Ingredion Inc (INGR) 2006 Q4 法說會逐字稿

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

Thank you, operator, and good morning to everyone. Welcome to Corn Products International's conference call to discuss our 2006 fourth-quarter and full-year earnings results, as well as our 2007 earnings guidance and outlook press release issued earlier today. I'm Dave Prichard, Director of Investor Relations for Corn Products International. Joining me today to lead the 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 simultaneously broadcast on our Web site at www.cornproducts.com. The charts for our presentation this morning can be viewed and downloaded from our Web site, and they are always available about 60 minutes ahead of our conference call. Those of you using the Web site 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 Web site can easily follow through the presentations. I have just shifted now to Chart 2, which is our agenda. Cheryl Beebe will present the financials for the fourth quarter and full year 2006 with appropriate analysis and flavor. Following that, Sam Scott will comment on our company's performance and key developments in 2006, and then discuss our 2007 earnings guidance and outlook, before we move to Q&A.

I've 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 press releases 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 Web site at www.cornproducts.com, and as you'll see, are included as an appendix to the slide presentation.

With that, I'm 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'm going to review the fourth-quarter results and then move onto the full-year results for 2006. I am starting on Chart 5. Unless otherwise noted, the comparisons will be the fourth quarter of 2006 against the fourth quarter of 2005.

Net sales were $687 million, up 17% or 101 million from last year. North America contributed about 63 million of the increase, South America 29, and Asia/Africa about 9 million. Gross profit for the quarter was up 30% from last year or $25 million. The fourth-quarter gross profit margin was 15.5%, up 150 basis points from last year.

Operating expenses are 55 million, up 35% from last year. Operating expenses as a percent of net sales are 8% this quarter versus 7% last year. The increase in operating expenses mainly reflects increased compensation-related costs, primarily attributable to higher variable compensation costs, driven by our earnings improvement and the year-over increase in the stock price of approximately 45%, as well as the expensing of stock options. Additionally, currency translation associated with stronger foreign currencies contributed to the increase.

Operating income was 57 million, up 13 million from last year, for a year-over-year increase of 29%. Operating income margin was 8.3 versus 7.5% last year, for an improvement of 80 basis points. Net financing costs in the quarter were basically unchanged at 7 million. The tax rate for the quarter was 31.5% and reflects the adjustment for bringing down the full-year effective tax rate from 36.5% at the end of September to 35.25%.

Net income was $33 million, up approximately 10 million from last year, or 40%. Diluted earnings per share was $0.43, an increase of 39% from last year. The weighted average shares outstanding were 76.2 million versus 74.6 million last year, up 2.1%.

Turning to Chart 6, let's review the net sales by geographic region. All three regions posted solid net sales growth. Net sales in North America and South America grew by 18%, and Asia/Africa was up 11%.

Looking at Chart 7, the net sales variance analysis, we can see what drove the sales growth by region. North America's performance was driven by strong price and product mix followed by volumes and the stronger Canadian dollar added a bit. South America was driven by strong volume; price and mix and currency also contributed. It is worth noting that this is the first time we have seen a positive price/product mix in South America this year. Strong volume in Pakistan and Thailand contributed to the 7.6% volume growth in Asia/Africa. The stronger Korean Won more than offset the decline in the price/product mix. The bottom line is, of the 101 million increase in net sales, about 53 million was from price/product mix, 38 million from volume, and about 10 million from stronger currencies.

Turning to Chart 8, operating income by geographic segment, North America's operating income was 31 million versus 13 million last year, or up 149%. All three countries contributed to this outstanding performance. Operating margins in North America more than doubled from 3.7% last year to 7.8% this year, reflecting the turnaround in the U.S. business and strong results from Mexico and Canada.

While South America's operating income was down 12% or $3 million from last year, this quarter reflects the best quarterly performance for the year and continues to show improving performance in the region, as discussed in previous earnings calls. Asia/Africa's operating income was 11 million, up 4% or $1 million from last year. Operating margins in both South America and Asia/Africa declined year-over-year. South America reflects the impact of price/product mix in Brazil, and Asia/Africa reflects the margin pressures in South Korea.

Corporate expenses were up about $3 million from last year, again driven by higher variable compensation. Option expense in the quarter amounted to $1.2 million.

Turning to Chart 9, we see the estimated sources of diluted earnings per share for the quarter. Changes from operations contributed over 90% of the $0.12 improvement. $0.06 came from volume, $0.04 from margin, and currencies added $0.01. The lower effective tax rate contributed $0.02, more than offsetting the $0.01 from higher shares outstanding.

That wraps up the quarter review. Now, let's move onto the full-year results.

Chart 11, summary income statement--2006 was definitely better than 2005. On all measures, the Company had an impressive year. Net sales were up 11% on strong volume, pricing and currencies. Gross profit margin hit 15.9%, or a 180 basis point improvement. Operating income reached a new high of 224 million. Operating margins expanded to 8.6% versus 7.8% last year. Net financing costs were down 21%, primarily reflecting increased capitalized interest and a swing in foreign exchange gains and losses. The effective tax rate was down to 35.25, versus 37.5 last year, reflecting changes in the earnings mix. All contributed to a record net income of 124 million, up 38% from last year. On an earnings-per-share basis, we hit $1.63, a 37% improvement over last year's $1.19.

Turning to Charts 12 and 13, it explains the net sales growth. All three regions contributed to the 11% increase in net sales. By category, volume contributed about 45% of the $1 increase, or $119 million, followed by pricing and mix, which accounted for about 30% of the growth, or 78 million, and stronger currencies contributed about 25% of the growth, or $64 million.

On a regional basis, net sales in North America were up 12%, South America grew 11%, and Asia/Africa was up 8%. Price/product mix drove North American sales, along with volume growth. South America's performance was driven by volume and currency, which more than offset the decline in price/product mix. Asia/Africa's performance was driven by volume and currencies as well.

Turning to Chart 14, operating income by geographic segments, we see the dramatic increase in North America--$130 million versus 59 million last year for an improvement of 121%. Operating income as a percent of net sales doubled from 4.1% last year to 8.2% this year. South America, at $84 million, was down 17% from last year. As expected, the second half of this year was stronger than the first half. Operating income for the last half of the year was 47.3 million, versus the first half of 2006 at 36.3 million. Given the tough operating environment in South America, particularly Brazil, operating margins were off. Operating margins for 2006 were 12.5%, down from last year's 16.8%. Asia/Africa's operating income was basically unchanged at 53 million. Margins in Asia/Africa are 14.7% versus 15.9% last year and reflect the continued pressure in South Korea. The rest of the region performed well during 2006.

Corporate expenses were $43 million for the year, up 13 million from last year. Corporate expenses include the 5.1 million from the expensing of stock options, along with the increase in variable compensation from the rising stock price and earnings performance. Operating expenses as a percent of net sales were 7.7% versus 6.7% last year. Bottom line, operating income rose 23% or $41 million from a year ago.

The next chart, Chart 15, is the estimated source of diluted earnings per share for the year. Clearly, the improvement in this year's performance was driven from changes in operations, which accounts for 77% of the earnings per share improvement of $0.44. The $0.34 improvement in operations is from volume at $0.18, $0.09 from margin improvement, and $0.07 from stronger currencies. The $0.10 from non operations were $0.06 from lower net financing costs, $0.05 from the low effective tax rate, offset by $0.01 for higher minority interest.

Chart 16 is the cash flow highlights for the year. Topline cash provided by operations was $230 million. The swing in that category in working capital reflects the increase in inventory positions, as well as an increase in receivables based on the increase in sales, partially offset by an increase in Accounts Payable and accrued liabilities. Cash invested in the business was $210 million and includes the acquisitions made in 2006, AKA the increase in ownership in GTECH in Brazil and the acquisition of DEMSA in Peru.

The last chart, Chart 17, is the key metrics. Return on capital employed is 7.5% and shows significant improvement over last year's 6%. Debt-to-total capital remains solid at 26.7%. Debt to EBITDA is 1.6 times, an improvement over the 1.8 times last year and in keeping with our conservative financial policies. Operating working capital is 261 million versus 190 million last year and as a percentage of net sales is 10% versus the 8.1% last year. Again, the story is receivables and inventory growth.

Net debt is 423 million versus 412 million last year. As you know, we have stated targets for all these metrics. With the exception of ROCE, we have hit or exceeded each one of these metrics. So all in all, 2006 was an impressive year on all fronts.

To talk about the highlights of 2006 and the forecast for 2007, I will now turn the call over to Sam.

Thanks, Cheryl, and good morning to all. I will comment first on 2006 and then review our 2007 outlook before we take you questions.

Turning to Slide 18, it was especially gratifying for us to be able to report record sales and earnings in 2006, as we were celebrating our 100th anniversary year. We made good progress on improving our return on capital employed by moving to 7.5% last year from 6% in 2005. In view of our strong earnings growth, we announced two quarterly dividend rate hikes during '06 for a total combined increase of 29%.

There were a number of important developments and achievements last year in North America in concert with the region's very strong financial performance. First, last April, there was a favorable resolution to a Canadian corn duty issue. The Canadian International Trade Tribunal canceled the preliminary duties imposed in December of '05, a ruling that supported our position that the corn duties were unfair and imports of U.S. corn were not injuring Canadian corn farmers.

Last fall, we successfully completed the startup of our new state-of-the-art coal-fired boiler at Argo here in Chicago. This was a major, three-year, $100 million-plus project that should bring long-term energy efficiency and reliability to Argo, our largest corn-refining plant.

Near the end of 2006 and at long last, I might add, the Mexican Congress eliminated the 20% tax on high-fructose used in beverages, which was imposed five years ago this month. Needless to say, this was a welcome development. We now look forward to the likelihood of higher calendar 2007 U.S. exports of high-fructose to Mexico and the prospect for a more open border between the U.S. and Mexico on high-fructose and sugar in 2008.

In South America, Brazil began to recover in the second half of '06 as we had suggested earlier in the year from the price/product mix challenges that began to impact the business at the start of the year. Also, we saw continued progress on our ingredient strategy as we started up three new modified starch channels in Brazil.

Our Asia/African region was a steady performer in '06, led by strong performances in Pakistan. However, Korea had lower results, largely due to the ongoing sluggishness in the country's domestic economy.

Now, let's turn to 2007 outlook and Slide 19. We've announced, in our second press release this morning, that we expect our diluted EPS in 2007 to grow in the range of 13 to 23%, or $1.84 to $2.01 versus our record earnings per share of $1.63 in 2006. Some of you are probably surprised that we've given annual guidance this time versus our usual practice of doing so when we announce first-quarter results in April. The timing of our annual guidance has been largely driven by the completion of the U.S. and Canadian contracting this season, which in the past is run through year-end and often into the first quarter of the following year. However, the most recent contracting period was essentially completed by year-end, so we've been able to move ahead with our annual guidance at this time. Our 2007 EPS range would keep us right track to deliver the low double-digit earnings growth we have targeted over the 2003 to 2008 period. We also expect net sales growth this year to be quite healthy, in light of our solid earnings outlook. Our goal is to become a $3 billion company by the end of 2008. Just as important for 2007, we also expect further improvement in our return on capital employed. Our target is to achieve ROCE of 8.5 to 10% also by the end of 2008.

Finally, we estimate capital expenditures in 2007 of about $145 million, which includes a number of promising investment opportunities around the world. While like in any other year, a portion of this is carried over from 2006, we are funding some new, high-return projects that are in line with our pathway strategy and support our overall growth and profitability targets. We are continuing to selectively invest in our base business in 2007, including such countries as Argentina, Mexico, Colombia, Pakistan and Thailand.

Turning to Slide 20, our expectations for another strong performance in North America is the major driver for our outlook for the record sales and earnings in 2007. Our U.S. and Canadian businesses have again achieved significantly higher contract pricing in '07 across our starch and sweetener book of business. The increase in price for our entire U.S. and Canadian businesses over the 2006 level is in the high teens, consistent with our stated policy that many of you are aware of, of firm price and fee-based book of business in both the U.S. and Canada is appropriately hedged and the open risks, as they always do, primarily relate to coproduct values in the corn basis. I would also note, however, that we have shifted more of our business to grain-related and customer-directed contracts in the recent contracting season than in past years, which tends to lessen our direct exposure to corn cost.

South America should deliver improved results in 2007, primarily because of the continuing recovery in Brazil that got underway in the second half of '06, as I mentioned earlier. South America's performance should get a boost from our acquisition in December of 2006 of the DEMSA operations, Peru's only corn refiner, and our pending purchase of the remaining 50% of the Brazilian polyol joint venture, Getec, which we expect to close in the first quarter.

Finally, we anticipate more growth in our Asia/Africa region this year. This should come primarily from the continuing growth and expansion in Pakistan, as well as improvements in Thailand and in China.

Rising corn prices are clearly a global phenomenon. There really is no historical precedent to compare with, especially since this is largely a demand-driven rather than supply-driven development, triggered primarily from biofuels expansion. However, with respect to South America and Asia/Africa--our South American/Asian-African businesses, we continue to believe that our business model in these regions should allow us to pass through increasing corn prices as the year progresses, as much of our business in these countries is spot in nature. This is consistent with our prior comments that we've made to you about our international business model, that of being able to recoup costs in a reasonable amount of time.

Finally, turning to Slide 21, I want to emphasize that we see continuing progress on executing our five-step pathway strategy in 2007, which is the fourth year of our global growth and improvement initiative. We remain focused on achieved excellence in operating our base business, selectively growing the base business, expanding our product portfolio through alliances, joint ventures and acquisitions, expanding into new high-growth geographic regions such as China and India, and becoming more of a higher-valued ingredient supplier. We have the balance sheet and liquidity to continue to make good strides in all of these areas.

An example of our recent announcement--an example of this is our recent announcement of the definitive agreement to acquire the SPI polyols businesses of Associated British Foods in the U.S., and the shares of SPI unit holding the remaining 50% of the Getec polyols venture in Brazil. This transaction should be EPS-accretive in the first year and ROCE positive, and should bring us annual revenues of around $100 million and strengthen and expand our sweetener platform in the Americas. We are presently evaluating a number of other opportunities around the world that are strong fits with the elements of our pathway strategy.

In summary, then, we think 2007 holds promise for our company, given our earnings outlook and the opportunities that exist, but also holds a number of key challenges for us in running the business, including the management of the global corn price risk and successfully integrating our acquisitions. All in all, though, we are looking forward to another good year.

Thank you. Now, we are prepared to take your questions. Jim?

(OPERATOR INSTRUCTIONS). Christine McCracken, Cleveland Research.

Good morning. I wanted to delve a little bit more into your cost outlook for the coming year. You obviously have locked in your corn needs here domestically, but you mentioned your basis risk and coproduct risk. I'm just wondering. To what degree has the outlook for that particular risk changed? You know, has the corn basis widened significantly or are you finding yourself competing more with, say, the ethanol plant down the street for corn needs? Can you talk about kind of how that outlook or environment has changed at all?

Sure, there are two things impacting the basis, Christine. One of them obviously is as the prices get higher, the basis tends to drop a little bit because the farmer wants to sell it at higher price. The second thing is the availability of corn, and so there's a counter to up-and-down on the basis scenario. It is not really that significantly different now than it would normally be at this time of year, but I felt it necessary to make comment on it because it both is up and downside opportunity.

In addition to that coproduct side of it, there's always a part of our coproduct business that's open. As you know, we can't go out for the year but we tend to book some of it in advance. But I think the coproducts do have, as corn moves up, opportunity to go out because we are competing with corn as a feed ingredient as meal prices go up and oil prices get tighter. Conversely, though, if corn were to drop appreciably, which I don't think many people are forecasting, that number could go down. So we are trying to make sure that we put on the table what is out there for us, but those are the two things that are open, based on the fact that we do hedge our corn, as we've told you historically.

Okay. Then just in your international business, Argentina has put some protectionist measures in place; other countries are talking about kind of trying to protect their domestic supply of corn. Theoretically, wouldn't that help your availability there in those markets, or how do you see kind of that international policy developing to secure corn possibly for internal needs?

I think it depends on what they do, and it will vary from country to country. Certainly, if in fact that they put a cap on corn prices, it helps us because it limits the exposure we have to the upside. Conversely, they also are looking to doing things on the finished product side of the equation, so it's a counterbalance there as well. But they are doing it in different ways in different countries, Christine, but on-balance, we are fine with that. All of that has been taken into account in our guidance.

That's good to hear. Then just on this latest development in Mexico, it seems like it's going to kind of roll out for you in terms of the benefits over time as you get improved access to that market. Can you talk about maybe how you see that impacting your forecast or what you've included, given your past history with gaining access to that market?

You think we've had a variability in access to that market? I hadn't noticed! (LAUGHTER) Yes, I think basically what we're forecasting is that that market opens up over time, and including this year, and particularly with the tax being removed from all customers--we have a broader base of customers we can sell to.

As we've mentioned to you, our utilization of that channel in Mexico has been high, so it's not as if we can sell twice as much product there, but we do have a broader mix and we certainly want to look at that and grow our various compilation of customers going forward.

I think, in the future, if the market stays open, it will obviously provide for more demand on fructose from the U.S., which will tighten up the entire North American marketplace for high-fructose sales, which is positive to us. We believe, since we are the only domestic supplier of 55, we have a positive advantage being in Mexico. So I think it's good. Obviously, it's nice to have the tax taken off because it removes one impediment that's there. Hopefully, we can open that border further as time goes on into 2008.

You are still importing corn into Mexico?

We both import and use domestic corn.

I assume those corn prices are up pretty significantly.

Yes, they are pretty reflective of the corn market that is here.

Okay, but you're not--with the increased access, I guess the customer base in (indiscernible) not expecting to, say, add capacity in Mexico any time soon?

No, Christine, I think after experiences in Mexico, it would be awhile before we would add high-fructose capacity. We would look at, obviously, productivity increases we can get from the normal operations of the business, but we're not going to put any capacity on right now.

Good to hear. thanks.

Christina McGlone, Deutsche Bank.

I guess first question, Sam, in a conference in September, you had talked about hitting low double-digit margins in North America, and that was before corn really took off. I'm wondering if that is still the plan or if it has been, if the timeframe has been delayed at all.

No, the plan is still to get there. We did not give a specific timeframe on it. But is there an echo? I hear an echo here. Is that bad for you, Christina?

I don't hear it at all.

Okay, good. The timeframe is basically the same as we had before. What we talked about before was in a few years and we thought that was a target we could get to, and it still is.

Okay. I guess maybe if you could talk about--you talked about the CapEx a little bit. It came in higher than you guided this year, and it looks like it's going to be higher than I was expecting next year. Is there any more--can you give more specifics on that or--?

Not specifics, but as I can say we--as I tried to outline in the various countries, we have some very attractive opportunities for growth both in the base business and some other opportunity beyond the base business that we believe is the appropriate time to fund. I think what we've said historically is, while we were coming out of the mess we were in, we were going to go slightly above the depreciation with the exception of the last couple of years which involved the boiler. But going forward, if the opportunity we there, we would take advantage of it. We just happen to see a lot of opportunities right now for capital.

Okay. Then maybe if you could just talk about Brazil in terms of it's obviously recovering. The meat sector is recovering well. Are we close to the end of that recovery? Are you still seeing pressure from the tapioca producers or are we nearing the end of that and then we're looking at--you know, how much in the future in '07 is going to be recovery versus pure growth?

Let me go back to your other question; I want to add one other comment. Those capital investments we are making are targeted to be at or above the ROCE of the organization. That's another important factor, so they are good business opportunities we're seeing.

Into Brazil, it's getting closer but everything gets closer to the end as you keep moving on. Tapioca inventories are going down; they are still there. The meat producers are producing again. The currency is still strong. President Lula has announced an economic plan for growth which will be beneficial to the country and hopefully beneficial to us because it's going to provide jobs for the general population, which will increase the demand for our products. So, we do see Brazil going through the trough. I think that we guided our investors pretty accurately through it last year when we told you what we expected. We saw the second half bounce back. We saw the fourth quarter strong. Our volumes were not--not in the higher profitability segment in that business but volumes did continue to grow. We were able to improve our overall profitability as the second half came along.

So I think that what we're looking at in Brazil is continued improvement, but it will continue to have some bumps. That's the way our business operates around the world, so we expect it to continue but we feel we manage it fairly well.

Okay, thanks. Then just last question--Cheryl, what should we be using as the tax rate for next year? Should we have used this year's rate?

What we have used in the earnings guidance is 36%. It gets updated each quarter as we see how the earnings mix is coming out. At this point in time, the best estimate we have is 36%.

Okay, thank you.

(OPERATOR INSTRUCTIONS). John McMillin, Prudential Equity.

Good morning, everybody. So Sam, we now do not expect corn to go down? (LAUGHTER) I remember the last conference call where we expected it to go down.

No, I didn't say that, John. I said I don't know where it's going to go, and right now, we have it where it is and there, depending upon which article you read in the newspaper, they're talking about plantings anywhere from 85 to 90 million acres. We're talking about--and I as read as many articles over the weekend that say ethanol is good that say ethanol is bad, so I don't how many people are going to start up at all these plants. I don't really--I can't comment on where corn is going to be, but I'd do know there's going to be a lot of it grown over the next year, everywhere, not only here but in Argentina, Brazil, Canada, China. We will see what shakes with the pricing when all of that happens.

You know, obviously this Coke Zero product did not seem to take hold as well as [Peyton Lyle] wanted, and I'm not saying that you're rooting against it but you probably were! (LAUGHTER). Could as you kind of--you know I guess you get this bump up from Mexico the next couple of years, but I think as an investor, I'm just struggling kind of what to pay for if the technology of high-fructose corn syrup oozes out or loses some appeal. What are your kind of long-range forecasts showing just in terms of the long-term demand for high-fructose corn syrup, particularly as you look out three, four, five years and what impact technology might have on it?

John, what we have included in our long-term thinking is that fructose will be flat probably at best, maybe slightly down but not significantly down. The reason for that is that it's being substituted in things other than the conventional beverage soft drinks that we know and in juices and in other products out there. We have not included in our thinking expansion of high-fructose in the U.S. or in North America, for that matter, per the question of Mexico. I don't think there's any need for that based on where we are today.

We are also still looking at and have continued to look at over the years opportunities to divert some amounts of grind away to accommodate the lack of growth in that business. As we talk about the ingredient strategies and try to tie it back to ag-based products, in many instances those ag-based products are corn-based, so that we can use our grind for other products production and not have it required to go into high-fructose corn syrup.

So, no, we don't root against any anything that our customers are making. I cheer everybody along when they come out with a new product, because the next one may have double the amount of high-fructose in it. But I think certainly we have been realistic in our growth forecasts for fructose and we believe the numbers we're looking at our probably reasonable and it will support the strategy we have.

Do you think the impact of corn going up has had any impact in your '07 guidance? You know, basically just have you been able to pass it on so--I know some people took estimates (indiscernible) but just quantify it all? Has higher corn hurt your '07 prospects or have you just been able to pass it on? Because these were numbers that basically I'd been using even three, four, five months ago.

I think, John, that the guidance we gave is reflective of where we see the business right now, and it would be--it would probably be misleading if I were to say if corn had stayed low, we would have gotten the same price increases we got. I don't want to say that because corn was higher we got where we are. I think that we are reflecting higher margins going into next year with this kind of an increase, so we got something out of it. I think the prices now are still not necessarily at the level that they need to be, but with the margins I'd like to see out of them, but I think certainly we are improving the margins and we're getting the largest business, both the U.S. and Canadian in our case, back to the kind margins we think it should have.

Did you quantify what byproducts, higher byproduct credits did to the fourth quarter?

No, we did not.

Can you?

They improved slightly but just not significant.

Okay, thank you.

David Driscoll, Citigroup.

Good morning, everyone. Well, first off, Sam and to the rest of your management team, congratulations on that '06 number. Certainly two years makes an enormous difference.

(LAUGHTER) This is a much easier call that last year at this time, for sure!

Oh, I remember well!

So do I! I've got the scars.

Oh well, you are battle-tested. Can you delve into the logic that goes into the guidance? The range is a bit wide, and I think that it would help me a lot if you could just discuss some of the some areas that get you to the lower end versus the upper end.

First, it's a little wider than normal because it's a quarter earlier than normal, and that we wanted to give ourselves some room. Obviously, the lower end, our negative risk--the things that I talked about as the potential risks, that's being the integration and the corn cost basis and coproducts, could drive it to the lower end. Obviously, volume issues can but we don't see anything there, but there is always that possibility that volume will slow down a little bit. But we have not seen nor do I forecast that happening right now.

Obviously, the upper end would be that the volume picks up above and beyond what we've planned, that Argo runs in an exemplary fashion and that our costs are lower, that the coproduct credits are substantially higher than we had forecasted in our presentation and our guidance, in our goal. So that would put us at the upper end of the range. I mean both of those are possibilities. I think we've given a guidance number that we're comfortable with right now. As I said, it's a little wider than normal because of the timing on it. What we're looking at doing is, as we go through the year, if wanted, we will revise it.

So then, one question I have, Sam, is really related to the coproduct values. How do you give this guidance? Can you just discuss for me--I mean, coproducts have a historical relationship to corn. Certainly, it absolutely depends on how you've modeled out where you think corn goes and then consequently where you think corn products--sorry, coproduct values go. Can you give us the baseline? At the midpoint of the range, if I'm trying to track this thing throughout the course of the year, should I be looking for--if corn falls from $4, does that been absolutely say you cannot make the midpoint of the guidance because coproducts values would consequently fall and you were unable to hedge those?

No, David, I'm not going to give a specific on it but I certainly wouldn't go to that conclusion. I think we have been reasonably conservative in our forecasting for what the coproducts would be. John's question of do I think corn can drop, obviously I mean, there's probably more upside pressure than downside but certainly I do think it can drop. And we would take that into our thinking when we put our guidance out there so that I think you have to kind of assume that we've been reasonable in our estimate and we have taken into account the ups and downs of corn in the marketplace and what impact that could have on coproducts.

On the energy cost side, can you give us a little color as to your assumptions for energy? I mean, obviously this was a very significant impact in 2005 related to diesel costs and your contracts, so I'm keen to understand if you're expecting petroleum prices to maintain at current levels and consequently the implication on diesel fuel.

I think what we have done is to try to pass-through our logistics freight cost increases. We have provided, in our contracting, pass-through clauses on that to our customers in the U.S. and Canada where we do fixed-price business. Obviously, in other parts of the world, it's not as much of an issue because we do have spot business and the price would include any up or down.

Our forecasting at the time we put the goal together and as we go forward with guidance would probably reflect oil a little bit higher than it is today but not at the peaks of $77 a barrel that we saw. But I think that the big issue is we've got it pretty much covered because of the contract we put together.

On the natural gas side, I think we are also facing a positive variance, given where nat gas prices are. Is that again fully reflected in your guidance, i.e., the expectation that the futures curve on that gas is the appropriate place? Can we use that as a benchmark?

As we've said in the past, David, we have all of our natural gas hedged before the end of the year. We hedge it--we can hedge it up to 18 months in advance, 18 months out, so that would reflect that we could have started buying natural gas on July 1 of '06 for '07 contracts. I won't comment where we did it because obviously I'm not going to give you that information, but it says that you can pick what you want in between there and use it.

Now what we've said also is that with the Argo boiler coming up, the use of gas should be down somewhat, so we're not going to be using as much. We've also said we've hedged our call numbers going down, so that should be reflected. But all of that is reflected in the guidance.

Okay. Just a couple more quick questions. Cheryl, the ROCE calculation was changed. I'm going to be a little bit cynical here on this one. If you change the calculation and then effectively raise the ROCE answer by about a half point--it wasn't quite a half-point but it looks like it's close to a half point. Does that mean that your target is now almost--you know, I would think about it that the target should've gone up by a half-point, but I don't think you raised that.

We didn't raise the target. The target is still 8.5 to 10%, which is reflective of creating shareholder value that exceeds your cost of capital. In terms of changing the calculation, actually if you look at all the historical numbers, it's not meaningful. We actually looked at it and said, where we being fair to the investors looking at the end of the year when, in reality, most companies are either during an average or the beginning year. So whatever your capital employed available on January 1 to create the income that you see during the year.

Then, Sam, one final on North American operating margins, I think, on a sequential basis, were down a little bit from where we were in the second and third quarters. Can you just make a little comment on why that might have occurred, why we wouldn't have seen those December quarter margins kind of constant at that? I think people might have a few questions about that.

I think volumes came off a little bit at the end of the year, David, surprisingly so. I don't know exactly why they've picked up since then, but with the price increases that were out there, I thought they would've been stronger than they were not.

I think also the norm is we had booked our corn going forward. Generally it's going to be going up as you book it earlier in the year, so you have slightly higher corn costs at that point. That's the only reason. I mean, it was relatively close to the same number and the business ran fine, but I think it might have been a volume issue and a little bit of the corn.

Well, again, thanks a lot for the comments, Sam, and congratulations to you and your team on a fine '06.

(OPERATOR INSTRUCTIONS). Ann Gurkin, Davenport.

Good morning. I just wanted some discussion on one point. We are hearing from some protein growers that they are looking at maybe sourcing corn outside of the U.S., even given higher transportation costs. I didn't know if any of your customers have indicated that they are looking to source corn from outside of the U.S.

Not that we are aware of, Ann. I guess when we have a customer-directed contract, if they elected to do that and got it delivered here, we would grind it. But we have not heard that from anybody in the U.S. or in Canada yet. That's a new one; I have not heard that, no.

Okay. Then can you just walk me through a little bit your expectation for freight expense outlook?

Right now, you know, with all things being equal, it's pretty much going to be flat with where it was in '06. You know, we've taken precautions, as I mentioned earlier, that we have put in freight surcharges into our contracts, so that if in fact it ran away from us unlike '05, we do have the capability of moving the freight charges higher. Around the world, we do spot pricing so we can move it again as the spot prices go forward.

But as you sit and look at it right now, I heard on the radio coming in today that the gasoline prices are down $0.19 a gallon from this time last year. Well, tomorrow, it could be up $0.33 a gallon this time next year, but at the moment, I see things being relatively consistent with where they were last year.

Great, thank you.

Christina McGlone, Deutsche Bank.

Sam, would you be able to disclose, when you mentioned that there's more grain-related than customer-directed contracts in '07 versus '06, could you give what percentage of your book is under that system and what it was in '06?

I could, Christina. Jack would shoot me, so I'm not going to do that. We've said it's more and I think that is about as far as I can go. You know, we see the opportunity at various times to move in and out of grain-related contracts, and our customers see the opportunity to do it also. In this instance, this year, a number of customers wanted to take on the grain-related part of the contract and in some instances we want to move that way, but I can't give you a comment as to much it is as a percentage of the book, no.

Okay, but it was a significant increase or a modest increase year-over-year?

It was somewhere between those two! (LAUGHTER)

Okay. Then following on Dave Driscoll's questions, so industry fructose volumes in the fourth quarter, did you say--what were they? Were they down and then now they've picked up a little bit since January or did I understand that wrong?

I didn't say what the industry was, Christina, because we don't know yet. We have not gotten reports on where they were. I think, because of the way the holidays fell, that the last couple of weeks of your volumes tapered off a little bit. That was a bit surprising because there were price increases that went into the next year. But they have picked back up in January, so we were watching the volume things to see where stood and as it turns out, they were softer than we expected them to be. But I believe it had a lot to do with the holidays and a lot of companies shut down for the week in between (indiscernible) shut down slightly before Christmas.

Okay, thank you.

Ken Zaslow, BMO Capital Markets.

Could you discuss the sequential contraction in the Asian margins from 4Q to the third quarter?

I don't know there was a contraction in the Asian markets.

You mean from the 15.7 to the 11.7, Ken? Is that what (technical difficulty)?

Yes, please

(technical difficulty) operating income as a percent of net sales?

Yes, please.

It's the pricing, or the cost pressure that we are seeing in South Korea.

How did that change from--just can you give a little bit more color on why that changed from the third quarter to the fourth quarter, and is that something that will continue on?

Well, you have the higher corn costs that, based upon the way the business is handled and booked, you would have had higher corn costs in the fourth quarter for South Korea than you would have had in the third quarter. You don't necessarily have the pricing power. What we saw in the fourth quarter was a negative price mix in the Asian/African region.

So, while you have--Korea is the biggest. If you look at how we break out the net sales, we break out net sales for Korea, so it's obviously the lion's share of the Asian/African. So if you've got margin pressures in South Korea and growth in Pakistan and growth in Thailand and China, you are going to have margin compression. The margins are not as strong--.

It was the mix.

Correct. (multiple speakers)

It was basically the mix of the volumes coming up into the other areas.

Is it expected to continue into '07 or is that going to revert back to--?

Ken, we've said that would be the case as we grew Asia/Africa, Asia particularly, because as we go into some of the other regions, we're not going to have the positions that we have in Pakistan or in Korea for that matter, and the margins will be that high. What we've said continually is that we expect the operating income to grow but the margins will probably shrink somewhat.

Going back to an earlier question on corn prices versus being able to pass it through, on the high-fructose--in the North American business, there is--you kind of implied the idea that you almost get 100% pass-through corn prices versus high-fructose corn syrup. Is that the right relationship to think about that, even in a rising corn environment, that doesn't really change your earnings trajectory one way or the other?

No, let me correct--I don't know that I said what you said I said. I said that we have better operating income numbers coming through and our margins are in good shape.

I think that the driver--and we've said this continually--for U.S. profitability is utilization. If utilization is high, then the opportunity to pass prices through or price increases, cost increases through is greater obviously than if in fact that is not the case, and we've seen that. We've seen it over the last couple of years, that utilization has improved. We've seen better pricing environments. When we didn't have utilization levels where we have them today, you saw that the prices--it was very difficult to get any kind of a price movement through even at $2 corn.

So I think basically what we're looking at right now is when you see a $2 corn number and we don't make good operating income, and you see a $3.50 to $4 corn number, and we do, the driver around it is the utilization of the industry, not so much the price of corn.

Okay. If you have high-fructose corn syrup locked in, corn prices in North America locked in, the ability to pass on higher corn prices in the international markets, and byproducts tend to be linked to corn prices, all this means is that you actually want corn prices to go up ahead of--up until next year when you are locking in again higher corn prices--corn prices in high-fructose corn syrup, so after the harvest--you want prices to go up all the way until the harvest, and then after the harvest, if they go down, that's fine but through the year, you would actually prefer corn to go as high as possible?

No, no, no, no. As we've said, we can pass corn through around the world, but it does -- every other major increase in costs that we have around the world is a delay factor around that. So we're sitting in this situation where you are implying I would like $6 corn and the answer is no. We don't need to see that. We don't need to see $4 corn and I think I would be fine if in fact corn went back down to $3.50 and still being able to do what we need to do in the guidance here.

I can't say that I sitting here wishing for corn in either direction, but certainly over time, I think we will live with it where it is. We can live with a little higher but I would like to see it come back down into a more reasonable range because as I said before, the overall environment we live in is driven more by utilization than corn price, so if corn were to come down a little bit, I think we would be more profitable.

So secularly higher corn prices is not as good for you as if they were secularly going down? I just want to make sure understand that. Which is what I thought but it seems like--.

Ken, could you just repeat the question? I didn't hear what you said.

I just want to make sure that secularly you prefer corn prices to go down, not up, as long as capacity utilization rates in high-fructose corn syrup are high.

I think that we would rather have corn more in a modest range than the higher end of the range, yes.

Okay. Could you remind us how many bushels of corn CPI processes a year?

We have never given that number out. We do a lot.

Can you give a range?

No, it's just a lot. That's a range.

I will put that in my model--"a lot".

It's a lot! (LAUGHTER)

David Driscoll, Citigroup.

Great, thanks a lot for the follow-up, everyone. I wanted to ask a question here about the share count and share repurchase activity. Sam, it looks like the share count is actually going up here on a diluted basis, 76.2 million versus, you know, I guess we ended '05 around 75.5.

Correct.

Can you talk to us here about what your designs are for the share count and option issuance, etc.? What's driving this up? Do you intend for it to keep creeping up or will you offset that dilution from I would presuppose option issuance, with repurchase?

David, what we look to do is to balance all aspects so that we're doing the best for the shareholders that we came, between repurchasing of shares, growing the business with acquisitions and/or capital expenditures, and paying back dividend. I have no desire to see the share count go up. Over the last couple of months, I think we bought back some shares earlier in the year and some shares were exercised at the end of the year, so that it just went up a little bit and there was a hiccup in there. But we are not looking to drive the number up and we're not looking to take it down appreciably. We will spend the money in the best way we can, though, for the shareholder.

Okay, very good. Thanks a lot, everyone.

At this time, there are no further questions. Mr. Prichard, I would like to turn the conference back over to you for any additional or closing remarks.

Okay, thank you, operator. It does appear there are no more questions and as a result, we will conclude our conference call and webcast for today.

I do want to remind you that we do have a replay of the webcast of course through Web site at cornproducts.com, and a replay of the audio conference call which is available through Friday, February 9. That phone number is 719-457-0820 and you need the passcode of 7992482.

On behalf of Sam and Cheryl, thank you for participating in our call this morning and we will talk to you again in April with our 2007 first-quarter results. Have a good day.

Thank you. That will conclude today's conference. We thank you for your participation. At this time, our phone audience may now disconnect.