Ingredion Inc (INGR) 2012 Q2 法說會逐字稿

Welcome to Ingredion Incorporated's second quarter 2012 earnings conference call. At this time all participants have been placed on a listen only mode until the question and answer portion of today's call. (Operator Instructions). This conference is being recorded. If you should have any objection, you may disconnect at this time. It is now my pleasure to turn the call over to Mr. Aaron Hoffman, Vice President of Investor Relations and Corporate Communications for Ingredion Incorporated. Thank you sir, you may begin.

Thanks Emily. Good morning to everyone on the call, and welcome to Ingredion's second quarter 2012 earrings call. Joining me on the call this morning are Ilene Gordon, our Chairman and CEO and Cheryl Beebe, our Chief Financial Officer. Our results were issued this morning in a press release that can be found on our website, ingredion.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 the forward-looking statements and Ingredion 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 Forms 10-Q and 8-K. With all that out of the way, I'm happy to 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. Ingredion delivered a very good quarter in the face of headwinds that include rising corn costs, foreign exchange evaluations and challenging macroeconomic conditions in a number of markets. In spite of this, we achieved a record level of quarterly sales and adjusted earnings per share. As you digest the results, you will see that we continue to take appropriate pricing action that allows us to generally cover higher input costs. We also continue to generate volume growth.

While the world is certainly a challenging place, we have repeatedly demonstrated that we have a business model that helps mitigate risk while capitalizing on growth opportunities. It has enabled us to reliably deliver our guidance over many years and allows us to maintain our 2012 guidance. As we have stressed, our business model is actually quite straightforward. We take a readily available raw material, for the most part corn and process it to add functionality and value for our customers who are primarily in the food, beverage and brewing industries.

At the same time, we manage risks quite well. Our North American business operates largely under annual contracts. Generally, about half of the contracts are firm price and backed up by hedges so we eliminate most of the input volatility. The other half are generally what we refer to as grain-related contracts. These contracts allow our customers to take the input price risk and thus remove it for us. The conclusion is that for more than 50% of our total Company, we have a formula for managing input price risks. Outside of North America, we have regular opportunities to adjust pricing to reflect market price movements with historically little lag or dislocation. At this time, we do not believe we will have issues with acquiring appropriate amounts of corn for our business this year or next.

Another headwind likely on your mind is foreign exchange rates. We expect our non-US operations to pass foreign exchange through in the form of pricing. We have a long history of successfully accomplishing this, though it usually takes three to six months to complete. Cheryl will talk a bit more about this shortly. In what can only be described as a challenging business environment, we are quite pleased that we not only delivered a strong quarter, but that we are in a position to maintain our adjusted EPS guidance for the year.

Finally, as you likely know and can see from our new press release and slide template, we have now officially changed our name to Ingredion. We continue to trade on the New York Stock Exchange, but under the ticker INGR. We fundamentally see this name as having a much better fit with our business model and our portfolio. As we don't raise or trade crops and we don't speculatively hedge or run for profit logistic operations, we are more properly defined as an ingredient company. Ingredion clearly conveys who we are.

Now let's take a look at the regional business performance in the quarter. Starting with North America, following a good first quarter, this region delivered strong results highlighted by further volume growth to a variety of industries, including beverage and brewing. We also grew operating income by 38%. It's important to remind you that in the second quarter of 2011 we successfully conducted a very significance maintenance project at our largest facility. The result was twofold. First, volumes were a little weak as we slowed our sales rate to accommodate the project. Second, the cost of the project impacted operating profit approximately $13 million. Even without the easier comparison, we still experienced good top and bottom line growth in our largest region.

Our South American business continues to face some challenges. Volumes are under pressure as various economies in the region are slowing. Currencies have devalued and inflation is increasing. In spite of these challenges, we are effectively managing through the volatility and held operating income in line with last year. This is exactly how we would expect a business model to address the situation. We remain focused on delivering dollar profits even if that costs us a bit of volume in the short term. While 2012 is clearly a more difficult year than we had originally anticipated for this region, we are managing the situation well and continue to be bullish about South America over the medium and long-term.

Turning to Asia Pacific, we delivered good volume growth in the quarter, though higher operating costs mitigated that benefit leaving operating income flat year over year. We are pleased to see volume growth in South Korea and Thailand, two of the region's key businesses. And finally, our Europe, Middle East, Africa region continues to face a variety of challenges that we highlighted since we first provided 2012 guidance in February. Volumes remain weak as the European economic crisis continues, and demand is soft in Pakistan as energy shortages impacted our customer's ability to run full schedules. The result, as we forecasted, is a decline in regional operating income.

As I turn the call over to Cheryl for a review of the results, I will reiterate that we remain confident in the full year guidance which is unchanged on an adjusted basis in spite of the challenges I've discussed. This is a testament to our strong business model, our risk management approach and the outstanding efforts of our employees around the world. Cheryl?

Thank you, Ilene, and again, good morning. The second quarter, as Ilene mentioned, is the best in the Company's history. It is reflective of the strength of the business model and the Company's risk management philosophy and execution. While no business model is immune to the economic ups and downs of the world, our business model is holding up well. As we have discussed in both the year end and first quarter calls, we expected a few headwinds this year and some tailwinds as well. Our forward looking guidance incorporated volume growth, increased pricing to cover higher year over year input costs and weakening foreign currencies. Since the first quarter call, we have seen a continued decline in currencies and most recently, a major spike in corn prices. We are not changing guidance as we move into the second half. The adjusted earnings per share range remains at $5 to $5.25. Given the economic climate and the volatility in the market, we are pleased to be able to maintain this outlook.

Moving to the second quarter, reported earnings per share were a $1.40. Included in this number is approximately $0.16 related to the reversal of a tax asset valuation allowance set up three years ago against our South Korean business. At that time we wrote down the goodwill of our Korean operations to reflect the change in the economics of that business. The write down was $119 million. We did not recognize the full tax benefit of that write down which is in line with the appropriate accounting rules. Following the same rules, we are now required to release the valuation allowance. Obviously, the tax rate for the year and the quarter are impacted by this. Without the valuation allowance and restructuring costs, we are estimating the annual effective tax rate to be between 31% and 33%.

We also announced a business restructuring related to our Kenyan operations. We are closing our plant in Eldoret and will move from a local production model to a distribution/trading model. After an extensive review of the business, we concluded that the ability to generate positive results with a local production model was not feasible. The major challenges were the volatility in raw material, sourcing and costs. Given the low barriers to entry, the ability to reprice for this volatility was becoming more and more challenging, hence the decision to restructure our approach. We estimate the total pretax cost to be between $22 million and $24 million. The charge this quarter is roughly $10 million pretax and covers primarily the write off of assets and some adjustments to the value of working capital. The after tax impact is $4 million and the EPS impact is $0.05. The remainder of the charges are expected to occur in the third and fourth quarters. Approximately 75% of the charge is non-cash.

Turning back to our financial overview, restructuring and impairment charges related to the National Starch acquisition in the second quarter were approximately $4 million pretax, $2.4 million after tax and worth about $0.03 per share this quarter. These charges are associated with the accelerated depreciation related to the continuing manufacturing optimization in North America that we have discussed previously. We have one more quarter to go on these charges. Of course, those of us who need numbers to balance, there is another $0.01 related to integration costs. The adjusted earnings per share reflecting the above mentioned items is $1.33 and is the highest adjusted quarterly earnings per share in our history. The other highlight for the quarter relates to the strong cash flow performance. We generated $289 million in cash flow from operations.

Moving to the income statement highlights, we generated $1.635 billion in revenues, up $50 million from a year ago or slightly over 3% growth. Gross profit dollars increased by $23 million to reach $295 million while the gross profit margin increased by 90 basis points to 18.1%. Reported operating income grew $18 million while the adjusted operating income was up $23 million. Again, the difference between these numbers is the $14 million in restructuring costs and $1 million for integration costs. Reported earnings per share rose $0.39, or 39% and adjusted earnings per share of $1.33 is up $0.23 per share or approximately 21%.

The $50 million increase in revenues for the quarter was the result of strong pricing actions totaling $80 million while volume growth contributed $42 million. The combination of these two more than offset the decline in revenues from weaker foreign currencies of $72 million. On a regional basis, North America lead the way with an 11% increase in net sales. The increase of $97 million was the result of strong pricing which contributed roughly $56 million and solid volume growth of 5%, or $47 million. The negative impact from currencies was $6 million. Again, as Ilene mentioned, last year's second quarter included Argo plant shut down. I would estimate that a couple percentage points of the volume are due to the weaker comparative quarter.

Moving on to South America, we see the impact of the significant devaluation of the Brazilian real, estimated at about 23% from the same quarter last year and about a 9% devaluation on the Argentine peso. Net sales declined roughly $41 million, or 11%. The foreign exchange impact was a negative $46 million. The impact from lower volumes was $9 million and positive pricing contributed $14 million. As we will see on the operating income slide, the foreign exchange and volume impact was basically muted due to high price mix and lower corn costs in the quarter. We are managing the foreign exchange headwinds with a combination of pricing and lower corn costs.

Asia Pacific was up 3%, or $7 million, driven by positive volume of $9 million and favorable pricing of $6 million more than offset the negative impact of $8 million from foreign exchange. Sales increased roughly $7 million.

EMEA's revenues declined $12 million due to the weaker euro and softening volumes, both a result of the current economic crisis in Europe. The euro declined about 11% from an average last year of $1 -- or $1.44 to the quarter of $1.27. Softer volume negatively impacted revenues by about $5 million and favorable price mix contributed a positive $4 million. On an operating income basis, North America was the driver. North America's operating income increased $27 million versus the year ago period. North America's performance was driven by strong pricing and volume. The pricing was enough to cover the year over increase in net corn costs, lower energy and manufacturing efficiencies also contributed to the good results.

South America is ably weathering the decline in economic activity and currency devaluations. Between pricing and lower corn costs, the region was able to basically offset the impact of currencies and increased manufacturing costs associated with higher energy and labor inflation. Asia Pacific is also holding its own. Pricing and volume were enough to cover higher manufacturing costs. EMEA, as anticipated, was not able to pass along the devaluation in the euro and their operating income is down $3 million.

Turning to the earnings per share bridge, we estimate that margin improvement contributed $0.25 and volume $0.03. This was more than enough to offset the negative $0.08 from foreign exchange. Below the line contribution was $0.03, $0.01 each from lower financing cost, tax rate and share count. We bought back approximately 300,000 shares this quarter and have 3.4 million shares remaining on our stock buyback reauthorization. Weighted average shares in the quarter were 77.9 million versus 78.6 last year.

On a year to date basis, revenues are up $165 million and gross profit increased $21 million. Reported operating income declined by $48 million while the adjusted OI was up $14 million. The variance was primarily a result of the income of $58 million from the NAFTA settlement in the year ago period and $4 million higher net acquisition restructuring costs. Reported earnings per share were $2.61, or $0.36 decline. On an adjusted basis, EPS was $2.59, an increase of $0.22 when accounting for the NAFTA settlement and change in net acquisition restructuring costs period over period.

Looking at the net sales variance for the six months ended June 30, revenue increased by $165 million, or 5%. The year to date performance follows the same pattern of strong pricing across the regions, volume growth in North America and Asia-Pacific offsetting weakness in South America and EMEA, along with foreign exchange. On a dollar basis, the price mix contributed $202 million. Volume added $58 million, which was more than enough to offset the negative currency impact of $95 million. Adjusting for one time items, adjusted operating income rose approximately $14 million. North America was up $26 million, South America down $4 million, Asia Pacific up $2 million and EMEA was down $6 million. Corporate expenses were up $4 million, restructuring impairment and integration costs amounted to $21 million. On a year to date basis, the change in adjusted earnings per share was $0.22. Changes from operations contributed $0.12 and non-operational contributed $0.10, largely from lower financing costs.

From a cash flow perspective, the year to date numbers look good. Cash from operations was $318 million, net income and depreciation and amortization generated $313 million. The margin account contributed $56 million and partially offset the increased working capital necessary to support higher sales. Capital expenditures are tracking at $128 million and we pay $33 million in dividends. The balance sheet remains strong.

Now, let's focus on the income statement guidance. Adjusting for the $0.29 of integration restructuring costs and the $0.16 discreet tax item this year, we are holding guidance at $5 to $5.25 per share. The guidance is based on continued pricing and volume performance in North America and Asia-Pacific. We expect to see a continuation of softer volumes in South America and EMEA. The guidance incorporates FX headwinds and the estimated annual tax rate, excluding discreet items, is expected to be in the range of 31% to 33%. Based on the business performance, we would expect to generate strong cash flow from operations to the tune of approximately $600 million and to spend between $275 million and $325 million on capital expenditures.

The regional outlooks remain fairly consistent with North America reflecting higher sales and operating income growth coming from pricing, volume and cost efficiencies. Volumes in South America are expected to be softer in the third quarter versus last year and then pick up in the fourth quarter. We expect operating income to be in line with the second half of last year as pricing actions offset higher input costs and foreign exchange headwinds. At the end of the day, volume will be the determinant of success for this region.

Asia Pacific is expected to show volume improvement versus last year lead by Thailand and South Korea. Operating income is expected to increase due to volume and pricing actions. EMEA is expected to show modest volume growth. Expected growth in Pakistan will help mitigate the decline in Europe. Foreign exchange will continue to be a headwind. Expect operating income to be in line with the first half of the year.

As we move through 2012 we expect to continue to manage the challenges of rising input costs and weakening foreign exchange rates with strong pricing actions and modest volume growth. There are a number of pluses and minuses, but we believe we have adequately captured them in the guidance range. With that, I will turn the call back to Ilene to wrap up.

Thanks, Cheryl. As I have done on previous calls, I will wrap up with our strategy blueprint which continues to guide our decision making and strategic choices, with an emphasis on value-added ingredients for our customers. The blueprint is a good reflection of our successful business model, which I detailed earlier. With a balanced geographic footprint and product portfolio along with prudent risk management, we have an enviable position which has lead to attractive reliable historical growth. And we see no reason to believe that we won't continue this year and beyond in spite of the turbulent world in which we operate. As both Cheryl and I noted, we are holding guidance in a tough business environment and feel very good about that. In sum, I believe that we are well positioned to deliver another good year while setting ourselves up for the future. And now we are glad to take your questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from Ken Zaslow. State your affiliation.

Good morning everyone, Bank of Montreal.

Good morning, Ken.

I get the question a lot from investors, and probably obvious given the recent environment, is how do you describe your ability to navigate the higher corn costs and be able to pass it on? Just not in terms of this quarter, but really 2013 and beyond?

Well, Ken, this is Ilene. Of course, we work with our customers in terms of the business environment, but we have always had a model where we pass those corn costs on to our customers. And in most cases they pass them on to the consumer and work through their own strategies. And of course, the brand owners are competing with the private label people so, there is always that challenge for them to figure that out. But for us, you know our business model and that as soon as we make a contract, we hedge immediately. So, it's certainly a challenging environment as we come up to next year, but we have seen the success of our customers creating value for the consumer, and our job is to create successful products for our customers.

I guess given that ability plus your CapEx spending, your mix shift opportunities, would you be surprised if you did not generate at least mid single, or high single growth into 2013, given your ability to pass on the corn costs. Or is there any sort of concern or caution that you would lay out there?

Ken, it's Cheryl. I would answer that two ways. 2013, it's really early to be thinking about a guidance range. I can look at the business model and say we have successfully dealt in the short term with higher input costs, specifically corn, currencies and volume ups and downs. And there is nothing that we see that says the business model changes. We would continue to expect in North America, because of high utilization, strong export demand, that we will -- our expectations would be to continue to price. And the same thing in the international markets. We haven't changed our long-term view of what drives the business, and that is the low double digit earnings per share growth of between 10% and 12%.

But it's fair to say that the recent move in corn doesn't change how you guys think about your business model. Is that fair?

It will make it more challenging, but this is an experienced business team and we have dealt with extreme volatility. 2007 to 2008 corn prices were running through the roof and then they dropped. When you look at our net sales variance, the reason that we are confident of the business model is that time and time again we have shown through the net sales variance analysis the ability to adjust for declining corn costs or rising corn costs. And again last year, we repriced $931 million as the exact number on the net sales variance 2011 versus 2010. We are confident in the business model's ability to deal with the challenges we are facing.

My last question is just, can you talk about what the outlook for Mexican? It seemed like Mexico and South Korea were exceedingly strong. Can you talk about your ability there, because those would be the businesses that would be more reliant on sugar pricing environment. Can you just talk about that, and then I will pass it on.

Yes, the Mexican GDP this year, in 2012, the forecast is about 3.9%, which is actually one of the best around the world. In fact, it's better than Brazil, which is at 2.5%. And even next year the number is at 3.6%. So, as you know, in Mexico we continue to serve that market, both with local production and with exporting from the US, and that we do have a focus on the brewing industry, as well as food processors and industrial. And so we continue to see opportunities in Mexico to grow, and we have the capacity to serve it. I don't know, Cheryl, if you have anything to you want to add?

I think, again, given the business model, what I would add to Ilene's comments is as we look at South Korea, we adjusted our asset base to be able to compete with sugar. We do hedge our book of business. So, even though corn prices have risen, we are hedged for the book of business that we have.

I really appreciate it.

Thanks, Ken.

Our next question comes from David Driscoll, state your affiliation.

David Driscoll from Citigroup.

Good morning, Dave.

How are you doing today? I really appreciate the -- taking the question, results look fantastic. A couple of questions Cheryl and Ilene, first one is on foreign exchange. Did you quantify what your new range is for the year? Is it still $0.17 to $0.20 negative impact from FX?

Actually Dave, I think it is going to be a little bit higher assuming that the basket of currencies stay where they are today. From when we did the first quarter call, we have seen some pretty significant movements in a number of the currencies. If I think about year to date, it's $0.11. If I were to hold those -- assuming that there was some revaluation in some of the currencies, then that would say about $0.22. I think it could be up to $0.26 or $0.27 for the year if currencies stay as weak as they are. And that is incorporated in the guidance of the $5 to $5.25.

Okay, on South America, you mentioned that volumes would be, I think you said constant or flat year-on-year for second half. I thought we had some new capacities coming online in South America, particularly in Brazil. I was hoping that you could maybe review what is coming online. How much volume does it actually add to the business? And then if volumes are flat, then that would suggest that there's offsets in the base business. If you could explain a little bit about what those offsets are?

This is Ilene, I will start out. Basically, the capacity that we announced, the first piece came on the end of last year, focused again on the brewing industry in the Northeast. And so I think, certainly as this year the economy has been slower than we anticipated, and -- but we have continued to perform and obviously are focused on the brewing industry as well as the food and industrial. Now, if you look at the second half of the year, in terms of the comparables, we feel that we can be certainly even with last year because the weakness was starting to happen by the fourth quarter. And if you look at the GDP forecast by the country, by the government now, the third quarter is supposed to be not that exciting but it firms up to 4% in the fourth quarter, which is actually incorporated in their total year for next year, GDP forecast of 4.6%. So, with the capacity that we have with the improving forecast of the economic situation, we certainly feel that we will have the capacity and the demand to fill it during the second half of the year. I don't know, Cheryl, is there any other color there?

Again, as Ilene said, when we hit the fourth quarter, we will have a weaker comparative, and so that's why we feel that the fourth quarter will be up. But I think we are going to be relatively flat in the third quarter versus last year, and Brazil just has not kicked in. The GDP in May was down to 0.5%. And so the impact of the global economic challenges is impacting Brazil a little bit harder than what we thought was going to happen. As Ilene said, we are still very confident in the business model in the medium to long-term and we have incorporated that weakness in our guidance range of the $5 to $5.25.

I appreciate the detail. On the US weather, obviously Ken was asking about the impact of corn and you mentioned it in your own script. But the weather has another impact. It's been remarkably hot. Remarkably hot generally is good for cold beverages. Can you talk about what you have seen in North America? And I would note July in particular versus May, June, July, July was remarkably deviant in terms of months as regards deviant from normal weather. Are you seeing an ongoing and significant improvement in beverage demand, i.e., high fructose corn syrup going into the beverage customers? And do you expect that to continue into the back half?

Yes, I think as you look at -- what we announced for Q2 and you look at the North American numbers, the strength of that volume growth certainly reflects more than just, as we said, the weak comparable from a year ago in that there is strength in the demand for high fructose and the beer industry in Mexico. We continue to see the soft drink demand increasing in the second quarter. It's early to have any July numbers, but we do see that strength, and that is what is reflected also in our second half, as Cheryl talked about those comments. We think the weather is certainly a positive from that point of view.

Okay, so let me pull it all together then. I feel like foreign exchange, Cheryl and Ilene, it looks like it's maybe worse by $0.07 max end. It looks like your South American volumes, I don't know that you've made any real changes here versus how you were looking at it. I think on the last quarter call you said South America was going to be a little bit weaker on volumes than maybe your January forecast had it. That feels reasonably consistent. US weather certainly looks like a positive. In the quarter you have a $0.10 beat versus the consensus estimates. Why not raise the 2012 numbers? You held the range constant, and it's a reasonably wide range. I think where a lot of questions will be is, number one, the range is very wide. And that number two, it actually feels like conditions are going very well for you and perhaps you could even have raised the guidance today.

We are pleased that we are holding our guidance when many others are really lowering it. And I think it's really the uncertainty in the economic environment that makes us hesitant to raise it. And again, when you looked at -- you were laying out the different headwinds, and certainly foreign exchange is one of them, we do have the weather on our side, but I think it's just the uncertainty in the global economy. And even going back to what Cheryl said about South America, the GDP forecast is to go up the fourth quarter. We have been hearing that for a while from those economic indicators in South America. And so maybe you would say we may or may not believe completely that 4% GDP growth in South America for the fourth quarter. Again, I think we are being cautious but prudent in really holding our guidance.

In other words, Dave, we haven't changed our stripes. It's still a conservative management team.

I appreciate that very much, and I appreciate even that comment, just to be reiterated here. Your stock has been phenomenally weak. I think the indication by the stock is that investors expected disaster here and everything that we looked at said that was absolutely not happening, that conditions were good. So, my comments are just almost simply to almost have you guys express just this absolute confidence in the business going forward, and I think you have and I appreciate it. I will pass it along. Thank you.

Thank you.

Our next question comes from Farha Aslam.

Stephens, Inc. Hi, good morning. Congratulations on a great quarter.

Thank you.

I just wanted to flesh out growth for next year. Have you had opportunities to discuss the high corn environment with clients? And how have they reacted to early pricing discussions, if you have had any? And going along with Dave's questions, could you highlight for us the CapEx investments that will come online over the next year that should help drive volumes for your business, excluding whatever would happen with the economy.

Sure. This is Cheryl. As we look at the corn market, there is a tremendous amount of volatility, which is driving the price. The million dollar question is, what is the state of the crop and what is the yield going to be? We do not do the farming so from our business model, the question is at the level of current corn prices, will we be able to pass those through when we redo our North American contracts? If I look at what the fundamentals of the market are, high capacity utilization, higher average selling prices have been achieved in order to cover higher corn costs in 2012, and so I don't expect that to change based upon the business model.

If I think about the impact to our customers, those who are doing grain related formulas, they may or may not have taken that risk off the table in their own hedging strategies. But again, back to the corn products, that's a pass-through. For the customers who like the certainty of knowing what their price is, I would expect that with volatility in the marketplace, they may wish to have conversations sooner rather than later, but that is on an individual customer by customer basis. And last but not least is when we look at what the cost of the sweeteners and starches are as a percentage of customers' cost of goods sold, it's relatively low. So, while there is a significant price increasing action that needs to happen if corn prices stay at these levels, again, because it's a relatively small percentage of our customers' cost of goods sold, we think we will be able to maintain our spreads. I wouldn't be looking for any spread enhancement at corn prices at these levels, but I would say that our marching orders are to cover the increase in net corn costs.

Relative to capital projects, we have a number that would -- we would expect both from a volume standpoint and from a cost savings standpoint to impact in 2013. We are bringing on our third plant in Pakistan, and that comes up in the fourth quarter. So, we would expect to see a positive volume growth. Not only in Pakistan, but exporting into the Middle East with that facility. We have made investments in Argentina. We have made investments in Brazil for volume growth in the core business around sweeteners, whether it be for the confectionary, the baking, the brewing industry, which we would expect to have a positive impact in 2013. And then we have a number of cost savings initiatives that really Columbia, North America, where we would expect to see some benefits on the manufacturing efficiencies. Last but not least, we have made two significant investments in the specialty starch line in Europe to support the NOVATION and Springboard areas. And so we would expect that to have a positive impact in 2013 as well.

Great, and my final question is really regarding your cash flow. It's quite strong. Could you share with us your priorities of uses of cash, whether it's to buy back dividends or what the M&A environment is for you?

Okay. Well certainly, as I've said before in our calls, always our first priority is to fund our organic growth that Cheryl just referred to and that continues to go well. At the same time, we are looking at bolt-ons, again, that would support our ingredient strategy and that, again, support making our customers more successful in having a variety of ingredients to supply to them. And so again, those bolt-ons are more on the smaller side as opposed to the larger acquisition, like a national starch. And so again, those bolt-ons are certainly a priority and we continue to look for those. But I've also said on calls that we understand as an ingredient company, we ought to be able to be looking at our dividend, and in fact, we've raised it twice in the past year or so and certainly, we are looking at that. I would say what we do is we can balance. We feel confident we can balance all three of those priorities and meet investor expectations.

Great, thank you very much.

You're welcome.

Thank you. Our next question comes from Heather Jones, please state your affiliation.

BB&T Capital Markets, good morning.

Good morning.

Very nice quarter.

Thank you.

First on North American volumes, if you look at some of the big soft drink, the big beverage purveyors, your volume numbers seem better than even what they are reporting. I was wondering if you could give us some sense of what is driving that? Are you gaining, not only growing with the GDP, but gaining new business wins? If you could just give us some color?

When certainly, you look at some of the numbers, I know Coke announced an increase of 1% for North America. Pepsi was pretty flat. I think some of the other players are also experiencing growth for North America for soft drinks. We continue to serve them very well in those regions. And of course, Cheryl did mention that a couple of our percentage growth year over year was certainly accounting for that maintenance project we had the year before. We continue to serve those customers very well, and again, their numbers aren't always captured the exact same way. But we continue to be very important to them.

Do you -- I know you don't have the maintenance project comparison in the back half, but adjusting for that, would you expect this type of growth to continue into the back half for North America?

I wouldn't expect it to be quite as robust. What we have said is that we would expect for the full year that we would be on the high side of our historical norms, and so you are talking several percentage points for the full year for North America. Second quarter, again, as we have talked in the past, the quarterly line ups are always a bit unusual. So, if we look at last quarter, North America did not have an increase in OI, and that was because the prior year we had the benefit of the lower priced inventory, even though full year we were fine. But it gets a little bit noisy quarter by quarter.

Second quarter this year is the comparison because we were managing the inventory through the Argo shut down for the steam pipe replacement. So, it makes the quarters a little bit difficult to track. Year over year, we tend to be much more in line, and we expect full year volume growth coming from the beverage industry, brewing industry and just better general growth through the rest of the food category. And that gives us a couple of percentage points, 2%, 3%.

Okay. When I go back to your Q4 call and you were talking about your outlook for 2012 and how the progression would be, it seems as if your first half came in meaningfully stronger and so -- mainly Q2 came in meaningfully stronger than you had originally anticipated. Was it the growth in North America, the volume of growth? Or what would you a tribute that to?

It was better growth their in North America and Asia-Pacific.

Okay, and then going back to the whole use of the cash question, frankly, your response to a question regarding the ability to price through in 2013 sounds fairly confident. To your point about the outlook for Brazil ramping up in 2013, it seems like while it's clearly a very challenging environment, but, you are confident in your ability to be able to navigate it and continue to grow your earnings. And so I guess you talk about bolt-on acquisitions and all, and you have raised your dividend, but the yield is still not that robust. And then I think about where your stock has traded at times, and I was wondering if you could respond to the question of what you are seeing out there that would be a better return than more aggressively buying your stock, given the weakness that we have seen in it. Particularly what the stock seems to be discounting in contrast to what you foresee?

Well, certainly we look at the business model in our long-term view, and we feel very confident in our business model. I was just having a bit of an echo here. So, I think that we see -- as you say, we are looking at next year. We are in the process, obviously, as everybody is, but again, we see some of the uncertain economic environment. We have a very strong experienced management team. Maybe a bit conservative, but we have done very well in navigating through the headwinds. And there are certainly, as everybody around us is looking at the same headwinds, we feel confident. At the same time, we want to be sure that we are contributing value to shareholders. And so that's why we feel very good about the organic growth that we are investigating in.

We are going to be very smart about bolt-on acquisitions and look at the best strategic fit. And at the same time, we appreciate the investor interest in dividends and how we use our long-term cash. We are balancing of that. And so again, the experienced management team and our strong business model make us feel very confident, but we want to make sure that we plan this out over the next couple of months so that we withstand all the headwinds in a very positive way.

So, your major push back, if somebody said, just asked you to give one major reason why you wouldn't hike your dividend more dramatically and/or institute a more aggressive share buyback would be just uncertainty or economic uncertainty in 2013? What would be your primary reason?

Heather, it's Cheryl. The primary reason for not buying back the stock, I think Ilene said that we are looking at continuing to make sure we have a dividend payout ratio that is more in line with the ingredient company. And so if you think about our dividend payout ratio, somewhere today it's 16%, 17%. The historical range has been 15% to 20%, and so I don't think it's unreasonable, based upon what has been said to get closer to the 20%.

With regards to the best use of cash as to, do you buy back stock because the value is down and the intrinsic value is significantly higher than what it's currently trading at, it becomes the question of, are we able to find bolt-on acquisitions which in the long-term would be a better investment than buying back the shares? And frankly, if we don't, if we don't find bolt-on acquisitions, then we are going to have to do something with that cash flow that we are generating. And I think again, based upon the conservative nature of the team, the belief in the business model is -- and the commitment to shareholder value is that we would make the right decision with that excess cash.

There is 3.4 million shares outstanding on the stock repurchase program. Pick a number, you want to do it at $50, you want to do it at $55, depending upon what the view is of where the value of the stock is at $60, $65, $70 based upon analysts' estimates. Then you can quickly do the math and say, alright, if you bought back 3.4 million shares, how much cash flow would you spend and what is the return on that? It really boils down to it is not a short-term issue that the stock took a hit, it's the long-term view is, are we better off in buying back the shares for the shareholders or continuing to look for acquisitions that will add long-term value? At this point, I would say it's more a question of timing than anything else.

Obviously, based upon our history, we are a conservative group. We look for acquisitions that will be a home run for our shareholders, AKA National Starch, and we are patient. But if the business continues to generate the positive cash flow that we are seeing, then we are going to have to come to grips in a short timeframe as to what is the better choice, hold off for the acquisition or buy back the shares? I hope that adds sufficient color.

That was very helpful. Thank you very much.

Thank you. Our next question comes from Tim Ramey. Please state your affiliation.

Good morning. It's D.A. Davidson.

Good morning, Tim.

I have to say, I was pleasantly surprised, maybe I'm just -- was too conservative on the North American operations in that normally -- I guess my bias was to think that when pricing is strong, you may not be able to -- it's a pass through environment. We may not be able to hang on to margins. And margins really performed very well, much better than I was expecting them to be up, based on the comp, but it was better. And it was really too early to maybe be attributable to some of the stuff. I think Ken might have been saying, the weather impact. Can you talk through why you think that was, or was I just too conservative?

Certainly, as we look at our business model, we planned it obviously last fall and early in the year as we worked with our customers in North America. And obviously, we've talked a little bit about, South America has been kind of lackluster and we have the Asia and then the Europe opportunities. I think the other piece, certainly as being an ingredient company, we are very much focused on our customers' needs in creating value for the customers with new products. And so we are formulating, and we have done well with our integration of National Starch. So, you don't want to say the whole thing is attributable, the margin improvement to growing specialty. I would say that's a piece of it.

But I think the other piece of it is when you look at North America and the volume growth, we ran very well in North America. In the Mexico, US and Canada. And so I think the combination of the strength of our volume and then running operational excellence through the facilities, as well as gearing up with our R&D efforts in our product development to try to grow our specialties and serve value. Whether it's the yogurt market or as Cheryl mentioned, the NOVATION product in terms of a clean label, those higher end products actually are doing okay. Certainly, when there is economic headwinds, you think there is a retreat to some of the basic products, but the higher end is actually also performing. Granted, they are smaller segments, so I would say the improvement in the margin was a combination of the throughput as well as some of the growth in specialty.

Got you. On the guidance, I actually was pleasantly surprised that you maintained guidance, given the huge move in currencies. Are you doing anything special to mitigate currency impact in the second half? Or is it just the operational strength that makes you feel comfortable that we can maintain?

Tim, it's Cheryl. It's the operational strength, it's the business model. And so again, we look for dollar returns. The ability to reprice, which we continue to see across the business. In South America especially, we will take some volume hit for that reprising. And in the case of South America where the two biggest currency moves have been the real and euro. And that is not to say that the Argentine peso hasn't declined and that the rest of the basket of currencies also hasn't devaluated. But the big movements are, again, the euro and real.

And so with the South American model, we have successfully demonstrated over time the ability to reprice. The lower corn costs as opposed to, say North America, in the second quarter helped with some of that pricing pressure. And Europe, as we have talked about, we cannot reprice. The issue with Europe is that we have local competitors and we import from our other affiliates to support the specialty business. We have done two things to help mitigate that. One on the transactional exposure, we do hedge for the European movement. And that is strictly the inter company so that there is pricing stability. We have a rolling 12 month hedge relative to that book of business. With regards to changing the business model, the investments that I talked about earlier, we continue to make investments locally so that we take it back more toward the local execution business model that we so well run on a global basis at Ingredion.

Great, thanks. It's impressive in the environment.

Thank you.

I think we will take one more question and then that will take us to the top of the hour and we will wrap up.

Thank you, sir. That question comes from Christine McCracken. Please state your affiliation.

Cleveland Research. Good morning.

Good morning.

Just real quick here, Ilene, you mentioned that you don't expect any issues with getting enough corn. I'm just curious, if for some reason they are -- these farmers don't deliver product or to the other side, the counter-party doesn't deliver, are their penalties to non-delivery? Has that ever been an issue?

It's never been an issue. And by having many locations around North America, with our regional model, as well as Canada, Mexico, US, we feel confident that we can procure what we need and our whole global footprint is also very helpful in this situation. That's why we feel confident we'll be able to get what we need in the next 18 months.

You think you will be importing South America corn, for example, into North American operations to -- if there is any kind of shortfall?

It's Cheryl. If this crop turned out to be a complete disaster and there was not enough availability, then I think given the fact that we have such a strong South American footprint, we would look to see whether or not we could import from either Brazil or Argentina.

But you haven't done that yet.

No, and it becomes a question of price. And so you've got to look at what the cost of bringing it in and the logistics behind it. I have no doubt that the team is sophisticated enough to be able to do it. We do move corn into Korea. We do move corn between the countries to support the various businesses. While that is not the basis of the model, we know how to do it. And so I think if there was really a disaster here in the United States, there would probably be perhaps some policy change with regards to food versus fuel. There would be perhaps be some policy changes with regard to importation of raw materials, and I think that, we would continue to manage through it. It really boils down to what is the cost going to be, and can you pass that cost through?

And that would be part of your conversations as you go into fall contracting, I would assume.

Absolutely.

And then just one last question. Because in drought stressed years sometimes we have issues with corn quality, is that -- does that become an issue for you in any way with aflatoxin levels? Or is that something, given your process, that is kind of a non-issue?

I think we have to wait and see, depending upon what the levels of aflatoxin may be. It's a bit too early to comment on what the implication would be until we know what those levels are.

Okay, I will leave it there. Thanks a lot.

You are welcome.

Actually, I think if we can take one more, and then we will wrap up with that, because I know we have a lot of people in the queue and we apologize as we reached the top of the hour with some competing calls that I know people want to jump on. So, let's take one more and wrap up there.

Thank you, sir. And that question will be from Akshay Jagdale. Please state your affiliation.

We might have lost --

Mr. Jagdale, your line is open, sir. Please check your mute button.

Let's -- we'll just go ahead and wrap up.

We may have lost some people.

Yes, we may have lost somebody there.

This is Ilene. I just want to say the Ingredion business model is performing very well and delivering strong results. In fact, the strength of the model becomes more obvious in these difficult times when many other companies struggle to weather various headwinds. We delivered a record quarter, and we believe we are positioned to achieve our full year guidance, and we look forward to posting you on our growth and success in the coming quarters. That brings our second quarter 2012 earnings call to a close. And again, we would like to thank you again for your time today. Thank you.

This does conclude today's conference. Thank you so much for joining. You may disconnect at this time.