Ingredion Inc (INGR) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to this Corn Products 2006 second-quarter earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to the Director of Investor Relations, Mr. Dave Prichard. Please go ahead, sir.

Thank you, Jake, and good morning to everyone. Welcome to Corn Products International's 2006 second-quarter and first-half earnings conference call. I am Dave Prichard, Director of Investor Relations for the Company. Joining me today to lead our call are Sam Scott, our Chairman, President and Chief Executive Officer, and Cheryl Beebe, our Vice President and Chief Financial Officer.

This is an open conference call that's 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 an hour 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 make this morning's presentations and they will indicate as they move from chart to chart so those of you who are using our slides from the website can easily follow along through the presentations.

Now I have just shifted to chart 2 which is our agenda; Cheryl Beebe will present the financials for the second quarter and first half with appropriate analysis and flavor. Following that Sam Scott will discuss our 2006 outlook before we move to Q&A.

I've now gone 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 forms 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 CornProducts.com and, as you will see, are included as an appendix to this morning's slide presentation. With that I am now pleased to turn the conference call over to our Vice President and Chief Financial Officer, Cheryl Beebe. Cheryl?

Thanks, Dave. Good morning, everyone. I am pleased to report we had a solid second quarter with a 14% increase in both net income and diluted earnings per share. So let's go look at the numbers. I'll start the review with chart 5 -- the summary income statement for the quarter ended June 30, 2006. Unless otherwise noted, the comparisons will be to the second quarter of 2005.

Net sales for the quarter are up 8% or $49 million. North America accounted for approximately 65% of the increase while South America and Asia/Africa account for 29% and 6%, respectively. Gross profit at $105 million is up 16% or $15 million. The gross profit margin increased to 16.2% from 15.1% last year showing a positive 110 basis point improvement. This puts us back to the level we had in the second quarter of 2004 and, more importantly, should be more indicative of the run rate for the balance of the year.

As anticipated the second quarter gross corn costs were favorable versus last year. Coproducts credits were lower, the result being slightly higher net corn cost for the quarter. In addition, energy costs were up 17% versus last year, but this is lower than the first quarter where they were 23%. Operating expenses are $49 million, up approximately $10 million from last year. As a percent of net sales operating expenses were 7.7% versus 6.6% last year. Variable incentive compensation, stock option expense and stronger currencies are the main reasons for the increase in operating expenses. For the quarter we expensed about $1.3 million related to options.

Operating income was $57 million, up 10% from last year's $52 million or $5 million. The operating income to net sales margin increased to 8.9% from 8.7% last year and 7.5% in the first quarter of 2006. Net financing costs are down 20% or approximately $2 million due to a combination of higher capitalized interest and interest income and a reduction in foreign exchange losses. The tax rate for the quarter was 37% versus 35.1% last year.

Turning to chart 6 -- net sales by geographic segment. We see North America's net sales at $398 million or up 9% or $32 million. South America's net sales at $156 million are also up 9% or $14 million from last year and Asia/Africa's net sales at $91 million are up 4% or $3 million.

Turning to chart 7 -- net sales variance analysis. About 42% of the net sales growth is volume; 36% is from stronger currencies; and 22% is from stronger pricing and product mix. North America's net sales growth of 8.7% is being driven by stronger price and product mix. The stronger Canadian dollar as well as volume growth in Mexico also contributed to the net sales growth this quarter. South America's net sales growth of 9.1% is derived from strong volume growth across the region, 10.4%, and favorable exchange rates contributed a positive impact of 4.7%.

As in the first quarter we're seeing a decline in price mix. The decline relates to the pressure in Brazil from reduced co product values and the lack of pricing flexibility on head products. Asia/Africa's 4.3% net sales growth came from a combination of volume growth and favorable currencies. The softness in domestic consumption in South Korea is masking the strength of the other countries in the region.

The next chart, number 8, operating income by geographic segment -- total company improvement entirely relates to North America. North America's operating income at $37 million is up $16 million or 79% from last year. The operating income margins are 9.3% versus 5.6% last year and 6.5% in the first quarter of 2006. Gross corn costs were favorable versus last year while co product values are lower; however, we had lower net corn costs with the gross corn outstripping the reduction in the co product value.

In addition, as expected, energy costs for this region were up. All three businesses performed well during the quarter. South America's operating income at $16 million is down 25% or $6 million. Both gross and net corn costs are up year-over-year. Manufacturing expenses are also higher on energy costs, currencies and volume growth. The decline in the region's operating income, as discussed in the first quarter call, is driven by the weaker Brazilian results. We believe we've hit the bottom in Brazil this quarter.

Again, as we mentioned in the first-quarter call, we are forecasting that while the region's operating income performance should show improvement over the first six months, the year-over-year operating income performance will be down. Asia/Africa's operating income is $15 million, down 4% or approximately $700,000. Both gross and net corn costs are up versus last year. The South Korean business continues to dampen the region's performance. The business in Pakistan is strong; Thailand and China are on track for a solid year. The region in total is expected to show a slightly up year from the 2005 operating income level.

The last earnings chart for the quarter, chart 9, is the estimated source of diluted earnings per share for the quarter ended June 30, 2006. Approximately 80% of the improvement in EPS is coming from operations which have contributed $0.04. Nonoperating changes contributed a penny and favorable financing costs offset the penny increase in the tax rate. We are anticipating an estimated effective tax rate for the year at 37%.

I would once again mention that the tax rate is subject to volatility based on a number of factors -- income mix, local tax rates and tax settlements. Our estimated effective tax rate for the year is 37%. Diluted weighted average shares outstanding are 75.3 million, down from 76 million last year. We repurchased approximately 863,000 shares in the quarter.

I am now turning to chart 10 -- in summary income statement for the six months ended June 30, 2006. Net sales for the six-month period are up 8%; gross profit is up approximately $34 million or 21% from last year. Margins are at 15.7% versus 14% for an improvement of 170 basis points for the reasons discussed in the first- and second-quarter reviews.

Operating expenses at $97 million are up 23% from last year. Operating expenses as a percent of net sales are 7.7% versus 6.8% last year. We are estimating operating expenses for the remainder of the year to be at about the same level as we've been in the first six months of the year. Operating income is $103 million versus $87 million last year for a change of $16 million.

Operating income margins are roughly 8.2% versus 7.5% last year. Net financing costs are down $5 million on higher capitalized interest costs, increased interest income and lower foreign exchange losses. For the six-month period the effective tax rate is 37.8% versus the 34.5% last year. Net income for the six months is $54 million, up 24% from last year's $43 million. Diluted earnings per share is $0.71 versus $0.56 last year. Diluted weighted average shares outstanding were 75.4 million versus 76.3 million last year.

Turning to chart 11 -- cash flows for the quarter. Cash flow provided by operations is $46 million versus $84 million last year. The investment in working capital primarily reflects higher sales and inventory levels to support the business as well as a reduction in our accounts payable. Cash invested in the business was $39 million versus $36 million last year. We invested $39 million in fixed assets, up from $34 million a year ago.

Last year's $3 million for acquisitions relates to the purchase of most of the remaining minority interest in Thailand. We are still forecasting capital expenditures to be around $150 million for the year. Our spending year-to-date on capital expenditures is tracking that number. Cash used for financing activities was $42 million, debt decreased $15 million, dividends paid were $7 million and our net share repurchases amounted to about $21 million.

Looking at the key ratios for the year, chart 12, the key metrics are all within our targeted ranges. Debt to total cap ratio is 26.9%, an improvement versus last year's 28% and well below our targeted range of 30 to 32%. Operating working capital investment is $241 million versus $210 million last year. Operating working capital as a percent of net sales is 9.8%, down from 10.1% in the first quarter, but up from last year. We expect 2006 to be at the upper end of the target range for this ratio which is 8 to 10%.

The debt to EBITDA multiple is 1.7 times versus 2.1 times last year and continues to reflect the improvement in operating income. Net debt less cash was $468 million versus $424 million last year. As you can see, our targets are well within our ranges and we continue to have a strong balance sheet. That concludes the financial presentation. I will turn the call over to Sam for color on the remainder of the year.

Thanks, Cheryl, and good morning to everybody. I'll quickly review 2006 outlook before taking your questions. As slide 13 notes, we continue to expect that diluted earnings 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. Second-half earnings should be stronger than the first half and we see good topline growth as well.

We believe our earnings per share improvement in 2006 should be near the high end of our range. We plan to fine-tune our guidance when we issue our third-quarter results in the latter part of October. 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 five-year period of 2003 to 2008, a goal we've committed to achieving. We also see a higher return on capital employed one of our key performance measures.

Turning to slide 14 -- our 2006 outlook by region, first North American. Last year we discussed expectations for a major turnaround in our North American business, in fact we've discussed that for a number of years. We have seen that happen in the first half and we expect the strong North American performance should account for most of our earnings per share growth in the second half as well. A key driver should continue to be higher contract pricing in our U.S./Canadian business coupled with continued strong performance and growth in Mexico. We believe we're still on track to have the new coal fired boiler at Argo up and running by the end of September.

Turning to South America and Asia/Africa on slide 15, we continue to expect lower results this year in South America. Related market and currency factors are still impacting Brazil's price/product mix and limiting our price flexibility. In addition, higher net corn and energy costs are expected to persist in the second half in Argentina which will dampen results there too.

But we think the second half in Brazil and South America overall will be stronger than the first half as we stated in our 2006 first-quarter earnings release and conference call. We expect to work through this situation as we have in the past in this region. In Asia/Africa we continue to expect a steady performance for the rest of 2006.

Pakistan, which performed well in the first half, should remain a bright spot; but it looks like our South Korean business will remain affected by softness in the local economy, primarily weak consumer demand for food and beverage products. All in all this year was essentially on track, is tracking our earlier expectations and we see that continuing for the rest of the year. And now we're prepared to take your questions.

(OPERATOR INSTRUCTIONS). David Driscoll, Citigroup.

Good morning, everyone. First off, congratulations on the nice results, certainly a much better feeling this quarter than last year.

I can guarantee you that.

Absolutely.

Just a short question at first here. Were there any charges in the quarter, Cheryl, related to the startup of the new boiler?

David, there were. What we said in the first-quarter call was that we would expect the year to have about 10 to $12 million of expenses related to the boiler which would be incurred between the second and third quarter. We're not going to break out that level of detail, but we're still on track to spend the 10 to $12 million this year.

Will that information be in the Q?

Probably not; it's not large enough to be material.

(indiscernible) by quarter.

Sam, you had a teens level price increase this year in the U.S. high fructose corn syrup; however, currently one of your competitors that was brought back online capacity and Mexico to my knowledge has not announced a continuation of the high fructose [trade] that was the established on a one-year deal last year starting October 1st. Will high fructose prices go down in 2007 in the U.S.?

David, I can't comment on where the prices will go in 2007 yet. I'll give you that information sometime in April of 2007 or maybe a little earlier than that. But what I can say is first off the capacity is not on stream yet to the best of my knowledge. As best we can track it it's still scheduled to come on sometime in September. They have not committed to keeping that plant open for any period of time; again, that's from the press release that they put out. We obviously don't know what the plans are, but we have not seen that plant up and running, we've not seen volume coming out of it, we don't know how long it will run for.

Relating to Mexico, the book is still out on Mexico and where that stands and what's going to happen vis-à-vis volume going down. President Fox has stated that he plans on taking gift tax off as a move before he goes out of office effective January 1st. There are all sorts of talks going on between the countries as to what kind of volume will go down there. One thing we do know is sugar is short in Mexico.

The other thing I'll comment on going into next year is that the fructose volumes are exceptionally tight this year with spot shortages throughout the country. We've seen some growth in fructose this year which is probably the first time we've seen any meaningful growth over the last couple of years with volume decreasing. So I guess what I'm saying is overall I can't comment on where prices are going to go, but this is the best environment we've been in in quite a while to look forward to pricing for 2007.

So regardless of what happens with this one small plant, that would not change your outlook?

No, I would say that that is a true statement. I think that plant coming on stream is going to be enough to perhaps satisfy the demand that we're short right now as an industry.

Moving to Brazil and my last question would just simply be that in the past, Sam, we've talked about the high marketshare that you enjoy, that Corn Products enjoys in that geography, and that that's been sort of the savior for a lot of different problems that happened in Brazil. However, it feels different right now. It feels like the high marketshares are not helping you. Your operating profits were down very substantially in the quarter. Can you comment on what is different in Brazil this time and why the strength of that business is not evident in operating profit results?

First off, David, the high marketshare is helping us because our prices are above everybody else's down there even in this environment. So I just want to make sure that that is clear to everybody, the marketshare is still a major positive for us in that environment and it generally is every place in the world. What's happened, as we said in the first quarter, is that we had a situation down there where coproducts backed up on us to the extent that we were just overflowing in Brazil with coproducts because we couldn't ship out products as a result of the poultry side of the equation.

Secondly, the environment down there for ag products in general was over backed and we were getting competition from products we never saw -- I shouldn't say never, but we didn't have competition from before. And resulting from that was a volume shortage in most of the products, the higher margin products we had down there, our volumes are up but they're primarily in the brewing sector which is our lowest profit margin business down there. Any even that's being impacted by the ag sector in Brazil right now.

What we're seeing happen in Brazil at the present time is the volumes are starting to pick back up in poultry. As you might guess as a result of ethanol in Brazil, acreage is being shifted from tapioca to sugar and that's very positive for us in that environment. So it's going to take a while for the tapioca situation to play through, but we expect it will be playing through and we've given the word that we believe we've hit the bottom and expect it to turnaround.

So I think that the marketshare is what we are using to deliver what we're delivering right now and I believe that marketshare will continue to bode us well as we go forward and move forward in Brazil and Latin America in total.

Great. Thanks a lot for the comments, everyone. And again, congratulations on the nice quarter.

Thank you.

Thank you, David.

Christine McCracken, Cleveland Research.

Good morning. I just wanted to see if you could give us an update on the outlook for corn. Obviously it's a risky thing to do this time of year, but you're a little closer than some of us to the crops. I'm wondering, are you comfortable at this point going into next year relative to your costs?

Christine, I'm looking outside my window right now and I see greenery everywhere, but I don't see any corn yet. However, having said that, all of the inputs we are getting on the crop this year are positive. We believe that the yields will be better than forecast. We think the acreage is a little bit more than forecast, and we believe that even some of the corn is tasseled already. So things are in pretty good shape as far as that goes, throughout all of the corn belt.

The rain that has come through the Midwest has been timely. The weather, it is a greenhouse out here and things are growing pretty well. So where it is going to be next year, things can change overnight, but right now things are looking pretty good and we expect it to be a pretty good crop.

The question people keep asking is where is it going beyond that, and I don't know. I've heard rumors of every kind of price you could imagine. I think we are going to continue to see improvements from the feed companies on yields, but whether every year is going to be the question mark in and out of where it is going to go. So I think next year we are okay, within reason. I say okay now, and this is July 25th or something.

So you know and I know that the last week of July and early August can have a bearing. But the crop is pretty well along this time and in pretty good shape going into the last part of July, early August. I think we are okay going into next year.

What about the location of your plants? Do any of your plants compete directly with an existing dry mill or a planned dry mill where you are actually competing for the corn in a local area that could affect basis?

I guess indirectly they all do, because our plant in California is sourcing out of the western corn belt. But given that we can source from any part of the western corn belt I think we have more flexibility than some would have by being right up against a dry mill. And the same thing would hold true for Winston; we source out of the eastern corn belt and it can come from any part of the eastern corn belt, we don't care, as long as we get the best corn and the best price.

Argo is located in the Midwest and obviously the demand in the Midwest is pretty solid, but we have not had a problem with that. We can bring it in from Illinois, Iowa, Nebraska, Minnesota, Indiana and Wisconsin. So again, I don't see it being a supply situation where our plants' basis may increase somewhat as we go forward, but that's to be expected as you have different locations sourcing and different locations using the corn going forward.

Fair enough. And then just on guidance, it sounds like you're a little reluctant I guess to firm up guidance or you're going to provide at least incremental guidance next quarter. Is there anything specific that makes you hesitant or is it more a function of some of these -- like the boiler issue or South -- the turnaround in South American?

No, I think what we're saying is we will be clearer as to where we stand at the end of the third quarter as we go through the third quarter. I think we've given the fact that the boiler is on track. We've given the fact that we expect South America to turnaround, but we also like to deliver. And I want to make sure that the guidance we give you is accurate and I think what we've given you today is accurate. And if things are better than that we will let you know in the third quarter.

Okay. And then on pricing, it seems like high fructose pricing, which you never comment on, but timing --

I totally comment on that, Christine. Always. I just don't say much.

Wondering on pricing if you could just comment on the timing of the pricing. It seems like in the last couple of years it's moved around a bit. Wondering, is it something that you see maybe your customers changing the way they actually secure pricing or is it kind of business as usual as you see it, it just depends on the year?

That's a very good question and let me answer it this way. We are dancing now and we generally dance about this time of year. The good part about it is sometimes you lead and sometimes you follow and I like the dance better this year. Our customers are interested in talking to us about pricing because they have seen spot shortages around the country and around Canada as well and to some extent even into Mexico. So we're not any further along perhaps than normal; every year it's different so I can't say where we stand vis-à-vis anything being done as far as conversations go.

But we always are talking -- for the last three or four years anyhow -- talking at this time about what we see and what customers can expect going into next year and that's been consistent year-over-year. As we stated before, generally Canada goes a little earlier than the U.S.; I expect that probably to be the same this year although it may vary a little bit. And I expect the timing of the contract being finished will be pretty close to what we saw last year.

Okay. I'll leave it there. Thanks.

Anne Gurkin, Davenport.

Good morning. Before I return to South America and Brazil, I guess we were hearing maybe some discussion that the government may be looking at revaluing the real to make the ag more appealing. I didn't know if you had heard any discussions on that?

I have not. I don't know if anybody else has? No. Everybody's shaking their head no around the table, Ann. I have not heard anything on that.

Okay. And then secondly, can we just get an update on your tapioca business?

The Thailand business?

Yes.

Volumes are picking up in Thailand. The business is running pretty well right now. We see it going pretty much the way we want to see it going. We have some investment going in over there and I'm pleased with the Thailand -- I want to see it make more money but I could say that about every business I've got. But the volumes are very solid -- the good part about Thailand is last -- I think it was last year we talked about the substantial drought which caused all kinds of problems both on our production as well as the raw material supply. That is no longer the case.

In fact, they have an overabundance of water right now, so we've got crops coming in very, very handily at the moment with pretty good yields. But the volumes good and Southeast Asia's volumes are generally good overall. Customers are building plants in that Southeast Asian region and, in fact, building plants in Thailand which is good for us. And we expect to continue to move more to the higher value products in that marketplace over time.

Okay. And then how does the acquisition pipeline look for you all?

There are a lot of things out there we're looking at.

Same amount as you did last year or is it stepped up?

Well, you know, we've brought somebody on board whose primary responsibility is global growth for us from a strategic point of view. So I would hope it has stepped up somewhat, but he is very new onboard so it's going to be a matter of a little bit of time for him to get his feet grounded in this thing and we will continue to look at the other things we were looking at before. And those acquisition targets are around the world.

Great, thanks very much.

Thank you.

Christina McGlone, Deutsche Bank.

Good morning. First question, I was wondering if you have an estimation of the amount of swing capacity that's still out there by your competition. Is there -- I guess basically is there capacity that's still available to go from fructose to ethanol or is that pretty much maxed out?

Christina, all I can say is you hit the nail on the head. It's basically only an estimate, but we do know that most people that have swing capacity have swung it we believe. I don't think there's a whole lot more room to swing more from fructose to ethanol at the present time.

Okay. And then just getting back to the comment you made about volume. You were saying that -- I know we saw volume growth in the U.S. in the first quarter and then it sounded like we were continuing to see volume in the second quarter, but you attributed the volume growth to Mexico. So I'm wondering if you did see U.S. volume growth in the second quarter and then what's driving that. Because the regular carbonated soft drink volume has been kind of still flat to down, but I'm wondering if this sort of volume growth is sustainable?

The volume growth -- first off, let me be clear. We didn't say we had volume growth in Corn Products because obviously with the plant shutdown we had for that point in time our volumes are relatively flat compared to last year. But we saw volume growth in the industry for a couple of things. Number one, the carbonated -- first, Coke and Pepsi have announced growth in their businesses and they may have said carbonated is down but the still drinks, teas and all of the other things, are up pretty substantially. So we're seeing growth in the marketplace for high fructose corn syrup.

Part of the tightness you're hearing about right now is from the shutdown of the plants that took place moving the product into Mexico and that growth we just mentioned before and the diversion from high fructose to ethanol and/or other products. So the utilization has picked up, the demand probably is up slightly from where it was before, and the capacity available to supply that demand is off from what it was before. But our volumes are relatively flat because of the shutdown of Argo that we had that we talked about for that period of time.

So given that Argo is now up and running would you be able to participate in this industry volume growth in the second half?

Perhaps on a spot basis, but, as you know, we do mostly contracting and based on the fact that we knew we had that situation going, as much as I'd like to be able to pick and choose, the weeks we ship I can't. So we had to pick volumes that we thought would be relatively consistent for the year. We built our inventory, as we told you, in the first quarter in preparation for the shutdown and we booked based on the volume that we thought we'd be able to handle for the year.

Okay. And I guess going back to Dave Driscoll's question, Cheryl, the 10 to $12 million, could you give us a sense on how it's weighted? Because we put in a projection for it and I'm trying to determine if today's out performance was purely operational or maybe if costs were less than I was thinking. I know that you took Argo down for ten days; I think that's pretty substantial. But then you have the month of natural gas coming in the third quarter; would you say it's maybe roughly half and half?

We're not going to break it down by quarters, Christine. Again, our guidance is always based on annual forecast, it's not a quarterly forecast. We're sticking to the 10 to $12 million. If we are substantially over or under that number we'll update the market, but at this point in time we're estimating that we're right in those numbers for the second and third quarter.

And Christina, you hit the nail on the head with two big things -- the shutdown of a plant for 12 days, the largest plant, is a meaningful number and the gas number is a meaningful number. So you're not -- it's not like all of it's coming in one quarter or the other.

Okay. And then the fire up to natural gas, that's still scheduled for the end of the month?

Yes, it is.

And then even if a third party is running it when it transitions to coal into the fourth quarter, we shouldn't see any incremental costs related to that?

That's correct also.

Okay, great. Thank you very much.

Kenneth Zaslow, BMO Capital Markets.

Just a couple questions. What are the key variables -- just to kind of beat a dead horse a little bit -- but what are the key variables that influence your 2006 outlook that you're going to have a better handle on given that you've locked in high fructose corn syrup, locked in corn prices?

We'll have three more months behind us.

Okay, but assuming -- well, let me rephrase it then. If I look at your North American margin in the first half and I say generally speaking they should probably continue at that pace, it would seem that I'm missing something because your guidance would be significantly under where I would go with it. What would I be missing?

Kenny, I don't know if you're missing anything. I think what we're saying right now is at this point in time, with the things out there that we want to make sure we deliver what we say we're delivering. And although I don't see any problems with the boiler, I don't see problems at the facilities we have right now, I want to get through some of the phases of this startup before I go beyond where we are at the moment.

Okay. Is there any -- can CPO in any way benefit from the spread between spot and futures prices of corn? Like for example, can you be buying more in the spot market or are you completely locked in through '06 and into '07?

As we've said continually, Ken, we hedge our corn when we book the business and that holds and we'll do the same thing going into next year. As we book the business we'll book the corn.

Okay. And capacity utilization rates in Asia, can you talk about that a little bit and how that's progressing?

That's an every location scenario. The volumes, as I said, in Thailand are pretty strong. There are a bunch of small tapioca facilities in Thailand. In Korea the utilization -- as we said, the volumes have been soft for the last couple of years. So utilization is okay, it's not great. In China we're starting a facility up; we have to get some product approved at different customers, but as they get approved the utilization of that will be higher. Pakistan is running very strong; the second plant is up and running now. We will continue to look to grow that business so we will continue to expand that plant as needed. But I can't say utilizations for the markets, I can just talk to us there because the market is so spread out it doesn't really make any sense.

And generally speaking, your utilization rates are still under utilized?

I don't think I said that. I think what I said is that in Thailand we're running pretty strong, in Pakistan we're running well, in China we're picking up and we have to get that approved. But in Korea the volumes are a little on the soft side. We have not seen the bounce back in the Korean economy that we've been looking for for the last couple of years. So that's the only place that I'd say utilization is soft in the region.

And if I look out three to five years, how do you think the margin structure in Asia and Africa will kind of evolve?

I think we've said before, Ken, that as we go into places like China and like India and we put in more of the commodity-based products, that the margins in our existing businesses will hold where they are, but the average of the margins will probably come down because we're going into more basic product. Over time as we get those plants in place we'll start introducing the higher value product, so I expect that the margins will moderate to some extent in those regions but it's going to take some time. In over three to five years I really can't tell you, but directionally what I just said is what we see.

But you don't see any time in the near future getting back to an '01-'02 margin structure?

You're talking about up in the --

The high teens, low 20s. We're still going to be in the midteens level for a little bit. There's no --

Our margins are going to be in the upper teens and I think that we'll see it at that, but as we add more and more volume in the lower regions you're still going to see very, very good profits. But as we said before, our cost of capital is a little lower in that region; we're not going to be able to get the same margins and the product mix is going to be different. So you will probably see it come down somewhat, but it's not going to be anything that's going to hurt the business.

Right. I appreciate it. Take care.

Can I go back? Christina, you made a comment before about the turnover of that plant to somebody else running it. We will be running the boiler. We'll have the startup team in there that's our startup team; we'll be working with the manufacturer and their startup team and they'll be transitioning that boiler to us over the next few months. We will have our people in it. We have people that are trained to run that boiler; they've been in training for the last ex number of months and will continue.

So I want to make sure that there's no misunderstanding that we will not be running it. We will be running the boiler as we go through this startup time as well. And we designed it; we worked with the manufacturer to build it. We're training our people to run it. They will start it up because that's part of the contract we have with them. They will turn it over to us as we go through that period. So I just wanted to clarify that. I'm sorry.

John McMillan, Prudential Securities.

Good morning, everybody. I know you don't give quarterly guidance, but were these second-quarter numbers in line with your internal forecasts or were they above?

We were pretty comfortable and happy with the number that we got in the second quarter. We did expect the business to start turning, as we've said before, and I think the business performed okay.

And some of the variables -- I guess currency might have been more favorable. I don't know if you gave me a specific answer to that, yes or no. But what are the variables that were positive in the second quarter compared to your -- I mean, you knew pricing. I mean, so the variables are volumes and currency.

The currency was pretty much on target for what we expected. The pricing was -- we had a fairly good mix of pricing throughout the regions in North America and we saw both businesses perform very, very well. I think that we saw Asia do okay for it. But in general we expected the quarter to be pretty good. It came out a little better than we thought.

Okay, great. Cheryl, I'll just point out that 10 to $12 million seems material to people on this call including me. So if you can disclose it -- basically just a rough breakdown. The 12 days the plant was closed, was that in this second quarter?

Yes.

It was in the second quarter and the training and the additional natural gas is in the third quarter. If the number was large enough in the quarter obviously we would disclose it. When we get to the end of the third quarter we'll confirm the estimate of 10 to $12 million, and if it is material in the third quarter, John, we will obviously disclose it.

Okay. I guess it's a fine line who determined what's material. It seems like a big amount. Why were there reasons people thought there were some delays in implementing this boiler? There have been no delays on your part?

John, I can't comment on that. I had a review just yesterday morning and as of yesterday it's still on track for as to what we talked about on a regular basis. And that's where we are.

And can you just tell me who brought a plant back on-stream -- an old plant back on-stream?

Cargill is looking to start of their Decatur plant. They announced it about a month and a half ago. They've been trying to bring some of the employees back. I understand they're having some problems with that. As I said, it's scheduled as best we can tell now to come on sometime in September -- the end of September I believe. In their announcement what they said was that they were bringing it on to handle some of the shortages that they were seeing in this market and an expectation of Mexico opening up beyond where it is today. That was their expectation. I can't say where we are on that. But they also said that they were not committing to keeping the plant open and they were going to pay a premium if they had to to bring their people back.

September is an unusual time.

I would think so also, but the market has been spot shortages throughout the last few months and probably going forward. I don't know what their situation has been as a company, but the market is seeing tightness. So as I said, there is growth that we're seeing in this market right now. If they're right with their expectation on Mexico there will be a reasonable amount of growth down there and we'll see where it goes.

And just my last question. It's now been about two years or so since you kind of laid out the plan to be an ingredient supplier or a broader ingredient supplier. I've kind of just watched over that two years, three months, whatever, and I don't want to say nothing has happened, but not much has happened -- at least from my vantage point in terms of this new strategic direction. Did you miss a deal? I mean, why did you do it and why hasn't more been done in that strategic direction?

Well, let me give you a slightly different vent on it than the way you're looking at it, all right? I guess it was the first quarter we talked about the facilities were coming up for internal growth on specialties. And as I said at that point in time, from the time we gave you that announcement two years it took about that length of time to bring those channels on-stream.

So the three or four channels in Brazil -- this week I was up in Canada -- last week I was up in Canada commissioning the startup of the [upper west] facility up in Canada, I've mentioned that one before. The plant in China is all specialty starches, a joint venture we put in place there. Some of the products coming out in Thailand are higher value products. We hired somebody to start looking at the growth of specialty business and globalizing that around the world. We have not announced any major acquisitions and/or ventures. The GTC acquisition was small; directionally we said it was part of where we wanted to go and we saw other products coming on with that and we have some product in house that we've been working on that we've introduced on a very small scale and I mentioned those to the group outside before, John.

Directionally we are still going for the ingredients company and we still plan on both acquiring, venturing with, obtaining technology and growing our business in that area. It will not become 50% of our overall business in the next to years. If we took all of the cash we throw off and used all of it and bought companies in that direction it's not going to be huge. But because of what we have in high fructose and everything else around the world. But directionally that's where we're heading. We're looking at opportunities to get there, but, as you know and I know, if we would go out to buy companies in that space, the valuations of things, knowing, Mr. McMillin, you'd probably shoot me for if I paid some of the prices people are asking for.

So we're looking very carefully at that, but we're looking at the amount of business and the amount of cash we throw off, how we can invest it, where we'll invest it and we're going to do it in a prudent fashion. And I think to this point we've been able to turn the business around. Last year we had some problems in our business and I was not prepared to go out and do something stupid in the middle of a very difficult year that we were having in our largest single business. That business is turning around now and we're looking opportunities that will make sense.

Fair enough. Thank you.

(OPERATOR INSTRUCTIONS). Ephraim Bernstein, Highline Capital.

It's actually Joe Saludi from Highline. I didn't hear you guys last year talking about shortages in the market. And does that imply that the setup this year going into negotiations on pricing is actually tighter than it was last year?

Joe, we didn't talk about it last year, but I can't comment on where the situation is right now. The volumes were pretty -- we were selling last year what we made and we're selling what we make this year. So I think that last year and then this year with product being diverted to ethanol, both years there was a tightening. This year we did see the growth and this year we saw the shutdown of a plant. So the supply side of it would be a little tighter than it would have been last year.

Okay. And then where do you think capacity utilization for the industry is right now?

Pretty high.

Where do you think margins can go for the North American business given that capacity utilization is -- I'll put a number -- north of 90%?

I can't comment on that one as to where I think they can go. I think they can improve, but I don't know where they're going to go to because there's still stuff out there.

Right. But if you achieve another price increase of similar magnitude to '06, if corn costs were to stay the same and your energy costs actually come down assuming that the Argo boiler works as promised, we should see substantial margin changes in the North American business.

You just did those numbers. I'm not commenting on that, but you just ran that scenario and everything stays comped and prices go up there will be moderate improvement, yes.

Okay. And then the corn, do you think that the crop is in better condition this year than it was at the same time last year?

I think that if you went forward on a strip today as compared to this date last year would be about the same level. If you look at the crop right now, I think in general -- I have not heard anything about droughts that I heard last year in Illinois. So from the point of view of looking at it with no outside comments coming in to assess the crop I'd say it looks a little bit better where I can see it, but I only see it in Illinois.

Understood. Okay, thank you.

Thank you.

Alan Seymour, Columbia Management.

My question has been asked and answered. Thank you.

(OPERATOR INSTRUCTIONS). David Driscoll, Citigroup.

Thanks for taking a follow-up. Last year, Sam, you and Cheryl talked about the energy surcharges that were being passed on by the trucking and rail companies in the United States. When I look at the P&L I see the shipping and handling costs are up again year on year in the second quarter. However, it certainly didn't make very much of a presence felt in the earnings number or in your comments.

Can you talk a little bit, Sam, about what happened in the contracting side? Were you able to change the way the contracts are written such that there's more of a pass-through here related to the shipping costs or is this simply the effect of the higher price increase or of the price increase that you were able to capture for '06?

It's a combination of both, David, but we were able to put through different types of contracts where the shipping costs, the logistics costs were identified as such and if in fact prices went up beyond a certain point we were able to do something and pass it on through. We had the option at the contracting time of where somebody -- we might have given them a higher price for it if in fact they didn't want to take the expense of the shipping. But we were able to look at what we did and we were able to put most of it through in the contract.

Cheryl, can you quantify for us the expected increase in energy costs for the full year?

The year-over-year comparisons get better. If we look at the -- and it varies by region, David. But the big change last year, if you remember, we had the additional energy costs in the third quarter and fourth quarter for the U.S. business as we bought spot natural gas to run the natural gas boilers.

It's those numbers that I wanted to quantify. So forgive me, the U.S. is what really I'd like to focus on if we can.

I can't give you a percentage, but I can directionally tell you. We would expect -- everything else being equal, we'd expect them to be better in 2006 than they were in 2005 because we're hedgers of our natural gas. So we're not expecting to buy spot natural gas in the third or fourth quarter. So we should have a year-over-year improvement.

And if we did have to buy it, David, as you know, the spot price today for natural gas is a lot lower than it was this time last year. So although we don't expect to have to do it, if we did the numbers would be less and I think -- however, if you look at the gas that we bought this year as compared to last year, that is already hedged. The actual price of the gas is probably higher than it would have been in third quarter. But the ratio of comparison, as Cheryl said, the increase of 25% in first quarter, 17% in second quarter, we would expect that that percentage would probably be down something from the 17% in third. And then going into fourth quarter, since the gas prices spiked back up again, it's probably going to be somewhere around the same level, maybe a little bit below it depending upon how much incremental natural gas is used.

Great. And the fourth quarter last year, Dave, also includes our charge for the coproduct due to Hurricane Katrina.

Thanks for that. I appreciate the reminder that one. So then to sort of -- if I could sum up then. Q3 and Q4 last year we had the very significant increase in natural gas costs as you described. We're having, again, enormous increases in energy costs in Q1 and Q2 so far. We expect a big favorability in Q3 and then Q4 I think you're saying, Sam, is roughly equal to where it was in the year ago period?

No, I'm saying that it's going to be up from where it was a year ago period on a percentage basis, up would be about what we saw in the second quarter. I think the percentage up in the third quarter will be less than 17%. The percentage up in the fourth will probably be around that 17% number I think, and that's an estimate right now, David, because we don't know how much incremental gas we're going to use and we know last year we used incremental gas in the third and fourth quarter we bought on the spot market.

So then maybe if I just try the question one other direction. Can you quantify the savings from the new plant, the new cogen coal-fired plant, can you quantify the savings that you would project in 2007 on a full-year basis for us?

No. I don't mean to be smug, but --

It's too soon, David, for us to do that in 2006.

What I will say to you, David, let's make the assumption that the boiler is running and that's a damn good assumption and one that I'm counting very strongly on, we should not have substantial incremental gas required because it's all coal and it should be running on coal. So the scenario of any natural gas next year -- because there's obviously going to be some, we use natural gas for our dryers, we'll use some for backup of that boiler because it will have times that it goes down like anything else goes down or for maintenance if nothing else.

But in general, the running of that boiler should reduce substantially our requirement for natural gas in the boiler part of our operations. And what we said to you last year and this year was the reliability of the Argo coal boilers was such that we were using the gas boilers much more than we had historically. And hopefully, and we expect that that should go away with the new boiler coming on-stream.

Then Sam, one final question for you. Switching gears here and just discussing world sugar prices for a minute. You have substantial sweetener operations in Argentina and South Korea. It would be my thought that the high sugar prices would be potentially a benefit to those operations, particularly perhaps Argentina. It doesn't feel like we're seeing that right now. Can you just give us a couple of comments on what the effect of these higher sugar prices are globally on your operations?

Around the world it's good. Argentina has a cap on sugar prices that they've had for a long time, David, so the government puts it there and blocks the level of sugar pricing movement in the Argentine country in general. But in general we like higher sugar prices. It's good for us. What it ends up doing in general is it allows for more substitution. It raises the level of pricing for the product that we have and it causes greater demand for our product as substitutable in other areas.

Certainly the price of sugar in Korea is also to some extent controlled by the government and the governments have to move those prices, so we price against it, up to the ceiling of it, and as they move up we get better prices on it. Most of the rest of the world, the price of sugar is flexible and obviously we take advantage of it wherever and whenever we can.

And the export opportunities out of Argentina are still not compelling enough to take advantage of relative to your domestic sales?

We export a reasonable amount of product out of Argentina and that that we do we obviously are getting the advantage of. But (multiple speakers) we have customers in there that we have to ship to. Unfortunately, as much as I'd like to say we can take opportunistic shots at moving it outside the country, you do that and when the marketplace shifts around a little bit you know longer have those customers in countries, so you have to take care of the ones that you built the facility for in the first place.

Okay, thanks a lot for the comments, everyone.

Operator, if there is one more question we will take that and then we'll close down the call here because we're up on the hour.

Actually, sir, there are no more questions. I was going to turn it back over to you for closing remarks.

All right, thank you. As a result of that we will conclude our conference call and webcast this morning. As a reminder, a replay of this webcast can be accessed at www.CornProducts.com and a replay of the audio conference call is available through Friday, August 4th and that phone number is 719-457-0820 and you'll need the pass code of 4910-199. So thanks to all of you, for Sam and Cheryl for participating on our call this morning and we'll talk to all of you again in late October with our 2006 third-quarter results. Have a good day.

And once again, that does conclude today's conference. We do thank everyone for their participation. And once again, have a great day.