Ingredion Inc (INGR) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Corn Products 2010 Third Quarter Earnings Conference Call. Today's call is being recorded. At this time I'd like to turn the conference over to Mr. John Barry. Please go ahead, sir.

Thank you, April, and good morning everyone. Welcome to Corn Products International's conference call to discuss our 2010 third quarter and nine months financial results that were announced earlier today. I'm John Barry, Vice President of Investor Relations for Corn Products International. 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 charts for our presentation this morning can be viewed and may be downloaded from our website 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 a listen-only mode. Ilene Gordon and Cheryl Beebe will deliver this morning's presentations.

Moving on to the agenda, Ilene will provide a 2010 third quarter overview. Cheryl will present the financials for the third quarter and nine amounts with appropriate analysis and flavor. She will also provide an update to our guidance for 2010 and discuss the financing of our National Starch acquisition. Ilene will give an update on the National Starch integration and provide an update on our National Starch business. 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 and actual results could differ materially from those predicted in those forward-looking statements. Corn Products International is under no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the Company's most recently filed annual reports on Form 10-K, subsequent reports on forms 10-Q and 8-K.

I am now pleased to turn the conference call over to Ilene.

Thank you, John. The third quarter has been very exciting for Corn Products. Our team worked very hard on the acquisition of National Starch. Towards the end of September we secured the permanent financing for the acquisition. We closed on the $1.3 billion National Starch acquisition on October first without the need to issue equity, while maintaining our investment-grade credit rating.

At the same time, we kept focus on our business and delivered another excellent quarter. Net sales were up 5% from the third quarter last year on strong volume in each of our regions. The stronger volumes and resulting improve plant efficiencies continued to drive profitability.

In North America we continued to see strong demand for corn sweeteners from the Mexican beverage industry, as well as improved demand for starches and sweeteners throughout the region.

Our South American business performed well and we continued to see strong demands for our products across the region from multiple market segments.

In Asia/Africa we saw strong volume growth driven by Korea and Pakistan.

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

Thank you, Ilene. Good morning, everyone, and again thanks for joining our third quarter call. It's been a busy quarter. As Ilene just mentioned, we closed on the acquisition of National Starch on October 1. We issued $900 million worth of long-term debt and we redid our revolving credit facility creating a new $1 billion, three-year facility. I have to say that it feels pretty good to have the permanent financing in place so we can focus on the integration.

So, on to the numbers, given all of the above, it is appropriate to highlight the costs incurred in the third quarter associated with the National Starch acquisition. The third quarter impact on a pre-tax basis is $32.3 million and on an EPS basis $0.31. About 67% or $22 million of the pre-tax amount is related to the cost of the bridge loan facility and the incremental interest expense related to the $1.2 billion debt financing.

Given the strong rebound in National Starch's 2010 numbers, we decided to finance the transaction with 100% debt. Later on we'll show a chart on the funding and rate associated with this debt. The transactional costs relating to the accounting, tax, human resources, integration and legal services amounted to $10.5 million on a pre-tax basis and $0.13 on an EPS basis.

As disclosed in the second quarter, we impaired the Company's Chilean plant and took a pre-tax charge of $20.8 million. In the third quarter we consolidated production in Argentina and are servicing the Chilean market from our Argentine operations. The final component relating to the shut down came through in the third quarter for $3.2 million on a pre-tax basis and $0.02 on an EPS basis.

We estimate a net benefit for next year at about $3 million on a pre-tax basis. Of the $35.5 million in acquisition and restructuring costs, on a financial reporting basis $13.7 million sits above the line in operating expenses and the $21.8 million is reflected in the financing line.

Turning to page nine, net sales at $1.02 billion increased 5% over a year ago. Gross profit was a $172 million, up 12% or $19 million from last year. The gross profit margin increased 100 basis points to 16.8 from 15.8% last year.

Reported operating income was $89 million, up 1% or $1 million from a year ago. Excluding the acquisition and restructuring costs of $10.5 million and $3.2 million respectively, operating income was up 17% or $14 million.

On a regional basis net sales were down 3% in North America, up 14% in South America and up 30% in Asia/Africa. On a geographic basis North America accounts for 57% of the net sales, down from 62% last year. South America represents 30%, up from 28% a year ago and Asia/Africa is 13%, up from 10% a year ago.

The $49 million increase in net sales is broken down by a positive volume impact of $91 million. Foreign exchange had a positive impact of $23 million and a combination of price and mix had a negative impact of $65 million.

Again, the price mix is primarily driven by the correlation between corn prices and product selling prices in our North American business. Co-product sales were $183 million this quarter versus $176 million last year. Volume and FX offset the price decline of about $12 million in co-product values.

The net sales variance by region shows strong volume demand in all three regions. As Ilene mentioned, the driver in North America is the strong sales in Mexico to the beverage industry, the across the board demand in South America and strong sales to the beverage industry in South Korea.

Exchange rates revalued in all three regions with minor exceptions, those being Argentina and Pakistan. Price mix was negative in North America reflecting the decline in selling prices versus last year. South America is a combination of mix driven by the brewing segment and lower co-product prices. Asia/Africa reflected strong price mix in both South Korea and Pakistan.

On a regional basis, the operating income improvement versus last year of $14 million was made up of a $5 million improvement in North America, a decline of $2 million in South America, a positive increase of $9 million from Asia/Africa and a positive $2 million in lower corporate expenses.

Operating margins improved in North America on strong utilization rates driven by volume, while South American margins declined, reflecting the mix impact from brewery volumes and lower feed and meal values.

Asia/Africa's margin of 9.5% improved significantly from last year's 3.7%.

I'm now moving to chart 14, the EPS reconciliation.

Changes from operations added $0.13; improved volumes added $0.14; $0.02 came from the impact of stronger currencies. Other income added $0.01, while price mix was negative $0.04. Non-operating changes accounted for a negative $0.02 with a $0.01 positive change in financing costs offset by a negative $0.01 each for non-controlling interest, change in effective tax rates and a higher share count.

Bridging the gap from the $0.81 EPS before items to the reported Q3 EPS of $0.48 were the Chilean plant restructuring for a negative $0.02, the acquisition costs for a negative $0.13 and the bridge loan and other financing costs, which amounted to a negative $0.18.

Moving on to the nine months results, net sales up 9% for $247 million, gross profit up 34% for $120 million. Gross profit margins improved 300 basis points.

On an adjusted basis, operating income is up 56% or $100 million. On a reported basis operating income is up 341% or $183 million. Adjusted diluted earnings per share were up 72%. Reported diluted earnings per share were $1.53 versus a $0.20 loss last year. Last year's year-to-date numbers include the goodwill impairment charge for our South Korean business, which was taken in the second quarter last year.

The nine month roll forward on an EPS basis shows the loss of $0.20 last year adjusted for the impairment and restructuring charges of $1.47 to arrive at the adjusted earnings per share of a $1.27 for 2009.

Changes from operations added $0.88, $0.42 from higher volume, $0.27 from positive price mix, $0.16 for FX and $0.03 from other income. Non-operating charges contributed $0.04. Lower financing costs added $0.09 and this was offset by a negative $0.02 each for a higher effective tax rate and a higher share count. Non-controlling interest was a negative $0.01.

This then brings us to the adjusted EPS of $2.19 for 2010. Factoring in the Chilean restructuring costs for $0.29, the National Starch cost of $0.19 and the bridge loan and financing costs associated with the National Starch acquisition of $0.18 brings us to the reported EPS on a nine-month basis of $1.53.

Turning to page 18, cash flow highlights, the business generated $325 million in cash flow from operations, $123 million from net income. We add back the $19 million impairment and restructuring costs for Chile, the bridge loan financing costs, the $20 million depreciation of $105 million and a positive working capital contribution of $66 million. Capital investment was $90 million and we continue to maintain tight control over capital projects.

Cash provided by financing activities reflect the increase in debt of $1.2 billion, the bridge loan financing costs of $17 million, $14 million in debt issuance costs and $35 million in dividends offset by $6 million in common stock issuance or options.

Looking at the balance sheet highlights, fixed assets are down slightly from a year ago at roughly $1.5 billion. Total debt was $1.8 billion and cash was $1.6 billion. Net debt at $188 million was down almost 15%. Minority interest was $24 million and our stockholder equity was $1.9 billion.

Moving on to the 2010 outlook, we have adjusted the guidance range to reflect the better than expected third quarter performance and an improved outlook for the fourth quarter. The new range is $2.75 to $2.85 on a comparable basis to our prior guidance. This excludes the impact of National Starch and the restructuring charges for Chile and assumes a normalized tax rate.

Volume and currencies were better than we were expecting in the third quarter and the fourth quarter reflects an expected benefit from higher co-product values. Despite the higher co-product values, we are estimating that the fourth quarter will still be below last year's $0.74 as spreads narrow in North America and South America and the comparables are tougher as the fourth quarter last year was the strongest quarter in 2009.

Turning to page 23, highlighted is the source of funds for the National Starch acquisition. We used $250 million from the revolver, $350 million in five-year notes, $400 million in ten-year notes and we issued another $150 million under the existing 30-year notes and we used $200 million of cash.

The acquisition debt borrowing rates on chart 24 reflects the all in costs at slightly below 4.3%, the actual 4.29%.

I will now turn the call back over to Ilene.

Thank you, Cheryl. This is a very exciting time for Corn Products. We have successfully financed and closed on the National Starch acquisition. This acquisition is a major lynch pin in our ingredients solutions provider strategy. Our focus is now on ensuring that we successfully integrate our two businesses.

As I have said before, we will move quickly but thoughtfully. I expect that the integration will take 18 to 24 months to complete. The first big step in our integration is the addition of Jim Zallie to my executive leadership team as Executive Vice President and President, Global Ingredient Solutions. Jim was National Starch's President and CEO and adds a wealth of experience and talent to my team.

As we integrate our businesses, we continue to expect to obtain at least $50 million in cross synergies. We expect that by the end of 2011 we will achieve a cost synergy run rate of $20 million and we expect that we will hit the $50 million cost synergy run rate by the end of 2012. So in 2013 we should see the full-year benefit of the cost synergies of $50 million.

I am also very pleased to report that the National Starch business has performed very well in 2010. The business has seen a strong recovery in food sales, favorable costs and improved plant utilization rates. We expect that 2010 will represent a record year for National Starch. While we will have owned National Starch for just the last quarter of 2010, we expect that on a full-year IFRS carve out basis and before any purchase price adjustments the business will show operating income of approximately $160 million to $170 million.

If we applied our preliminary purchase price adjustment estimates for the full year 2010, National Starch's operating income would be approximately $130 million to $140 million. Just as a reminder, the purchase price accounting adjustment is an estimate and the final adjustment could vary. Given all the above, I hope that you see we consider this an outstanding acquisition for Corn Products International.

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

(Operator Instructions). And we'll first hear from David Driscoll of Citi.

First off, congratulations on completing the acquisition and a very good quarter. I wanted to go back to your National Starch slide here, the final slide in the deck. If I recall correctly, when you initially announced the acquisition, your estimated EBITDA range, I believe it was dramatically lower than what you're showing on the slide today of $2.05 to $2.15. Can you go back and review those numbers for us and then just explain why they're so much higher?

Sure, when we put out the numbers back in June we had not seen the year-to-date number for National Starch. They were not expecting -- we were not expecting their volume to be as robust as it has turned out to be and so the change really in the range, David, goes to the improvement in their operating income.

This is very dramatic. I believe the old number was something like $1.35 to $1.50 and now you're showing numbers of $2.05 to $2.15 so unless I'm missing something there is an enormous step up here in terms of now what I believe our expected EBITDA generation should be, both in 2010 and an ongoing basis. Now, is there any reason why we'd be getting off track thinking like that?

No, there is a dramatic improvement. What we're looking at again for 2010 per these numbers is we're looking at a year that brings them back comparable and again these are carve out financial statements, but from a business perspective they are back to 2008 and slightly better. They are having a pronominal year.

The increase in D&A from 45 to 75, that is your estimate of what the increased amortization of intangibles is, is that correct?

It's the combination of the increase in intangibles and a slight increase in depreciation, as the asset values are reflective of market value in the asset valuation work.

Okay two more questions for you, on National Starch can you discuss how the Company buys its corn and does it follow the same methodology that Corn Products does?

Well, I would say that they've had a certain process in the past in terms of buying corn, which has been similar to Corn Products and we intend to basically pull the two companies together and have a similar process in terms of hedging against fixed-price contracts. So it's been a little different in the past in the different regions for them, but we intend to bring it together.

I would add to Ilene's comment that the same philosophy of if you do a firm-price contract, you will back it up with the appropriate futures to eliminate the margin risk.

Okay, final question is just, could you comment on the U.S. utilization rates right now for high fructose corn syrup and approximately how tight is the industry running right now?

You know David, it's Ilene. They certainly are up from last year and we read some of the same reports that you do and so I certainly see them up 2% to 4% higher than last year. In terms of absolute numbers, I don't have specifically the industry numbers, but it is tightening up.

Great, congratulations on the numbers and I'll pass it on.

Heather Jones, BB&T Capital Markets.

Good morning, congratulations. Going back to the National Starch numbers, I guess first on their contracting, while you're in the process of moving them to a process similar to yours on the corn hedges, I mean do you looking to 2011, are their hedges structured in a way that they should be able to -- the price increases that they put in place should be able to offset the higher corn costs?

I think that's question not only for National Starch's business but the Corn Products business, Heather. It's for both of them because there is annual contracting that both business do and, given the fundamentals in the market, we're going to try to pass the corn price increases that we've seen that have been fairly dramatic on a year-to-date basis but more specifically the run up in corn prices since June.

Well, given the pricing umbrella with sugar and hyper utilization, I mean could you give us a sense of your confidence in the ability to pass on the increase?

Heather, I'm going to -- this is the always the $1 million question because, as you get into the fourth quarter, it's you look at the fundamentals and you hit them right on the head. Demand is strong; that's giving good support to utilization rates and sugar pricing is still up from its historical levels. So all the fundamentals are strong, but it's never over tell it's over and that's about as far as we'll comment on the contracting season for 2011.

Okay, going back to National Starch, so estimated EBIT of $1.30 to $1.40 after the higher D&A for 2011, I mean I just did very, very quick math, but I got to some like pro forma accretion of roughly $0.60/$0.70 cents. Am I missing something and then on top of that potential -- well, synergies into 2011, am I missing something with those figures?

Well, no I don't think you're missing anything in the figures. Basically we had given the financing rate at 4 point -- I'm just going to round it up to 4.3%. There's obviously some amortization of the issuance cost but you're look -- you can do the math as easy as I can, so I suspect you're coming up with $50 million or $52 million in financing costs. You subtract that from the 130 to the 140. In the pro formas that we issued back in September to support the financing we're estimating that the tax rate is 38% relative to the transaction and, again, the tax rate is impacted not only by mix but a lot of the costs associated with the acquisition don't get all tax benefits so use a 38% tax rate and you're in the range.

With regards to the synergies for 2011, what we have said is that we expect to get basically of the $50 million we would get 40% on what we would call an annualized run rate basis in 2011. We would pick up the remaining 60%, or $30 million, on an annualized run rate basis so that by the third year so talk about phasing it in, the $50 million, over a two-year period of time. By the time we get to the third year we expect to have the $50 million. The costs of getting the synergies we've said is about 1.5 times. So, at this stage of the game, it's a little bit difficult to say whether or not there will be a net benefit to these numbers when I take in the actual synergies and we're focused on procurement and the landscaping of our distribution and sales offices. Production won't come in until the 2012 time frame.

So I think at this stage of the game it's preliminary. It's an estimate. I wouldn't necessarily be adding into the 2011 numbers a net benefit from the synergies on a reported basis but clearly you have the number in the range relative to what the adjusted operating income is less the financing costs and what the impact to the EPS is.

But of course long-term we expect to get certainly benefits after it's all completed, the 18 to 24 months on a net basis.

Absolutely.

Sure so I mean these costs you're talking about, I mean you're just talking about the typical severance costs etcetera that--

We're talking severance costs. We're talking breaking leases where it relates to offices. We're talking -- and I'm talking 2011. We're talking the costs associated with the same thing on distribution of warehousing, the 2012 the cost that I'm talking about is as you rationalize manufacturing you may have costs associated with that. So I believe we in the chart back in the June presentation we said that it would cost us at about 1.5 times synergy dollar in costs.

So it's okay the lease and things that probably most investors would look through but looking at 2011 could you give us a sense of how those synergies are going to flow? Are they going to be heavily back end loaded or should we start seeing some benefit?

No they're going to be heavily back end loaded and what we've said is the integration is going to take 18 to 24 months. Let me put a little context around that. The biggest challenge in integration is getting your systems. As Ilene has said, we want to be thoughtful about this, both with regards to our customers, our employees and you have to integrate your systems. Your systems is what takes the longest piece.

Now I'm very happy that Corp Products International has been working on the systems' upgrade. We started with our South American operations probably four years ago so we're running SAP, Enterprise software with full costing and it is up and running in South America. It's up and -- and we do it on a regional basis. In Asia/Africa, as a matter of fact, we brought Pakistan up on July 1st. Our Mexican business is running on the global blueprint and our North American business will come, the remainder of the North America business, U.S. and Canada, comes up in February and April. We have had a phenomenal success. We're very disciplined. We're very thoughtful about our systems upgrades and so that's what's going to drive the length behind the integration of National Starch. So the international regions, their smaller businesses, those will go first. The last business to go will be our U.S./Canadian. Does that help, Heather?

It's very helpful and congratulations again on the quarter and the acquisition.

Ann Gurkin, Davenport & Company.

Good morning and congratulations as well. Returning to higher corn prices, I get asked this and is there a level at which you all cannot pass through higher corn prices or it's more challenging? Is there any kind of range you target?

No we don't target a range. Of course, it becomes more challenging for all of us, including our customers but, as you can see, customers are already announcing price increases because many ingredients are increasing so we are hopeful that the whole system will move in the right direction and that we'll be able to pass them on.

Okay is there any change in the way you're contracting for sweeteners, smarter (inaudible) hedge your corn at the time you lock in the contract, have you changed that mechanism at all?

Absolutely not.

Okay great. And then in the release in South America I guess can I get some more detail on the decline in co-product pricing? Is that a demand issue or does that reflect the decline in the grain? Can you help me with that?

It's the competing pressure from their record soybean crops.

Okay great and then, as you look out over the next 12 months, what are you assuming for demand for your products, both on industrial and the food side?

Well, we continue to see volume upside from our expectations and certainly I think if you look at some of the industrial numbers, as an example the corrugated industry September numbers were up 2.6%. I think they were up about 3% so far year-to-date so we expect that type of rate to continue and I think if you look at the food companies we also -- you know, the volume in the U.S./Canada has not been very exciting in the food. It's been pretty flat.

In fact, some people I think in volumes have reported declines, though the beverage side, as an example, Coke announced a 2% volume increase in North America. So I think that's the level that we're looking at, the kind of 1% to 2% would probably be the maximum for U.S./Canada. On the other hand, when we look at Brazil and the demand for volume from the brewery and confectionary industry we see their economy in numbers of 7%, 8% and Asia would be something similar, so I think it depends on what part of the world you're in.

That's very helpful. Thank you and congratulations again.

Ken Zaslow, BMO Capital Markets.

Just got one question on the National Starch, you guys said, just said it was record year in 2010. Does -- that's not implying that it's peaked. I mean, you will grow off the 2010 number; is that a fair expectation?

I think it's early in the 2011 goal process but when I look at the demand factors around the globe and the fact that they have a European business, a strong Asian business, I don't necessarily see at this point in time why I don't expect 2011 to be the same type of record year that 2010 is versus 2009. But yes we continue to expect to see growth in the National Starch business.

And the other thing, this is Ilene. I would add is with National Starch's innovation capabilities and the focus on health and nutrition and, as an example, resistant starches that are -- take longer to digest, those type of products focused on let's say yogurts, are you growing around the world? So that's why we are very excited to have National Starch as part of our Company.

And, Ken, we would expect to see, as we move forward on the integration, what we've talked about in the synergy line is cost synergies. What we haven't focused on or made a lot of comments about is the growth opportunities as you either change your mix, meaning that you shed some of your lower margin business so provide the input to the higher margin business, and just the growth opportunities that come from the cross sell.

So we should use 2010 as a base year, not as a record year, just as a base year to start modeling from?

At this stage of the game I have no reason to say no.

Great and then going to the mix question, what -- can you get a little bit more specific about in the Asian business? I know you said South Korea there was a mix benefit. Can you talk about what happened there?

In Asia it's the recovery in South Korea as you have the volume recovery of the corn sweetener sales to the beverage industry so you have not only volume but you have the utilization rate, which helps to improve the gross profit margin. And then we did very well in Pakistan. Despite the energy and the devastating floods that occurred, our Pakistani business was up the third quarter of this year versus the third quarter of last year.

And then my last question is Mexico. The crop issue, the short sugar crop in Mexico, that should help your pricing environment. Is that a fair comment?

Yes I think it should continue to be a very positive environment for shipments of corn sweeteners to Mexico with that sugar situation. I know that the soft drink companies and food companies continue to use the corn sweeteners but as they continue to also use a blend of the two.

Great. I appreciate it. Thank you very much.

Christine McCracken, Cleveland Research.

I was wondering, just in terms of the National Starch business clearly they had a great year but I was wondering if you could provide any more color around any specific geographies or product lines that really out performed maybe relative to what you had been expecting?

I see the strength everywhere in the system. It wasn't one particular region or another and the National Starch product portfolio and facilities just performed very well in filling up the facilities and meeting customer needs and expectations around the world so we started very balanced and strength throughout the world and, as you look at the trends, food companies are looking for ingredients that help make their products more healthy, more palatable and so what we've talked about before, that it's the demand continues to increase for those products and National Starch has done very well in working closely with customers in developing the ingredients for their food products.

Okay so it was really volume driven?

Yes, yes it was volume driven. There was strong recovery in the North American market. There was very good demand in the European EMEA, Asia the same and South America, a little less on South America. Their South American business is the smallest in the portfolio on a regional basis.

Okay and then you mentioned that industrial starch is I think fairly good demand I guess consistently in that 2% to 3% range maybe but it's my understanding that the industry wasn't successful I guess in the last round of pricing and I know they were kind of reaching I think in that area. I think they'd had a couple of price increases already. Is that impacting your ability to pass through any kind of pricing in that specific category?

Well, in the corrugated especially those numbers do look more robust than one might expect but it's from a very low base so when you look a year ago the numbers were very low and so, of course, the increases this year, the year-to-date of 3.6% is very positive from a low base. You're right that there was a lot of competition and margins weren't very exciting in that business during this year. We're hopeful to be able to do something going into next year but, again, it's a challenged industry in terms of their own cost structure and customers so that I think that it will be a very challenging environment.

And then just finally, in South America I think that the brewing industry is having a lot better results here I think through the back half. I am just wondering looking into next year you're going to come up against some pretty tough comparisons. Is it your expectation that you'll be able to maintain that kind of growth going forward and is there any expectation around pricing as a result?

I think that the brewing industry will continue to grow in South America and we are a key supplier to that industry. It will be challenging in terms of comparables but we still are hopeful to continue to grow with the brewery industry but, again, I think that it really depends on the competition and the expectations of the brewers in that particularly area but we're still excited about the brewers in South America. I don't know, Cheryl, would you add anything to that?

No I, Christine, you have a very valid point that the comps will be more difficult because the rate of growth in breweries 2010 versus 2009 is going to be difficult to match but when we look at generally demand in brazil it's tending to grow, as Ilene said, you know, 5%, 7%, 8% and so if brazil demand holds up we'll continue to see growth. Just it won't be at the same pace that we saw 2010 versus 2009.

And do you guys have any view on the election?

Which one?

Fair enough. Let's just limit it to Brazil, given your exposure down there.

No we don't have a view on that.

You're not expecting it to affect your businesses though?

No.

Okay great thanks.

Christina McGlone, Deutsche Bank.

I just wanted to better understand kind of the profile of National Starch in terms of pricing because it's more -- I guess it has a more gradients value added profile, so I wanted to know if it was similar in terms of pass through of corn to Corn Products or if pricing there tends to be a little more sticky like packaged foods, for example.

It's a good question. As we learn about the business really what National Starch's strategy and our new strategy really is to deliver ingredient solutions to customers and work with customers on growth and value added opportunities and so, of course, we need to make money and our customers need to have a product that brings them value with the consumers and so I think it's really a mixture of technology and value and service that we're delivering. There are ingredient costs to us that certainly have to be part of the package but, again, it is a more value added sale and that's what makes us excited about the business and it's the partnering with the customers that we're very focused on.

Christina, I would add one additional comment to Ilene's and that is when we think about our business we look for the pass through of our corn costs. If I look at our international businesses because of our share of market or our positions, we expect also to be able to recover the valuations. We look at the combination of volume, price mix and currency in the net sales equation. What is different in National Starch because they are a higher value added product, while you expect that if there's a change in the corn cost, significant change in the corn cost, you're going to have a change in the pricing mechanism on an annual basis? What is left correlated is the change in the translation and so, as we pick up a nice sized European business with exposure to the pound and to the euro and we pick up a nice sized Asian business, we will have some currency translation differences than what you see in the corn product model.

Okay that's really helpful. Thank you. and then on the hedging side, I though that National Starch, some parts of its business use a different type of corn so is there any issue with hedging or you can still use CBOT corn as a proxy?

Well, let's talk about them actually, unlike Corn Products, we don't have any patents to seeds. They do. They provide the seeds, and this is domestically, to farmers and then they have a contract with the farmers to come back with that specialized corn and it's in the waxy lineup. And so the pricing mechanism there is a little bit different because the farmers are able to price it over a period of time.

But it's not enough to move the dial that there would be a significant displacement in the numbers. It's not like our business, where if we left the corn unhedged and you saw a 30% movement in gross corn costs, frankly we'd be screwed. That's not a very financial technical term but ultimately we would blow through the guidance plus or minus and we hedge that risk because that's not the business we're in. The order of magnitude for National Starch is a lot smaller but it is a different model.

Okay and then thank you. Last question, in South America it was a little weaker than I thought so I want to understand the mix issue. Is it just that brewing grew faster than the other product lines or did -- were any of the other product lines weak? And then do you -- will co-product values now pick up because globally we've seen prices pick up in all sorts of grains?

Well certainly the answer on the volume is just brewing grew more rapidly as a percent of the mix. I mean, we still had good growth in confectionary and the other product lines there but certainly brewing grew faster. In terms of co-products I'll turn it to Cheryl.

We're expecting when we raised the guidance we took into account that we expect the fourth quarter to have the benefit of the current level of feed, meal and oil prices.

Okay thank you.

Vincent Andrews, Morgan Stanley.

Just wondering if you could comment a little bit on sort of the volume trend maybe in North America, just in terms of obviously you've contracted a lot of your volume but you must see some spot volume during the year as well. How has that been trending sort of sequentially and how is it looking for the fourth quarter and is there anything interesting about it or anything changing that we should know about?

When I look at the industry volume from the CRA certainly in U.S. and Canada again we're seeing numbers that are, as I mentioned before, that are in the 1% to 2%, maybe a little bit higher range. Actually I recently saw some restaurant reports that were a little bit more robust than that and so I think restaurants have been getting a little more creative in terms of attracting people in with unique and special menu items, certainly healthy ingredients and even special prices. So I saw some numbers that said that restaurant volume was up 2.6% and 3.8% more recently.

So I think that -- and grocery is the same 2.3% and of course there's a fight between private label and branding but I think that if you look at the volume in the U.S./Canada it's certainly going -- I hope it should continue in that range. And then, of course, for us we run our North America system and so we benefit from the more robust growth in Mexico and so again our whole system benefits from that but I think that if you look at the U.S./Canada volume we'd expect the 1% to 2% to 3% and 3% would be high I think, but basically that continued growth.

But just in terms of incremental volumes that you're picking up in the spot market in North America, was there an acceleration in that during the quarter relative to the first half of the year?

No nothing that would be major. There's always minor opportunities and, of course, we're trying to grow our portfolio and specialty products everywhere and so we're constantly testing different texture and sweeteners with our customers but it's not huge volume.

Okay and was there anything that -- there was obviously a big soft drink promotion over the summer. Did that impact the third quarter or was that in -- would that have come out of your second quarter?

No I think it was the normal expectation and it was a busy summer. I mean I think the numbers reflect that we were busy in the beverage side of the business but it wasn't a shifting from one quarter to the other.

Vincent, it's Cheryl.

And then on Coke products -- go ahead, Cheryl, if you have something to add.

It's when I look at the third quarter internal estimates that we had we beat the internal estimates basically on volume and we wouldn't call that necessarily spot volume. I think when people talk about spot it's that you basically are pricing because there was more demand. Our contracts allow our customers to pull demand within certain ranges. We just have not -- we did not forecast a particularly strong second half internally. We were expecting that there was the potential for a double-dip. Clearly we did not see a double-dip and the volume was both stronger in North America and South America. Does that help, Vince?

Yes that was perfect. That was exactly what I was looking for. The other maybe two more quick ones, the first is just as we calculated the co-product recovery rate the other day and it was traditionally been between sort of 40% and 55% and it looked like it was slightly below 40% so I guess my question is for the fourth quarter it sounds like in your comments before, Cheryl, that you're assuming this sort of below average recovery rate remain status quo in the fourth quarter?

I expect that we'll still be below where we have been in the past but it will be an improvement from the third quarter.

And lastly, any sense of whether--

And, Vince, I'll just add the comment that's because we're contracted so our corn is covered and so, as the co-product values increase in the fourth quarter, that recovery ratio will improve.

Sure no that's fair. And then my commentary was based on spot corn, which is obviously different from mature you're dealing with.

Yes.

And then lastly, on contracting is there any sense that it's going to finish earlier or later than normal this year based on sort of the recent run up in corn prices? Are customers any more eager to get it done?

I would say that it feels like it will run its course in a normal way and we have no sense of an early or a late adjustment to it.

Okay perfect thanks. Congratulations on the quarter and the acquisition.

And we'll take a follow-up from David Driscoll of Citi.

I just wanted to come back to National Starch in your guidance changes here. They're really quite startling. I have to absorb this. This is an enormous figure. Can you explain one thing though? Given that you had this outlook for National Starch at something like $150 million for EBITDA and it came in so much dramatically stronger, I think what you're saying is it's just business conditions were better. When I look--

Conditions were better, David. The volume recovery and again there are some similarities in terms of if you don't have volume you're not running your plants efficiently so that volume impact, the stronger second half volume, is positive both in terms of the top line and the GP rates because of the higher manufacturing efficiency.

Just let me just add on one thing to the question. It's the comparison between the CPO legacy business versus the National Starch business. Their increase seems to be dramatically more than what your guidance increase is and so forth so what all I am trying to say is that when I look at CPO's numbers they came in very good. They came in roughly in line with what we expected. When I listen to the National Starch numbers it seems like it's a completely different ball game, that it's just massively better and I suppose I am just trying to reconcile the two pieces.

It's the reconciliation is going to be a bit of a challenge until we actually get all the numbers out there. Again, we only take control as of October 1 and the best I can say, David, is that really the increase in the volume takeaway, I mean they are really operating extremely well from a demand standpoint and it is better than what they were internally forecasting or what we were internally forecasting.

Well, what a brilliantly timed acquisition. Congratulations this looks like a home run. Thank you.

Thank you for that comment.

And there are no further questions at this time.

Okay well thank you, April. If there are no more questions we're going to close down our conference call and our webcast this morning. As a reminder, there is replay of the webcast at www.cornproducts.com and also an audio conference call replay is available through Friday, November 12th. The phone number for the replay is 719 457-0820 and the pass code is 6046021.

Thank you for your participation this morning. Bye.

Thank you.

And that does conclude today's teleconference. Thank you all for your participation.