Corn Products International Inc. Q3 2008 Earnings Conference Call Transcript

Oct.26.08 | About: Ingredion, Inc. (INGR)

Corn Products International, Inc (CPO) Q3 FY08 Earnings Call October 24, 2008 8:30 AM ET

Executives

David A. Prichard - VP of IR

Cheryl K. Beebe - VP and CFO

Samuel C. Scott, III - Chairman, President and CEO

Analysts

David Driscoll - Citi Investment Research

Vincent Andrews - Morgan Stanley

Ann Gurkin - Davenport & Company

Christine McCracken - Cleveland Research Company

Heather Jones - BB&T Capital Markets

Kenneth Zaslow - BMO Capital Markets

Christopher Bledsoe - Barclays Capital

Christina McGlone - Deutsche Bank

Operator

Good morning everyone and welcome to the Corn Products 2008 Third Quarter Earnings Call. This call is being recorded.

At this time I will turn the call over to the Director of Investor Relations, Mr. David Prichard. Please go ahead sir.

David A. Prichard - Vice President of Investor Relations

Thank you, operator and good morning to everyone. Welcome to Corn Products International's conference call to discuss our 2008 third quarter and nine-month financial results released earlier today.

I'm Dave Prichard, Vice President of Investor Relations for Corn Products International. Joining me today to lead the call as usual are Sam Scott, our Chairman, President and Chief Executive Officer; and Cheryl Beebe, our Vice President and Chief Financial Officer.

Now this is an open conference call simultaneously broadcast on our website at www.cornproducts.com. The charts for our presentation this morning can be viewed and downloaded from our website, and they are always available about 60 minutes ahead of our conference call. Those of you using the website broadcast mode for this conference call are in listen-only mode.

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

Now I have just shifted to chart two, which is our agenda. Cheryl Beebe will present the financials for the third quarter and nine months with appropriate analysis and flavor, and then briefly review our 2008 outlook. Following that, Sam Scott will comment on our company's business model success to-date and product expansion activities before we move to your questions.

I've now gone to chart 3, which is our forward-looking statement. Our comments, within this presentation, may contain forward-looking statements.

Actual results could differ materially from those predicted in those forward-looking statements and Corn Products International is under no obligation to update them in the future as or if circumstances change.

Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call, or in this morning's earnings press release, can be found in the company's most recently filed Annual Report on Form 10-K and reports on forms 10-Q and 8-K.

Finally, statistical and financial information and reconciliations of non-GAAP numbers from this presentation are also available on our website at www.cornproducts.com. And as you will see, they are included as an appendix to this morning's slide presentations.

With that, I am now pleased to turn the conference call over to our Vice President and Chief Financial Officer, Cheryl Beebe. Cheryl?

Cheryl K. Beebe - Vice President and Chief Financial Officer

Thank you, Dave. Good morning everyone. Before I go directly to the charts, I would like to add a little color to the quarter. As you can see from the press release, the numbers this quarter were quite strong, better than what we had been expecting for the third quarter. To reflect this performance, we have raised full year guidance by $0.25.

The better than expected results came from a combination of better prices/mix and stronger foreign currencies. We would not expect to have a repeat of this performance going forward into the fourth quarter. The implied fourth quarter earnings per share guidance is between 50 and $0.70 and reflects our fourth quarter expectations of higher growth corn costs, lowered co-products values and volatile currencies. With the revised guidance, we would expect to deliver another record year.

Now on to the charts. I', starting with the summary income statement for the quarter ended September 30, 2008. Net sales are up 24%, representing an increase of $207 million. Gross profit increased to 44% or 62 million. Gross corn costs were up almost 30%. The stronger co-product pricing significantly offset this increase.

Total energy costs were up about 9%. Gross profit margins expanded from 16.2% to 18.8% representing a 260 basis point improvement. Operating expenses were up 8% or $5 million. As a percent of net sales, operating expenses declined to 6.2% from 7% last year. Included in other income this quarter are two items, an insurance recovery of 4 million and a $3 million gain from a land sale.

Net financing costs at $10 million remained basically unchanged from a year ago. Weighted average borrowing costs were up about $1.3 million versus last year. Average debt outstanding for the quarter versus last year was up about $22 million. The effective tax rate for the quarter was 34.9% versus 33.1% last year and reflects the changes in operating mix and one-time discreet items.

Net income increased 72% or 37 million from last year. Weighted average shares outstanding in the quarter were 76.3 million shares, down slightly from 77 million last year. Diluted earnings per share increased 74% to $1.15 from $0.66 last year.

Turning to chart 6, net sales by geographic segment; we see all three regions contributed to the net sales increase of 24%. North America's net sales increased 22%, South America increased 33% and Asia/Africa was up 13%.

North America contributed about 118 million out of the total company's net sales increase of 207 million or about 57%. South America contributed 75 million or 36% of the increase and Asia/Africa contributed about 14 million or 7%.

Turning to the next chart 7, we can see the net sales increase of 22% or 118 million in North America was driven by strong price mix. On a dollar basis, this represents about $123 million. Volume was down 1% or about $5 million, and the impact from currencies was negligible.

South America's net sales increased of 75 million or 33% was led by strong positive price mix of roughly 45 million followed by stronger currencies of about 27 million and volume was up slightly.

Asia/Africa's net sales increase of 14 million was also favorably impacted by strong positive price mix, which represented about 35 million in net sales. This performance was offset by weaker currencies for about 16 million and lower volumes for about 5 million.

On to operating income, chart 8. North America's operating income increased 80%, or $47 million; South America up 68% or 18 million; Asia/Africa up about 1%.

Corporate expenses are up 5 million to $11 million and primarily reflect the impact of stronger currencies as well as higher variable compensation costs.

The next chart is the estimated source of the diluted earnings per share for the quarter. Changes from operations contributed $0.52; $0.50 from margins, $0.02 from stronger foreign currency values. Non-operating changes reflect negative $0.03 for the higher effective tax rate and a penny for the lower share count, offset by the negative penny for higher minority interest.

Moving on to the nine-month results with chart 10, we see net sales at 3 billion, up 22% or 548 million from last year. Gross profit margins are up 70 basis points, while gross profit dollars are up 27% or $121 million.

Operating expenses are up 13% or 24 million. Operating income grew 39% or $104 million from last year. Financing costs are down 27% or roughly $9 million, reflecting lower borrowing costs and a foreign exchange gain of approximately $6 million.

The estimated effective tax rate for the year is 34.5% versus 33.3% last year. Net income is up 46% to $221 million or an increase of $69 million. Average shares outstanding for the nine months ended September 30th was $76 million versus $76.7 million last year. Diluted earnings per share for the nine months is $2.90, up 46% from last year's $1.98.

Chart 11 highlights the cash flows for the nine months ended September 30th. Cash provided by operating activities is 16 million and reflects the change in working capital of $293 million.

The working capital increase reflects the decrease in the margin accounts and the higher receivable and inventory values. While we expect receivable and inventory values to decline in the fourth quarter, we are not expecting the margin account to change.

Our futures positions are reflective of our books business and are similar to the number of contracts held at December 31. The change in the margin account is reflective of the dramatic drop in foreign market prices.

Year-to-date, we have spent 160 million on capital projects, and would expect the full year spending to be between 200 and $250 million. Dividends paid equaled 31 million.

Chart 12 shows the key metrics for the period ended September 30th. Debt to capitalization remains conservative at 29.4%. Debt to EBITDA on a trailing 12 month basis remains strong at 1.2 times.

Operating working capital is 482 million or 12.2% of net sales and reflects the change in the margin account receivables and inventories. Net debt at 612 million reflects the increase in debt to fund working capital. Total debt at September 30th was 728 million and cash was 116 million.

I will end the presentation with a few comments on the 2008 outlook. With the raised guidance, we expect EPS growth for 2008 versus 2007 to be in the range of 31% to 39%. Net sales should reach 4 billion and our return on capital employed should exceed our target of 8.5%.

This should be the third consecutive year of growth in net sales, gross profit, operating income, net income and earnings per share. Our business model has consistently performed well in these challenging years.

With that, I will turn the call over to Sam.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thanks, Cheryl and good morning to all. Now turning to chart 14, our strong third quarter results and our outlook for our best year ever in 2008 after two consecutive record years in 2006 and 2007 reinforces the strength of our business model and for competencies in what continues to be an unprecedented global environment of volatile commodity costs and more recently economic uncertainty and softness.

Managing through the risk on high corn costs is the constant focus at our company. As most of you know, we address commodity risks on an individual country basis using a combination of risk management procedures. In North America, principally the U.S. and Canada, we have both firm price and grain related contracts that are covered by our hedging policies. We also have a mix of annual and multi-year contracts.

As we have previously told you in the past few years, we have shifted a meaningful portion of our U.S. and Canadian book of business to some form of grain related contracts where the customers bear the corn risk.

In addition, tight corn refining utilization rates in North America have been and remain important to the success of our business model. We continue to believe corn refining utilization rates today remain relatively high, providing a good environment for negotiating new contracts which we are doing right now for 2009. There is also no new capacity coming on in the North American market.

Internationally and primarily in South America, our market positions have so far enabled us to pass through increase corn cost in reasonable periods of time. In contrast to the U.S. and the Canadian market, South America is a spot or for short-term market. So we are pleased to have been able to navigate this changing and challenging global marketplace with discipline and much success to-date as our results indicate.

Lastly, we continue to invest to diversify our product offering around the world, adding higher valued ingredients and selling existing products to new markets to broaden the base of our business. We believe this will help long-term for the performance of our business as well.

Let me close by asking and answering the question that is on the minds of many. What about the Bunge merger? I personally continue to believe in the strategic rationale of the merger. Our position is set forth in the press release. We are disappointed in the performance of the stock prices of two companies, and we will continue to monitor the situation closely. Beyond that, I will have no further comments about the merger at this time.

And with that, I would say thank you and we are prepared to take your questions. Operator?

Question And Answer

Operator

Thank you. [Operator Instructions]. We'll take our first question from David Driscoll from Citi Investment Research.

David Driscoll - Citi Investment Research

Thank you. Good morning everyone.

Cheryl K. Beebe - Vice President and Chief Financial Officer

Good morning, David.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Hey Dave. How you are doing?

David Driscoll - Citi Investment Research

Well, fantastic results, certainly you probably could have done it on a better day. It looks like we are going to open limit down. So --

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

And I don't know what the limit is?

David Driscoll - Citi Investment Research

Those limit keep changing, don't they?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Yes.

David Driscoll - Citi Investment Research

Question here regarding the 2008 performance. Certainly when we take up a big picture to look over the last several years of the company's earnings per share, it has improved just dramatically and this year has been nothing short of exceptional. Can you quantify for us just the ballpark, what is the contribution of co-product values that are in excess of historical relationships? So to be super specific here, Sam, we all know that you contracted... buy your corn and I'd say at the beginning of the year and then if co-product values rise substantially in excess of what was in your model, do you see a positive variance.

Yes, I believe this year was one of the most exceptional years in the history of the market on that particular topic. But what 'd to hear from you is just some sense of what the actual magnitude is, so that those of us on the outside can make some intelligent assessments as to what '09 might look like?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Dave, I'll tell you what's significant. I'm not going to tell you what the exact number was but we did indicate that there was a fairly significant change in our guidance. It was reflecting to a great extent the co-product credits that we got along the currency. So, you can figure it somewhere as part of that 25 to $0.30 we talked about.

Obviously, you know and all of you on the phone are aware that most of it was from oil. The feed prices remain relatively constant, meal prices had been strong prior to when we had forecast that. The oil went up was the thing that we could not forecast to the extent that it went up and as you know it's coming back down. So it was significant but I can't give you an exact number.

David Driscoll - Citi Investment Research

Can you give... go ahead please.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Hello?

David Driscoll - Citi Investment Research

Sorry, I thought you were saying something.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

No, no, no.

David Driscoll - Citi Investment Research

Can you give us a little bit of comment on why Brazil was so strong in the quarter?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

The Brazil price mix was good. We had co-products credits there. We had strong pricing in Brazil. We had a good relationship on overall corn and the currency helped us out a bit in Brazil.

But that's basically... and we had some specialty products that came on. You've heard us talk on the last, I guess it's been four years now. We've been talking about investing in specialties in Brazil. We did the Polyols acquisition in Brazil. We are expanding that. Our channels have come on stream further. Our expansion in Balsa Nova has come on stream with specialties. So it's been a combination of a number of things down in the Brazilian and South American market that have worked well for us.

David Driscoll - Citi Investment Research

Was any part of the out performance in Brazil related to problems in the tapioca market?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

No.

David Driscoll - Citi Investment Research

Okay. Final question. I know you said you didn't want to answer this. But, your stock is trading over the deal price. Certainly with Brazil today it's hard to imagine a Corn Products holder here who wants to be tied to Bunge stock which has seen such pressures. So, your performance is testament to how well you and your management team have done. But of course your stock is not going to get rewarded for it.

Sam, is there... what's the reason why you don't want to make any comments here or I guess, I feel like the folks out there are really fairly desperate to hear some understanding as to why the stock has gone down this far and really what Corn Products management believes that should be done. It seems to me that there is a lot of shareholder value that's locked up in this thing, and that's not being reflected in the current stock price?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

David, I appreciate the comments and the praise. That sounds really good. But I will not comment further on it. As I said earlier, as you know, we're in a point in time right now where we have to be quiet on what we're doing and we will be. But the press release stated our position and that's about as far as I'm going to go.

David Driscoll - Citi Investment Research

Okay. Thank you very much. Great job.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you.

Unidentified Company Representative

Thanks.

Operator

My next question comes from Vincent Andrews from Morgan Stanley.

Vincent Andrews - Morgan Stanley

Good morning everybody.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Hey Vincent.

Unidentified Company Representative

Good morning Vince.

Vincent Andrews - Morgan Stanley

I was just wondering if you could just remind us. There is a lot going on the foreign exchange markets and you guys obviously have assets in various places outside of the U.S., but if you could just, as we think about on a go forward basis and what's in your guidance, how should foreign exchange affect you assuming rates stay where they are over the next 12 months?

Cheryl K. Beebe - Vice President and Chief Financial Officer

On a translation basis Vincent our sales will come down as well our expenses. In the South American market, we've said the business model is typically to price for the recovery of devaluation. It shows up in the price mix line and it takes anywhere from one to three to several months to recapture that.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Historically Vincent, we've said that it takes us a while to get it back and we also say that if it devalues we tend to see export capabilities pickup. So, we normally would have a period of time for re-pricing and a period of time for adjustment on volumes so that the country that's devalued can start to be... not only us but our customer's starting to export out of the developing world. And that has typically been the case throughout South America and also is been the case in some of the smaller markets in which we deal in Asia.

Vincent Andrews - Morgan Stanley

Okay. And then my other question would be, can you just put some sense of, you've done a number of small acquisitions for the last several years and you've been putting an incremental CapEx on for growth projects. Can you give us a sense of how much that's contributing to results this year?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

As I said, certainly in the Brazilian marketplace it's had an impact. I won't give you a specific number on it, but the, the Polyols operation in North America has being integrated and its starting to bear fruit for us. We are seeing the growth in our nutrition... health and nutrition business. It's coming along very nicely.

All of these things, Vincent, are still relatively small in the scale of things but they would be the foundation we were laying, and are continuing to lay for the growth of the business in the future.

Vincent Andrews - Morgan Stanley

But they are clearly contributing. You got very nice operating margin gains and my sense would be that was at least a contributor to that. Is that fair?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

It's more a contributor. Obviously, the gains that we got, when you look at the size of our business that is on the specialty and higher valued ingredients side, its small by comparison. So it was part of, but we also got the margin gains as a result of the base business performing well.

Vincent Andrews - Morgan Stanley

Of Course.

Cheryl K. Beebe - Vice President and Chief Financial Officer

And Vincent, just what is in the public arena is when we announced the Peruvian [ph] acquisition and Polyols acquisition, the combination was about 100 million in net sales.

Vincent Andrews - Morgan Stanley

Okay. I'll leave it there. Thanks so much.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Ann Gurkin with Davenport & Company.

Ann Gurkin - Davenport & Company

Good morning.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Good morning, Ann.

Cheryl K. Beebe - Vice President and Chief Financial Officer

Good morning, Ann.

Ann Gurkin - Davenport & Company

I want to start North America, you've seen tremendous improvement in you margins and is that a level that could be sustainable as you look our into '09 or what are the risks to that maintaining that margin level?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well, I think we... I think Cheryl said in her comments and as we see, we saw a spike in co-products, it was unusual in the third quarter and we probably reflected it in our guidance for the fourth quarter, we expect it to come down.

Right now it is very difficult to forecast anything for fourth quarter for next year. We would not do it at this time anyway but with the volatility in the marketplace today and currencies and commodities, I try to explain that the business model works for us and we believe that is the appropriate.

We believe utilizations are still in good shape in North America. Corn numbers have been all over the place in contracting; will come when it comes as you know we book our corn contracts. So I cannot forecast where we are right now. But we have seen improving margins on North America and we expect to see North America perform well going forward.

Ann Gurkin - Davenport & Company

Okay. And Sam, I think you mentioned you all are currently negotiating contracts. In the past couple of years, I believe, lots of those contracts have been finalized earlier than maybe historic levels. Do you have any anticipation as to when or what percentage of your business will be contracted in the October-November timeframe this year versus last year?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Not on a percentage basis, Ann. I think what we've said is that is going earlier. We've been doing it. For the last couple of years, we've been finished before year end and this year I'd expect the same thing would be the case. But on a percentage basis by month, I can't give you the indication on that.

Ann Gurkin - Davenport & Company

Okay. And then can I get an outlook for South Korea?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

South Korea as we said in the press release was off a bit. As we've stated I think the last call, we're going through introducing non-GMO corn or GMO corn into South Korea and we're pushing that into the marketplace. The market is slowing receiving it.

So we expect it to take a little longer than we've thought. But once that's in, we have a better corn cost position in South Korea and we expected it to... as we said before, we do expect that business to come back. Perhaps not to the levels it was in the past, not even perhaps. We had Korea was one of our highest performing businesses a while long back but we do think it can come back stronger than it's been in the last couple of years.

Ann Gurkin - Davenport & Company

So you're not concerned that the economy might weaken right now given what's going on?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

We're all concerned about economies weakening every place. So it's not only South Korea but certainly as I think South Korea, just like every place else in the world has to get through this mess we're in right now, then we'll come back.

Ann Gurkin - Davenport & Company

Okay. And then as you look into '09, is there any reason you all cannot grow earnings in '09 versus '08? Can you comment on that?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

There are probably a lot of reasons why we could not but I'm not saying we won't. I think that with the volatility that's out there right now, we have a number of issues facing us. But I was trying to describe as I said in the model, we believe that our model represents a strong business model going forward. And we will continue to execute on that model.

Ann Gurkin - Davenport & Company

Great. That's great. Thank you very much.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you.

Cheryl K. Beebe - Vice President and Chief Financial Officer

Thank you.

Operator

Next we will hear from Christine McCracken from Cleveland Research Company.

Christine McCracken - Cleveland Research Company

Good morning.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Good early morning, Christine.

Christine McCracken - Cleveland Research Company

Just a question on your Mexican business. With the dollar where it is, my expectation would be that U.S. forecast [ph] isn't exactly flying into Mexico. Is that a fair assumption and to what degree has that benefited your Mexican operations?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I don't know that it's a fair assumption Christine. I think that obviously it could have an impact, which will be mutual to us in Mexico because obviously we've been selling what we could produce down there before, and we have market dynamics that affect the pricing scenario down there.

So I think that we still see product flowing into Mexico. It may not be as much as it's been in past and what we don't know yet. We're not far off along in the contracting to say that. But I think we will be okay in Mexico as a result of what's going on there.

Christine McCracken - Cleveland Research Company

Okay. And then just in terms of Argentina. There's obviously been pretty significant disruption in those markets here lately. I'm wondering if you talk to your group in the region to see what their thoughts are on that overall market and the potential and ramifications for your South American business.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well the Argentine business has been performing well. And as we've stated, the entire South American business has been performing well. As it turns out, I'll be seeing them over the weekend and we'll get our first hand update.

But I can guarantee you if there any problems of any nature at all, I would have had a call by now. We see Argentina doing fine and its business as we've said before we have we put money into invest and expand, we see the expansion coming on and doing well. And the business has performed well for us throughout the course of the last couple of years and we expect it to continue.

Christine McCracken - Cleveland Research Company

And with the drought affecting that the corn expectations there. Is that a concern at all or --

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Not at the moment. Obviously depending upon how severe it gets, it could cause prices to go up somewhat. But we're not seeing anything that is significant right now.

Christine McCracken - Cleveland Research Company

Okay. I'll leave it there. Thanks.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you.

Operator

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

Heather Jones - BB&T Capital Markets

Good morning and great quarter.

Cheryl K. Beebe - Vice President and Chief Financial Officer

Good morning, Heather.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Good morning, Heather. How are you?

Heather Jones - BB&T Capital Markets

Good. I have some questions about the international markets. I understand the idea that you price locally to recover devaluation of currencies and it should ultimately help to export to those markets. But I was concerned about the quickness with which the currencies have deteriorated and I would presume that any near terms disruptions from that, I assume that's in your Q4 guidance?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

That's correct, yes.

Heather Jones - BB&T Capital Markets

Okay. And how much... as far as you guidance goes, what kind of timeline are you all assuming for recovering that in local price?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well, what we've said historically, Heather, is that it takes about three months, three to six months for a recovery and I mean, we've seen the devaluation, and this one has been relatively sharp, but it's still been over period of time. We've seen devaluations that hit us in a day,

And it takes typically about the three to six month timeframe to get it through. I think that the volatility right now, we don't know where its going to end up. I've watched it in a day move up and down, the Riyal has gone from 220 to 255 in a day, and back down to 220 the next day.

So, this has to settle out before we can really make a move and I don't know that that settling out will be a week or a couple... I don't think it will be a week, a couple of months or whatever. But historically, we've been able to move it through and we believe we will be able to do the same thing this time.

Heather Jones - BB&T Capital Markets

And I noted that your products in these countries tend to be fairly defensive but still given the severity of what's going on, have you seen any, in October and even in the last week or so, have you all seen any change in consumption trends in these markets?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well, we wouldn't be anything that would be indicative of anything, Heather. Our volumes could go out in any kind of timeframe. As we've said for the quarter, our volumes in South America, in particular were up slightly and it was slightly but they were up. We have not seen anything dramatic any place that we can speak of right now, no.

Heather Jones - BB&T Capital Markets

And was the U.S.... the North American volume down 1%, was the U.S. worse than that?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I don't... I think basically, we'll just leave it at the overall volumes there. One thing that I will comment on historically in tough times the products that we supply to our customers are products, our customers products are pretty much in demand. People stay home; they eat more, drink more and do everything else.

So we are not forecasting a fall off as a result of the economy right now, I could be wrong on that but historically it's not been the case and what we're seeing right now is that things are all holding up reasonably well, at least through the third quarter.

Heather Jones - BB&T Capital Markets

Okay, I have a couple of more questions on Pakistan. I mean that economy seems like it's in weakened all year but it's getting worse. What are you all seeing and thinking there?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Our business there is performing well. I mean, again, we're in basic fundamental products that people need. We sell to the textile industry. We sell to the food industry. The economy although it's having some problems right now is up significantly from where it was four or five years ago and the people have grown accustomed to using these products and they are using them.

So we expect that business to continue to perform. As we said we're building a third plant there. That plant is moving forward and with our expectation, it will be up on the prescribed timeframe and to supply products that are needed in the market and export it out of the country into the region.

Heather Jones - BB&T Capital Markets

Can you give us rough idea, what percentage of your products there are for domestic consumptions versus exports.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

In Pakistan?... most of it its domestic led by start away [ph].

Heather Jones - BB&T Capital Markets

Okay. And I'm not going to ask for a opinion on the merger, what I have a technical question. Given that the vote date was pushed out, has the shareholder of record date been pushed out?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

We have not said that yet.

Heather Jones - BB&T Capital Markets

Okay. All right. Thank you very much and congratulations again.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you,

David A. Prichard - Vice President of Investor Relations

Thanks, Heather.

Operator

Our next question comes from Ken Zaslow from BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets

Hey, good morning everyone.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Good morning, Kenny. How you're doing?

Kenneth Zaslow - BMO Capital Markets

Hanging in there.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Yes. That's about the half of the world is.

Kenneth Zaslow - BMO Capital Markets

At current net corn costs, what type of high proof [ph] of doe corn pricing do you need to get to just maintain margins per volume, I guess. Because, I think you like to talk about a margin per volume rather than margins.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Right.

Kenneth Zaslow - BMO Capital Markets

How you're looking at that?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well since I've never answered that question before. I don't know that I'm going to answer it right now. I guess what I'm going to say is that the market is such that there is room for prices to be passed through, that would accommodate the costs and some more. And the issue now as we go through the negotiations, do we get those numbers.

Kenneth Zaslow - BMO Capital Markets

Okay. One of your public competitors was the Initials ADM.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Who could that be?

Kenneth Zaslow - BMO Capital Markets

What?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I said who could that be?

Kenneth Zaslow - BMO Capital Markets

They imply that there is a high likelihood that pricing will still be up in 2009. Is that your judgment as well?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I hope so.

Kenneth Zaslow - BMO Capital Markets

Okay.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I believe they will but that's what... I hope for that all the time Ken, as long as it relates to my product being sold to my customers.

Kenneth Zaslow - BMO Capital Markets

Okay. And I guess, how does the price of high fructose corn have compared to sugar at this point and has its spread widened?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well, the sugar prices in the U.S. you are talking about?

Kenneth Zaslow - BMO Capital Markets

Yes.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Sugar prices in the U.S. are pretty high and there's plenty of room.

Kenneth Zaslow - BMO Capital Markets

Okay. And then I guess my last question would be, how is your search for a new CEO going?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I don't... I think we said we put it on hold as we went through the merger and that's all I can comment on really.

Kenneth Zaslow - BMO Capital Markets

Okay. Thank you very much.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thanks Kenny.

Operator

And next we have a follow-up from David Driscoll from Citi Investment Research.

David Driscoll - Citi Investment Research

Great. Thank you. Cheryl, this question is I think you said this in your prepared comments, but can you go back over the working capital issues and the cash flow issues, and what you would expect to happen over the next couple of quarters in terms of just... the debt rose because the working capital rose because of these margin issues on the corn. Does that stay with us permanently or do we get it back at some point in time?

Cheryl K. Beebe - Vice President and Chief Financial Officer

It depends upon where the corn prices go. I mean if we look at December of '07, what I did make the comment on, and let me se if I can wind this up so it's intelligent. It's always at a point in time. So its way is where is your book of business and the contracts that you have and the future to support that book of business.

So, you got your portfolio futures 1231... 930, 1231 doesn't make much difference. It's where the price goes at those quarter end points in time. So, if we look at last year, we actually had a fairly substantial inflow on the margin account. It continued that trend through the first quarter and the second quarter with anticipation that as the year went on that would be given back.

So what actually becomes a neutral will flow through the earnings as you have the price of the book of business, you'll release the corn future to go with it. So you'll buy your corn at the current price and you'll release your futures and you'll be back to where you are on a hedge basis.

So, from out a debt standpoint, David, which I think is what you are after, is I would not expect our debt numbers to change substantially by the end of the year.

David Driscoll - Citi Investment Research

That's very helpful. Sam, just a couple of follow ups here. On the international business, are you in effect saying that right now today you really do not see any weakness in those businesses or really forecast, that's a better statement, forecast any weakness in those businesses related to a slowdown in global GDP growth.

I mean it's my presumption that many of the products that you sell are very, very basic products that go into industry and thus the kind of a knock on effect would be those industries see a slowdown and subsequently that backs up through the chain negatively impacting a volume demand for products that Corn Products makes.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well basically, David, we have... I think I've said that on the food side for the most part even in a downturn and this maybe more dramatic than most, but in most downturns the food industry stays pretty solid.

And it's been a defensive industry and you've covered it for long times, you know the volumes stay relatively constant. Perhaps lower price products sell better than higher price products but our products handle all of them.

The industrial side of our business can vary depending upon where we are, because obviously if people are not using as much corrugated or paper and other applications outside of the food, both numbers could come down. But as you look at the developing world, when the currencies drop we tend to see those industrial businesses able to compete more effectively in the global marketplace, so paper, corrugating textile does tend to hold fairly well as the currency devalue in the rest of the world.

So I can't say that without any kind of a doubt in this environment, will we have hiccups for a period of time? Sure, we may. But I think in general the basic model works well and the businesses we're in tend to send the service well. And we're spreading the mix around. We are selling more of our products in markets we didn't sell before. So we're able to accommodate some growth as a result of that as well.

David Driscoll - Citi Investment Research

Then a follow-up on the North American markets specifically U.S. CSDs, Pepsi and Coke gave some, I think, Pepsi said they were down 4% on volumes and Coke down something like 2%. Bottom-line it was negative and I think that the retrieve that a lot of people had was that this would be very negative for the fructose makers.

Again I think your volumes in North America were down just 1%. But specifically when you look at the U.S., how is that your volumes are down less that what the Coke and Pepsi guys are reporting and is there an eventual catch up here or is it that there are other product markets within the United States that are doing better which net outs in your volumes.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I think that's... the latter is pretty much the answer of the question, David. As we've said before that we are diversifying our product mix. We are diverting grind from fructose where we can over the last multiple years recognizing that there could be a slowdown in the take away of high fructose and as a result of that we've been able to put capacity in for other products and we're selling those other products into markets that are growing better than perhaps the soft drink market or the high fructose market to soft drinks and growing.

So, the net of it is that we are looking to diversify where we can. Fructose will always be an important part of our business but we're making less of it today than we made in the past. Not significantly. We're not giving up market share. We are not walking away from the business. I don't want even get anybody thinking that. But we've said right along that where we could we put a channel and into cold drink [ph]. We're diversifying our mix with respect to some of the higher valued products.

We're putting the higher valued ingredients throughout the world to be able to diversify and switch grind off because we've not expanding grind to anyplace, except in South America, where we need it. And that is working well for us as part of the business model.

David Driscoll - Citi Investment Research

And that's very helpful. Thank you so much.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you

Operator

[Operators Instructions]. Our next question comes from Christopher Bledsoe from Barclays Capital.

Christopher Bledsoe - Barclays Capital

Good morning

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Chris, how are you?

Cheryl K. Beebe - Vice President and Chief Financial Officer

Good morning.

Christopher Bledsoe - Barclays Capital

I think in response to an earlier question you had mentioned that you see room to for prices to be passed through to accommodate cost and then dump.

So to me I kind of take that to mean you're just, as you would expect managing for margin in your HFCS business. But I just wanted to I guess dig a little deeper and when you say you're kind of or when you think about managing for margin in that business, is that independent of co-product credit. And if it's not, and I don't think it is, with corn oil coming off the way that it has, how do you make sure that you get paid for the volatility in the co product values?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well we try to price taking everything into account, Chris. We recognize that we can't forecast what oil prices are going to be nine months out. Not that forecast would be on the feed prices are going to be there but we give it our best guess and try to price through with that point.

As we said, this year would be the run up in commodities that we saw. It went beyond where we thought it would go. And we don't expect those kind of thing to happen again. But what I was trying to say is that with our forecasted numbers right now, we believe we can pass through the cost increases we will see and we're seeing corn up slightly at the present time from where it was last year. We're seeing corn products down from where they were when we entered the quarter last year. So that would mean, our net corn will be up some. We think we can get that through and hopefully we can get little bit more through. But we will not see the run up in co-products that we saw that was above and beyond what we had forecast at the beginning of the year of 2008.

Christopher Bledsoe - Barclays Capital

And when you sort of referenced net corn costs being higher taking into account both the co-product values as well as the growth, and that's based on the growth components based on I guess the futures curves.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Futures curve and the basis number. What we pay to get the corn, the futures curve would be the market that we have to go to. So, somebody came through today and say they wanted to buy corn, book of business for us, fructose, maltose anything. We would go to the market today, book the corn and the basis we can book throughout the year, so we would go out perhaps as far as we can on the basis which could be a couple of months, and that we'd buy the basis throughout the year on that corn. But that's how we run our business right along.

Christopher Bledsoe - Barclays Capital

And so, the futures curve gives you visibility into at least what the markets are redeemed is in appropriate through a level for that kind of a growth, I guess primarily raw material but the co-product value... the co-product credit, are there factors that you look at to try to get to what you think is kind of a right level for the year ahead, I mean, whether it be protein production and potentially less demand for animal feed or kind of a global growth. I mean, are those the kind of factors that you're looking at and trying to come up with a kind of fair value for the co-products.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I'd like to think that we were that sophisticated but I would be probably exaggerating a bit. We look at historic norms. We look at where we think the numbers are going to be. We look at what we believe to be the case as far as is the cost of commodities going forward. I mean I think right now all things being equal, commodity prices could be... in this environment they could go further. But they are probably bottoming out us to where the farmers are going to be able to flow to continue planning unless we see some rise in commodities.

So we might see a pickup in the planting. It was planting intensions depending upon where it going and we look at that. But we're not going through in every look in cranny kind of analysis to figure out what is going to be because it is at best an art. It's definitely not a science.

Christopher Bledsoe - Barclays Capital

So. I guess and anything around the subject of sort of major or that's where the importance of capacity utilization comes in and all that. And on the utilization front, it seems to me that you feel fairly good about, where the industry is at, at least relative to maybe flows earlier in the decade. But is that something that you'll be able to quantify kind of where the industry is at in terms of utilization today?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I've not said where it is, but it is in pretty good shape as you said as compared to where we were before. The industry and I can't talk of the industry I'm talking of us, but we've heard some of our competitors say, that they are diverting grind and we've seen some plants shutdown.

As I've said earlier we have diverted grind where we can to all the products that are growing faster than perhaps like fructose is growing. We also have diverted grind to specialties and sold products into new markets.

So from our perspective, we've tried to maintain the utilization of our plans at a reasonably constant level or hopefully increasing it a little bit. But those numbers are high enough to be able to support price movements that we're hoping to see as we go forward in the contracting.

Christopher Bledsoe - Barclays Capital

Thank you.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. Our next question comes from Christina McGlone from Deutsche Bank.

Christina McGlone - Deutsche Bank

Sam, you talked about if we're entering into an era now where co-products are not going to continually move us, because we're in a flat to maybe declining corn curve. What is... can you just talk maybe more specifically about your opportunities for growth because on the same vein it seems like specialty and value-added is still small and you talk about this diversion to other products, could you maybe talk about it so we could have an idea of the growth potential aside from that the co-product contribution that really helped the past two years.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Well, Christina, I think what we've said historically is we thought that our business would grow over the last five or six years in low double-digit and we've said going forward the business model still works. So as we put capacity... as we put a $200 million a year in capital expenditures most of it for growth.

And as we look in our world and see new capacity coming on within our business to continue to grow the business, we believe we can handle that. As we said, we had a situation this year where we had a bit of positive hiccup on the business and we'll take that off the top of the business model going forward and say all right we'll still continue to grow at the levels we thought we could at grow before, perhaps with not with that in the base.

But the business model tends to work. So I think I've said in normal circumstances we can pass through the primary cost increase that is corn. We see some other energy issues coming back a little bit in our favor. We see that the businesses we are going into albeit a small, are tending to give us better returns in the overall because they are a higher valued products and as long as we invest properly, we will continue to see that grow small but growing. I mean, that all benefits us as we go forward.

So I think it's a combination of all of those things coming together that allow us to say that we think the business can continue to perform on a compounded base over time at a pretty good growth rate.

Christina McGlone - Deutsche Bank

So, when you say taking the top off, what kind of base should we think about using when we apply that 10 to 12% rate?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

I can't give you a base on that. I think I gave you... Cheryl gave you some ideas as to how much was in the quarter that was unique to the quarter. And I think that would be something that you could go forward with from there and use that as a model.

Christina McGlone - Deutsche Bank

Okay. And did you have any benefit in the quarter from the floods, the fact about three competitive facilities were offline for a while. Did you see any slow into your U.S. business from that?

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

We saw some volumes come in from that. It happened at a time that generally the industry is running at pretty high rates. So, it was a situation when we picked some that we could, we helped out where we could. But it was not a significant amount of volume that came in.

Christina McGlone - Deutsche Bank

Okay. And then last question for Cheryl. Your pension plan is under funded, given the market performance. I'm just curious about what kind of pension expense headwind we should think about. And maybe it's too early for next year but maybe more importantly what sort of cash contribution that you're thinking about for '09 because it's been significant.

Cheryl K. Beebe - Vice President and Chief Financial Officer

It's the way too early, Christine, to be able to make a comment on the pension funding.

Christina McGlone - Deutsche Bank

Okay. Thank you.

Samuel C. Scott, III - Chairman, President and Chief Executive Officer

Thank you.

David A. Prichard - Vice President of Investor Relations

Thank you.

Operator

[Operator Instructions]. And at this time there are no further questions in the queue. Mr. Prichard, I'd like to turn the conference back over to you for any additional or closing remarks.

David A. Prichard - Vice President of Investor Relations

Thank you, operator. And as you say, it appears we don't have any further questions and as a result, we will conclude today's conference call and webcast.

I do want to say, as a reminder, there is a replay on the webcast that you can access through our website at www.cornproducts.com and there is a replay also of an audio component to the call and that's available through Friday November 7th and the calling number for that by phone is 719-457-0820 and you'll need a pass code and that's 3424653.

So on behalf of Sam Scott and Cheryl Beebe, we all thank you very much for participating in our conference call this morning and have a good day. Thank you.

Operator

And this does conclude today's conference. We thank you for your participation. Have a wonderful day. .

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!