Ingredion Inc (INGR) 2011 Q3 法說會逐字稿

Good day, everyone. Welcome to Corn Products International 2011 third quarter earnings conference call. Today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Aaron Hoffman, Vice President of Investor Relations and Corporate Communications for Corn Products International. Please go ahead, sir.

Great, thanks, Melody.

Good morning, and welcome to Corn Products third quarter 2011 earnings call. Joining me on the call this morning are Ilene Gordon, our Chairman and CEO; Cheryl Beebe, our Chief Financial Officer. Our results were issued this morning in a press release that can be found on our website, CornProducts.com. The slides accompanying this presentation can also be found on the website, and were posted about an hour ago for your convenience.

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 those forward-looking statements, and Corn Products International is under no obligation to update them in the future as, or if, circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call, or in this morning's press release, can be found in the Company's most recently filed annual report on Form 10-K, and subsequent reports on Form 10-Q and 8-K. With that out of the way, I'll turn the call over to Ilene.

Thanks, Aaron. And let me add my welcome to everyone joining us today.

We appreciate your time and interest. We continue to see strong performance across the Business, and the year is playing out largely as we had described in February when we first issued 2011 guidance. At that time, we indicated that 2011 would be front-end loaded. Looking back, the adjusted EPS for the first quarter was $1.28. That was followed by $1.10 in the second quarter, though that included the Argo maintenance. Today we reported $1.20 of adjusted EPS, and are guiding to a $1.05 to $1.15 in the fourth quarter. The primary reason for the sequential decline in EPS is the layout of our hedged corn costs, with the cheapest corn coming early in the year, and rising as we moved through 2011.

I'm pleased to see that our team and our business model proved resilient. We have delivered our plans and commitments in spite of tough macroeconomic conditions and volatile commodity markets. I see this performance as all the more impressive, given the significant workload the organization has undertaken to successfully and swiftly integrate National Starch. We are on plan to complete the integration by the end of 2012. By implementing certain integration programs more quickly, we are in a position to achieve an incremental $30 million of cost savings in 2012. And we remain focused on the long-term growth prospects that underpin our strategy, expand our portfolio of products, and extend our geographic reach. We have recently committed approximately $100 million of capital to support the long-term growth of our specialty ingredient platforms, and for geographic growth.

The addition of National Starch's R&D capability enhances our go-to market position. It gives us long-term opportunities to enhance our mix of products. While the strategic fit of the acquisition is outstanding, the financial implications are also compelling. Through 9 months of 2011, our adjusted EPS has increased by $1.38. Roughly two-thirds of that amount came from National Starch, net of financing costs. At the same time, that leaves significant growth having come from organic business performance. In fact, that implies double-digit EPS growth on an organic basis in spite of the head winds that I discussed earlier.

Let's now shift from a broad view of the first 9 months to some thoughts about how the business performed in the quarter. I'll take this from a fairly high level. Let's start with North America. We continue to see stable demand in North America, as we have for most of the year, in spite of the general economic challenges. We have also seen significant price increases take hold to offset rising raw material costs. On our second quarter earnings call, we reported that contracting had begun a bit early and has continued through the third quarter. We will update you further on our year-end call when we have wrapped up the contracting season. In manufacturing, optimization is progressing well. This is the process of integrating the Corn Products and National Starch manufacturing footprints to maximize efficiencies and minimize costs. It should represent an important part of our integration cost savings in 2012.

Turning to South America, we continue to see strong food, beverage, and brewing demand, reflecting positive economic conditions. At the same time, we have made capital investments in the region this year, and will continue to do so next year in anticipation of long-term opportunities. As in North America, you can see in our press release today that we have taken significant pricing actions in South America to offset higher input costs. Turning to Asia-Pacific, demand remains balanced, with a mix of growth and decline in different countries. The volume growth we saw was driven by the acquisition. Demand is also stable overall in our EMEA region, though Pakistan continues to see robust pricing trends that are offset by energy issues. And we are pleased to see ongoing margin recovery in Europe after some input cost challenges in 2010.

In summary, we are very pleased about how the year has come together, and anticipate a good finish.

Now, I will turn the time over to Cheryl to take you through some of our financial results. Cheryl?

Thank you, Ilene.

As usual, let me add context and color around the quarterly performance. Organic volume remained relatively stable in line with expectations. Economic weakness across the world, combined with the impact of higher commodity costs, and in some cases, stronger currencies, has dampened demand. We expect this to continue into the fourth quarter.

Acquired business volume contributed about $337 million in net sales in the quarter, which is pretty consistent with the previous 2 quarters' results. This quarter marks the fourth quarter of CPO ownership. The trailing 4-quarter net sales for the acquired Business amount to approximately $1.4 billion. The estimated operating income associated with the acquired business is around $190 million. Obviously, this acquisition has created a substantial amount of value for our shareholders. Now that we have passed the 1-year milestone, we will no longer break out the acquired Business.

Moving on, we continue to see significant pricing actions in response to rising input costs. The third-quarter gross and net corn costs are up versus last year, and are sequentially the highest so far this year. This is the pattern we discussed previously, with the first quarter having the lowest corn cost, and increasing as the year went on, causing the first half to be stronger than the second half. On the foreign exchange side, the strengthening of the dollar occurred late in the quarter. At the current levels, we would expect the comparison to be negative in the fourth quarter by roughly $0.02 to $0.04. The third quarter has a positive effect from currencies of about $0.02. This year's effective tax rate is lower, due to the NAFTA settlement. Without that, we would estimate the tax rate to be around 31% to 32%. And finally, we bought back 1 million shares in the quarter under the Company's stock repurchase program. We have 3.7 million shares remaining on the authorized program.

Moving on to the quarterly results, net sales increased $608 million, or 60% versus last year. Gross profit increased by $104 million. The gross profit margin was up 20 basis points, reflecting the increase in net sales. Reported operating income was up $53 million, and adjusted operating income increased $49 million. Reported earnings per share increased 133%, or $0.64 per share. Adjusted EPS was up 48%, or $0.39 per share. Please see the reconciliations at the back of the press release. The $608 million increase in net sales from a year ago is approximately $337 million from the acquired National Starch Business, $243 million from price mix, and $26 million from foreign exchange.

Organic volume was basically flat. North America showed a net sales volume improvement of 2% against last year, up from the negative 2% last quarter, and flat in the first quarter. South America's organic volume was up in sweetener sales, but lower in feed and corn oil sales in Brazil, which drove the number for the region negative this quarter. Asia-Pacific was down 2% versus last year, but improved from a negative 6% in the second quarter and negative 1% in the first. Lower starch demand and exports, and the loss of one-time sales volume in liquid dextrose are behind the decline in Asia-Pacific. EMEA's organic volume was flat this quarter versus last year, compared to a 5% increase in the second quarter, and 19% increase in the first quarter.

Adjusted operating income was $151 million, up $49 million. To get back to the reported operating income of $142 million for the quarter, we subtract integration and restructuring costs of $9 million. All 4 regions continued to contribute to the growth. Adding back the $0.33 of charges to the [2010] third quarter reported EPS brings us to an adjusted EPS of $0.81. Changes from operations contributed $0.44. This is derived from volume of $0.35, $0.08 in margin improvement, $0.02 from foreign exchange, and a negative $0.01 of other income. Nonoperational changes amounted to a negative $0.05, $0.04 from higher financing costs, $0.02 from a higher share count, and $0.01 from a favorable tax rate. That brings us to the adjusted EPS of $1.20. Taking into account the integration restructuring costs of $0.08 brings us to the reported EPS of $1.12.

On a year-to-date basis, the net sales are up $1.7 billion; reflecting about $1 billion from the acquired business and $722 million from price mix, volume, and foreign exchange. Gross profit dollars increased by $368 million, and the gross profit percentage increased 190 basis points. Synergies and integration costs are tracking well. We are running a bit better on the synergy number, and a bit higher as well on the integration costs. For the first 9 months, operating expenses increased by $175 million, of which $138 million relates to the acquired Business. Reported operating income is up $268 million, and adjusted operating income is up $195 million.

On an EPS basis, reported EPS has increased by $2.57 per share, and is up $1.38 on an adjusted basis. Adjusting for $0.66 of restructuring and acquisition costs, the year-to-date [2010] adjusted EPS was $2.19. Changes from operations has added $1.71; $1.29 from volume; $0.36 from margin; $0.07 from exchange rates; and negative $0.01 from other income. Nonoperational changes amounted to a negative $0.33. Higher net interest expense associated with the acquisition financing increased $0.34. The higher share count impact was $0.08, and was more than offset by the lower tax rate. The year-to-date adjusted EPS was $3.57. We add back the NAFTA settlement of $0.75, and subtract $0.22 for integration and restructuring charges, to get us to the reported EPS of $4.10.

Moving on to the cash flow highlights, the story here is the impact of higher commodity prices on inventory and receivable values. We have invested $279 million in trade working capital, and $59 million in the margin accounts. Capital expenditures year-to-date are $158 million. Cash provided by financing activities was $17 million.

With three quarters behind us, we have tightened the guidance range by bringing up the bottom of the range from $4.85 to $5.05, while the top end of the range remains at $5.15. The adjusted range is $4.62 to $4.72. The guidance for the fourth quarter on an adjusted basis is expected to be in the range of $1.05 to $1.15, excluding the $0.10 of integration and restructuring costs. The guidance incorporates a forecast of weaker currencies and softer demand. Both of these are expected to be offset by lower financing costs and a lower tax rate.

Again, as we have said on the prior 2011 quarterly calls, corn costs are expected to be higher than the fourth quarter 2010. On a regional basis, we expect North America's operating income to be down versus last year, based on higher input costs and softer volumes. In South America, we expect operating income to be up on favorable price mix. The forecast incorporates weaker currencies and soft demand as we continue to trade price for volume. The outlook for Asia-Pacific is flat compared to last year on an operating income basis, and incorporates higher costs and soft demand. We expect to complete the integration of our operations in Thailand this quarter. With respect to EMEA, the outlook is for an improvement in operating income over last year, as we anticipate that favorable price mix will more than offset the higher costs. We are expecting demand to be relatively stable.

I will pass the call back to Ilene for closing comments.

Thanks, Cheryl.

As I have done in previous calls, I will wrap up with our strategic blueprint, which continues to guide our decision-making and strategic choices, with an emphasis on value-added ingredients for our customers. Looking at the blueprint, we have seen real operational excellence this year in generating savings from various initiatives, while integrating a sizable acquisition. As I mentioned earlier, we have seen growth from both the organic business and from the acquisition. We have delivered this strong performance in spite of difficult economic situations around the world. This is a testament to our prudent, thoughtful approach to managing risk, building our business, and the talent of our dedicated employees.

Now we will be glad to take your questions.

(Operator Instructions). Our first question comes from Ken Zaslow with BMO Capital Markets.

Good morning, everyone. My first question is how much visibility do you have in 2012 and 2013?

Ken, the visibility, so we said on the second quarter call, the fundamentals for North America are positive. We have very tight supply or high utilization. That bodes well for high pricing. We look at the synergies that we expect, and that is positive. And again, that is coming from our manufacturing optimization and procurement savings. There is a little bit of regional SG&A. There are some costs that will offset the $30 million as we continue to deliver those synergies. If I look at the currencies, they are a bit of a head wind, as we were relatively stronger in the first three quarters of this year, and obviously weaker in the fourth quarter. So that will make the comps a little bit more challenging next year.

But when I look at it in total, I think the environment is positive. It's a bit too early. I can appreciate why everybody would love to have numeric guidance for 2012, given all the volatility that is occurring in the market. But I think we are just a little bit too early to do that, and we will stick to our normal pattern of doing it on the fourth quarter call, early in the first quarter of next year. But I think the environment is generally positive.

The one unknown is what is the demand factor, given the economic challenges around the globe. I am relatively positive -- I don't think we are back in the 2008 environment where we saw, because of the US economic crisis, demand just fall off the table in the first and second quarters of 2009. I think there is less inventory in the consumer's pantry and on the retail shelves. So, I think we are talking a couple of percentage points plus or minus, using the best guess I have at this point in time. Ilene, would you like to add anything?

I think that the other thing is that we have made some capital investments that expand capacity in places like South America and around the world. And those are -- we are in the process of making those investments now, and some have already occurred earlier in the year. So, those will start to come on stream in late 2012, 2013. So that will give us the added capacity for some of those growth ingredients in other parts of the world, and we will be ready for 2013.

So, let me ask you straight up, then, if you were delivering anything less than $5, would you be highly disappointed? Let's take the midpoint of your range of $4.67, or whatever it is. It seems like the things that you said, just taking the $0.26 of cost synergies plus the $0.12 gets me above $5. If everything is a wash, you are still above $5. Is that not at least the weight as a starting point, from my point of view.

Hi, Ken, it's Ilene. I think that is right. When we look at the arithmetic of the maintenance shutdown that we won't have next year and then the anticipated synergies, I think that would be a fair statement that we ought to be able to make that type of improvement. If demand is reasonable, then more than that.

And, this is not a fair question for you, Ilene, and I apologize, because it's probably more for Cheryl. I get the question all the time, look at 2009 results and the issue is, we go into another macro issue globally. Can you talk about what the difference is between 2009 and going forward and how that will not itself, and draw that conclusion? Because I think that's what creating a little concern. If you can resolve that, that would be helpful.

Again, if I go back to a piece that Cheryl touched on, this whole destocking. The customers that I've met with and have talked with, again, reiterate that they don't see the current headwinds like it was in 2009 in that in the supply chain and the consumer's cupboard, they don't -- nobody came back and built up all that inventory. So, any type of slow down that you might be seeing now in consumption is really just people's concern or maybe trading down in some food items. But people are still eating, and they're going to work, and they are attending to what they need to do in their daily lives. So people are continuing to consume food products. What is different is definitely that jolt that the system had which had a couple of months of incremental inventory in 2008,2009 that came out. It never was rebuilt, and so what we are seeing today is just a response to people being a little bit nervous.

And, Ken, I would add a little bit more color as well. When I look at where the 2009 impact was, it was really the US economic issue. And then when I look at the size of our portfolio in the new combined business, all right, this time it's Europe who is having the economic crisis, and Europe is the smallest of our four regions.

All right. I appreciate it.

Thank you.

Next we will hear from Christina McGlone with Deutsche Bank.

Good morning.

Good morning.

I guess just to follow on Ken's questioning, two areas that I worry about, one in particular, paper and corrugating. You just talked about people are eating and that kind of thing. I know it's only 10% of sales, but I just wanted to understand your exposure more maybe from a volume perspective. What I would worry about is if that area is slowing, which we are starting to see a little bit, then what does it do to your utilization? So, if you could frame that exposure.

Christina, it's Cheryl. I think for us, the exposure is probably the least, because, as you said, it is about 10%. But as I think about our manufacturing optimization going back to our largest region in North America, part of what we are doing in the manufacturing optimization is we are actually moving [grind] away from the industrial and into the food.

Okay. That's helpful. That's really helpful. I guess in Europe, it is your smallest region, but I think about drivers for National Starch like clean label demand. And I'm curious in this economic environment if that dissipates because people can't afford it.

I think that the consumers, we have a couple of different types of consumers around the world and certainly in Europe. We are continuing to see the demand for the clean label products in what we call our wholesome category. So, it's true that some consumers are trading down to more basic products. We continue to see that demand, and we have added capacity in our global network to address that type of demand. So, I think that it may not grow as fast as we would like it to; on the other hand I do see some growth there.

When you were giving the outlook, there was a lot of soft demand, maybe stable demand. Is this demand elasticity to the pricing that you put through, or is it weakness over and above that elasticity?

I think the majority of it is relative to the pricing. If I look at South America, they have had to continue to take strong pricing action as corn continued to rise throughout 2011. North America is 50% firm price and 50% grain-related. So, they took the pricing action based upon how the book of business was done at the early part of -- end of 2010, early part of 2011. So, this is really the trade off of maintaining that pricing, and we'll sacrifice the volume. So I see that both in South America, and I see a piece of it in Asia-Pacific as well.

The other piece is that up until the end of the third quarter, the strong currencies, or the weak US dollar. And I will be specific with regards to Brazil. The strong Real was impacting and probably will continue until it clears the system in the fourth quarter, to impact our customer's ability to export. That is mostly in the confectionary line.

Thank you. That is really helpful. I will pass it on.

Thank you.

Thank you.

Our next question comes from David Driscoll with Citi.

Great, thanks a lot, everybody. Good morning.

Good morning.

Good morning.

Just a quick question, on the guidance itself in the press release, you basically say that you were just tightening the guidance or something like that. Somehow I think it's different than that. Was it not that the charges, the $0.32 number is higher. It used to be $0.25 and at the top end of the range as of last quarter, with something like $4.65 after we exclude all the various items.

If you do the reported number, we took up the bottom of the range. We did not adjust the top end of the range. You are absolutely correct on the adjusted. And part of what moved the adjusted was the fact that there was an increase in the integration costs, as you have pointed out.

Then that would suggest to me, if you can keep the other number the same, if the integration costs go higher, then really, there is a positive answer here regarding the underlying operations. If I have got that correct, can you describe simply what it is?

Sure. Absolutely. There is basically we are not changed at the -- what I am going to call the above the line. So, from the operation side of it, we are having a little bit better result due to mix on the tax rate, which is part of that. And the other was a little bit of lower operating expenses, while higher than this quarter, they are a little bit down from what I was expecting in the fourth quarter.

Interest expense, Cheryl. Can you talk about the numbers there? We were looking for something a fair amount higher. So, what is the sustainability of the new interest expense run rate?

Let's talk about the interest rate this quarter. We are down about $5 million from where I suspect everybody was forecasting based upon the guidance that the Company had given. What occurred in the fourth quarter is that we had a $5 million FX gain, which reduced the net interest expense. I do not expect that to occur in the fourth quarter with the larger operations. We do get some volatility from the movement in the exchange rates. So, for the fourth quarter, we would be back up to $18 million or $19 million. In the financing costs, I think that is a one-time issue as the currencies moved at the end of September.

But that $5 million was for the third quarter.

That was for the third quarter.

I appreciate that. I did understand, thank you. Final question for me is this foreign exchange issue and South American pricing. Cheryl, we have bone gone through this for years. Normally, and if my memory is right, I will make this a statement, but it's truly a question. In historic past, there was a number of quarters that would go by while the Company was recovering pricing to offset big foreign exchange devaluations. If the past is true, then it would suggest to me that Q4, Q1 have some foreign exchange headwinds that are not fully recovered by local pricing. Would you see this situation today the same way, or do you think the pricing would come faster or slower?

I think I see it the same way. I think with the high price of corn, and let's make the assumption that the corn stays around this level, that we don't see a lot of volatility as we go into 2012, I don't think we are going to see corn prices decline, but let's hope that they remain stable. Then, I think the historic pattern will occur here, and we will continue to reprice, not only for the corn prices but also for the FX.

Really appreciate those comments. Congratulations on the quarter, and nice job with the consistency here. Thank you.

(Operator Instructions). We will go next to Heather Jones with BB&T Capital Markets.

Good morning.

Good morning.

Very nice quarter.

Thank you.

On the interest expense, I want to make sure I understand this correctly. You were at $12.7 million this quarter. So we are essentially at $17.5 million quarterly run rate.

Yes, I will round it to $18 million.

Okay. And you would anticipate that to go down in 2012?

Yes, I would. Really why I would expect it to go down is that we have, when I look at the margin account and the increase in inventories, which is really the main driver behind the trade working capital change, I don't expect to see that type of investment in 2012. So, that is free cash flow or cash flow from operations for us to either pay down debt, go buy something or to buy back shares.

And what is your preference at this point, those three things you mentioned?

I always prefer to have growth opportunities. Our balance sheet is in good shape. From a bank covenant standpoint, we are at slightly below the two times debt to EBITDA. That says we are strong. We have good cash flow generation. So, I don't feel the need to pay down debt, but if there is no other choices from a growth standpoint, and the growth standpoint, acquisitions are easy to do on paper, harder to actually deliver value. And I think Ilene has raised the bar that the acquisitions have to be very positive for us to go down that path.

The other thing I would, it's Ilene, that of course, for use of cash, we see capital projects. Now that we are a bigger Company and on our way to being integrated, we see a lot more organic investment opportunities around the world, Asia, Europe, South America. Therefore, that has really been the priority on funding those projects that add capacity to areas where we can get value added for our customers. And, of course, what also supports that is our R&D effort to come up with product development. And we have got to make those products to get them to customers. That has really always been our first priority.

Your CapEx guidance, if I remember correctly, was 280 and now it's brought down. Is that a timing issue, or did you make a calculation that share repurchase was more accretive to shareholders than CapEx? Or if you could walk us through that.

Yes. This is Ilene, then I'll turn it to Cheryl. But it definitely was a timing issue. In other words, we have plans to spend the money. We are trying to do it in a very prudent, organized way. From a physical point of view, we have been a little bit slower in implementing and getting those projects built than we thought we had an appetite for. So it's really just a timing, and pushes some of that spending into the first quarter.

I would concur.

Unfortunately, one of the things that I think still is a focal point for investors as far as the CPO story is coproducts and the impact of those on your results. Going back to the 2008, 2009 change in earnings, I was wondering, Cheryl, if you could just explain, because I'm sure you would do a better job than me why this environment is different than 2008-2009 and we shouldn't expect that large a delta year on year. Because I think that is something that continually hangs up investors with this.

Okay. Let's go back to the fundamentals of 2008 where there was a shortage of oil to address a change in the marketplace, with regards to trans fat. Corn was relatively stable, but the value of corn oil tripled. So, it really was a one-time benefit to the 2008 numbers. And we pulled it out and drew it to everybody's attention.

Now let's fast forward to 2011. While oil feed and meal prices are up significantly on a year-to-date basis and even on a quarterly basis, the rate at which the co-products changed was not enough to cover the rate of change at the gross corn costs. So, hypothetically, if the gross corn costs went up by year-over-year 65%, all right, on a year-to-date basis, the value of the coproducts did not keep up with that change. That's why it's a different story in 2011, and we have said in the first quarter call and the second quarter call that incrementally on a total Company basis, we have not gotten a benefit. We haven't been hurt, but we haven't had a benefit either.

It's really a North American story as opposed to necessarily the rest of the world, where we do not get the benefit of coproducts. So, in the case of Asia-Pacific, our corn grinding is in Korea; that had no benefit. It actually had a hurt. But, again, to the total Company. That is not the driver. But there was no benefit in Asia-Pacific. Thailand is tapioca. If I go to South America, South America's rate of change far exceeded anybody else, as they had to reprice on a consistent basis, every 30 days, every 45 days. North America, again, 50% roughly, of the book of business is grain-related, so we get no benefit for that.

Last but not least is in order to manage the volatility in the North American firm price book of business, we are hedged somewhere between the 65% to 100% ratio. We never disclose what the Pacific-specific ratio is, but to the extent that you are trying to manage the volatility, you are going to be somewhere between those two. So you have to [buy] some gross corn. Does that help explain the difference, Heather?

It totally does. So you don't have an unusual gain; you are lapping.

No.

In 2012.

The fourth quarter, there market numbers, when you look at the fourth quarter coproducts as we lap last year, they started to increase. The amount of difference will decline, but that is all factored into our guidance.

Okay. And finally, are you -- Ilene, do you remain confident that because of tight utilization, the pricing umbrella from sugar, that you should be able to at least pass on all the net corn cost increase to at least maintain your dollar margins going into 2012 in the North American business?

Yes, I think given the tightness in the capacity, the tight capacity utilization and the demand capacities from Mexico, and as you said, in sugar, and the price difference, we are confident that we will be able to pass on corn costs. Of course we are in the middle of that right now. But we are confident we will be able to do that.

Okay. Thank you very much.

You're welcome.

We will go next to Morgan Stanley's Vincent Andrews.

Thank you. Good morning, everyone. I have a follow-up on the coparts question. I want to make sure I understand it. Cheryl, what you laid out, I get it. It was from a total Company perspective. But as we look at 2012, I want to make sure that I understand what you were suggesting which was that in 2011, the benefit, whatever it was, that you had in the US was offset largely by a loss or entirely by a loss on coproducts or negative variance on coproducts, particularly in Brazil in 2011. Is that correct?

No. When I look at the total Company, or I even look at it by region, all right, and I know, Vince, you like the recovery ratio. Our recovery ratios were not stronger in 2011. They were actually weaker, no matter where I looked, North America, South America, EMEA or Asia-Pacific. That's why on a total Company basis, there is no benefit.

I think that part of what you are looking for is how does the net corn cost -- if you had an increase in coproduct values, but your gross corn cost remains stable, you would have a lower net corn cost in 2012. How do you then adjust in your market pricing for that? And it's the opposite as if your gross corn goes up, and your coproducts go down, you have a higher rate of increase in your net corn costs. And what we look for is any change in the net corn costs to the covered plus in our negotiations, which go on each year in North America. I am not expecting any surprises in the 2012 numbers from coproducts, as we sit here today.

Okay. I'll leave it at that. The other question I had was just, and I apologize if you mentioned this, I dropped off the call for a moment. Did you give an outlook for where the full-year cash flow would come in or just go through what was happening with the working capital?

The working capital, I don't expect the working capital to improve significantly in the fourth quarter. Most of the working capital investment did occur in the first quarter of this year. There was a slight improvement in the second quarter, and the third quarter really the change is from the margin account, as it is now a $59 million investment, which is reflective of the positions that we have. So, I don't expect the investment in working capital to dramatically change as we go through the fourth quarter.

Okay. And then into next year, barring some change in the cost of inventory as a function of corn prices, we would expect to be running at a similar rate? Is that correct?

No, actually, if corn prices stay where they are, then I would expect the only increase in the working capital would be come from the increase in net sales.

Right, as volume moves and whatnot.

Yes, as volume moves.

Exactly. That's what I thought. Then lastly, I want to clarify. Cheryl, in your prepared remarks, you talked about softer demand in some of the regions. And then I think what Ilene clarified, I believe, was that you weren't talking about -- you were talking more about destocking rather than an underlying change in demand. Is that correct?

Well, I think it depends on what region. We are saying that it's not destocking, that it's just a little bit of a slow down in a couple of areas. As Cheryl mentioned in Brazil, we still see high demand for the food and for the brewery, but as an example, she mentioned confectionary was a little bit -- our customers, confectionary customers were a little bit slow, because they are not able to export because of the exchange rate. I don't know whether you call that a slow down in demand. It's not really destocking.

There were other areas where demand seems to be okay, but not as high as it was. As we said. Argentina is one of those areas where we have seen demand continue to be strong, as well as in Pakistan. You saw the North America growth was 2% this quarter.

Okay. Thanks very much. I will leave it there.

Thank you.

Next we will hear from Christine McCracken with Cleveland Research.

Good morning.

Good morning.

Just a couple of follow-up questions, first, I know you suggested that you would provide an update on the high fructose contracting here in the fourth quarter. It's still underway, but is there anyway to get a sense as to how much business really got done before prices -- corn prices fell so we could have a rough idea on pricing for next year as a percentage at the higher level?

That's not information that we really look at or give out. We are just in the middle of it. So, it's been continual since we mentioned that comment during the second quarter. There was a little bit of early contracting done then, but it continues now.

All right. And then just in Thailand, there has been some flooding lately. Is that anything that would impact your operations there?

It's Cheryl. What we are seeing with the flooding in Thailand is that it's the impact -- our plants are fine. We have three plants in Thailand. It's the impact of our customers because Bangkok is flooded. So it impacting the ability for local producers around the Bangkok area to get in and out of their facilities and run their production, which will impact us, which is factored into our fourth quarter guidance.

Is it material?

No, it's not material.

All right. Then on the pricing, they have done a good job as they always do in South America getting the pricing. I'm just curious if there is any specific areas -- you mentioned a little bit of weakness in the industrial side where they have had some resistance to pricing, or is it pretty much business as usual?

No, I think in the South American context, the industrial side, again, is some of the exporting relative to local production in Brazil. In Columbia there was an oversupply of bananas. There is not as much demand as they thought there would be, so there is a weakness in the corrugating there, as well.

Who knew? Bananas, another thing to watch. Thanks.

We will go next to Akshay Jagdale with KeyBanc.

Thank you. Congratulations on the quarter.

Thank you.

Thank you.

Cheryl, this one is for you. Actually, either one of you could answer this. But if I'm looking at the North American business, and I exclude what happened at the Argo, the $13 million costs from last quarter, we see a sequential decline in North American margins now for three straight quarters. Is that, just very simply put, net corn costs going up? And if that's the case, was that in line with your expectations?

The answer is yes and yes. As we laid out the year, we expected, and I think we may have made a comment both in the first quarter and the second quarter, is that it was very front-end loaded for North America. And, so, when I look at the absolute dollars, third quarter, we are basically flat for the legacy CPO business, and the increase is coming from the NS. And that is strictly a function of the layout of the corn costs.

That's helpful.

Year-over-year, the legacy CPO business in North America will be up.

Okay, and then in that context, if you look at next year, and I think of the comments you've made, and you said you are relatively positive. And Ilene also referred to a $5 EPS, which would talk to at least stabilizing, if not improving outlook. But why should -- so, if we are seeing a sequential decline in margins and percentage margins, and the expectation is that corn costs are going to go up again next year, is there any reason to believe that operating conditions above the line, as you call them, would actually improve? Like what would make you feel positive relative to, let's say, a $5 number or relative to the margin structure that you have in place today? And then what would make you feel a little more concerned about that? So, what are the positive factors that sequentially could drive your margins up from here, knowing what you know? And what are some of the major wild cards out there on the negative side as well?

Well, this is Ilene, I will make some comments, and Cheryl might add something. I think that certainly we are repricing all the contracts now in North America. And so, as I said earlier, we expect to pass on corn costs. And that we have a tight capacity utilization. But when I think about the overall numbers for next year, of course, and even the fourth quarter, we always talk about what is the up side, what is the downside? I think the demand factor is important here, because there is a little bit of nervousness globally around the economy, but I still see positive GDP growth in Brazil of closer to 4%. We have some strength in Argentina and even in North America. It's not that robust, but it's considered to be positive rather than negative. It's that type of demand that would increase what we see in terms of volume and certainly, hopefully on the margin side. And of course, the converse is true if we see some weakness.

Now, of course, as you look at the margins, you can't just look at the percent. It's really the margin dollars that we are driving, and, of course, the percent varies depending on the corn costs, which gets into the price and so you get the ratio. But I think what you need to think about is it's not so much the margin here. We are going to get our corn costs. It's really the demand side. And the consumer product companies, they are raising prices, and they have talked about this in many different places. They are trying to create value for consumers, and maybe it's a smaller pact or maybe it's a higher value. But, again, the consumers will pay more, and, so, therefore, what we think about is how will that affect demand? And we do have different types of consumers, and so the consumers will continue to buy food and beverage products, but, again, it really depends on how strong they feel about the environment.

It's actually a very good question relative to just reminding everyone that we do have an unusual pattern in the 2011 layout, with the first quarter being the strongest, the Argo maintenance in the second quarter, third quarter being sequentially down, and the fourth quarter. So, as we go into next year, those first quarter comps are going to be very difficult, because I wouldn't expect the same thing to occur. I would expect the normal distribution, which is corn costs do rise through the year, but I wouldn't expect the dramatic change that we had in the first quarter of 2011.

That's helpful. One last follow-up for Ilene on the demand side. Is your expectation for demand, which I hear you, it's positive, right, so it's up year over year because global GDP projections I guess are still showing positive numbers. But if I was to ask you what that demand outlook was six months ago, I'm assuming you are a little bit more cautious. Would that be a fair statement?

Yes, I think it would be fair to say cautious, a little bit more cautious. They revised the Brazilian numbers probably six months ago. So, again, they were much higher, but they are still robust. We have a couple of big sporting events coming in Brazil, and things began flow there very well. I think there is a little bit more cautiousness now than there was six months ago, but we still feel good about what we see going forward. And we have added capacity in anticipation of that.

Great, thank you. I will pass it along.

Thank you.

We will go next to Ann Gurkin with Davenport.

Good morning.

Good morning.

Congratulations on a great quarter.

Thank you.

I apologize I joined the call lately. So, have you talked about capital spending for 2012?

No, we haven't, but I wouldn't expect it to be significantly different than the level that we were expecting this year. So, somewhere between 280 and 320.

The fact that we are spending a little less this year than we thought won't bump the number up. Again, it's a timing issue and the flow of getting the projects done.

That's all I have left. Thank you very much.

Why don't we take one more call then, and we'll wrap up.

And that will be from Jeff Farmer with Jeffries & Company.

Good morning, everyone.

Good morning.

I just wanted to come back to pricing for a second. You've commented several times that you have been successful in quickly passing along the higher corn costs that you have seen in the US and internationally. I'm trying to reconcile that with some of the elasticity comments you made. You've made some demand destruction comments as well. As you get into 2012, especially outside of the US, do you think you are going to have the same amount of pricing power that you did in 2011?

The pricing power relative to --

Higher corn costs in particular?

Yes, absolutely.

You will.

Yes. That's our expectation.

Okay. So, again, coming back to the elasticity comments that you've seen a little bit more, again, sensitivity to higher prices. And then on the demand side, so, you think you are still in good shape in 2012 on that front?

Yes, we do. Based upon what we are seeing.

Okay. That's helpful. In terms of the -- you touched on this, but the coproduct recovery ratios, especially outside of the US, can you give us some sense of what you are seeing in South America in particular?

South America, the recovery ratios were down on a South American region basis versus a year ago. And so again, they are the ones taking the most hit relative to current corn costs.

Okay. And then final question from me, if you look at your volume comparisons, at least your organic volume comparisons in all four regions, much more favorable in 2012 than they were in 2011. A little bit of a tail wind there. But, how should I think about that more favorable backdrop as I'm looking to model 2012 volumes, keeping in consideration what you said about some of the demand head winds?

Well, we haven't said that much about demand in 2012. We feel overall, a positive outlook depending on where you look in the world. So, 2011, we feel good about the year. It's been a challenging year, and we have had a lot going on, but we feel good about going into 2012.

Okay. I'll leave it there. Thank you.

Thank you. So, this is Ilene. Just as a quick sign off, we are almost out of time here, I think that we believe to continue to see corn products as an outstanding investment. And we have a history of good EPS growth and a prudent risk management strategy. We have demonstrated financial discipline and strategic acumen with the acquisition of National Starch, so we are very happy about that. The acquisition provides additional avenues for portfolio and geographic growth that are highly complementary, and we talked a little bit about the R &D side of that. And we have proven to be return-focused and disciplined in our capital expenditures, which generates strong returns. These points all support our overriding goal of driving shareholder value over the long term. And I believe we are very well positioned to do so. That brings our third quarter 2011 earnings call to a close, and we would like to thank you again for your time today. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you all for joining.