Ingredion Inc (INGR) 2010 Q2 法說會逐字稿

Good morning, everyone. And welcome to the Corn Products 2010 second quarter earnings call. Today's call is being recorded. At this time I will turn the call over to John Barry. Please go ahead, sir.

Thank you, Rachelle. And good morning to everyone. Welcome to Corn Products International's conference call to discuss our 2010 second quarter and six month financial results that we announced earlier today. I'm John Barry, Vice President of Investor Relations for Corn Products.

Joining me today to lead the call are Ilene Gordon, our Chairman, President and Chief Executive Officer. And Cheryl Beebe, our Chief Financial Officer. This is an open conference call simultaneously broadcast on our website at www.cornproducts.com. The charge for our presentation this morning can be viewed and are downloadable from our web site and they're 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.

Ilene Gordon and Cheryl Beebe will deliver this morning's presentations. Ilene will provide the 2010 second quarter overview. Cheryl will present the financials for the second quarter and six months with appropriate analysis and flavor. Ilene will then provide an overview of the business outlook and our guidance for 2010 and update on the pending National Starch acquisition. Following that we'll move on to your questions.

As a reminder our comments within this presentation may contain forward-looking statements, these statements are subject to various risks and uncertainties. Actual results could differ materially from those predicted in the forward-looking statements and Corn Products 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 vary materially from those discussed during today's conference call or in this morning's press release can be found on the Company's most recently filed annual report on Form 10K and subsequent reports on forms 10Q and 8K. I'm now pleased to turn the call over to Ilene.

Thank you, John. I'm pleased to report that our business continued with its excellent performance in the second quarter of 2010. During the quarter, our business enjoyed double digit volume growth in each of our regions. The volumes not only helped drive top line growth, they allowed our plants to operate more efficiently. This helped to drive this quarter's gross profit margin improvement.

In North America, we continue to see strong demand for high fructose corn syrup from the Mexican beverage industry. Our South American business, led by Brazil, is performing very well. We continue to see strong demand across the region from multiple market segments, especially brewery, paper, dairy and ice cream, confectionary, and personal care.

Asia/Africa delivered significantly improved results compared to the second quarter last year, driven by South Korea and Pakistan. In South Korea, we saw good volume improvement, led by the beverage and brewery industries. In Pakistan, the growth was led by the confectionery and textile market segments.

I will now turn the call over to Cheryl for a review of the financial results for the second quarter.

Thank you, Ilene. Before I go over the quarter, and year to date results, I want to take a moment to cover several items that occurred in the quarter.

The first item is the impairment of our Llay-Llay plant assets. As we reported in our first quarter Q, Chile was hit by a major earthquake in February of this year. The earthquake caused significant damage throughout the country. Fortunately, none of our people were injured.

The same cannot be said for our plant. We idled the plant for safety reasons and ordered an engineering study to determine the extent of the damages. We took a $2.7 million charge, equal to our insurance deductible in the first quarter. Late in the second quarter, we received the detailed engineering study of the facility. We made the decision to impair the plant assets. This quarter has the impairment charge of $18 million. This equates to $0.23 on an EPS basis. We will continue to review and monitor the situation in Chile as we progress through the year.

The second item relates to National Starch acquisition related costs. We spent $3.9 million pre tax, $3.1 million after tax, or $0.04 on an EPS basis in the quarter. We also spent $3 million pre tax, $2 million after tax or $0.02 in the first quarter. Going forward, we will continue to highlight acquisition-related costs.

The third item relates to the estimated effective tax rate. The quarterly tax rate was 44.3% versus 1.1% a year ago. The quarterly tax rate is impacted by a number of items including the restructuring and impairment charges as well as the acquisition-related costs. The revised guidance is predicated on a more normalized rate of approximately 33%. The actual tax rates for 2010 may vary considerably.

I am now moving on to the results for the second quarter.

As Ilene noted, we are very pleased with the rebound in the business. This now marks three consecutive quarters of improving results. As we move into the second half of 2010, the comparisons will become more normalized.

Now, for the quarterly results. Net sales are up 10% to just over $1 billion. The $91 million increase in net sales reflects double digit volume growth and stronger foreign currencies, partially offset by lower price mix. I would point out the lower price mix reflects the normal relationship of pricing in North America to lower corn costs.

Gross profits jumped 47% to $164 million from $111 million last year, driven by the higher volumes, improved plant utilization rates, lower corn costs, cost reduction programs and favorable foreign currency translations. On an as-reported basis, operating income was $77 million versus an operating loss of $73 million last year. This includes the $18 million in impairment charges related to Chile and $4 million in costs associated with the pending National Starch acquisition. The 2009 operating loss includes the $125 million impairment and restructuring charges largely related to South Korea.

Adjusted operating income jumped 90% to $99 million from $52 million last year. The adjusted operating income margin increased to 9.9% in the second quarter of 2010, from 5.7% in the same period last year. Reported earnings per share for the quarter was $0.48, compared to last year's loss of $1.13. On an adjusted basis EPS for the quarter is $0.75, adding back $0.27, $0.23 for Chile, $0.04 for acquisition costs. Last year's adjustment is $1.47 which would give us a comparative number of $0.34. This represents an increase of 121%.

Looking at net sales by region, we see North America's net sales were basically flat, while South America increased 26% or $59 million, and Asia/Africa increased 35% or $34 million. Of the $91 million increase in the second quarter net sales, relative to the same quarter last year, improved volumes added $143 million, stronger foreign currencies added $44 million with the biggest impacts coming from Brazil, Canada, Colombia and South Korea. Partially offsetting the positive impact on net sales from volumes in currencies was a negative $96 million price mix. Again, the lower price mix was principally in North America and reflected the normal relationship of lower corn costs to lower pricing.

As we can see in the net sales variance by region chart, the improvement in North America's Q2 net sales resulted from 14.1% increase in volume and a stronger Canadian dollar which added 2.2% and this was offset by a negative 16.6% in price mix.

South America's second quarter net sales grew 25.6% resulting from 15.9% in higher volumes, 11.7% in favorable foreign currency exchange rates, price mix was a negative 2%, largely due to lower co-product values in Brazil.

Asia/Africa's net sales increased over 35% with volumes accounting for 25.3%, price mix adding 5% and currencies contributed 4.8%.

Moving on to the adjusted operating income bridge by region we can see that the second quarter 2010 adjusted operating income improved by $47 million or 90% to $99 million, again versus the $52 million last year. North America contributed $26 million, South America added $13 million and Asia/Africa added $7 million. Corporate expenses were $1 million lower.

North America's operating income was $60 million or 78% above the second quarter of 2009 and was driven by the higher volumes and an improved gross profit margin.

South America's operating income increased 48% to $39 million from $26 million in the second quarter of 2009, reflecting the higher volumes, improved gross profit margins and favorable foreign currency translations.

Asia/Africa's operating income increased 130% to $13 million from $6 million in the second quarter of 2009, and reflects the improvement in our South Korean business and higher gross profits in Pakistan.

Moving on to our estimated sources of diluted earnings per share, the $0.41 adjusted EPS improvement in the second quarter of 2010 resulted from solid performance from operations.

Margins/price mix added $0.19, volumes contributed $0.15, favorable currency translations added $0.05, and other income and expense contributed $0.02. A $0.03 improvement in financing costs was offset by a negative $0.02 from a higher effective tax rate and a negative $0.01 from higher diluted shares outstanding. All in all, an outstanding quarter.

I will now quickly touch on the year to date financial performance. Moving on to the results for the first six months of 2010, these results include not only the second quarter impairment and acquisition costs, but also the first quarter charge of $2.7 million for the Chilean deductible and $3 million in acquisition-related costs. On an EPS basis, this is worth $0.06. Net sales grew 11% to $1.9 billion reflecting the double digit volume growth, stronger foreign currencies, partially offset by lower price mix.

Gross profit jumped 50% to $307 million from $204 million last year, and gross profit margins improved to 15.8% from 11.7% last year. Adjusted operating income jumped 94% to $176 million from $91 million last year. The adjusted operating income margin increased to 9.1% from 5.2% in the same period last year. Adjusted diluted earnings per share increased 146% to $1.38 from $0.56 in the first half of 2009.

Moving on to the estimated sources of diluted earnings per share, the $0.82 adjusted EPS improvement for the first six months of 2010 resulted from again solid performance from operations, with $0.74 and $0.08 from non-operating items.

The largest contributor was margins which added $0.33, increased volumes added $0.27, favorable currency translation added $0.12 and other income and expense contributed $0.02. Lower financing costs added $0.09, while a higher number of diluted shares was a negative $0.01.

Turning to the cash flow highlights for the first six months of 2010, we generated $185 million from operations, reflecting the improvement in net income and $11 million reduction in working capital.

Excluding the margin accounts, year to date reduction in working capital was $54 million. Our net investment in fixed assets was $56 million, cash provided for financing activities was $24 million and we paid dividends of $23 million.

Fixed assets at June 30, 2010 were approximately $1.5 billion, total debt was $599 million of which $499 million is classified as long term. Cash was $326 million while net debt was $273 million. Stockholders equity was just slightly below $1.8 billion.

I will now turn the call back over to Ilene for the 2010 outlook. Ilene?

Thank you, Cheryl.

On a comparable basis to the company prior 2010 earnings per share outlook, which was $2.25 to $2.60 we are revising the range to incorporate the strong first half performance. The revised comparable range is $2.55 to $2.75 per share which would put the second half of 2010 in a range of $1.17 to $1.37 per share. This range excludes the impact associated with the impending National Starch transaction and the impairment of the company's Chilean plant and assumes a more normalized tax rate. Given the pending National Starch acquisition, we expect to reduce our capital spending from what we guided at first quarter.

We now expect to keep our capital investments to between $150 and $175 million in 2010. We expect volume growth to moderate in the second half. We expect the North America volume to continue to be driven by increased sweetener sales in Mexico. We expect South America growth to continue though against more challenging comparables. We expect to see continued strong sales to brewing, processed food and dairy customers, with the biggest demand growth coming from Brazil.

In Asia/Africa, we expect to see continued improvement in our South Korean business with growth driven by the favorable economics of corn sweeteners versus sugar and the relative competitiveness of locally produced ingredients versus Chinese imports. And we expect Pakistan to continue growing despite challenges resulting from the energy shortage in that company.

We recognize that there is a risk of a slowdown in the rate of economic growth especially in the U.S. However, we remain cautiously optimistic about the balance of the year. With the recent run-up in corn prices, we are seeing and expect improved co-product values.

Finally, I would like to provide an update on the National Starch acquisition. We have made a good start on our integration planning. We have formed integration teams to guide our companies through the integration planning process, and move us toward a successful day one. We've begun the regulatory approval process and filings are underway. Although one can never be certain, we do not anticipate any issues. This process will keep us on track for a successful transaction close near the end of the third quarter.

Cheryl and I will now be happy to take your questions.

Thank you. The question and answer session will be conducted electronically. (Operator instructions) And our first question we'll hear from David Driscoll with Citi.

Good morning, David.

Good morning. Congratulations on a great quarter.

Thank you.

Thank you.

A couple of questions. The first one I wanted to start off with Ilene is, can you talk to me a little bit more about the North American volumes? And what I'm trying to understand here is your export business from the United States to Mexico, is that significant or was it simply that volumes are higher in Mexico because of your assets in Mexico? Do you understand the nuance?

Yes, I do. It's a combination. I mean, our business out of Mexico is strong, but our exports from the US down to Mexico are also strong. Stronger than we anticipated. And we're also strong in volume in the US and in Canada. So, overall, we saw strength everywhere.

Can you give me a sense on the magnitude of change on the exports? Because historically, I thought that the nature of the three plants that you have in the United States really kind of limited the amount of exports that corn products would have and that generally it was the other players in the industry that would be big exporters from the corn belt into Mexico, but I feel like you're telling me something different.

So could you just give me some sense of magnitude on this export number?

Well, I don't have the magnitude of the number, but I can tell you the way we run our system we're able to take all of our plants in the US and Canada and optimize the system, and then take advantage of opportunities in the Mexican region. So we're capable of shipping to distances and optimizing the transportation costs, just like our competitors are. So we have that capacity and capability.

And David, I would add a little more color to Ilene's comment, and that is, we typically, because we are the hometown player in Mexico, we wind up with an advantage.

Okay. So it's the sales force advantage, et cetera, and wherever -- ?

Exactly.

And wherever you source it from, maybe the client doesn't even know. They just know it's corn products, Mexico?

Correct.

Okay. Cheryl, can you tell us what the share count is in the full year guidance?

It's 76.6 million. That's assuming fully diluted. Based upon where the stock price is.

It does not give effect to the expected equity issuance related to National Starch?

No, it does not.

Can you give us any more clarity on your thought process regarding the financing strategy on National Starch?

A good question, David. It's Ilene. At this point, we're really open and obviously we've been working on the debt markets. We think that we have a lot of options and so we actually won't make that decision till we come closer to closing. But we see a lot of flexibility there.

Cheryl, would you add anything to that?

I would add that when you look at how strong our cash flow is on a year to date basis, I mean, if I look at our debt versus a year ago we're down on average $151 million and our cash is up about $180 million. And so I think given the strength of the cash flows, the fact that we have adjusted the CapEx down by about $25 million is that we have a very good flexibility point and we could easily do this 100% debt if that is the appropriate thing to do.

But however at this point in time, do you still consider an equity offering to be likely?

I would say that we always leave our options open with regards to the capital structure.

Moving on to sugar. Number 11 sugar has gone all over the place in the first quarter I think we reached a high of just about $0.30 a pound. We then hit a low in the second quarter of something like $0.14 a pound.

Ilene, can you talk to me a little bit here about how this might affect volumes going forward and I'm thinking South Korea mostly here, but there's probably other effects.

Yes. We see that the relationship with sugar and high fructose in the areas where we participate, certainly South Korea, Argentina and North America. We don't see a lot of change in what that will mean for demand in the near term, meaning for the rest of the year. That certainly, as it relates to the US, there's enough of a difference between sugar and high fructose to the purchasers that the decision's already been made in terms of which item to purchase driven by that relationship.

In terms of South Korea, it's the same thing, in other words, the switch to back to high fructose has already happened because of the change of economics. If sugar were to come down quite a bit, there would be an opportunity for some switching back, but I think that for the rest of the year we feel pretty comfortable that the relationships will stay where they're at.

One final question. Is there any appreciable effect in the quarter related to the World Cup on your business? I apologize, this may be a ridiculous question but somehow I remember that your beer brewing business in Brazil historically had seen some effects whenever there was a World Cup. But is that true? Was there any positive lift in the second quarter?

Well, I would say, certainly as I mentioned before that we did have strength in the brewing industry in Brazil and South America. And part of it could be in terms of watching of the World Cup. I think that it's a general trend in the countries in South America, in terms of the demands of the Brewers. But I think, I read the same reports as you, in fact, I read that Coca-Cola even had an effect from the World Cup, so there could be a small piece of it certainly reflected in South America.

And it may be that they were drowning their sorrows that they didn't win.

Yes, I think that's probably the case. Congratulations on the quarter. Thanks for the information.

Thank you.

Thanks, Dave.

Next we'll move to Heather Jones from BB&T capital markets.

Good morning. Congratulations.

Thank you.

Just I wanted to make sure I understand on the guidance, it looks like your pro formaing -- I know that's not a word, but whatever -- Q1 for the $0.06 impact from the Chilean insurance deductible and the National Starch acquisition cost for Q1, adding back that $0.06 for the first half estimate.

That's correct.

I just wanted to make sure I understood that. And then going to your guidance, you're talking about a moderation in volume. I'm just wondering if you've already begun to see that or is it more, you've got more difficult comparisons in South America and just anticipating that?

Yes, I think that it -- we have not started to see anything, I think it is a combination of perhaps what we read in economic reports, as well as the more difficult comparables in the fourth quarter. Not necessarily in South America per se, but it could be in any of the regions.

All right. When you look at the second half guidance, Heather, third quarter we started to see the rebound last year, but our fourth quarter was the strongest. Normally, our fourth quarter is not the strongest quarter in the year, so we're expecting the fourth quarter to go back to the more normalized pattern. And I --- you know -- what's normalized these days, but based upon historical trends, our fourth quarter would be down from our third quarter.

Okay. And if I look at the quarter to quarter comparisons on a volume basis, you still have a fairly easy comp in Q3 for North America. Clearly, Mexican volumes continue to be strong for HFCS, but speaking specifically to the US and Canada, are you seeing continued improvements in food and industrial starch demands?

In the second quarter, we saw volume improvement throughout all three countries in North America. So it wasn't just driven by Mexico. As we continue through the year, as Ilene said we still expect to see strong volume in Mexico coming from the beverage demand.

And relative to the industrial starches, what we see is the weakness in the pricing in industrial starches. The volume was off slightly, but the impact of the volume between our US and Canadian business was less than $10 million. And again, industrial starches on a total company basis is less than 10%.

Okay. All right. Thank you and congratulations again.

Thank you.

And Ken Zaslow of BMO Capital will have our next question.

Good morning, Ken.

Good morning.

There was some comment in your press release that said that your typical normal correlation between corn and selling prices. I'm assuming you mean that with -- in terms of co-products but not in terms of (inaudible) products?

No, it was meant in terms of, again, our North American book of business is -- it goes between the 40% to 60% that's grain related. And the rest is on firm price contracts, so those that are grain related as corn comes down, so will the price.

Can you hear me?

Yes. Go ahead.

I'm sorry. The other question I have is also pertaining to that is utilization rates. How do you -- two parts to this. One, how do you see the utilization rates in North America and how will that affect the pricing environment for 2011? Have you seen that improving?

And then the second part of that is can you give us some sense of, in this quarter, the extent to which the utilization rates improved helped your margins?

Sure. I think Ilene will field that question.

Basically, we are seeing low inventory and a lot of strength in demand, so naturally we do see some tightening of the relationship here going forward. So that I think going into the second half, I think we're cautiously optimistic as I said in our forecast of the range, and of course in terms of industrial production, we're cautiously optimistic in North America, but things seem to be continuing on a good trend. But of course it's too early in terms of the pricing environment, but right now, things are moving very well. Does that answer --?

Yeah. Then what about the leverage for the quarter?

Could you repeat that part of the question?

Yeah, how much of your margin expansion actually improved because of the utilization rates?

About half of it.

About half of it?

About half.

And then I saw that -- I think Jorge is retiring. Did you expect other retirements and can you talk about that in terms of the scope to how that is going to affect CPO?

Well, in terms of George retiring, I think after 39 years he was ready and he's a great person and we're very excited about the team that he's built in South America. And in fact, we also are announcing that Julio dos Reis from Argentina will be taking over George's position there and Julio has been in the company for many years so he'll continue to drive the successful strategy. We don't anticipate other retirements, but certainly as people reach a certain age level, it's a little bit hard to predict their timing.

But we're very excited and George will be a consultant for us. So he'll be very helpful I think in this integration as we go forward.

And my last and final question is, the question was asked, in terms of the capital structure. I know you're not going to lead us down the exact path of -- of how you are going to do the capital structure, but what considerations, I mean, why would you do all debt, why would you do all partial equity? Like what is the considerations to what you're thinking about when you are doing it and why not do all debt or -- just take us through your logic rather than what the final decision will be so we just know how to think about it from your perspective.

Let me just start with the guidance, the revised guidance is on a comparable basis. So again it doesn't take into account the pending acquisition, whether the income from it, the expenses from it, and the potential change in capital structure.

Relative to our thought process behind the capital structure, it has a lot to do with as we integrate the business going into the fourth quarter, what the opportunities we see in their business. So to the extent that there are growth opportunities on a global basis, we may want to give ourselves some operating flexibility by having some equity in the capital structure. Clearly, with the cash flow being as solid as it is, the margin accounts are relatively quiet, even though corn popped up a bit over the last several weeks. The balance sheet is in great position. So it's really around the flexibility, Ken, as to whether or not we should have equity in the structure.

We also have the opportunity that we're in the process of redoing our revolving credit agreement, and we will be looking at whether or not we pull a piece and have that outstanding in the revolver as opposed to the permanent debt financing. And that would give us the flexibility on the equity issue that we don't have to do it day one, but we could do it at a later point in time if that was the appropriate decision to make.

Does that help you in understanding why we would use equity or not?

That's a great explanation actually. That was perfect. Thank you very much.

You're welcome.

And as a reminder, to ask a question please press star followed by the digit one. Next I move to Christine McCracken with Cleveland research.

Good morning.

Good morning, Christine.

Ilene, following up on your earlier answer on industrial starches and you talked I think a little bit about the over capacity situation, the pricing weakness you've seen, we have also heard about the paper industry passing through now three rounds of pricing. It seems like the industry might be getting in a little better balance. Is that what you're seeing? Is it possible that you could get a little bit of pricing on industrial starches? You know, maybe in the next year or something.

When I look also at the corrugated shipment numbers, you know, June was -- for corrugated boxes was plus 3.7% and year to date it's been 4.2%. So of course, there's some strength in those shipments. Some of that however could be in anticipation of another price increase, I believe that that industry is pushing through. And I know inventories are low, but I still see that as an industry where there's quite a number of customers and that the ability for better pricing from our industry to that industry is not necessarily changing in a positive way.

I don't see it going down, but I'm not sure I really see the ability for those companies to absorb much stronger pricing. So right now I think that it certainly -- corrugated and paper reflects industrial production, and GDP and right now it's just an average type growth. So until that starts to tighten I don't see there's a huge amount of strength in that area.

All right.

The other piece that I would add, Christine -- and this is Cheryl -- is that for some of the players, starch winds up as the fly wheel. And so you can balance your utilization rates by using industrial starches. And that's where there tends to be the lower margins.

Have you guys shifted any capacity out of industrial or --?

Actually, we did because we didn't like the margins. And so we actually chose not to sell into the lower margin business.

All right. And then just in terms of 2011 pricing on high fructose, obviously, it's early, but you mentioned that corn prices might be strengthening here. You've talked about better volumes in the industry. It seems like it's setting up for a better pricing environment for the coming year. Any early color on that?

You know, I think at this point it's too early to tell and I think customers are a little bit in a wait and see right now environment. But I know that we're busy right now in continuing our commitments for this year. But I think as the year progresses as this continued supply demand balance, customers will have to make those decisions along with the suppliers and start to move ahead.

And then just in terms of National Starch, you have had a little time now to kind of maybe spend some time looking at the numbers in terms of growth synergies. Are you still comfortable with the targets you set out there or any change to that?

No, we're certainly comfortable with the $50 million synergies that we announced on June 21st and we continue to be very excited about the company and how well we fit together strategically and the people and the customers and the opportunities for synergies in technology and value added and innovation growth and broadening our portfolio.

Is it still two thirds I think for the first year in terms of capturing those $50 million?

The capturing in the 2011 time frame?

Yeah.

I think that's a reasonable -- yes.

Okay. Great. Thank you. Congratulations.

You're welcome. Thanks.

And next, we'll move to Christina McGlone with Deutsche Bank.

Good morning. Congratulations.

Thank you.

I wanted to understand, Ilene, as to a lot of prior questions you talked about better volume all across North America so also in the US and Canada. What's driving that? Are people switching from sugar back to fructose or is it just pure volume growth? If you can give any color on that.

Yeah, I've looked at the different segments and I'll give you an example. I think it's across the board and it's not necessarily switching back, I think it's just general growth in the industry. So as an example, in the restaurant business for the first time we're seeing a little bit of growth. The numbers I have seen is 1.9% growth for the first six months.

Of course, when you look at some of the food statistics, if you look at retail and food service it's obviously more robust on the retail side and that number together, I saw a report that showed over 6%.

But the restaurants, the growth is now in the positive mode versus last year where it was not growing at all. So I think that that's certainly demand for ingredients is coming there.

And then again we're also seeing opportunities in both our branded and probably more importantly our private label customers to grow in the food side of the business. So that along with the beverage that we talked about before and industrial versus a very weak year last year, we're seeing the positive momentum in the different areas.

Okay. Great. And then the other question, what kind of opportunity do you see in terms of increased penetration in Mexico? Because I think that HFCS is only making up 20% of sweetener consumption, so it means to that there's still opportunity there.

I think that there's been a great penetration this year obviously with the switch and the blending of high fructose with sugar in Mexico. But I'm not sure that as it relates to beverage that I see a lot more penetration. I think that the beverage companies are happy with the mix now and that they are living with the different economics so that I think that this year represents a very positive year. But I'm not sure I see an increased penetration beyond where we are this year.

Okay. What about on the food side?

Well, the food side, certainly, the growth in Mexico as it relates to GDP and the middle class and the demand for healthy products continues to grow. And so that the food ingredients and the broadening of our ingredient portfolio will continue to build in Mexico. As an example, we have capacity in modified starches and that's why National Starch also fit very well to target our Mexican market so that we're creating new products with our customers for the different food tastes, of the consumers in Mexico. So I see certainly upside in the food business.

Okay. Thank you. And then National Starch, I don't know if you're going to update any sort of -- I think the last you talked about was cash accretion in 2011. I don't know if you've got your hands around the amortization in that business if there's an update to that.

No, there isn't at this point, Christina. Once we actually own the business and are able to complete the valuation work then we'll update.

Okay. And then last question, Cheryl, what do you think about interest expense for 2010?

We're running about in gross interest expense around 6%, a little bit slightly below the cash balance. And so, again, all things being equal not taking into account the acquisition closing end of third quarter, beginning of fourth quarter, we're probably at about the same level we are in this quarter.

Okay. Thank you.

You're welcome.

Next, we move to Ann Gurkin with Davenport & Company.

Good morning, and congratulations.

Thank you.

I wanted to start with the comment you made about improved co-product prices in North America. Have you assumed the strengthening of those prices in your expectations for the second half?

Yes, we have. In order to get to the upper end of the range, we would have to see co-products continue to firm.

Okay. Great. And then secondly, results in the second quarter, versus our expectations were a little light in terms of margins in Asia/Africa. Can you comment on the long term target for margins or kind of help me understand where to think about that business over the next several years?

That's a bit of a challenge given the fact that when you look at South Korea which is what's driving the year over year performance it goes to what's the relationship between sugar and HFCS. And so as long as the price of sugar and corn and freight are in balance, then you would look at what the margins are this quarter as indicative. X that they are probably a couple of percentage points below.

When we took the goodwill write-off last year, it was reflective of not having the South Korean business back to where it had been prior to the structural change with regards to import tariffs.

Okay. And then the same question for North America operating margin. Should a nice improvement this quarter, for the year can you hold a double digit margin, or can you help me there?

I think when you look at the guidance it's reflective of this quarter's margin. As I said, we expect the fourth quarter to lighten up a bit, so clearly, that means it would come on down. But, you know, the best way to guide you for the long term strategic view that we have, our comment is that we look to exceed our cost to capital, and that means that on average our business has to have an OI margin in excess of 10%.

I think the other thing I would add to that is if you look back over time, the second quarter of 2007 we made $68 million. Of course, 2008 was a very strong year and then it came down last year. So I think our number this year is showing that with everything going right we can be very successful. But everything has to be going the right direction.

Okay. Thank you all.

You're welcome

And next we'll hear from Ian Horowitz with Rafferty Capital Markets.

Good morning, congratulations.

Thank you.

Just to go a little bit more off of some of the comments we have heard -- or questions we've heard this morning on Asia. I think it came in a bit of a surprise for us in terms of the top line growth. Is this as much an anomaly, should we see some sort of a return to more normal levels or is this kind of a sustainable level that we're in?

Well, let's back up a second and look at the 2009 margins. The margins were relatively weak throughout most of 2009, which is reflective of the worst point in the pricing between the price of corn, so the high corn cost carry over from 2008 into 2009 and the weak pricing environment. And so when you look at what the average OI margin was for Asia/Africa in 2009, it was 4.3%.

The resumption of the HFCS sales to the beverage industry should make that more than double. And that gets you to the more normalized range of the 8% to what I'm going to call 10% for the division. If I go back and look historically, 2005, we were at almost 16% margins.

Right.

OI margins. And so I think, again, given the structural change and the fact that fructose and sugar can be used in the beverage industry that we're looking at an 8% to 10% margin.

Okay. Fair enough. The next question I had, you know, are seeing continued announcements of removal of HFCS primarily here in the US from formulations. Are you kind of modeling that into your expectations, a continued reduction in HFCS use and have you seen that really kind of start to impact your business with your customers at this point?

You know, we watch it just like you do, and we've seen certainly customers make some switches. But normally, most of them are switching it in a high-end brand, an organic brand or a particular small SKU and that certainly some brands are using it as a marketing focus and certainly I would think that the consumer companies, because they're paying more money for the sugar on the order of 30%, that they'd be looking at the impact and is it really creating the value they'd expect in market share.

So as we continue to deliver value to our customers, we're working with them not just on high fructose corn syrup, but even our Enliten product, our Stevia based product and other ingredients to help formulate new products. So we're aware of the different demands of consumers on our customers and at the same time we're partnering with our customers to create those new products that will help our customers be successful.

And Cheryl, would you want to add anything to that?

I would say that we have seen the decline in the carbonated beverage category for several years now and with that the decline in HFCS. The strategic value of National Starch is to broaden that portfolio and to make it less reliant on HFCS in the US market.

All right. So it seems like it is your expectation that this trend is going to -- not from a corn product standpoint, but from an industry standpoint, that this trend will continue in terms of volume declines primarily in the beverage industry?

I mean, I don't see it necessarily changing direction, but in terms of the magnitude, certainly I don't see a big change there. But it could be in the order of 1% to 2% per year. And -- but yet, there's demand to other areas of the world in terms of [aging] the population.

Absolutely. Absolutely. And then Ilene, you mentioned a little bit of the Enliten product. Can you give us a brief update on kind of where we are with that?

Well, we are working on the manufacturing side and we're actually in the process of building our factory in Brazil which should be up and running by early next year. At the same time, we're working on formulations with customers and do have product to work on formulations. So we're working on the acceptance and taste and it does take time to formulate it and do taste testing and our customers are excited about the product.

But it is something that does take a focus and it's really those people interested in a niche focus that will really bring it to market. But I think that we'll see some success over time. As an example, I think we're trialing it with 84 customers. So it's just going to take time to get it to market.

Okay, great. Well, congratulations again.

Thank you. Thank you.

And we go to Vincent Andrews with Morgan Stanley.

Good morning and of course congratulations. Just a couple of quick ones. The first is, I might have missed it but usually you say how much the co-products, you know, plus or minus was in the quarter. Did I miss that?

No, we didn't actually break it out because it wasn't that material in the quarter. We started breaking it out when it was having a significant impact. The co-product prices on a total company basis on a net sales view was about $16 million below what it was a year ago.

Okay. All right. And then, you know, just to sort of -- on Mexico, it sounds like, Ilene, the commentary you made was that Mexico's probably come through faster than you thought, but you sort of reached the run rate. So I guess my point or question would be that you feel very comfortable, if we sit here a year from now, that on the beverage side of things that you'll hold on to the volume that you got this year. Is that correct?

Yes, I think what we've said for 2010-2011 we feel comfortable. Now, sugar can obviously have some major changes on the long term, but for that period of time we do feel comfortable.

Okay. And then another question I had, if you could put into perspective maybe relative to a prior year or something, you know, where you feel like utilization levels are, either for you or industry or both.

Well, certainly I think if you look at this year versus last year, we feel certainly the utilization has improved which is reflected in what we've talked about in terms of the strength of numbers in Mexico. But as we said earlier, we can't comment yet on what implication that may have for the upcoming contract (inaudible). So certainly 2010 feels a bit stronger than 2009.

But you don't want to comment on where you are relative to 2007 or 2008?

No.

Okay. And how about on South American pricing, over the last couple of years obviously some of the moving parts there were FX and just was some cost changes and some inability to take pricing. Can you sort of characterize where you are today relative to a prior year?

You know, I think that it's very balanced. South America we feel strength in all the different areas. As an example in Brazil, the demand is strong there. And even Argentina is very strong and actually has had a very good pricing environment beverage strength. So we're feeling in all the different areas that there's lots of opportunities in South America.

Okay. And maybe going back to Mexico for a second. I felt like I read in a conference call transcript from SEMSA that they were discussing an expectation that prices for HFCS were going to go up in the near term, presumably the pricing environment there is spot like it is pretty much everywhere outside of the United States. So is maybe the opportunity set in Mexico less about volume now and more about pricing?

No, I think it's certainly about continuing the relationships that we have and a lot of the relationships have been set and we continue to supply and have normal commercial relationships. So I didn't see that report from SEMSA but I don't see that necessarily there are increases coming there, but I don't expect a lot of change. As we said before I feel like the supply/demand is very strong there right now.

Okay. Great. And last question would just be are you guys seeing any impact from the quality of the US corn crop and I just -- I know I asked that question before, but as we get further, deeper into the old crop, we're continuing to hear reports of quality issues and that seemed to be implied in some of the adjustments USDA has made recently. Anything on your end?

We're seeing the same thing, as the quality of the corns is below what expectations, there's a pricing mechanism to adjust for some of it. And probably on the positive side is the harvest is further along this year. So in all probability, they'll get the new harvest to blend with the old harvest which will mitigate the quality issue.

Okay. But it's obviously a manageable issue for you but you are seeing --?

Yes.

Okay. Perfect, thanks again. Congratulations.

Thank you.

Thank you.

And operator, we are running out of time, so we could take one more call and that's it.

Okay. We'll take a follow-up from David Driscoll with Citi.

Taking the follow-up.

Okay.

A couple of questions. So Cheryl, I just want to make sure I understand this. The first quarter when it was reported was reported at $0.57, but now as I look at this, it's $0.63 I believe in your calculations today. And I think what you've done is kind of retroactively gone back and said that there was some impairment charges and some charges related to the acquisition of National Starch that were embedded in Q1 that you're calling out today, but didn't call out back then, is that right?

That's correct. In order to put it on an apples to apples basis, we adjusted the first quarter. We actually had the reconciliation in the press release on the last table. So the $0.06 is the $2.7 million Chilean deductible. And there was $3 million of acquisition related charges.

Okay. In the second quarter, you don't give quarterly guidance, but can you tell us did the second quarter exceed your internal expectations for the quarter?

Yes, it did. And basically, where it exceeded our internal forecast was on volume. And the volume was up both in North America, South America and Asia/Africa. So not only do you get the volume, the incremental net sales, but you're also running your plants at a higher utilization rate, Dave, so you've got better GP's as well. And there were a couple of pennies in for the currency.

That's very helpful. So if I, I want to pull a couple things together. So if the top end of the guidance is up $0.15, and there's a kind of a retroactive raise to the actual 1Q number of about a nickel, second quarter beat the consensus by $0.18 so just those two numbers puts you at plus $0.23. Top end of guidance was up $0.15, but is the second half just conservative or is it really this fourth quarter comparable issue that you really want to pound home as the key part of this and that the rest of us, you know, we have a hard time with these quarterly patterns, is that the key variable or is it just a conservatism that's kind of in the forecast?

No, I think actually it is the variable in the fourth quarter. When I look at the consensus numbers, they appear high for the fourth quarter.

That's very helpful. South Korea, you took an impairment last year, I think it was second quarter and I think it was --.

That's correct. The $125 million.

Yes, ma'am, it was reasonably significant. So then the question is, is given how well South Korea is performing now, I don't remember the accounting rule on what -- if you would reverse an impairment charge like that, does that -- can that happen? And would it happen any time soon?

Well, let's go back and explain the $125 million. The $125 million related to the goodwill associated with our Korean business. We did not write off the fixed assets, the PP&E. So at the level that it is operating, which is what we felt it would operate at, when that corn, freight and sugar pricing was in balance so we're running at a rate that supports the PP&E. We're not running at a rate that would have supported the goodwill. So there's no likelihood of any kind of write-up.

And the accounting rules wouldn't allow you to do it anyway.

That's what I needed to know. Last and final question here is I asked you before when you made the announcement about National Starch but I want to just see if perhaps you've had a chance to talk to them and learn this.

I just would like to understand as much as I can about how National Starch goes about their annual contracts, i.e., of their percentage of business, can you give us a sense as to what percentage of their business they actually sign annual contracts like you guys do in the United States? Does that make sense?

Yeah, and David, I understand your question -- it's Ilene. And certainly we've spent a little bit of time with them, but it's really too early for us to know those percentages and in fact that's the type of information that we would not be discussing until we're one company. You know, we do know they're a successful company, and well thought of by their customers and they continue to have a great reputation in innovation and growth.

But in terms of the details of their contracting with their customers, it's certainly not discussed by us and it's handled by their current owner Akzo Nobel. But we'll be able to get into that as soon as we become one company in the fourth quarter.

I really appreciate that. Thanks, everyone.

You're welcome.

Take care.

Okay. And Rachelle, we're going to terminate the call now. Just as a reminder for everybody, there will be a replay of the web cast at www.cornproducts.com. And also, an audio conference call replay is available through Tuesday August 10. The phone number for the audio replay is 719-457-0820. The pass code is 2346756.

Thank you all for your participation this morning. Good-bye.

And that will conclude today's call. We thank you for your participation.