America and we expect to be able to do that again. It may take a little bit of time as it always has and we’ll see how quickly we can get through it.

Well super. Thanks a lot everyone.

Our next question will come from Prudential Equity Group, John McMillin.

I guess the mid point of your range, Sam, is about $1.43 and the Street was about $1.55.

Right.

And I guess if there’s a difference, it ties to these South American trends that you were just talking about with David. Is that kind of the long and short of it?

No. I think the difference -- well I shouldn’t say no, that’s a piece of it, but I think the major difference between where the Street was and where we are, John, is the tie-in and start-up of the boiler at Argo. I don’t think anyone realized the expenses that were going to be associated with that, but that is a huge project. We have finished the actual tie-ins as I mentioned and the plant is running, but we’re talking about taking out a two-foot steam line that’s -- you got to take it out and the pressure in that is about the same as a 747 engine starting up wells and everything and the plant was down for about 10 days. So no one knew that. We did not say it in our first quarter. We had it in our planning. We knew the tie-in had had to come in.

Second part of it is, as we start the boiler up, part of it will be started up or it will be started up and run in the beginning for environmental reasons on gas first to test out the tubes and go through the running process of the start-up. Again, we knew about that and the Street did not. So I would say the major difference that we’re talking about right now, other than the running of our business, and we’ve always talked and managed the business reasonably well with ups and downs, that’s the major delta between the Street number and ours. Obviously, we did have the expensing of options, which may or may not have been in everybody’s number. And then lastly, we had the tax rate and I don’t know what people had in their tax rate estimate for us going forward and it ended up being 37%. I don’t think most of you had that number in your taxes. So --

Yes, that’s fair enough.

Those would be the key issues that I would say. And Brazil is balanced by North America just as North America was balanced by Brazil last year.

And you know, I see this $500 million credit facility and I read all this and I’ve heard your comments for the last couple of years. It does seem like you’re in a inquisitive expansion role and I don’t want to revisit past questions, because many times I’ve got things wrong, but I still kind of go back to the question I first asked 3 years ago. Ethanol is such a related business to what you already do, is it just, it doesn’t matter if oil goes to $200, you ain’t doing it, right?

I didn’t say that but I, John, I’ve gotten pretty well-rehearsed at this question because it’s asked of me by a number of people. As I’ve said to everyone, if I took the next $100, $200 million of expansion that we have and put it into ethanol, we’d have a 1% to 3% share of the market with zero competitive advantage. Part of the reason I went through some of the examples of what we’re doing is because we do believe in those spaces and the things we’re introducing, we have substantial competitive advantage for the long-term. And as a result of that, we would prefer to invest our money there and we can ride the wave of ethanol pricing while it’s there because it’s tightened up our fructose market and partially helped us allow to get prices through. I know people, a number of people have said, that have asked the question, I wouldn’t say that they have suggested but they’ve asked the question. I know typically where I’ve answered it, and many people have said we’re glad you’re sticking to the strategy and our intention is to stick to the strategy and perform well as we execute.

Yes, I see it, but I think the idea that you get no competitive advantage making ethanol from a starch stream can be debated, given the higher costs in making it from dry mills.

The cost from a dry mill, John, is probably less then making it from a wet starch stream and if, in fact, we are running our plants at anything, any reasonable utilization rate, we’d be cannibalizing products that we just passed pricing through on last year. So the option for us would not be taking it out of one of our existing plants, building a new facility. And a new facility, the most economic way to do ethanol from corn is dry mill. It’s not our business, it’s not where we are, it’s not where we’re investing and we will try to stick to the strategy.

Okay. I could debate some of this but --.

We probably will.

Just in terms of my statement regarding inquisitives.

Yes.

I mean as I read this higher credit facilities, do you think I’m making the right observation that it appears that you’re closer to an acquisition or doing something, or is it just kind of transferring, kind of revolving debt?

I’m going to let Cheryl answer that one since she’s our CFO and reminds me of that whenever it comes up to a financial question.

Yes, but you’re the guy pulling the trigger.

Well I’ll answer it after she’s finished and let you know what I think of her answer, okay?

Okay.

Okay, that’s fair enough.

John, I think there, I like the word “inquisitive” but that wasn’t the driver behind the $500 million revolver. We have $255 million worth of bonds coming due in ’07 and we have another $200 million due in ’09. We’re paying 8.25 and 8.45 on those 2 bonds, respectively. So the credit facility, we had a five-year, we just upped it. It was really done to provide financial flexibility so that if the market is there, we can go out and refinance those bonds into something lower that would help the long-term tax rate because we’re negatively impacted by our inability to absorb the foreign tax credit. So it’s really more a structural long-term issue, but I wouldn’t be unhappy if Sam came and said we have something that we need to use it for.

And let me just add a little color to that, John. Certainly we have talked before and said to you and I reiterated the strategy again that part of it is acquisition, alliances and ventures. So the combination of being – having the flexibility to do what we want to do with the business when the opportunities present themselves at the right cost is something we are not about to pass up right now. And with the balance sheet we have today, as you might guess, we are a much more attractive borrower today then we were 3 or 4 or 5 years ago. And we wanted to take advantage of that.

Okay, well congratulations on your 100th birthday. You don’t look a day over 70.

Well, John, there are times that I feel every bit of 100, but I appreciate the comment. Thank you, bud.

Our next question will come from Christina McGlone with Deutsche Bank.

Sam, I wanted to follow up on a comment you had just made to John's question. When you had talked about riding the wave of ethanol, with ADM swing capacity maxed out now, how does additional ethanol -- growth in the ethanol market really benefit CPO?

Well additional growth doesn’t necessarily do it, but I think certainly the capability of the swing capacity to swing any further -- anybody’s going to be bottle-necking as much as they can, and there is always the capability of the bottle-necking a little bit more and a little bit more to go that way and take it out of the fructose marketplace. But, what is does is it provided a tighter market in 2006 for pricing and that market in all probability will be relatively tight as long as ethanol numbers are there. So that opposed to having utilizations that were where they were when we had our prices are a lot lower than they are today, I think it keeps the opportunity there for reasonable pricing in the marketplace because supply/demand is what it is today.

Okay. So basically it’s that you don’t have to worry about that swing capacity swinging the other way, not that you’re getting any further tightening.

I cannot comment on what our competition is going to do, but what you have seen and what we have seen is a swing away from the typical corn refined products, fructose and the others, to ethanol, and that has been beneficial to our position on high fructose.

Okay. And next question. Can you talk about Mexico? I know that you were running at about your old run-rate, and now you’ve gotten significant growth there. So where is the addition growth coming from?

We are running at very good rates in Mexico, and all of our products are running very well. So, I think, with seeing the economy in Mexico doing well, we have seen the capability of selling fructose to more of the bottlers now as they’ve gotten more and more [emparos]. We’ve typically been able to, and are currently being able to, sell more products to the rest of our markets because our plants are running at high utilization rates and running better -- more efficiently, and we’re introducing some new products in Mexico. The whole idea behind the strategy has been to introduce ingredients of higher value everywhere in our world where that makes sense. Mexico is one of those areas where is makes sense. And again, I don’t want to make the McIntyre deal or the Expandex deal sound like huge things because they’re not at the present time, but they’re examples of the kind of things we’re trying to do throughout the world, and the kind of things that we’re doing throughout the world right now, and Mexico is one of those places.

Okay. And then, last question. When you were talking about the substitution from sugar to your sweeteners in South America, could you give some examples of where -- of which industries that’s occurring in?

Christina, any place that someone is using sugar in a dry form, obviously we can use the crystalline dextrose that we have, or other dry products, maltodextrins, because the substitute for sweetening is there. The biggest industry is the confection industry where they can take formulations and swing, to some extent -- they can’t swing, obviously 100% from one to the other, but they can make substitutions of a couple of percentage points and reduce their cost. It can also take place in the baking area. It can take place in the dairy area, so it’s just a matter of whether or not the customers want to, need to, go back and reformulate to put more in. Most of them have the formulations there. Many of the companies have not seen sugar at these prices in a long time, so it’s going to take a while for them to decide to make the formulation, or the reformulation, but I guess I don’t want to imply that is a major driver of our business right now, but it certainly gives us support in the world market to be able to sell more product.

Our next question will come from Davenport Securities, Ann Gurkin.

I was wondering if we could start with capacity utilization for the HFCS market in North America. Where do you see that utilization in '07, and then I’d love a comment on sweetener prices in '07.

Well, let me start with the second question first. I’m not going to give you that. On the utilization, I think utilization of fructose is pretty high right now, and I expect that it will probably stay relatively high going into '07. We’ve seen the shutdown of a couple of facilities last year. Actually, the [indiscernible] facility by Cargill, I think was the end of '04 or beginning of '05, and they took out the Decatur facility at the end of '05. We have seen the swing from fructose to ethanol where possible in the industry, and we saw Mexico open up last year. There has been no, that I am aware of, no new capacity added. So if you take that, that has been a tightening of the marketplace that afforded the opportunity for us to move our pricing this year, and I think that, my guess is, and I don’t see any reason to not feel that the utilization levels will probably stay at or around these levels going forward. Obviously, if Mexico opens up even further, that would be more demand for the product. There’s no guarantee on that, but the WCO ruling has passed, so we’ll have to see what happens on that.

Okay, and then one of your pathway strategies is broadened value-added product portfolio?

Correct.

Can we get a progress report against that? It looks like you’re stepping up innovations? Are you pleased with the progress or do you need to make acquisitions to fill out that strategy?

Ann, those that know me would know that I’m not pleased with any progress. So, the answer to that is that we are not satisfied with where we are yet, but we did hire John Saucier specifically for the reason of helping to drive that. We created the position. I gave a couple of examples of things that are coming on. When we told the Street back in May of 2004 what the strategy was, we started investing then both to build the channels, as well as to investigate what we wanted to do and where we wanted to go with building and buying companies. Since that time, I just announced that 3 channels in Brazil are coming on. It takes about 18 months, plus or minus a few months, to get those channels in place. I mentioned FOS coming on stream. We’ve hired people to help move that product throughout the Americas. We did China. We’ve expanded China. We are looking at other things, and obviously, if that’s the strategy and we’re forecasting that we’re going to continue to grow at the rate that we told you we were going to grow, then we’re executing on it, and when I say I’m not satisfied with it, we always want to move faster, but we’re going to try to move with a certain amount of caution to make sure we just don’t go crazy on this thing. We’re not out there to just try to create brand new stuff that we have no idea what’s going on with it. We’re going to keep things close to the vest, but we’re going to make sure that these are higher valued products that we can sell into a marketplace that support what it is we’re doing. Back to the point of competitive advantage and building on strength.

Our next question will come from Ken Zaslow with Harris Nesbitt.

Two questions. First, this is for Cheryl. Every year, you tend to lock in your natural gas prices sometime in the month of December.

We’ve never said that we do it in the month of December.

Okay. You tend to do it in the winter.

No.

We’ve never said that either.

What we have said is that we are hedgers of natural gas.

And we’ve also said that we have a hedge before the goal is submitted to the Board. That’s all we’ve said. So, we can hedge it at anytime we want to as along as we don’t go out beyond a certain period of time.

Alright. Let me try and rephrase it then. This year, it seems like you hedged in the December period. That was kind of on the last call, no?

No, we didn’t say that either. We have never said when we hedge, Ken. We’ve said, we’ve given you the parameters around which we hedge. We’ve never said when we do it. Nor have we ever said it when we do with respect to corn, other then the fact we do it when we sell the product.

When we book the business.

Okay, net -- let me try this another way.

If natural gas prices continue to go down, will you benefit this year?

No we will not. Not in the North American market.

Again Ken, let me take it back. We say that we have hedged our natural gas by the time the goal is submitted to the Board for the upcoming year. So that would say that for the 2006 plan, I would love it in fact if I could submit my 2006 goal to the Board in June, but they probably won’t accept that, so they get the goal at the very beginning of the year. And by that time, the gas for this year has to be hedged. We have not said when we hedged it; it just has to be hedged by that time. So the last day we could hedge would be the day we submit the goal. We could have started hedging anytime 6 to 8 months prior to that for this year and that’s the case every year.

Why don’t you tend to hedge in the summer months then? Is that not a lot – I’ve never run a business, I understand that, but to me, logically speaking, I would want to start hedging natural gas prices sometime in the summer due to seasonality. Is that what you tend to do?

I’m not going to comment on that, but we’ve never said we didn’t do that. You make, I think you’re making the assumption we don’t do that and we have never said that. We look at that market, as does everybody else. Now, having said that, over the last couple of years that has been relevant. Prior to that, it didn’t make a lot of difference because the numbers were relatively – you could forecast where you want to be and you could pull the trigger almost at anytime you wanted to. Obviously that was not the case last year, but if you look at the environment we’re in now, most of the drive on natural gas, although it’s been creeping up over the last 2 or 3 years, most of the impact has been last year’s result of the hurricanes and that’s when the major step change took place. So we have not said when we hedge, we have not said we don’t hedge during the summertime, we have never said we hedge it all on one day, but what we have said is that we hedge it before the plan is in place.

Okay. In terms of the pricing power down in South America, to what extent, is that, is your ability to get pricing power somewhat changed, is that part of the reason that South America is not going to be doing as strong, or is there something in the back half you’ll start to get your pricing power back. Because historically speaking you’ve always said we are able to pass on the pricing power throughout the year in South America.

It’s a very complicated situation and I’ll try to explain it in a couple of minutes, but you know, as you go through our South America thing, we’ve always said that we’d rather have the real weaker than stronger because the volumes are there then and we can move the product out of Brazil. We, and our customers, can export greater volumes when that’s the case. It tightens up the marketplace in general. But this time we have a couple of added complexities. Number one, the poultry industry in Brazil is flat on its rear end right now. We expect that to turn around throughout the course of the year as we’ve had a problem in the beef industry also late last year and the first quarter of this year. The combination of those effects has been that both our co-products are not being sold to – into those industries. And secondly, we’ve had a situation where tapioca producers who have been a supplier to the corrugating industry and to some of the meat packing industries in the past do not have places to move their product. They’ve always been in the market; they just have not had places to move the product. The quality is not the same as ours and their governance is not the same as ours. I’ll leave it at that. Given those scenarios, when they start rolling back and they cannot export their product and they can’t sell to those markets, they’ve come back into markets where we supply. That, in combination with the fact that the overall demand for the finished product of our product is down because of export, has put pressure on our pricing scenario in Brazil right now. What I tried to indicate in the comments was that we expect over time to be able to do what we always do and that’s to strengthen the position. Our position with our customers is strong, we are holding price where we can, we’re meeting competitive issues where we need to and we expect over time both the tapioca prices are going to go up and we expect this to be a short-term issue. And the short-term we’ve always said 6 to 9 months. We’re not changing that. We’ve said that the impact was greatest in the first half of this year. We expect it to start improving in the second half. Our expectation is the world market on poultry – I was down in Brazil and met with the economists down there. Their forecasts are that the lack will be right now, it’ll come back. It’ll ease off by 70%, it’ll come back to off by 2% by the end of the year. Those things will start turning and we will start coming back long, and the tapioca producers that have low cost product today, they’re not going to plant tapioca. That’s a cyclical business. It’ll come up and we’ll see ourselves back in better shape.

And my last question is, in terms of Asia and Africa, the last two quarters have been either flat growth or on the profit line or lower growth. Is there something secularly happening here or is there a change in your outlook? Because that has been a high growth area and now it seems to kind of have tempered down a little bit.

We’ve seen the volume grow, Ken, and we’ve seen the revenues grow. We’ve had the problem in Korea that we’ve talked about with the soft economy for some period of time and we’re pleased still with our progress in Asia. We’ve been able to see that the volumes that I said are moving and the revenues are moving. And this is one area that recognize it as we start facilities up and as we start new businesses up, we’re not going to have the kind of margins that we have ongoing, but it’s going to take some time to get them there. We expect to get them there, we’re going to continue to invest there because that is the growth region for the world and, again, we’re staying the strategy. It’s working and it will continue to work.

How are you going to get the margins to more sustainable high levels?

Well, you have to get your facilities running at full rate. When you start up a plant, very rarely does it run at 100% capacity if you’re expanding or you’re putting a new facility in. So as we start building those businesses, as we start relating better to the customers, and remember, China is a new territory for us. Thailand is new territory for us, not brand new. We’ve been in Thailand for a while, but these are places that you have to get your facility – you put a new channel in or a new plant in, it doesn’t start up at 100%. It ramps up. So we expect to see margins improve when the ramping takes place. We also typically will start those facilities with the base raw material, base starches, base glucoses. As we establish our position, we start putting more specialties in. So we start ramping up on profit margins as well. And that’s why the growth opportunities are there. We are still hoping and waiting for Korea to start showing some signs of growth. That country has not really shown any growth in the domestic economy. The use for our products over the last couple of years, the margins are still good, the business is there, but we’re not seeing the growth in income that we had hoped to see there, but the rest of the region is doing very well for us and is growing for us. And Korea will turn. It’s just a matter of when.

How long will it take for you to get to full capacity?

It depends upon the country, it depends upon the plant. I can’t give you an answer on that one, but it’s always going to be a ramp-up at a start-up facility. And understand that as we are coming up to full capacity, we will continue to expand. I mean that’s the only way we can position ourselves in these territories to grow that business is to stay in front of the demand for our product and grow it.

So years, it sounds like?

No. You’ll see better returns continuing to improve, but you’re also going to see us growing and I think that’s what you want us to do in some of these regions.

[OPERATOR INSTRUCTIONS] And from FTN Midwest we’ll hear from Christine McCracken.

Just wanted to follow up on your expectations around the poultry industry in Brazil. Is it built into your guidance then that Brazil gets back in normal operating rates by the end of the year, or is that kind of a soft assumption?

Christine, I read your notes on that, and we are seeing the same thing you are down there. We have certainly not figured it’s going to be back up to 100% in that area by the end of the year. I don’t know if we would be sane if we thought that. Basically we believe it will get better. As I said, I was down there listening to experts on the economy, so-called experts on the economy in Brazil, and I don’t mean to be negative to that, but I don’t know that anybody can tell us what’s going to happen in the Italian poultry consumption area to a depth definitive number. So, obviously we’ve governed what it is we think is going to happen, but we’ve taken into account those things in what we’ve projected going forward.

Okay. And in terms of inventory then, is that, like in the corrugated industry. Is that building now? Is that something that will need to be worked down? Or is it -- and that will delay the recovery, or it is something that you think could come back fairly quickly?

I think when the volume starts to move through the export side, the corrugating facilities will open up and start running again. We are not running our plants building inventory in expectation of that. The one area that we have an inventory build is in [cold] products. Because in order to produce the products that we’re selling to the rest of the markets, we have to make some seed and meal and oil. So, those products with the poultry industry being soft and the beef industry being relatively soft, there’s an inventory backlog there that we’re going to have to work off over a period of time when the volumes start coming back in place.

And is that part of the reason that the U.S. markets have been weak as well? Is that interrelated or are there other issues driving the weakness? In corn oil, for example.

Corn oil, I can’t give you a reason for where it is, why it is where it is. My thought would be it would be higher than it is today, but it’s not. I think in the poultry arena in total, I think the world market is starting to see itself as a world market, but I think that some of the U.S. poultry people are feeling the same pinch that I just talked to on the export side. And I expect that when it starts coming back, there will be a mad rush to the open markets, wherever they happen to be, and it just depends upon who’s going to put the pricing from the poultry players in to those markets.

Alright. Just on Canada. Obviously you got a favorable ruling there. Was there any impact on your business over the quarter, or was it kind of a nonevent for you?

It was pretty much a nonevent. As we had talked before, we had done things to mitigate the impact of that duty. Obviously some of those things were to put bases in place in Canada that were above the norm, but nothing close to where we had seen it before. So, the impact of the ruling will not be felt significantly this year on us. We have booked corn out and were able to take advantage of very good basis numbers, but good in relationship to the duty scenario. Not good in relationship to what they have been historically. So we have an impact on the business this year. We expect that next year the duty will be – not that we expect - the duty is gone as of next year, and you’ll be very pleased with the long-term result of this thing. What we have in this scenario we can go back to our people and tell them that they have jobs. We expect that they’re going to be able to keep working. The customers, we can be a more reliable supplier for them, and local, which is important as part of our strategy, and they like that. We expect that going forward this is a good result for us.

Fair enough. Just then on the Argentinean corn situation. You obviously mentioned that higher corn costs could be an issue for this year, this coming year. It looks like a pretty significant drop in the size of that crop. Is that a concern for you as you move forward? It seems like there’s been some shift in planting down there permanently. I’m just wondering is that a temporary situation? Is this something you can work around? Talk to me about maybe how you work around that.

Well, if it’s not a temporary situation, and I’m not sure that it’s not. I think the planting there were impacted by weather as much as anything else. Certainly the way we work around it is what we’ve done in the past. We pass the raw material costs on through, and we believe we can do that. But it does take a little bit of time, and the environment has to be conducive to doing it. We are moving some areas right now. We will move others as time goes on, but we feel, Christine, with the position we have in that market, and with the need for our products and other products, that there will be pass-throughs that go into the marketplace as time goes on. So if corn goes higher, we will see the benefit of it. The benefit of a pass-through. And in addition to that, as corn goes higher, our co-products and our oil and all of the other things associated with it, the prices of those products go up as well, and we get it back on that side. So I do not think there’s a fundamental shift in Argentina in corn. I may be wrong on that, but that’s my belief, but if in fact it is, we believe we can handle that and deal with it in the normal course of business.

Our next question will come from Sun America, Daniel Lew.

The new boiler startup costs. Are those going to be fully expensed in the September quarter?

They will be expensed in second and third quarter.

Okay. And are there any cost savings associated with the boiler once it’s up and fully operational?

It will be much more efficient. It should not require as much maintenance. However, we do have the depreciation on it. So we expect some minor cost savings that is being done more as an efficiency and a reliability factor. As you heard this year -- last year, we’ve have had a number of reliability issues. So the impact was not being able to run the plant or having excessive costs because of gas cost on it. When the boiler comes up and starts running, it will provide us with a reliable source of energy and a reliable source of power coming out of that boiler. So that’s why we did it.

Could you give me any efficiency ratings of the new boilers versus the old ones? The old ones are very old.

The old one is very old and the new one is very new. So it’s much better. I can’t give you what the efficiency ratings are per se, but it is going to be a much better boiler operation for us.

[OPERATOR INSTRUCTIONS] We have a follow-up question from David Driscoll.

Thank you. Cheryl, could you talk to us a little bit about the tax rate again? You made a couple of comments here. My understanding was that the inability of the company to use those foreign tax credits was generated by the reduction in U.S. source income. Given the price increase that the company achieved on high fructose corn syrup and the rest of your product lines in the U.S. this year, my presumption would -- or was, that your U.S. income was going to go up and the ability to utilize those foreign tax credits would have once again come back to you, and that the tax rate subsequently would have been down in 2006. Can you explain why this has not happened?

Sure. There’s a couple of things. First of all, yes, David, foreign tax credit issues, the resumption of profitability in the U.S. helps that but we also had income shifts with South America down and the rest of North America up. So if we look at the statutory rate in the U.S., it’s 35% and so to the extent that we’re shifting in the international operations, you have higher or lower effective tax rates, which then impacts the entire company.

Before – there was a point where you were giving us some guidance here of a tax rate down in the low 33% -- it was, I don’t know, like 33% 34%. Give me some idea here as to where this thing could go. I mean, should we just be modeling the tax rate that you produced in the quarter? Should we be modeling that kind of a number in perpetuity or will we ever see this permanently go down to a lower rate of 33, 34?

I don’t – I am not going to commit whether we will permanently get down to a 33 or 34% tax rate. And I don’t believe, David, that I ever said that we would be at 33%. I said our historical average was around 36% and, if none of the foreign jurisdictions had changes in their statutory rates, then what we saw in 2004, which was 30%, 3% coming from a statutory tax rate change and 3% from settling tax claim, could potentially become closer to what the tax rate is. But we’ve got 15 countries that we’re operating in and to try to say that there is a permanent tax rate that will be there over time is almost impossible.

I recognize that and, I mean, I guess I’m just trying to get a directional sense. Do you think it comes down at all from the level you’ve advised to the year?

At this point, no.

For this year, no.

If something changes in the forecast and the income mix changes, then it’s a different game.

I think when Cheryl said the end of last year, David, was when the question was asked whether we think it will be, she says the normal rate has been 35, 36 and that’s what we were thinking it would be going forward. We’re going to work obviously to get it lower if in fact we can. The mix this year brought it up higher, but I would still say our normal ongoing, not this year but ongoing as we look at it, is going to be in the range she talked to before. And we’re still going to work to get it lower. It’s not something we can forecast today and say it’s going to be there, although we have tax planning and when we say – when I said pathway 1 was excelling at the base business, it’s every element what we do including tax planning and what can we do to get it down. But it’s going to take some time to do that and we can’t guarantee that we’re going to do it. We’re going to try.

Okay, thanks for the answer.

Thank you. Operator, if there is one more question we’ll take one more before we close down our 60-minute call. Is there another question?

Actually, Mr. Prichard, there is no further questions in the queue.

Okay. Thank you very much. Thanks very much. I guess as a result, with no more questions, we will conclude our conference call and our webcast. I do want to remind everyone that a replay of the web cast can be accessed at cornproducts.com and we also have a replay of the audio conference call available through Friday, May 5 and that phone number is 719-457-0820 and you need the pass code of 3844034. So thanks very much to Sam and Cheryl. Thanks to all of you for participating on our call this morning and we’ll talk to you again in July with Q2 results. Thank you.

That does conclude our teleconference for today. We’d like to thank everyone for your participation and have a wonderful day.