Ingredion Inc (INGR) 2006 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Corn Products 2006 third-quarter earnings call. This call is being recorded. At this time I will turn the call over to the Director of Investor Relations, Mr. Dave Prichard. Please go ahead, sir.

Thank you, operator, and good morning to everyone. Welcome to Corn Products International's 2006 third-quarter and nine-month earnings conference call. 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.

As a reminder 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 their presentations.

Now I have just shifted to chart 2 which is our agenda. Cheryl Beebe will present the financials for the third quarter and the nine months with appropriate analysis and flavor; following that Sam will discuss our 2006 outlook before we move to your questions and answers.

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 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 www.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?

Thank you, Dave. Good morning, everyone. As you have probably seen from the press release or the presentation slides, we had a very good quarter. A number of records were set -- net sales, operating income, net income and earnings per share. I am starting the financial review with chart 5, the summary income statement for the quarter ended September 30, 2006. Unless otherwise noted the comparisons will be against last year's third quarter.

Net sales grew 10% to $674 million from $612 million last year. The $62 million increase is coming from stronger volumes which contributed $42 million of the sales growth, price mix exchanges amounted to $8 million, and the balance of $12 million is the impact from stronger currencies. Gross profit increased 28% to $112 million from $88 million a year ago. The dollar impact is $24 million. The gross profit margin improved 230 basis points, 16.6% versus last year's 14.3%. The increases in volume and price more than offset the slightly higher net corn costs and energy costs versus last year.

Operating expenses in the quarter were $50 million versus $38 million last year. Operating expenses as a percent of net sales were 7.4% versus 6.3% last year. Most of the increase in operating expenses is from the impact of better earnings on variable compensation, the translation impact from stronger foreign currencies, and the stock option expensing, which is about $1.4 million in the quarter.

Operating income increased 24% to $65 million from $52 million last year for an improvement of $13 million. The operating income margin for this quarter is 9.6% versus 8.5% last year. Net financing costs for the quarter were down 27% or $2 million due to higher capitalized interest primarily coming from the Argo coal boiler and foreign exchange gains. The third-quarter tax rate is 34.5% versus 44.9% last year.

Let's start with last year's tax rate. We had estimated through June of last year an effective annual tax rate of 34.5%. In the third quarter of 2005, based on changes in the income mix, the estimated annual tax rate was changed to 38.5%. The catch-up occurs in the quarter and hence the increase in the quarterly rate to 44.9%. This year, based on changes in the income mix, the estimated annual tax rate is expected to be 36.5% versus 37.8% previously used this year. The impact in the quarter for this year amounts to about $0.02. The year-over-year impact amounts to $0.08.

Each quarter we make the best estimate of the effective tax rate expected to be applicable for the full year. That rate is used in providing for income taxes on a current year-to-date basis. The current quarter tax expense is calculated by comparing the current year-to-date expense to the previous quarter.

Net income for the quarter is up 60% or $14 million from last year. The weighted average number of shares outstanding on a diluted basis is 75.5 million shares versus last year's 75 million. We did not buy back any shares during the quarter.

Turning to chart 6, net sales by geographic segment -- North America's net sales grew by 10% or $38 million. South America is up 9% or $14 million, and Asia Africa is up by 11% or $10 million.

Looking at chart 7, the net sales variance analysis, we see volume growth as the key contributor across all three regions and the Company in total. Price mix is favorable in North America and negative in South America and Asia/Africa. Currencies were favorable across all three regions. In South America the price mix decline is coming from Brazil and in Asia/Africa the negative price mix is primarily from South Korea and Thailand. The favorable currency impact in Brazil, South Korea and Thailand help to mitigate a large portion of the negative price mix impact on those countries' net sales.

Moving to chart 8, operating income by geographic segment -- North America's operating income for the quarter was up $15 million or 64% compared to last year. The improvement is coming largely from the improved pricing and increased volume. South America's operating income was down $1 million or 6%. As previously discussed in the first- and second-quarter calls, the region is down due to the price and mix issues in Brazil, reduced coproduct values and lack of pricing flexibility on high head products.

Columbia's strong performance in the quarter led by lower costs helped to mitigate Brazil's impact. We're steady in Argentina as we continue to see year-over-year higher corn and energy costs. They are still performing well compared to last year's where they had lower net corn costs. Asia/Africa's operating income grew 6% or $1 million; last year's operating income included other income of about $1.8 million for the land sale in Malaysia. Pakistan, South Korea and Thailand all showed improvements over last year.

Chart 9 is the estimated source for the change in APS year-over-year. The $0.18 increase from last year is broken down as follows -- $0.5 from volume; $0.02 from margin improvement; a penny from stronger currencies. Lower financing costs contributed $0.02 and the lower effective tax rate contributed $0.08.

The last quarterly chart is chart 10, cash flow highlights. Cash provided by operations is $69 million this quarter versus $39 million last year. Net income is the driver. Cash invested in the business is $62 million versus $29 million last year. This quarter we have the $22 million investment in Getec. Capital expenditures are still on track for about $150 million.

Cash provided by financing activities for the quarter was $8 million versus a use of $35 million last year. The change primarily reflects the third-quarter option exercises versus last year's repurchase of shares.

Turning to the nine-month results, chart 11, we see sales up 9%, gross profit margins at 16% versus 14.1% last year, operating expenses are up 26% to $30 million, operating expenses as a percentage of net sales are 7.6% versus 6.6% last year. We again expect approximately the same run rate in operating expenses for the remainder of the year.

Financing costs are $21 million, down $7 million from last year or 26%. The effective tax rate for the nine months is 36.5 versus 38.5 from last year. The change is due mostly to the domestic and foreign income mix. Net income is $91 million, up $25 million from last year. Diluted earnings per share were $1.20, up 33% from last year's $0.87.

Turning to chart 12, we see the estimated EPS reconciliation for the nine months, the $0.33 increase from last year as coming from increased volumes, $0.11; improved margins $0.06 and $0.06 from stronger currency values. Lower financing costs and a lower effective tax rate contributed $0.06 and $0.04, respectively. The penny from fewer shares was offset by the increase in minority interest.

Last but not least is chart 13, key metrics for the nine months ended September 30th. Debt to total cap improved to 26.1% from 27.8% last year. Debt to EBITDA was 1.6 times versus two times last year. Operating working capital is 9.4% versus 11.1% last year. And net debt less cash was $450 million versus $447 million last year. That's it for the financials; I'll now turn the call over to Sam.

Thanks, Cheryl. Let me summarize our 2006 outlook. (technical difficulty) as noted on slide 14, we are raising our expectations for growth and the diluted earnings per share for 2006 to 33 to 36% or $1.58 to $1.62 versus $1.19 per share in 2005. Our prior guidance was to be near the high end of the range of 16 to 24% growth or $1.38 to $1.48. This suggests we expect a fourth quarter of $0.38 to $0.42 per share compared to our $0.31 in 2005.

We see 2006 as a record year for earnings and net sales along with solid margin improvement for the Company primarily driven by North America. Our expected EPS improvement this year will keep us on track to achieve compounded low double-digit earnings per share growth over the 2003 to 2008 period, a goal we've committed to achieving. We also anticipate a higher return on capital employed, one of our key performance measures, with solid progress on our goal to meet and exceed our cost of capital by the end of 2008.

Turning to slide 15, our 2006 outlook by region, first let me address North America. It's evident through the nine months of 2006 that the major profit improvement in our North American region continues to account for much of our EPS increase this year to what we believe will be record performance. The key driver, as you all know, is the low teens percent increase we achieved in contract pricing in 2006 for our entire U.S. and Canadian book of business, along with continued strong growth in Mexico across all of its product segments. Let me note here that we are also hopeful that the Mexican government will indeed eliminate the tax on high fructose used in beverages by the end of January 2007 as they have pledged to do.

I am pleased to report that the new coal fired boiler at Argo, our largest facility, is up and running any we have scheduled a ribbon-cutting ceremony for October 30th. This has been a major project over the last few years and is among the actions we have taken to ensure that Argo is a state-of-the-art, low-cost corn refining plant for many years to come. We have also revised our prior estimate of startup expenses for the new Argo coal boiler to about 8 to $10 million from the previously announced 10 to $12 million.

Turning to South America and Asia/Africa on slide 16; third-quarter results indicate that the second half recovery we expected in South America is beginning to occur led by Brazil. The factors impacting Brazil's price/product mix and limiting our pricing flexibility have bottomed out, as we said, and it appeared to be the case when we talked to you on our last call in late July. Conditions in Brazil are gradually recovering and the country's third-quarter results reflect that with year-over-year declines narrower than in the first half.

As expected net corn and energy costs are still impacting results of Argentina, a condition we expect to continue into the fourth quarter. However, the Argentine business continues to perform at our expectations and is a very healthy business. And I'm pleased to note that our Andean region has been a bright spot led by strong performance in Colombia.

The important point is that our earlier expectations that the second half in Brazil and South America overall would be stronger than the first half are coming to pass, which should hopefully set the stage for further improvements in the region in the coming quarters.

In Asia Africa the story is unchanged, a continuation of steady performance and that region. Pakistan remains our strong country performer. While South Korea's performance improved in the third quarter it has still not shown the growth we would like to see primarily due to the sluggish domestic economy that has been there for some time now.

Finally on slide 17, let me touch on several recent strategic transactions in South America. In September we increased our equity ownership stake to 50% from 20% in Getec, our Brazilian joint venture which was formed in 1998. Getec is a major producer of Polyols and anhydrous dextrose. And we just last week signed a stock purchase agreement to acquire DEMSA, the only corn refiner in Peru and which has been operating there since 1964. We expect to close the DEMSA transaction by the end of November.

Both of these transactions are moves to further enhance our historically strong market position and broad territory coverage in South America. We believe DEMSA will help the overall performance particularly of our Andean region. In summary, we are pleased with the third-quarter and year-to-date results and our abilities now to raise our earnings per share growth expectations for 2006 to a record range of $1.58 to $1.62 per share. Thank you very much and now we're prepared to take your questions.

(OPERATOR INSTRUCTIONS). Ann Gurkin, Davenport Securities.

Good morning. I wonder if you could comment on a couple of things. One, in terms of I guess what we call swing capacity in the industry, is that still being diverted to ethanol production? Are you seeing any of it coming back to sweetener production? And secondly, if you could just update us on your progress towards becoming more of an ingredients company?

Ann, we have not seen anything diverted back, although we don't have the swing capacity of ethanol that I think you're referring to. But for the most part, with oil prices still at $60 a barrel and the contracts going forward, there is still a deficit in ethanol. So we've not seen anything at all with it coming back.

As far as the movement to becoming more of an ingredients company, part of the Getec deal is that obviously we pick up some specialty products in Brazil. We're working on, as we had mentioned before, opportunities to do some product movement and some of the new capacities that we've brought on in Brazil that we announced at the end of the first quarter I believe -- we mentioned it's going through the test cycle now.

We're starting to see approvals, but we knew that that was going to take six to nine months to get approval in place. Our business in Colorado, GTC, we've got the channel up in London, Ontario running today and that product is being approved out of that facility now and we continue to look at other opportunities as well as developing products internally.

Great. Thank you.

Christina McGlone, Deutsche Bank.

Good morning. I guess the first question is just on the fourth-quarter guidance. If I look back over the past three years it looks like there's a sequential uptick from the third to the fourth quarter. But now you're signaling it to be down sequentially and I just wanted to know what was driving that?

Christina, normally our third quarter is our best quarter. And particularly because of the North American size the volumes come off in fourth quarter as a normal rule and we see it being a lesser quarter than third. There may have been some years where, particularly because of the Brazilian performance being strong and particularly last year with North America's performance being weak, we might have seen it. But the normal tendency because of the size and mix of the business is that third quarter is larger than all the rest of the quarters combined.

That has moderated to some extent as the South American business has grown, but it's certainly not a situation that I would say there's any indication of any problems at all. It's pretty much the way we reflect it in our goal and pretty much what we're expecting to see.

Okay. And in terms of the boiler costs, have they all been incurred now or do some fall in the fourth quarter?

There's still a little bit that's in the fourth quarter, but for the most part they've been incurred right now. We are -- as we said, we have the ribbon-cutting ceremony going on, it's scheduled for October 30th. The plant is running for the most part on the new boiler right now. We're doing some checklist things once in a while that we bring it down, but the boiler has been running for the last couple of weeks continually and if we bring it off we just bring it off slightly and back it up with the other boiler. But these are just hit list items that we have to work as we go through it. Everything is moving forward as we expected. We're very pleased with the way that boiler started up and the way it's running to date and I expect it to continue forward.

Okay. And Sam, was there industry growth in fructose this quarter? And what drove your volume growth in North America?

The U.S. business was relatively flat for the fourth quarter on fructose. Basically we saw -- I'm sorry, third quarter, I said fourth quarter -- in the third quarter. We saw some volume growth in Mexico, we saw volume growth in some of the other productlines that we have in the business above and beyond fructose. And then we saw growth in other parts of our world. Obviously Cheryl reflected that we saw growth levels of -- I think it was 12% in South America and 11% in Asia/Africa. So it was a combination of just solid business performance throughout the region and the fact that we have pretty decent positions with our customers.

And the industry, the fructose industry in the quarter -- because I know you noted at last quarter that it was growing and actually in the first half. Did that continue in the quarter?

I think it was flat in the third quarter, Christina. We have not gotten the CRA data yet; that would come out probably the end of this month to give a true feel for it, but my guess would be it was relatively flat in the third quarter.

Okay. And then Sam, at a recent conference you talked about getting margins in North America -- that they would be achievable and sustainable in the low double-digit range operating margins.

Yes.

Do you -- I mean, given the jump in corn, do you think that that's still the case and/or has that been pushed back at all?

No, this year we're reflecting about 9%. I think that I've said continually the range of corn from $2.50 to $3.50, we can pass that through and still improve our margins. I still believe that that is the case and I think certainly we're looking at the kinds of numbers that we've talked about in the past.

Okay. And just last question. What is making South American get better? Are you seeing tapioca producers shift? Is the meat sector improving? What's really responsible for the improvement?

We're going it cold medicine to help out the cold. Basically what we said before was that as the Avian flu situation kind of subsided and we were able to start again out of South America -- shipping out of Brazil in particular but South America in general -- shipping poultry, we'd be able to see some of our coproducts start to move again both in volume and in price. And we have seen that. We expected it; we forecasted it when it first happened and we still expect it to continue to improve and it has gotten better throughout the course of a year.

In addition to that, as all is written every place around -- they are converting acreage in Brazil primarily to sugar but to other products and tapioca at the lower value is not moving nearly -- or not growing -- being grown as much as a result we're seeing some improvement in that. We expect that to continue over a period of time. And as we go forward we expect to see it continue to improve as far as the tapioca position goes.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Michael [Piken], Cleveland Research Co.

Good morning. I'm calling on behalf of Christine. I just wanted to talk a little bit more about your outlook next year for energy and corn costs. It looks like with natural gas coming down and Argo coming on board it should be a little bit more favorable. But also with respect to corn costs, could you talk about how you source some of your corn internationally?

Certainly from the energy price point, as you said, the futures on gas are coming down. Since we have the cold boiler in place we will be using mostly coal in the U.S. obviously, but we still have some gas usage. But you're right, the futures position is down; I won't comment on how much nor when we bought, but as of the moment it's lower than it was last year when we bought in.

As far as corn goes, obviously in the marketplace today we all see corn at higher levels. I don't know that it will stay there. Our estimate is it's overpriced at the moment by a reasonable amount, but that doesn't mean anything because that's our estimate and we'll find out what happens with it. As you know, we source our corn for North America primarily from the U.S., although we get some of it in Canada locally, we get some of it in Mexico locally. For the most part outside of the North American business we get our corn in local regions.

We apologize for the noise here in the background. We're in a conference room in New York today and we have fire engines going behind us. But, also in Korea most of the corn is either brought in from the U.S. or Brazil or China, and in Colombia it's typically brought in from either the U.S. or Argentina. So we source it from any number of locations, but certainly we expect to see slightly or higher corn costs going forward and we also expect to see better coproduct values going forward.

Okay, thanks. Also if you to talk for a little bit about in Asia and South America my understanding is historically you've been able to kind of pass through some of those higher input costs and this quarter your margins were down a little bit in those regions. Could you talk about your current pricing power in those areas?

Well, we said earlier that the margins would come back in Brazil. And if you look sequentially the margins have improved in South America. We had identified the fact that we had problems in the first half, they've turned around, they're getting better. We said it would take a while to get it back, but they're coming back.

In Asia we've also identified the fact that the margins in Asia were going to come down over time only because of the fact we have some businesses that are coming on that are in start-up mode which we would not expect right upfront to be able to provide the same margins that either Pakistan or Korea could provide historically.

And then lastly, if you look at the numbers last year in the third quarter, we did have an almost $2 million gain, a $1.8 million gain on a land sale that was not affected from the operations. So I think if you check the number you'll see that we're pretty much where we said we would be and on track almost in every region with what we forecasted.

Okay, great. And now last question. Just taking a look at North America -- you had mentioned your results were up in all three regions and I know -- was Canada primarily up due primarily to higher pricing or was there anything else driving the improvement in Canada?

No, the pricing in North America was it and I think we also said volume was an improvement. So we didn't break out which country had volume growth, but all of them did. So I think it's a combination of all. And please say hello to Christine and the baby.

Okay, will do. Thanks a lot.

(OPERATOR INSTRUCTIONS). John McMillin, Prudential Equity.

Good morning and congratulations. Are we all invited to the ribbon-cutting ceremony?

You have my personal invitation, John. And if you tell me you're coming I'll send you a formal invitation.

Well, as long as it's not 25 below zero.

I'm not promising that. It's supposed to be pretty cold out there today.

I just have a question for Cheryl first. It seems like the year is coming with more U.S. profits and North American profits than maybe was in your business plan. Shouldn't that raise your tax rate rather than lower it?

There are a couple of issues. It's not just the U.S. operating company results, John; we're bringing on the boiler this year so you get accelerated tax depreciation.

Okay, I've got it. Sam, historically you've been very close mouthed about contracting, even in January and February. So Lord knows how I'm going to get any information out of you in the month of October. But I think almost more business is done now in October than is usually done in mid-January. Would you agree to that?

No. I think that last year we did business earlier than we have in the last seven years, I'll admit to that. And as I said -- we've said in the past, typically the Canadian business is done in October/November. I think, John, you might guess that with corn going up the way it has gone up recently we've kind of stopped pushing contracting right now because the situation is such that, as we said, we hedge it.

And I believe that we see a situation both where we have to adjust what we go to the market with because we've seen a run-up in price in corn; we expect to see that moderated to some extent, a great extent by the coproduct credits. But also, if in fact, if our belief is right that it's over priced by about $0.25 to $0.30 right now based on the fundamentals, then we're going to let it go. And the customers are not anxious to book at the moment either.

So as I've said before, it's difficult to say when and how we pull that trigger. But we will do the dance as best we can dance it to be able to optimize all of the profitability we can get out of the business.

Do you feel like any other corn refiner has kind of cornered or gotten better corn costs? Somebody is buying -- you could have made the same statement $0.10 or $0.15 ago that corn was overpriced and it keeps going up every day. Do just get the feeling that one of your competitors has not cornered the corn market, but who do you guess is buying here?

We monitor what our competitors do, John, at least as best we can and I have no idea exactly how they buy. But our indications are that most of our competitors buy the same way we do and they hedge their business going forward. There are some that buy day to day and don't hedge at all. They're generally the smaller ones, so they've bought corn -- they buy whatever 1/100th -- 1/365th amount of their corn on a daily basis, they just actually buy it that way.

But for the most part the larger players in the business book corn basically the same way we do. Some may have anticipatory hedge as we do. If they take their anticipatory hedge and buy it at a day that we don't buy ours they may do a little better than we do. Or conversely, if we buy ours and they don't buy theirs we do a little better. But I don't think anybody has that significant an advantage over us or we over anyone else at the moment.

I think the report that came out when corn popped up was a surprise. If you go back and look at what the USDA reported in the number two weeks ago I guess it was, when they reported almost 1 million acres that they had made a mistake on, this is about the third or fourth year in a row that you've heard me go after the USDA for making mistakes because it's either gone up or down, but it's had a major impact.

So I don't think anyone was sitting their prior to that report expecting corn to go up. Most people, including us, were looking for improved yields. We saw improved yields, but when they took that kind of volume out because of acreage the corn market got impacted. So there's nothing that would indicate to me that somebody would have been sitting there expecting that sort of thing to happen.

Okay, thanks a lot and congratulations.

David Driscoll, Citigroup.

First off, congratulations on a nice quarter, certainly a year makes an incredible difference.

You don't know how much better we feel on this call than we did a year ago on this call.

I probably actually think I do.

You probably do. That's a possibility.

Cheryl, just two quick questions for you on both the tax rate and interest expense. Would you say that the tax rate on a going forward basis, '07 and beyond, modeling around a 36.5% rate is a reasonable estimate?

I think that the historical range of 34 to 36% is reasonable, but it's the ultimate forward-looking statement, David, because it's dependent upon income mix, it's dependent upon where the debt sits and it's also dependent upon what happens with stock options. So if you have the stock price moving forward at a large clip and you have the rank-and-file exercising that's all a deduction from U.S. source income.

So being a multinational, which is -- you don't find too many $2.5 billion multinationals, but that's really the issue around the inability to predict it, it's because of the nature of operating in so many countries and having a large pool of debt in the U.S. But from a modeling standpoint I'd say 34 to 36% is as good a guess as anybody could get to.

So you would certainly then characterize the quarterly tax rate as right in that range and in line with your thoughts on a normalized business?

I would agree.

Interest expense, it's down nicely versus the year ago period. Can you give us some thoughts about where you see that trending? Is this quarter a good representation as to how this should trend?

No, actually, David, I think it should trend a bit higher because this quarter you see the impact of the capitalized interest which is primarily the Argo coal boiler. And the coal boiler is capitalized this year and so as we go forward into 2007 you won't have the capitalized interest.

And that would add $1 million or $2 million to the number?

On an annual basis or a quarterly basis?

Quarterly.

Quarterly basis, I'd say $1 million.

Okay. Sam, just -- if we could go back and I asked you this question a number of quarters ago and maybe I'd like to go back to it again. The benefit of your experience in the U.S. corn refining business, give us your thoughts here on where we are in terms of capacity utilization and your sense just with the Mexican announcement, the trade agreements being reached with these guys in '07 looking I think much more bright regarding fructose shipments to Mexico from the United States. Can you put it together for us and just give a sense on how strong you feel the environment is relative to where we had been?

Yes, David, I think certainly as we've stated throughout the year, utilizations this year have improved significantly as a result of plant closures, diversion of product and opening of Mexico and that continues. Certainly Ann's question in the beginning, we have not seen any swing back nor do we expect to see any swing back from ethanol production to either high fructose or any of the other conventional corn refined products.

Mexico, as we said, is hopefully the -- they take the tax off of all beverages using high fructose in Mexico by the end of January which opens up the door for more product for us to be able to sell into Mexico, we personally but there are limits on how much can go in from the U.S. But even that number is increasing based on the fact that it is 250,000 tons from September 30th -- or October 1, '06 to September 30, '07. And then an incremental ex up to 250,000 tons in the last quarter.

So all in all, fructose should be tighter. The rest of the markets are still growing at the normal growth rates of 1%, 2% a year. There's no new capacity coming on stream in the foreseeable future. Obviously Tate & Lyle has their announcement out in 2009, but that's ethanol. So I think we're seeing and still looking at relatively tight markets going forward and I don't see that changing in the foreseeable future.

Would you characterize the competitors as acting in a rational fashion? Certainly in the past when we've had this conversation on these conference calls before where people have an expectation for pricing and subsequently a competitor has done something fairly negative in terms of capitulation on price and that has had a ramification on the industry. How does that dynamic feel right now?

David, it's difficult for me to comment on our rational my competitors are, although I like to think of them as being very rational people. Certainly from the point of view of what they have stated publicly -- ADM and Cargill had stated before that the returns that they were receiving were not acceptable returns in the business for the investment that they had made. That makes sense. It's what we've said also. And we said that we had to improve our margins in this business or take other action and we've been able to improve the margins.

I've got to believe they're in the same position. But I can't comment on what they're thinking or what they're doing. Obviously last year -- this year, I'm sorry, 2006 the pricing was solid. We were able to get the increases through. Utilizations are tight going into 2007. So my expectation is that we certainly are going to be going for improvements to get to what we said. We are still not returning what we said we need to return in this business. And we see the opportunity to go after it right now and we're going to try to get it.

Last year you led the pricing increase which was unusual for corn product as maybe the number four player in North America -- or really U.S. and Canada. Are you doing the same thing this year or are you -- I think on the last conference call I asked you the same question, but again, you really hadn't gotten into contracting. Can you give us just an idea here of what your strategy is? Are you guys taking more of a back seat approach in letting the two big producers really drive pricing?

We are evaluating that as always, David, and looking at it to see where we think the business is. I think some of you have written that price announcements were put up there before by some of our competitors and we did not put announcements out at that point. Right now we do not have any announcements in the marketplace today. As I said earlier, we're going to evaluate where the market is going, what we see happening in the corn environment and determine how we want to go forward with it.

But I think that that's prudent at the moment because basically without knowing where it is, and even John's pointing to me -- corn can go up or down, but at least we'll know where it is. And if it continues to move up, which I don't think it will do, but if it does we will price later on. And I think you would find that the rational people in the industry are going to look at it that way.

And given how tight capacity is this would seemingly sound like a reasonably good position for you.

Well, I like it when utilizations are tight. I'd probably like it a little bit more if corn was a buck lower than it is right now. But as I said before, we'll be able to move the corn -- we expect to be able to move the corn numbers through and improve on our margin.

Sam, those comments are real helpful. Just one final question. Cheryl, can you tell us if in the quarter, the third quarter, this was where the bulk of the charges were taken regarding the startup of the boiler?

No, I would say the bulk of the charges were taken in the second quarter. We had third-quarter charges and we'll have a couple million in the fourth quarter.

Very helpful. Thanks a lot, everyone, and again congratulations on a great quarter.

Ken Zaslow, BMO Capital Markets.

Just a couple quick questions. What percentage of your U.S. contracts tend to be cost-plus basis?

We have never given that out, Ken, as to percentagewise, but I think we said this year that we're looking to move more in that direction because of the volatility of corn going forward. But we've never said what percentage it is.

Okay. Can you give us an idea of what you think of the outlook for coproducts? I think you said that you think there's going to be a greater recovery on your corn costs and what's that driven by?

What I hope I said was that we expect to see coproducts get better -- pricing to improve. We're seeing that already. It's going to take some time. It's not going to happen overnight, but certainly we've had indications that both seed and meal are moving. And also as we look out a little bit we expect to see corn oil move as well. So with the corn -- the gross corn number going up, as we go into next year we expect to see the coproduct values improve as well. We have not said to what extent, but we don't know to what extent, to be honest with you, but we do expect it to happen.

What do you think is going to drive the feed and the meal side of it?

The price of corn, they're competing with corn for the feed value. And if corn is higher they're going to be higher.

Okay. And in terms of Asia your volumes were well ahead of what I would have thought. Is this an inflection point and what has changed in Asia to give you these types of volumes and I'm assuming the profitability that will follow?

Well, over the last couple of years -- we put the second plant on in Pakistan and that's running -- full up and running much better now. The volumes in China are starting to pick up some. The volumes in Thailand are starting to pick up some. And Korea, we did see, as I've mentioned, a better third quarter than we had expected. And hopefully -- I mean, I don't expect it to turn around, but I am hoping that we are able to see something start to happen.

And then last year, if you remember, we had the drought in Thailand, so our volumes in Thailand were off last year specifically because of an environmental problem that happened over there. But we said before that we expect to see growth in Asia on a continued basis and we still expect to see that.

Great.

And you're right, the profitability should come later.

And can you allay -- one major concern I always get from investors is -- is there a price at which you think bottlers would switch from high fructose syrup to sugar?

I think there's a price, but I don't think we're close to it.

Can you give us an idea? Because I get this question all the time and I've come up with ideas of -- what do you think it is?

Well, the sugar price today is $0.26, $0.27, $0.28; the spot price is $0.35 or $0.40. And then we have to have fructose at that price because for them to convert back to something else is a huge conversion factor. The whole supply chain becomes an issue because they're buying dry sugar and having to melt it and the whole routine. So I would say that's the minimum and we aren't there.

And wouldn't there be about a $0.02 addition to that just because of the conversion to liquid?

Whatever the cost is for them to do that because they would probably do the conversion at their own facility. There is a cost associated with that. I don't know that I could give you an average number for that.

And just a final question. Is there any reason that CPO can't deliver another year of 30 plus percent growth in '07 given you have the high fructose corn syrup environment, you've got a recovery in international and you've got lower natural gas prices? Is there any reason not to believe 30 to 40% growth?

Ken, I am not foolish enough to say that I'm going to grow 30% at this time this year going forward next in an industry that we're in right now. We expect next year to be another good year, but I can't quantify it right now until we get further into next year at which point in time. As John said, he tries to get numbers from me in January and I tend not to give them out then. It is not only being cautious, it's being realistic because of the environment and the business we're in. We do expect it to be a good year; we've had a very good year so far this year, we expect to continue. And I expect going forward we should have continued growth.

What would deter you from -- if I just put in very simple margin assumptions like the low double-digit and a little bit decrease in Asia -- it gets to pretty high numbers pretty quickly. What would deter me from getting to those numbers? What could change dramatically? You're able to pass through a lot of your corn costs. High fructose corn syrup looks pretty tight. What would change my view on that?

I don't know that anything is going to change your view on it. I think certainly we've said a couple of things sitting out in front of us are coproducts that we have to get. I've given you my estimate as to what will happen. I can't guarantee you. We've got issues all-around the world that can impact our business. If you had talked to me at this time in 2001 before we went into 2002 with the problems we had in a couple of parts of our world I would not have been able to forecast them and I can't forecast that tomorrow.

The basics of the business today are solid. And given the basics of the business being solid I think that -- as I've said, I expect next year to be another good year. We've got higher raw material. And if corn ran to 450, which I don't expect to happen either, but I can't tell you it won't today because I don't know we have pressure and we have to go and work our way through that. But I can't, nor will I even think about saying we're going to grow at 30% next year.

Okay, I appreciate it.

Thank you.

(OPERATOR INSTRUCTIONS). Paul [Schroeder], Highline Capital.

Thanks, it's actually Joe [Saluti]. Can you talk about whether the last time capacity utilization was this high in your industry, which I guess you have to go back a very long time. When you had to deal with input price issues while you had a tight market. So corn prices are rising but you have pricing power. Have you been able to change the contracting structures so that you can get price increases affectively on your conversion revenue and pass the corn price on to a greater extent?

So I'm not asking for a mix percentage, I'm asking whether in the past you've been able to really change your contracting structures if the environment has been tight and your input costs are high.

Joe, let me start by answering. Ten years ago, which is what time frame you're talking about, things have changed dramatically in not only our industry but the world since then and I don't know that anything then would be relevant today. But having said that, I think in any industry if utilizations are high then you can price a little bit differently than when utilizations are low; this is basic fundamentals.

So as to whether or not we can change the structure or whether or not we can shift things around, as I said, we move more to -- not quantifying how much more, but more to grain related or corn related pricing we would look to do perhaps some more on a longer-term basis because we're at a pretty good point in the cycle right now so we take some chances on that. But I think the pricing strategy, the pricing philosophy is going to be one that's used at that point in time and we will determine today what is appropriate for today and tomorrow.

How have your customers reacted to the rise in corn price in the middle of the contracting environment? Does it make them want more certainty? Are they the ones pushing longer-term contracts?

I think they're about as unhappy about it as we are because obviously it just means that our raw material -- they know our raw material cost is going up so they can pretty much assume that the price is going to go up more than what they thought it was going up before. So I don't think anybody is happy in that environment, nor are we. I don't necessarily want to see us having to push through substantially higher prices to our customers because it's not good for anybody. But the reality is that if in fact the utilization is where it is we have to move forward in the direction we're moving.

right. And someone asked prior, you don't think any of your competitors came into this price spike very, very long corn and have some ability to take some share -- I guess if everybody is operating flat out it doesn't really matter.

I guess I -- my comment before was I don't know what my competitors have done and I stick by that. I do know we track and typically they hedge the same way we do. I would assume and I don't know for sure that they -- we take a small portion of our corn on an anticipatory hedge, they may or they may not, but I really can't comment on where they are. I don't think that anybody could have guessed that in August we were going to see a spike up like this as a result of the USDA report that came out that just said they made a mistake.

Right, okay. Thank you.

Thank you.

And there are no further questions at this time. I'd like to return the conference to our speakers for any concluding remarks.

Thank you, operator. As you said, it sounds like we don't have any more questions and as a result we will go ahead and conclude our conference call and webcast this morning. As a quick reminder, a replay of this webcast is available at www.cornproducts.com and we also have a replay of the audio conference call available through Friday, November 3rd, and that phone number is 719-457-0820, that's 719-457-0820 and a pass code of 504-6218. For Sam and Cheryl I want to thank you all for participating on our call this morning. We'll talk to you again in late January with our 2006 fourth-quarter and full-year results. Have a good day.

Take care.

That does conclude today's teleconference. Thank you all for participating today.