Ingredion Inc (INGR) CEO Hosts Guidance Conference (Transcript)

Jul.15.13 | About: Ingredion, Inc. (INGR)

Ingredion Inc (NYSE:INGR)

Guidance Conference Call

July 15, 2013 9:00 am ET

Executives

Aaron H. Hoffman - Vice President of Investor Relations & Corporate Communications

Ilene S. Gordon - Chairman, Chief Executive Officer and President

Cheryl K. Beebe - Chief Financial Officer and Executive Vice President

Analysts

Kenneth B. Zaslow - BMO Capital Markets U.S.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Amon Wilkes - Gabelli & Company, Inc.

David Driscoll - Citigroup Inc, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ingredion Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Aaron Hoffman, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Aaron H. Hoffman

Thank you very much. Good morning and thanks, everyone, for joining us today on rather short notice. Joining me on the call this morning are, as always, Ilene Gordon, our Chairman and CEO; and Cheryl Beebe, our Chief Financial Officer.

Our updated view on the second quarter and full year 2013 was issued yesterday 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 our -- in the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K.

So now I'll turn the time over to Ilene.

Ilene S. Gordon

Thanks, Aaron. Let me add my welcome and appreciation to those joining us this morning on the call and the webcast.

Ingredion has produced a long history of delivering against our commitments, and we take that obligation quite seriously. Over the past 3 years, we've managed against volatile commodities and currencies, energy issues and macroeconomic crises. And in that time, we've delivered outstanding earnings growth. However, there are times in business where market environments create situations that simply cannot be offset or overcome in the short term. Today's call is to address one of those times and to recalibrate our expectations with yours.

As we've discussed for more than a year, the situation in South America has posed challenges, and our managers there have worked diligently to navigate a difficult environment. We have also consistently discussed with you that there was risk in Argentina, as the economy was unstable and could deteriorate rapidly. This concern has come to fruition. From a high-level view, Argentina has moved into a rather severe situation that has placed significant pressure on our results in the region. At the same time, the Brazilian economy continues to be somewhat stagnant and our sales to the brewing industry remain soft.

North America is also seeing a general slower-than-expected volume recovery. To be clear, we still expect the region to be flat to up for 2013, but we can't rely on North America to offset the large negatives in South America. Both Asia Pacific and EMEA are trending largely as originally expected.

The result of these factors is that we expect second quarter EPS to be in a range of $1.15 to $1.20. We also anticipate that full year EPS will be between $5.10 and $5.40. Cheryl will walk you through all of the puts and takes in just a moment.

In spite of today's news, our view of our business model remains unchanged. We are dealing with these short-term issues while always investing for our future. We remain confident in our long-term EPS target of 10% to 12% compounded annual growth rate. We have a strong balance sheet and we'll continue to make shareholder friendly moves with our capital.

Let me now turn the time over to Cheryl to walk you through the change in outlook for the quarter and the year. Cheryl?

Cheryl K. Beebe

Thank you, Ilene.

We have experienced a rapid decline in the results for the second quarter, with a negative impact of approximately $10 million in operating income. While we put together the second quarter guidance, the assumption is that we would have more pricing flexibility to handle the impact of inflation, currency devaluation and volume performance. April results were in line with this view. In June, when we saw the May results, we saw a slight deterioration, with costs increasing, while preliminary June results showed a far greater deterioration, which led us to revise the assumptions for the remainder of the year.

The cautionary comments on the year-end call and first quarter call, that if Argentina imploded, we could not hold the range, unfortunately, are playing out. The operating income impact on the outlook is estimated at $35 million: $10 million in the second quarter and $25 million for the rest of the year. Our revised estimate incorporates little change in the third quarter from the second quarter, with volume and pricing improving slightly in the fourth quarter, as Argentina hits its seasonally strongest quarter in their summer.

Moving to Brazil. We are optimistic about -- we were optimistic about Brazil, that the economic activity would slowly improve and that the currency would devalue at a lesser rate and that the second half would show improvement. Based on the estimated second quarter results for Brazil that showed slower sales to the brewing sector, slower economic recovery and roughly a 10% devaluation relative to our expectations in June, we are revising our outlook.

Our assumption is that the currency will remain in the current range and that the economic activity likely will not pick up in the second half as the country deals with strikes and protests. The operating impact of these changes is estimated at $7 million. That, combined with the $7 million negative impact in the second quarter, changes our outlook for Brazil by roughly $14 million for the full year.

The change in the North American outlook relates to volume expectations. As we discussed on the first quarter call, our guidance was based on relatively stable volumes for the remainder of the year. As we reviewed the preliminary second quarter numbers, we did not get the volume in the second quarter we were expecting. In fact, the volume trend is in line with the first quarter, at about a negative 3%. The volume shortfall from expectations was primarily in June. As a result, we re-examined the volume expectations for the second half and concluded that it was appropriate to revise the volume outlook down. We estimate this impact to be about $12 million on operating income. However, I'll reiterate that we expect North America's operating income to be flat to slightly up for the full year.

With respect to Asia Pacific and EMEA, we still expect the full year outlooks to be in line with last year.

The new outlook reflects about a $0.55 negative impact using the midpoint of the previous range, which was $5.80, to the midpoint of the new range, which is $5.25. The bulk of the hit is Argentina at an estimated $0.32, Brazil at $0.13 and North America at $0.10.

Given that we don't have the final results for the second quarter, I will hold off on additional color commentary regarding the second quarter performance until the earnings call on July 31. We appreciate your patience and your understanding. We are here this morning to update the full year outlook predicated on what we are currently seeing.

Ilene S. Gordon

Thanks, Cheryl. Let me wrap up by reiterating some important points.

First, our business model is holding up in every region other than South America, where the environment is simply deteriorating too rapidly in the short term. In the medium to long term, we remain bullish on South America and we are well positioned for future growth when the Brazilian and Argentinian economies get back on track.

The story in North America is actually quite impressive. In spite of a historically severe drought and multiple years of pricing actions to account for rising corn costs, the region continues to deliver. While 2013 may not be as robust as originally planned, I am pleased with our employees' ability to cope and succeed in this environment.

And finally, our Asia Pacific and EMEA regions are generally right on track with our previous expectations for 2013.

Moving beyond this year, we continue to see an attractive investment thesis for Ingredion. We have a strong balance sheet and have a history of shareholder-friendly action. Our recent 46% dividend increase, which came about 6 months after a 30% increase, is a great example. So, too, is our acquisition and successful integration of National Starch. Our management team takes its responsibility for being good stewards of shareholder capital seriously.

We also continue to believe in our long-term EPS growth rate of 10% to 12%. In fact, since the company went public, our EPS CAGR has actually been almost double this target, giving us confidence in our ability to deliver against the goal.

While it is obviously premature to offer guidance for 2014 at this time, we look forward with optimism that we will return to our historically strong growth trajectory sooner than later. Current indications are for a very strong U.S. corn crop. Lower corn costs should have the positive impact on our business. Some of the challenges we are facing in 2013 may subside and could offer upside.

We're now glad to take your questions, though I want to remind you that there are likely questions that we simply won't be able to answer at this time and we appreciate your understanding.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ken Zaslow.

Kenneth B. Zaslow - BMO Capital Markets U.S.

So 2 questions. One is, about 1 month ago, or 1.5 months ago, you guys did confirm expectations. Can you talk about your systems and your ability to actually spot these changes in your business model? That's my first question.

Cheryl K. Beebe

Sure. Ken, it's Cheryl. We came through April looking fine. May, we saw a slight deterioration. And I'm really going to focus on South America and Argentina. And what we were looking at is the ability to price for the rising raw material costs, energy and labor. We expected that the currency would be the key for devaluation. And really, what's happening is the government policies are impacting the economy in ways that one wouldn't necessarily expect. And so the real change here is that, as we went through the June results, we were off almost 81% in the southern cone, which we then very quickly re-looked at the assumptions. Was this an anomaly or was this going to continue to trend for the remainder of the year? And we believe that it will remain for 2013. So the normal currency devaluation where we would have gone from, say, ARS 5.10 to ARS 8 is actually biting us by the inability to price-through the rapid increase in our costs. While we still maintain pricing power, limited pricing power in Argentina, it's not enough to cover the rate of change in the cost structure. So for example, we were able to get about 1/3 of the cost increase covered with pricing, the other 2/3 we were not. So I think our systems are fine, it's just the rate at which this deterioration occurred was fairly rapid.

Kenneth B. Zaslow - BMO Capital Markets U.S.

And how much of what you lost this year will be recovered in 2014?

Cheryl K. Beebe

Ken, it's a little bit premature for me to give an absolute number. Let me rely upon history for a moment: In 2001 when Argentina blew up, it took us about 12 months to recover. And so if we follow the same pattern, then I would expect that, as we got through the second half of 2014, we see the cost pressures ease and we would see volume pick up.

Kenneth B. Zaslow - BMO Capital Markets U.S.

And my last question. November 28, I think, at your Analyst Day, you guys said, 12 to 18 months, you guys, you would use your cash to do acquisitions. We're coming up closer to that category. Where are we? And would you think about just buying back stock given your stock is going to probably be not so great today?

Ilene S. Gordon

Ken, this is Ilene. As I always say, our first priority with our cash and our strong balance sheet is to fund internal capital. Obviously, we raised the dividends. We have been looking at M&A opportunities. But again, as we've said on these calls, we're always looking for those that will add shareholder value over time, either strategically and broadening the portfolio or geographically. So we continue to look at that. And I think that time frame continues to be in the realm of what we're looking at. So it's certainly -- looking over the next 12 to 18 months is certainly what we're looking at. At the same time, we do have a strong balance sheet. And so you know that we do still have an authorization of 3.4 million shares, so we do have that opportunity.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Right. And so you're -- like, you're extending it out another 12 to 18 months. Is that what you're saying, rather than -- are you resetting the clock?

Ilene S. Gordon

No. No.

Kenneth B. Zaslow - BMO Capital Markets U.S.

So if you don't find anything in the next -- by November 28, 2013, plus 6 months, you will start buying back stock.

Ilene S. Gordon

What we're saying is that we're not restarting the clock from last November. I mean, obviously, we're looking for those right opportunities, but we also have a strong balance sheet, so I would say it's also not either-or. It -- we have opportunities to buy back shares, we have opportunities for M&A, we just want to find the right opportunities to do that.

Operator

And next we'll go to the line of Tim Ramey with Davidson.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Cheryl, a little bit of a follow-up on Ken's first part of his question. To indicate a range of $1.15 to $1.20 on the 15th of the month when you're reporting in 2 weeks implies a wider degree of variability in results than I might expect. We've -- I had one other company pre-release with a single point pre-release. Is it -- are there issues related to tax rate? Or what are the remaining issues for you in terms of the visibility with regard to that $0.05?

Cheryl K. Beebe

There's 2 things. One is obviously the tax rate. And the second is we need to get through audit. And so just from a prudency standpoint, leaving $0.05 in the range or having $0.05 in there is appropriate considering our external auditors have not been through the quarter.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Okay. And then just to better kind of understand: It sounds like you're not getting price realizations, so that results in margin pressure. I'm just trying to figure out how to model this from a top line versus margin perspective. It sounds like it's a little bit of both. Is that a fair...

Cheryl K. Beebe

It's more a margin squeeze in Argentina. And it's a combination of volume, which would be top line, in Brazil, along with the currency. So I would look at South America as a pretty significant margin squeeze. When you add in the revision in the full year outlook for Argentina and Brazil, I would take that 80% margin and 20% revenues. And that's just a guess.

Operator

And next we'll go to the line of Bret [ph] with BB&T.

Unknown Analyst

I just wanted to go back to the issues that you called out in Argentina. And you gave some good color there, but at a more micro level, can you just help me understand how they normalize into 2014? I mean, you talked about this continuing into -- or the back half of 2013, but how these conditions might normalize in the year ahead.

Cheryl K. Beebe

All right. If I think about Argentina and what we're seeing, let's call it government policies, which is a bit broad, but I want to take it down to policies on the currency, control over dollars, what we would consider hyperinflation. The unofficial inflation rate is probably between 25% to 35%. And the way that this normalizes is that when the currency does blow and goes to, call it, the black market rate, so if we're at, let's call it, ARS 5.25 on the peso and it goes to, call it, ARS 8, then the currency control should start to ease, price control should start to ease, we see more economic activity and we see lower costs.

Unknown Analyst

Very helpful. So coming back to North America for my last 2 questions. I -- volumes in Mexico, a lot of market watchers and those that report data into Mexico are talking about a pretty tough May as well, expecting that to continue. However, these data watchers are also talking about -- or rather, implying a rebound into the fall. And I just want to get your thoughts and opinions on how the Mexican market is trending from an industry standpoint and if you believe that volumes into Mexico -- or rather, in Mexico can stabilize and improve going forward.

Cheryl K. Beebe

If I look at the data for North America, and let's really look at this as a North American market, with the unbelievably high corn prices last year as a result of the crop issues, it put pressure on the differential between sugar as a sweetener and HFCS, and that really relates more to Mexico. How it comes back to North America is we really service Mexico through our North American network. And so with corn prices currently forecasted to be significantly lower than last year, as we head into the fourth quarter, if we do have this awesome crop come out as it's predicted at the moment, then that should ease off on some of the pricing differential between sugar and HFCS, which would bode for a more stabilized market.

Ilene S. Gordon

This is Ilene. I'm just adding that, in Mexico and North America, the contracting is done in -- on basically an annual basis, and so the contracts were made last fall for the coming year. And so what we're setting up for is what kind of contracting environment to go into for 2014. So surely, one can look at monthly volume data. And it does have small impacts, but it -- when you look at the whole market, we are looking at a more positive situation for going into 2014 with the lower corn costs, and more normalized relative to sugar.

Cheryl K. Beebe

And it's Cheryl again. Maybe if I added one other data point, it may make it a little clearer. When we were looking at the range of $5.60 to $5.80 back in April, our assumption was that we would see the order pattern of our customers in North America pick up in the second half. We were minus 3% on the volume variance analysis, and we really expected that volume would be relatively stable. As I looked at the second quarter, we followed the same trend, so let's call it minus 3% on that volume variance. And that's what we're expecting to hold for the remainder of the year. I would also remind the audience that we did the shed program of reducing the lower-value products, and so that's a piece of that minus 3%. But really, the revision in the forecast is that, whereas we expected volumes to be relatively stable as we went through the remainder of the year, we will expect volumes to be down in North America on HFCS 55. And with that, the North American numbers are looking to be stable, equal or slightly up from last year at the operating income level.

Unknown Analyst

Okay, okay. And just quickly, my last one, just staying on that bigger corn crop, I think the expectation out there is you get this crop, the crop gets made, the futures curve suggest that pricing can compete better with sugar going forward. The main question, I guess, that I get is, of course, what happens at the margin level in that type of scenario? And I was wondering if you would care to just give a comment as it relates to a bigger corn crop, thus lower prices on the margin environment.

Ilene S. Gordon

Okay, this is Ilene. As we talk about our business model, we lock in our margin as we go into contracting with our customers. And so this scenario that you're describing with lower corn costs, we would pass that on to our customers and hold or try to grow our margins. And the way -- that would manifest itself in that the food companies presumably would pass that on to the consumer, and that would grow volume. And with the higher volume, obviously, the industry tightens up even further, though we've had a pretty good utilization over the last couple of years, it would tighten it up even further. So lower corn costs are good for food companies and the consumer to grow that volume. And so we -- that's how we -- our business model works.

Operator

And next we'll go to Amon with Gabelli.

Amon Wilkes - Gabelli & Company, Inc.

This is Amon Wilkes with Gabelli, I guess just kind of following up on the point you just made about volumes. In North America, you said that the volumes weren't -- aren't as strong this year. Did you expect -- and you kind of mentioned that you guys expected to grow volumes more in the second half, but what's going to be -- what was the driver of those volumes not appearing this year? Were prices still too high? Or what was -- you just weren't able to contract those? Could you give some color on that?

Cheryl K. Beebe

It's Cheryl. It really has to do with the pricing. This was the third year that we took pricing up. And I believe it may have been the first quarter call, it may have been the year-end call, that I talked about having to raise prices well over $1 billion over the last 10 quarters to deal with the increase in the -- in basically the corn costs. And so our belief is that the volume was impacted by the price of our products.

Amon Wilkes - Gabelli & Company, Inc.

Yes. And really, the only way to call -- calm those issues is for a larger corn crop in the U.S., or in North America?

Cheryl K. Beebe

Correct. Yes.

Ilene S. Gordon

And this is Ilene. This was a 50-year drought. And so the -- we normally get -- there are the high and low crops, but in general, they've been pretty good during my 4 years. But this was a very unusual one, and that's why we had the higher corn costs. And at the end of the third year, it really was -- we successfully passed it on, but it did impact food companies and food prices to consumers.

Amon Wilkes - Gabelli & Company, Inc.

Okay. And then just with -- just to Brazil, with the soccer tournament that's happening next year, how do you guys see the World Cup impacting sales in Brazil? And do you think a significant rebound will occur in 2014, or is it small improvements?

Ilene S. Gordon

Well, we think that the government policies will stabilize their economy. And obviously, our -- it's a situation we're watching because of the importance of these events and Brazil is in a bit of a showcase in the world. But assuming that they take actions to stabilize their situation, we believe that there'll be continued infrastructure being built for the World Cup and the Olympics and both people getting ready for that and attending. And so we'd expect activity around those sporting events and leading up to it.

Amon Wilkes - Gabelli & Company, Inc.

Okay. And then finally, for Argentina, could you just give some color, I guess, to how you think this situation normalizes? Is it going to be -- so you have potential hyperinflation there. Is it -- is this sort of going to be driven by the government? Is there any factors that you guys see causing a rebound in 2014? You gave kind of maybe 2014 as -- the second half of 2014 as potential time for normalization there in Argentina. I just want to get some color of how you think that would occur.

Cheryl K. Beebe

Sure. I think it's going to occur is that, as they go through their elections this fall, the pressure on the existing sitting government will be intense. There is -- our belief is there's a likelihood that the government will change. Currency will devalue, which will then make it easier to do business in Argentina because you will not have the price controls, you won't have the distortion driven by the fact that you can't get dollars and any dollars in order to buy energy. So I think that it's really the change in government, a devaluation, and then we start to see economic activity pick up.

Operator

And next we'll go to the line of David with Citi.

David Driscoll - Citigroup Inc, Research Division

I wanted to follow up on a couple of things here on Argentina and foreign exchange. On Argentina, I think, in fiscal '12, you had something like $350 million in sales. So if you made a $35 million reduction to your profit expectations, I think the math needs to work out that this business is actually going to lose money this year. Is that correct?

Cheryl K. Beebe

We'll not lose money, but it will be -- the forecast that I've incorporated is almost a 50% haircut in the operating income.

David Driscoll - Citigroup Inc, Research Division

Okay. And then on FX, Cheryl, can you just remind me? I think it was -- I just don't have some notes in front of me right now, but I think you said on the last call that your full year forecast for foreign exchange impact to the business was, like, negative $0.15? I remember that...

Cheryl K. Beebe

Correct. It was $0.15 to $0.20. I would take that up to $0.20, $0.25.

David Driscoll - Citigroup Inc, Research Division

$0.20 to $0.25, okay. And then I think you've said this, but just to be super clear on it. The margin squeeze in Argentina, it's above and beyond just simply a currency translation issue. This is, on top of all of that stuff, there is just a fundamental problem of being able to adequately raise prices given the inherent hyperinflation in the market. Is that true?

Cheryl K. Beebe

That's true.

David Driscoll - Citigroup Inc, Research Division

Okay, final question for me goes to North America. So on the First Quarter Conference Call, you talked about full year North America expectation was, "operating income was expected to be in line with record 2012 results." If the volumes are revised down, why don't you see full year operating profits below the year-ago results? Can you walk us through that?

Cheryl K. Beebe

Sure. Because we continue to see the benefits of the cost-savings program as well as the shed, so we were able to get our corn costs covered, what we call the spread, Dave, in 2013. Obviously, I would have expected to see a slightly higher number than what we will -- what we're currently expecting if we had, had that volume at relatively flat as opposed to minus 3% down. And so we're just not going to perform as well as we had hoped in North America, but still operating at record levels. I mean, there are -- we made the comment that, for the second quarter, North America will be up at the operating income level.

David Driscoll - Citigroup Inc, Research Division

And so certainly, to me, it seems like maybe lost in the shuffle is that there had to be an offset within the numbers. So if the operating profit guidance basically hasn't changed but volumes are weaker, something had to be going better than maybe what you had indicated before. And I don't think that had come out on the call, so I was really just trying to pull that out. Final question for me is on co-products in the back half the year. Given the declining corn prices, do you expect your co-product revenues to be in line with your budget forecast?

Cheryl K. Beebe

I expect that, the revision that we did in the numbers, Dave, driven primarily by volume. But we have the potential for some lower corn costs in the fourth quarter, which will offset the lower co-product volumes.

Operator

And next we'll go to the line of Akshay with -- at KeyBanc.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

My question is a follow-up on North America. Can you just explain? I'm not sure why there's softness relative to your previous guidance. Is it somewhat related to weather, by any chance? You're -- so I'm not clear on why you're seeing a little bit more softness in North America relative to previous expectations.

Ilene S. Gordon

Yes, this is Ilene. I think that, if you've read recently, it was a kind of a wet spring in North America. The good news is that the planting got done and the corn looks good, but in terms of consumption of soft drinks in North America, it's been a little bit weaker than people would've hoped. And so we've been obviously delivering to all of our customers. So that -- I would say that, that would be the major impact. And I would say food volume in general has not been -- it hasn't been weak but it hasn't been strong. And so I think we -- obviously, the summer in North America has now -- the weather is better, it's warmer, it's hotter, and so we feel good about the next couple of months. But the spring was a very wet spring and so it's like summer got started a little late.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And so just to follow up to that. So what -- the expectation right now that corn prices would likely come down significantly, is it -- do you still think it's a fair assumption to expect volume recovery just based on lower prices?

Ilene S. Gordon

Yes, yes. I think that, if you look at the last 3 years, had -- the prices of the raw material inputs have been very high, and we passed that through successfully. So the model has normally shown that as corn prices come down in our business model, we pass that to customers, that volume -- prices in food what will push volume up.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And just a couple on -- these are more philosophical, but it -- you see that -- you took your Argentina EBIT guidance down quite a bit. It's about 5% of your sales, but had a much bigger impact on your earnings this year, negatively. Is that -- first question is, is that truly sort of like a "once in a decade" event and you're alting [ph] in everything's going bad at once, type of thing? And secondly, what's the risk of something like that happening in North America and Europe? And my guess is that the likelihood of that happening in those regions is low because the business models are more resilient, but just would love to get your thoughts on that.

Cheryl K. Beebe

It's Cheryl. Argentina is a short-term event. I don't know if I can say it with certainty that it happens every 10 years, but if we look at the last time this happened, it was 2001, so it's really a one-off. The rest of the world does not have the type of political situation that Argentina has, so I don't think we can make any correlations between what's going on in South America with the rest of the business model.

Operator

And next we'll go to the line of Ann with Davenport.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Wanted to return to the volume discussion in North America. And is any of that lost business, as customers might switch back to sugar? And then at -- also related, shipment volume to Mexico. Are you seeing any change in use of sugar versus HFCS in that volume number?

Ilene S. Gordon

Well, this is Ilene. I mean, I think what we've talked about is volumes are not being strong and not necessarily a loss of share within our competitors. Now it is true that what we said is, obviously because of the 50-year drought, corn prices being very high, and yes, sugar has competed. But as I said earlier, the contracting that we did back in the fall was done where there was a difference between high fructose and sugar. That's moderated a little bit. So certainly it's been a competitive situation in the more short term, but that with corn costs coming down for next year based on the expectations of the drought, we would expect a more normalized situation for 2014.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Great. And then in terms of the number of contracts, like multiyear HFCS contracts coming up for renewal this fall, can you give us any indication, is that a normal amount? Is there a greater number coming up for renewal? Can you give us any insight into that kind of thought process?

Ilene S. Gordon

We basically have -- we've talked about the annual contracts, a few being different, but we don't give any percentage on how many or different types. So we have not had a change in that environment.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Okay. And then, Ilene, you also talked a little bit about investing in new markets. Is there any change in the timeline? Or if the opportunity came along for investing, say, in South America or Asia, you would still move forward with that kind of investment in these markets.

Ilene S. Gordon

Yes, absolutely. There should be some good deals out there, we're just looking for them, to create shareholder value. And with our strong balance sheet, we just continue to look for those opportunities. And if they exist, we'll act on them.

Operator

And our final question will come from Bill [ph] with TIAA-CREF.

Unknown Analyst

When we think about next year, I mean, you talk about corn costs coming down, but your byproduct credits have also fallen sharply, so I presume net corn costs are not going to be down as much as gross corn costs. And at the same time, sugar prices have come down, so how should we think about all this playing out in 2014?

Cheryl K. Beebe

Bill, it's Cheryl. I think that it -- let's say that corn costs, for easy math, were at $7 in 2013 at the gross line and they come down to $5 in 2014. That's $2 reduction in the gross. The change in the co-product credit, where we'll get less of a co-product credit, so the change in our pricing will not be reflective of $2, it will be less than $2. So we won't give $2 back to the market. Without knowing the exact co-product credit off the top of my head, let's call it a $0.50 change in the co-product, so the reduction then would be $1.50. So we will handle the lower co-products by adjusting the gross number.

Unknown Analyst

Right, but isn't fructose now more expensive than sugar in some markets?

Cheryl K. Beebe

It is. It's more expensive in primarily the Mexican market. The Argentine market is a reflection of the government policy at the moment, I don't expect that to hold. And then it's South Korea because we have to import. So let's say for the sake of discussion that the pricing declines by $1.50 next year, again really rough numbers, a $1.50 change in the price of corn will make us very competitive with where the current sugar pricing is.

Ilene S. Gordon

Okay, so this is Ilene again. Just thank you for joining us this morning. We look forward to speaking with you again on July 31 when we release our second quarter 2013 results. Thank you for calling in today.

Operator

That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference services. You may now disconnect.

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