Ingredion Inc (INGR) 2007 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Corn Products 2007 Second 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 2007 second quarter financial results released earlier today. I am 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 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 calls. Those of you using the website broadcast mode for this conference call are in listen-only mode.

Sam Scott and Cheryl Beebe will deliver this morning's presentations and they will indicate as they move from chart to chart, so those of you using our slides from the website can easily follow along through the presentations.

Now, I have just shifted to Chart 2, which is our agenda. Cheryl Beebe will present the financials for the second quarter and first half with appropriate analysis and flavor. Following that, Sam Scott will discuss our 2007 outlook and Pathway strategy growth initiatives before we move to your questions.

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 the 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. We're pleased to report another solid quarter of earnings growth. The diluted earnings per share for the quarter is $0.66 versus $0.40 last year, for a 65% improvement. Combined with the first quarter earnings, this brings us to $1.32 for the six months ended June 30, 2007. From the press release you can see we have revised our guidance upward on either side of the range by $0.25. This incorporates the stronger second quarter results and the improved outlook for the remainder of the year.

I am starting with Chart 5, the summary income statement for the quarter ended June 30, 2007. Net sales reached 857 million, up 33%, or 212 million versus the same period last year. As we will see on the next chart, all three regional businesses contributed to the net sales increase. About $30 million of the net sales growth in the quarter is from acquisitions. Gross profit dollars are up 49% or 51 million versus last year. Gross profit margins are 18.1% versus 16.2% last year. Strong pricing actions across the three regions offset the significant increase in net corn costs and the small increase in total energy costs versus the same period last year. Again this quarter, we continue to see margin recovery in North and South America.

Operating expenses increased 31%, or about $16 million. The increase includes higher variable performance compensation, operating expenses related to the acquisition, and the impact from foreign--stronger foreign currencies. Operating expenses as a percent of net sales for this quarter was approximately 7.6%, which is equal to last year. We are expecting operating expenses to remain in the range of $60 to $65 million per quarter for the remainder of the year.

Operating income grew 59% reaching $91 million versus 70--57 million last year. The operating income margin for the quarter was 10.6 versus 8.8% last year. Net financing costs for the quarter were 13 million versus 8 million last year. The higher net financing costs are attributable to the increase in financing costs associated with refinancing of the matured July 2007 bonds, the reduction in capitalized interest of approximately 1.7 million, higher FX expenses and acquisition financing costs in Brazil.

As a reminder, the Company issued $300 million worth of bonds in April of this year in anticipation of repaying the 2007 maturing bonds. The carrying cost in the quarter was about $700,000. Financing costs for the remainder of the year should be slightly lower than the current run rate.

The tax rate for the quarter is 32.8% versus 37% last year and reflects the earnings mix. The quarterly rate is slightly below the 34% effective tax rate anticipated for the year. Net income grew 68%, reaching $51 million, versus 30 million last year. Weighted average diluted common shares in the quarter were 76.6 million versus 75.3 million last year. No shares were repurchased during the quarter.

Turning to Chart 6, we see the net sales growth is coming from North America. North America's net sales grew 34%, or $136 million, representing about 64% of the Company's net sales growth in the quarter. South America's net sales grew 40%, or 62 million, and Asia-Africa's net sales growth was 15%.

Chart 7 is the net sales variance analysis. Total Company net sales were driven by the strong pricing actions. Price product mix accounts for about 79% of the net sales increase in the quarter, volume contributed about $20 million, and stronger foreign currencies contributed about 24 million. On a regional basis, North America's net sales growth of 34.1% is made up of a 32.3% increase in price product mix, followed by a 1.2% change in volume and a .6% improvement from the stronger Canadian dollar.

South America's growth of 40.4% is comprised of a 20.5% improvement in price product mix, 11.9% from the stronger Brazilian and Columbian currencies, and 8% from volume growth. Asia-Africa's 14.7% net sales growth was led by an 8.1% increase in price product mix, 3.4% from the stronger Korean Won and Thai Baht, and 3.2% in volume growth.

Moving on to operating income by geographic segment, Chart 8, again we see North America driving the income performance. North America's operating income increased 85% or $31 million. The operating income margin was 12.8%. South America's operating income was up 56%, or $10 million. Last year's operating income in South America was the lowest in 2006 and represented the bottom of the cycle. The operating income margin last year in South America was approximately 10.7% versus this year's 11.9%.

Asia-Africa's operating income dropped 22%, or $3 million. Excluding the South Korean business, the division's operating income would have been up in the double digit range driven by the strong operating results in Pakistan. While the South Korean business was able to raise prices versus last year, the increase was not enough to cover the significantly higher net corn costs. We expect this to be the weakest operating income quarter for Asia-Africa this year.

Turning to Chart 9, the estimated source of diluted earnings per share, we see the changes from operations contributed 28% - $0.24 from margins, $0.02 from both volume and currencies. Non-operating charges accounted for a negative $0.02, financing costs - negative $0.04, lower effective tax rate was a positive $0.04, both minority interests and shares outstanding costs - a negative $0.01 each.

Moving on to the six-month results, Chart 10, net sales are up 1.6 billion--are up 29% to 1.6 billion from last year's 1.3 billion. Gross profit increased 53% to reach 302 million, or an increase of $105 million. Gross profit margins are 18.6% versus 15.7% last year. Operating expenses are up 26% or $26 million, again, from higher variable performance compensation, operating expenses for acquisitions, and stronger foreign currencies impacting the translation.

Chart 11 is the cash flow highlights for the quarter. Contributing to the positive flow from operations is the strong growth in net income. During the quarter, we invested 69 million in working capital to support this strong growth. The majority of the increase is due to higher accounts receivable from strong sales. [Indiscernible] material inventories increased primarily due to a combination of price and volume. We invested approximately $37 million in fixed assets.

Cash provided by financing activities was $335 million. We issued 300 million worth of long-term bonds in anticipation of paying off the 255 million worth of bonds maturing on July 15, 2007. Dividends paid amounted to 8 million, and the issuance of common stock amounted to 10 million.

The last financial chart, Slide 12, is the key metrics for June 30, 2007. Debt to total capital is 35.4% versus 26.9% last year, reflecting the additional 300 million of new debt. We have a pro forma chart attached to the press release, which shows the debt to capitalization ratio after the repayment of the $255 million worth of bonds at 28.1%. The debt to EBITDA on a trailing 12-month basis is 2.1x versus 1.7x last year and is also impacted by the $300 million of new debt.

Operating working capital as a percent of net sales was 11.3% versus 9.8% last year and reflects the investment made to support the business growth. Net debt is 497 million versus 468 million last year.

That wraps up the financial charts, so I will pass the baton over to Sam for the outlook. Sam?

Thanks, Cheryl, and good morning to everyone. I'll discuss our revised 2007 outlook and growth initiatives before taking your questions. First, a brief word about our second quarter. It's clearly gratifying to report a second consecutive quarter of very strong results. We're now midway through what is shaping up to be a very impressive 2007 for Corn Products given the sales, EPS, and margin strength we reported for the first half.

Now to Chart 13, our 2007 outlook. Based on our better than expected second quarter and an improved outlook for the second half of the year, we are pleased to raise our earnings per share growth expectation for 2007 to $2.35 to $2.55, or a 44 to 56% increase versus a record $1.63 in 2006. Our prior 2007 guidance was $2.10 to $2.30, or a 29 to 41% increase in earnings per share. Our improved outlook is principally due to the very strong first half performance by our North and South American regions, which achieved 111 and 40% increases, respectively, in operating income.

We expect a healthy second half of the year. Our full year EPS guidance calls for the last six months of 2007 to be in the range of $1.03 to $1.23, versus $0.92 in the second half of 2006, which would be a strong double digit increase of from 12% to 34%.

Our higher guidance takes into account the key upside factors and downside risks that remain in 2007 in our domestic and international businesses. Our business models in North America and internationally are performing well in today's climate of a more volatile corn price. As I've said before, we're working hard to manage the risks of global corn prices and we continue to believe that our business model should enable us to operate successfully in this relatively new crop price environment.

We need to have a business model that allows us to pass through rising corn costs and other costs in a reasonable period of time. [Tight] corn wet milling utilization rates in North America remain very important, and that together with the benefits of our strong international market position, positions us well.

Our expected 2007 earnings performance--EPS performance means we should deliver a four-year compounded annual growth rate of EPS of between 22 and 24.5%. This is about double the low teens EPS CAGR goal we had originally set for the five-year period from 2003 to 2008.

Most importantly for shareholder value creation, we expect to exceed our ROCE, or return on capital employee target, of 8.5% in 2007. Given our net sales of 1.6 billion in the first half, we also expect to surpass $3 billion in annual revenue in 2007.

Moving to Chart 14, our 2007 outlook by region, it's clear that North America is providing the momentum for our earnings and margin growth in 2007 as it did in 2006. All three country businesses in North America are contributing strongly. We reiterate our expectation for higher operating income in 2007 for South America, primarily from the turnaround in Brazil that started in the second half of '06, as well as another solid performance from our Andean region led by Columbia.

Improved pricing is enabling south--the southern cone, essentially Argentina, to work through the challenge of higher corn and energy costs with minimal impact.

Finally now, expect--finally, we now expect our Asia-Africa region to be essentially flat at the operating income line for '07. This is a slight revision from the modest growth we had previously expected in the region for this year. While net sales should improve at a healthy double-digit rate, the flat profitability is due to lower operating results that we see in South Korea. This stems from the inability so far to pass-through all of the higher corn costs with better pricing, along with the ongoing stagnation of the economy in that region.

Weakness in South Korea, however, is masking profit growth elsewhere in Asia-Africa. Despite an expected drop in the South Korean operating income for '07 versus '06, the profitability in the rest of the region is expected to expand at a double digit rate. We continue to see sales and profit growth in Pakistan of businesses' performance we are very pleased with, and also improvement in Thailand as we build our position in expanding the Asian region.

A final comment on South Korea - despite its lower operating income, this is a business we value. It has always exceeded its cost of capital, generated strong cash flow, and remains a solid foundation for our Asian expansion strategy.

Turning to Slide 15, I'll conclude with a few comments on our Pathway strategy growth initiatives. Since our last call with you on April 24, we've increased our 2007 capital spending plan to 200 million from the original 145 million given the additional growth projects we have in our base business. The CapEx increases include polyol investments in the U.S., Mexico, and Brazil, to support our acquisitions, our new modified starch channels in Mexico, and a new plant investment in Pakistan to support the rapid market growth in that country.

These projects are in addition to the original capital spending plan of 145 million, which I noted before includes product channel expansions in countries such as Argentina, Mexico, Columbia, Pakistan, and Thailand.

In summary, we are pleased with the outstanding sales, earnings, and margin and return on capital employed improvements we've seen in 2007. And we remain focused on a successful execution of our Pathway strategy for future growth.

And now, I'll be happy to take your questions.

(Operator Instructions.) We'll take our first question from David Driscoll with Citi.

Good morning, everyone.

Hey, David. How are you?

Well, first off, congratulations on these results. You guys continue to be just doing an excellent job running the business. And it's a real pleasure to see after all these years and the various hard times that we had in the past, they sort of seem like a distance memory.

We agree.

Sam, I wanted to address a couple of topics. The first one is can you give us a little bit of detail on the variance in the earnings guidance between the last time and this time? So it's maybe a little bit different. In Cheryl's prepared remarks, she talked a lot about what was driving the results. But can you just really address the variance between your earnings guidance for '07 from three months ago versus what you've got today?

Sure, David. The key issue was net corn, which is composed of both better than we expected co-product credits--as you know, the corn numbers stayed pretty high into the second quarter, and we were able to capitalize on that both in the quarter and perhaps a little bit going forward. Secondly, we saw better basis results than we had expected as part of the net corn complex. With corn being that high, the basis number was lower or less than we thought it was going to be as a charge to our corn costs.

We saw better volumes throughout the regions - all of the regions, actually - in total than we had forecast. And then, lastly, we saw stronger than expected--or a weaker than expected dollar, stronger than expected foreign currencies depending upon the country that we had originally forecast because we did not expect the dollar to continue to weaken as much as it had.

So those are the major factors that impacted it. And we have those under control now. We've forecasted again in the new guidance where we think things will go. And we've given a range that wraps it around where we believe we're set to deal with the next six months.

Can you talk a little bit more about capital spending plans? This is a very big increase, going up to $200 million from your prior estimate. I'd like to get just a little bit more detail on where the money is going to be spent by region, if you could break down the 200 million by your three reported geographies.

And then, Cheryl, if you wouldn't mind commenting, or Sam, if you wouldn't mind commenting on what type of returns you expect to generate on average by geography, I think that would help folks a lot to understand what type of potential you have.

Well, David, I won't go through specifically breaking it down by geography, but as we've said, the expansions that we had announced before were primarily growth expansions in Argentina, Mexico, Columbia, Pakistan, and Thailand. So that's a pretty even mix of regions that we're talking about. I also said the incrementals are primarily coming from growth in the businesses that we acquired, primarily the polyols business. And we'll be investing in polyols in the U.S., Mexico, and in Brazil. I alluded to a new plant in Pakistan, which obviously is in the Asian region. And I addressed the fact that we'd be growing our specialty starch businesses in Mexico. So that's where it's coming from.

As we look at--and we've said before, we are going to be very, very diligent on requiring that our capital investments at least return the cost of capital risk adjusted in the regions. So depending upon the kind of monies we're talking about here, that that's required for Pakistan is going to have one return as compared to one in the U.S. that will have another return calculation. But the--we've said to the street that we will get to our cost of capital by '08. We've said today that we will exceed it in '07 and we will continue to invest to make sure that we both grow the company and we maintain returns that are above the cost of capital.

Well, Sam, can I try to characterize one part of this? So if it's $200 million in total spending and 50 million of it is maintenance spending, can we say here that at least two-thirds of that spending is in South America and Asia and both of those regions should generate kind of mid-teens type of return on capital? Would those be things that you would agree with?

That's a ballpark kind of a thing. I won't say it's exactly that, but you're relatively close.

Okay. The final question is just to give a further comment on South America. A year ago we saw operating margins in that region decline. And although that business on an operating profit basis did very well, the margins are still a bit lower than what I would otherwise expect. Can you talk about how you see those margins trending over the course of time?

Well, David, one of the things that all of us have to remember is when costs go up as appreciably as they have, if you hold your operating income at the same level, your margins decrease. And that's what we're seeing in South America. We [saw], as we've said, a substantial increase in our raw material costs. We passed through the same profits that we had, slightly higher. But because of the fact that the corn numbers and the overall cost of the business went up as substantially as it did, it reduced the margin in the overall.

If we get back to a more normalized raw material base and we held the exact same profitability we have today on an operating income level, those margins would increase appreciably. So what we're looking at is--and we monitor the business against ROCE and growing operating income, and that's pretty much the driver that we're focusing on right now. So although the margins have decreased somewhat, just remember that our costs went up. In a business where you're exceeding your cost of capital, it's kind of difficult to [indiscernible] to pass-through even greater margin improvement.

Would it be logical for us to expect that margins will expand over the course of the next 12 months or are you really trying to tell me that because of where ROCE is, that's not likely?

No, no, no. I'm not saying that. I'm saying that the margins will to some extent be dictated by our costs on raw material in that region. We will pass-through the cost, if in fact corn were to go higher. If you saw corn go lower, our margins would probably increase appreciably.

Very good. Again, congratulations on the quarter. Thanks a lot, everyone.

Thank you very much.

Our next question comes from Heather Jones, BB&T Capital Markets.

Good morning, everyone, and thank you.

Hi, Heather. How are you?

Hi. Very good quarter.

Thank you.

I have a couple of questions. First, on the CapEx. I know it's early to be thinking about '08, but I was just wondering this increase from 145 to 200, is this more like one-time investments, or should we expect a meaningfully higher number for '08 as well?

Well, Heather, you're right. It's too early to talk about '08. What we saw this year were some significant opportunities to grow this business. So we decided to jump on them right now. We have said historically that our number was in the range of 100 to 120. We said as we were growing it, it would probably go up something from that. But I'm not ready to comment yet on where we think '08 will be.

Okay. And as far as North America, the margins have been very strong here. And I was just wondering if you could give us an updated view of what you see as a sustainable EBIT margin here.

We have always commented that we thought our North American business could get into the low teens level. And obviously, that's what we're reflecting now. We said at the end of the first quarter that we expected that the year would not be at the same level that we had for the first quarter. The second quarter came in at about the same level, but I'll say it again, that as the corn costs go up, the margins will probably come down. But over time, we expect North America to be able to perform in and around the low teens.

Okay. And then, finally, I was just wondering going into just--I believe your contract season starts up I guess around October. So I was wondering beyond any corn cost increases, do you anticipate having further pricing power or are we at the point now where you'll pass through cost increases, but nothing much beyond that?

Well, I think that utilization has not changed since last year for the most part. I mean, it's about the same as it was last time. And I think the margins are pretty attractive right now, so we're in a position where we certainly can pass through at least the cost increases we think. And I think there could be some places where if in fact someone had a longer term position or contract, we would have opportunities to get some margin improvement. We might get a little bit more in the regular business. But I think right now, with the utilization where it is, and with the margins where they are in general, we would be looking to pass through increases of cost, as well as perhaps a little bit more on margin, if we can.

Okay. And then, my final question is on South Korea. Clearly, you brought down your expectations for the year. But I was just wondering with the new management in place, I mean, have you seen any encouraging developments there as far as how the business is being run as far as going forward?

Well, it's a little too soon for that. I just got back from--not just got back. I was in Asia last month and we met with management over there and they have been given specific marching orders as to what we're looking for. They know what they have to do. I expect that we'll see it. We pulled South Korea out specifically to say this is where our issue is. And we've told you and identified issues for the Street before that we had to work on and fix. And we brought this one out specifically, so we can say it's an issue. We will work on it. We will fix it.

One of the things that we talked about in South Korea is the fact that we have higher corn costs. We did not allude to the fact that we have significantly higher ocean freight also. So as the Street looks--or as our customers in Korea look at cost of corn, they're not seeing the full impact of the entire delivered cost to us in our marketplace. So we have to work our--our way through that. We are working on that right now. We did put a new general manager in. We are looking at other opportunities for that business and stay tuned.

You mentioned the freight costs. I mean, are you having to take more corn out of the U.S. now, given how just the reports we've been reading - China clamping down more on their corn usage in exports. I mean, are you having to take more out of the U.S. and that's increasing your freight costs, or is there something else going on?

Well, the price of corn in Korea is landed price against any location. So if we get it out of Korea--out of China, we get it out of Brazil, we get it out of the U.S., it's all--I mean, it's the same because what they do is they take a landed price off of the U.S. freight base. So it doesn't really matter where we're getting it from. It varies depending upon when the buy is made. If we can get it out of China, we do. If we get it out of--sometimes it comes out of Brazil, sometimes it comes out of the U.S.

So the issue of where doesn't impact the pricing, but the pricing is impacted in general by the freight costs that are in the marketplace. And right now, they are substantially higher than they've been.

Okay. I appreciate it. And congratulations, again.

Thank you very much.

Our next question comes from Vincent Andrews, Morgan Stanley.

Good morning, everyone.

Good morning, Vince. How are you doing?

Congratulations, of course.

Thank you.

And just wondering, from a pricing perspective, if you can distinguish or provide some color a little bit between product price realization and co-product credits. And I guess kind of what I'm driving at is it would seem to me that your co-product credits would be lower going through the balance of the year given the fact that corn has come down. And perhaps you could even talk a little bit about kind of where you expect the corn price to go, and obviously, that would be your guess, just like anybody else's.

Well, certainly, we forecast that our co-products would go down as corn goes down in the environment we're living in right now. And you're right, we have taken a guess on it. And we said earlier that we thought the corn numbers would drop to around between 3 and 3.25 at the bottom. Based on where it is right now, it could go a little lower than that. It might not. I mean, a lot of it right now is dependent upon weather. But it looks pretty decent out there right now and the most recent reports would reflect that we could see it down in the 3 or slightly below $3 level near short-term as the bottom. So that would have an impact on our co-product credits for this year.

Our regular--the finished product prices for the most part in North America, as we've said, were contracted. So with the exception of spot business, which is not a lot, our pricing is pretty well fixed in North America. That does not necessarily apply to South America, although we have some business that goes out [for a] quarter in the South American marketplace. And we've got our business going reasonably well in--throughout all of South America. And we've commented already on the Asian market. Again, it's mostly spot. So we can get some price movement for the rest of the year. But we've taken that into account in the guidance.

Sam, did you allude in your prepared remarks that you maybe had contracted some of your co-product credits for the balance of the year, or am I misunderstanding that?

What I said is sometimes we go forward a little bit on co-product credits, but we certainly don't have a large chunk of it and it's not way out.

Okay. And then, just thinking about next year's corn costs, if corn did do what you've guessed that it's going to do in that it moves to that lower range, obviously, your--the co-product credits would come down with it. I mean, any sort of guess on how you would be year-over-year on corn costs? I mean, would it be fair to assume just directionally that your net corn costs would be lower?

That's difficult to forecast right now, Vincent. I mean, obviously, you said if in fact we saw those kind of numbers. We would have to see what happens with co-product credits in a couple of areas because obviously they vary depending upon if you're talking feed meal or oil. But if we were to see significantly lower corn, then--gross corn, then the probability is we would see lower net corn costs just by the fact that the corn is 100% and the co-products are about 40%. So we would see better numbers.

Okay, that's helpful. And just one last question. I think you kind of alluded to it when you discussed North American utilization. But there's been nothing--all sorts of stuff written about supply gluts in ethanol. So I'm just wondering if you're seeing anybody--any sort of swing capacity from ethanol in a wet mill come back to high fructose corn syrup.

We have not experienced or seen that yet. As you know, and you said it when you said wet mill, in most of the ethanol glut is on the dry mill side, although ethanol is ethanol. But certainly, the wet mills that we know are producing ethanol as far as we can tell are still producing ethanol at the high rate.

Okay. Thank you very much and congratulations again.

Thank you.

Thank you.

Our next question comes from Christine McCracken, Cleveland Research.

Good morning.

Good morning. How are you?

Just a couple of questions. First, on South Korea, it seems like you're nearing an inflection point there. You talked I think in the last quarter about some efforts to develop some new products and obviously you've had a number of changes there and you commented earlier on that. I'm just wondering, can you talk a little bit more about specific products that might have been introduced recently. Have you had any progress there? And really, is there anything else that might be driving your better outlook I guess for the rest of the year?

Well, we're looking to expand our product portfolio in Korea, Christine, from both what we develop there as well as what we develop in other parts of the world and we introduce it in South Korea. And that's something that we're--the new management has been made aware of that we want him to do. In addition to that, we have some new products we haven't identified specifically what they are, that the Korean team has developed. And we're working on furthering that development right now and I'd rather not comment on it.

But the other thing that we have to do in that marketplace is just look at how we manage that business and how we run it. Can we be more aggressive in the export market in the region? Can we be more aggressive in the marketplace itself? Those are the things we have to look at in addition to the introduction of new products as well as cost. So the overall running of the business we're looking at. And I'm not going to give a specific detail as to the formula one, two, and three, as to how we'll get it back. But I think that identifying it and singling it out to all of you, so that we have put ourselves in a position where we have to fix it, we will fix it.

Sounds good. And then, just on China, we've heard a lot or read a lot about some of these hog herd disease issues that might be impacting feed demand going forward. And I know it's maybe early days. But given that you do operate maybe not as much there but in surrounding regions. Just wondering if you're hearing anything about potential for weaker demand to maybe improve the outlook or--for you, I guess, for corn costs overall? Or have you seen anything that might indicate that feed demand may change, not to benefit you long-term?

Christine, I missed what you said--the part--you said some sort of a herd?

Oh, sorry. There are some disease issues in the Chinese hog industry.

Oh, no, that has not impacted our business right now. What it could conceivably do is all of us have heard about all of the problems that have taken place in China. It may open up a market for further export into that country right now. We have not seen it as yet. The market for feed around the world is shifting a little bit as a result of GMO. I'm sure you've heard of what's going on in Europe right now. That market is starving for feed right now because the government is not allowing GMO feed to come in, which you've mentioned. And China, also, is also going to open up an opportunity there if in fact it materializes and grows - the hog business is a reasonable size because of the size of China. But it's not a huge market right now. And it's--the demographics and logistics of getting it in there are going to be difficult.

But that is not a major factor in our business plan, no.

All right. And then, just on freight, you did mention that obviously freight rates have been high. Just wondering as you look at your risk management strategies, have you talked at all about what you might do to manage kind of your exposure there? Do you expect things to continue to be problematic I guess from your [indiscernible] or is that pass through actually?

Most of the time, if we're talking about ocean freight, we are able to pass it through because of the market scenario we talked about. And there are only a few countries where we actually have to ship corn to the location - Korea being the primary one, Columbia being another one.

The rest are either domestically grown or you can get it by rail, so it's not an issue as far as ocean freight goes. And we think that over time we'll be able to manage that through. And also, we've seen the cycles on ocean freight. So we try to catch it at a lower level and go forward with it. But we don't always do that. And so, we have to manage our way through this issue and we will.

All right. I'll leave it there. Thanks.

Thanks, Christine.

Our next question comes from Christina McGlone, Deutsche Bank.

Good morning. Sam, you had talked about as corn prices go lower that co-products should follow it. But corn gluten meal has stayed really firm even though corn has gone lower.

Right.

And it's pretty high relative to soybean meal. So do you--what's driving that? And do you think it's sustainable?

I think it's sustainable at a higher level in soybean meal. I don't know if it will be at the same level it is today. I think certainly that if it comes down a little bit we may see that it--as corn comes down a little bit and soybean comes down a little bit we'll see it. But I think the overall complex right now for meal and protein is pretty strong. And if that complex stays strong, to the point that we were just making before, if there are parts of the world that need protein for animal feed and the world is growing and the chickens and the hogs and everybody else are needing to be fed, we're going to see reasonably good demand for meal, which will drive reasonably decent pricing.

So it may not be--and I can't say it won't be--but I'll say it may not be the same corollary in pricing that we have seen historically between meal and corn. Just like as you see biodiesel become a reality, it may not be the same reality we've seen in the past or relationship we've seen in the past between oil and corn. Feed, which is a lower protein level, is going to be more tied directly to corn because corn and feed compete directly with each other on the animal feed side.

Okay. And on feed, the--so the EU was expected to allow [indiscernible] in in July and it didn't happen. And now, it's supposed--it may happen in October. Do you think that they will make that decision in October and we'll see a pop in corn gluten feed prices in the fall?

Christina, I wish I could answer that for you. I thought we would have seen it back in the July timeframe because the--as I've said, right now Europe is slaving for feed. They don't have enough of it. And the feed users are crying all kind of things. For whatever reason, it was not approved. I would assume that--no, I won't assume anything. I would think that they might approve it in October, but I just really don't want to hazard a guess on that because I don't want to mislead anybody. I don't know what they're going to do.

Okay. And then, Sam, on the last call you--your tone on Argentina was a little bit more muted. You talked about higher energy costs and the fact that sugar with [cap to it] limited your pricing ability. But now, you talked about passing through with minimal impact to the business, yet we also are seeing an energy crisis. So can you tell me what's changed in that market?

The team has just done a great job executing. I mean, they have sucked it up and they pushed it through and they've worked on costs in other areas. They worked on costs in those areas. And they've been able to move some pricing through to get us the returns that I have just said--I talked about in this quarter.

So pricing on things other than fructose increased as well?

We were able to move prices to reflect the overall cost of both corn and energy in the Argentine market in total, yes.

Okay. And then, last question. In the past, you had said that Asia-Africa--well, I guess, Asia would be your major growth driver, particularly China. And now, most of the incremental CapEx is going elsewhere. So I'm wondering if the strategy has changed maybe because China is limiting industrial uses of corn, or if it's just delayed?

Well, first, I said the growth strategy was Asia. I don't think we've ever said, Christina, that it was primarily China. I think we've alluded to the fact that China and India are both large markets. But I don't think we ever said we were going to focus primarily on China. And certainly, we are looking still at that being our strategy. We see opportunities there. I was in India earlier this year. I was in Asia, China, Thailand, and Korea earlier this year. We still see it as substantial opportunities to grow the business.

The capital investment--the reason we didn't talk to China is we probably would not look at greenfield in China. We'd look at something other than that. So it would not be part of our capital project. And we continue to look for and try to find the right partner or acquisition or JV or whatever we want to find in China to continue to grow that strategy. And we will continue to look for that.

Okay. And--sorry, last question. In North America, the volume growth, was that in the U.S. or in Mexico?

The volume growth that I talked about was against what we thought it was going to be when we gave guidance last time, and it was throughout the region.

The volume growth that you reported in the quarter, I think the 1%?

The 1% was throughout the region for the most part, but I don't know if you're asking about the volume that we had, the 1.2%, or--?

--Yes, the 1.2%.

That was primarily in the acquisition piece that we got in the U.S., yes.

Okay, thank you.

Thank you.

Our next question comes from Kenneth Zaslow, BMO Capital Markets.

Hey, good morning, everyone.

Kenny, how are you doing?

Good morning.

Hey, I think you actually said that if corn goes to $2.80 to $3 lower you'd expect lower gross corn costs in 2008. Is that what I heard?

I said it could be, yes.

But if--no, that's just a lot more clarity than you've given in the past in terms of corn costs. So I just wanted to make sure I understood that. That's good.

So I think you know where corn was this year. And where it was as we went into it. And it certainly was above a $2.80 number.

Yes, but if you think about it during the summer of last year they were lower than that. So that's why I was just trying to get a better gauge of kind of when you locked in corn prices last year. And I think that helps out a lot. So--.

--Just to make sure you understand where we are, we say we lock in corn when we do the contracting. And you know pretty much when we do our contracting. So for us to have locked corn in in the middle of last year would have been a little unusual and away from where we normally talk.

Okay. North American margins dropped 30 bases sequentially. So essentially nothing. But for the back half of the year, you're looking--again, just doing the math--about a 100 to 200 basis point drop in North American margins. Again, assuming you could lock in corn. I understand that they're--the futures curve on corn going into last year has some sort of negative impact. But you've still got high fructose corn syrup locked in. You've got co-products year-over-year comparisons looking pretty good. Why would you think that the sequential drop would be so significant?

Well, I don't know that I've said what it would be, Ken. I just said we expected that as a result of higher corn costs that we would probably see margins in North America drop. I didn't say how much. And when we gave guidance along it was what we thought we would see in the overall of our business around the world. So the 100 to 200 basis point number you talked about, I did not--I don't think I've mentioned those numbers. And I'm not going to mention them now. I'll just say that we do expect that we would see a lower second half and first half based on the way corn goes on a normal basis.

Okay. Just--okay. That--it's fine with me. It just sounds just kind of backing into the numbers seeing South America is a little--you've got growth, Asia was relatively flat and I just backed into it. That's why I was just trying to figure that out.

Okay.

In terms of the--again, the sequential sales growth in North America from 1Q to the second quarter, the pricing accelerated, again, sequentially. What was it attributed to and is that the type of pricing we should be expecting for the back half of the year as well?

Well, in the fixed price business, Ken, the price is fixed, so it's flat.

Right.

The grain related business would vary based on where corn is. So if you ran corn through the course of its normal carry, you would see higher corn costs in the second quarter than you would in the first. And typically, you'd see higher corn costs in the third quarter than you would in the second. So given that scenario, you'd probably see some sales growth--it would be related more to raw material costs than change in price or margin.

Okay. And you mentioned the South Korea issue. How does that fit into your long-term business model? I think you said at the end of your prepared remarks that it is not a business--clearly, you're implying that you don't want to sell the business. But how does it fit into the long-term business model at Corn Products?

It fits in well if we fix it, and it doesn't fit in too well if we don't fix it. And we said we're going to fix it.

But what is it that you--why do you need that South Korean business? Why the headaches? And is it just worth selling?

Well, it's a--Ken, it's got good margins [still].

Okay.

It provides substantial cash flow. It's a foundation to Asia, which is part of our marketplace. We can export from there into Japan and China. It just makes good business sense. And I guess the question could be for any country why do we have it, if in fact we're going to single out Korea? Korea has better margins than some of our other countries right now.

The issue is that it has gone--the margins have gone from a very, very high level to a very attractive level, but they're down. So they've impacted the overall operating income of the country and, therefore, the region. But the business is a solid business. And when I say "fix it," I don't mean to imply that this is a broken business. I mean, it's one that we can get--we just need to fine-tune it and make sure we get it back on track so it can grow a little bit more.

Okay. And my last question is can you give us an update on your thoughts on Mexico? I had to ask it, right?

[Inaudible] a question on everything or what? I think Mexico is a good place. And--.

--Well, I'm talking about the borders.

Oh, I know what you're talking about, Kenny. I have been a bit apart from the normal line of the border. The border is still a bit apart from the normal line of the border. The border is still forecast to open in its entirety. I have said continually I have thought that there would probably be managed trade across the border into '08. As we get closer to it, I'm still of that position, although there is still talk about an open border. So--however, those things change in a minute, in a blink of an eye depending upon when the trade people are talking. So I think you are going to see more volume going into Mexico next year regardless. But the issue of how much is still an open question.

There's not a lot--I mean, if the border opened up all the way, there's not a whole heck of a lot more that's going to go in anyway because it's not available. But having said that, if the border opens up it will still tighten it.

Okay. Actually, I'm going to--one more question. I'm sorry. If corn prices do come back and self correct to this $2.80 to $3 number, your pricing for '08, '09 going forward is more contingent on capacity utilization rates or corn costs?

It's always been based on utilization, Ken. If utilization is solid, we can pass corn through or we can hold on to some of the benefits is the normal rule. If utilization is soft, we end up not being able to pass all of it through or not being able to hold on to all of it. So it's more a factor of utilization than corn costs basically.

Great. Thank you very much.

Thank you.

Our next question comes from Ann Gurkin, Davenport.

Good morning.

Hi, Ann. How are you?

Starting with HFCS contracting in the U.S., are you hearing from customers that they want to negotiate contracts earlier than normal again this year, like we saw last year?

Not in general, Ann. It's--this is generally the relatively quiet time. There may be one or two that come in, but not a lot.

Okay. But the same level as you saw last year in terms of timing?

About the same thing, yes.

Okay. And then, I saw a report that indicated in 2006 corn sweetener deliveries were down by 2.4%, which seemed to be a bigger decline than I would've thought. And so, I'm concerned that maybe we're building a little bit of softness in utilization as we go into 2007. And I would be interested in your comments on that.

I think in the first half of the year, they were off a bit. I think they're starting to pick up now. We did have a relatively cool first half. We're having a relatively cool third quarter, too, right at the moment. But I think that you're seeing--we're seeing volumes picking up a little bit as we go into the summer months. Because even though it's cool, the weather's been pretty good. And obviously, our sales are somewhat dependent on weather as to where they go.

In addition to that--I guess that's pretty much it. I mean, we have said that we expect to see plus or minus 1% in growth on an annual basis. This time it was down two for the first quarter. I don't think that's indicative of anything long-term.

Okay. So for the year 2007, you'd look for the industry to be plus or minus 1% still?

It--somewhere around that. I mean, I may be off by a little bit, but I don't think it's going to be off by much.

But not in a down 2% range?

I don't want to say definitely not, but I mean, I don't see it at that level right now.

Okay, that's great. That's all I have. Thank you.

Thank you.

(Operator Instructions.) We'll go next to Pablo Zuanic, JP Morgan.

Good morning, everyone.

Good morning, Pablo.

Just a couple of questions. I understand that the [inaudible] is very fluid and that there's sort of a scenario there in terms of how and when the border actually opens. But assuming that it was total free trade [indiscernible - accented] in Mexico, what are the economics that I would be looking at right now? I mean, do you have numbers in that regard? I mean, how much it would cost them to be buying sugar based on Mexican prices and duties there on HFCS?

If in fact the border were opened all the way, it would be advantageous to the bottlers in Mexico to buy high fructose.

Would there be any structural impairments in terms of either taste, flavor, or the production process for them to make the switch?

It--certainly, Coca-Cola has approved it to a certain level. And if it were more available, I think they'd approve it the same as they've done here. But there will be a change in flavor or taste to some extent - a small extent. But if you think about the fact that all of the beverage companies in the U.S. are using high fructose and some of them are even exporting product to Mexico, the taste differential is not that significant. If you get away from the major brands, the Cokes and the Pepsis of the world, they swing in and out of high fructose 55, 42, and sugar, depending upon pricing anyhow and always have.

So I don't think there's a significant enough issue on taste that would preclude anybody from using fructose if it was available. And I think it's just a matter of just the availability for the product to go in, so all the bottlers in Mexico would be looking at high fructose.

Okay. That's helpful. And just a related one. When I think of Brazil, I mean, I understand the Mexican situation--they think in terms of [indiscernible - accented] and sweeteners in total are somewhat protected from what I remember. In the case of Brazil, when [they're used to] Coca-Cola bottlers there, from my understanding, it's not a protected market for sugar. They use sugar for Coca-Cola there because it's cheaper than HFCS. So even--I'm trying to understand what's the growth potential? What's driving the growth of HFCS in South America, particularly [indiscernible - accented]. What I understand, a bottler uses sugar because it's cheaper than HFCS.

Well, we don't have any fructose in Brazil.

Okay.

We do produce fructose in Argentina where sugar is regulated, but much higher than it is in Brazil. As a matter of fact, Argentina is the only place in all of South America we do produce high fructose corn syrup, and it's not at the quantity of anything close to what we would produce in North America. But there are markets in South America, Columbia being one, Argentina being another, where the price relationship between fructose and sucrose is in favor of fructose. We only produce it in Argentina though.

Right. Okay. And one last one just on corn. And I know that this [indiscernible - accented] has been stressed widely today. But in terms of your hedging policies, do you just hedge corn on what you have contracted on a fixed price nature, but the other--the balance of the business - the co-products - that portion of the business corn is not hedged? Or how should we think of that?

That's correct. Basically, on a fixed price business we hedge as soon as we do the fixed price. We said we have a very small anticipatory hedge program that we allow ourselves to buy some corn not to a hedged position, but that's--we've never said how much it is, but we've said it's relatively small. On the co-products, we do not hedge the corn because co-products vary and we can't sell it forward. So basically, we just--the Coke products [float] and the corn associated with it floats.

Okay. But just to--last follow-up there. When we see the significant margin expansion that you had this year, if you had to distinguish between the portion of that that's coming from the fixed price contracts and from what's co-products, it would seem that co-products are what's driving the bulk of that margin expansion. Is that a fair assessment?

No. We've done very, very well in the pricing of the primary products to expand margins. And the co-products have been strong, but they've been strong in relation to a very high corn price, or a relatively high corn price. So I would say the major piece of the improvement we've seen in margin has come from the primary product price increase.

All right. Thank you.

Thank you.

We'll take a follow-up from Christina McGlone, Deutsche Bank.

Sam, thanks for taking the follow-up. Following on Pablo's question, if Mexico opened and fructose use increased there closer to U.S. levels, what's the kind of talk about what would happen to the displaced sugar from Mexico? Would that come up here?

Well, if it opened, the sugar can come up here because both products can go freely across the border. That's the reason I said I think it will be managed trade. I don't think that the sugar people in the U.S. are going to open the border completely to Mexican sugar coming in and I don't think the Mexican government is going to just say ship as much fructose down as you want.

But, yes, the issue would be that Mexican sugar would be free to come across the border just like U.S. fructose would be free to go across the border heading south.

And do you think that the U.S. government is committed to keep the current--the price supports on sugar?

I don't know. I--.

--Because if--if you're having all this sugar coming in from Mexico, but you don't want to change the price and the demand is at a certain level, how do you manage that situation?

Well, I mean, I think that we have had a sugar program in this country for a long time. Your question to me was do I think they're committed to hold it. I can't answer that question. And I think that definitely because it's been in place for an extended period of time - I'm talking about 30 years - there would be a reasonable assumption that something would be in place going forward. But I mean, the sugar lobby is exceptionally strong in this country and I can't imagine that they would say, oh, gee, just go ahead and let it go and float. But I can't commit to that and I can't say for sure that's what's going to happen.

Okay, thanks.

Thank you.

Operator, if there is one more question, we'll take one more before closing down the call.

And no, sir, there are no further questions at this time.

Okay. Thank you, Operator. It does appear there are no more questions, and as a result, we will conclude our conference call and our webcast. As a reminder, I do want to mention there is a replay of this webcast, of course, at www.cornproducts.com. And there is a replay of the audio conference call, for those of you who are interested, that's available through Friday, August 3, and that phone number for the audio conference call is 719-457-0820. And you'll need the passcode of 1281465 to access that replay.

So on behalf of Sam Scott and Cheryl Beebe, I want to thank you for participating in our call this morning. And we will talk to you again in late October with our 2007 third quarter results. Have a good day.

And this concludes today's conference. Thank you for your participation. You may disconnect at this time.