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Executives

John Barry - Vice President of Investor Relations

Ilene Gordon - Chairman, President and Chief Executive Officer

Cheryl Beebe - Vice President and Chief Financial Officer

Analysts

David Driscoll – Citi Investment Research

Vincent Andrews – Morgan Stanley

Christina McGlone – Deutsche Bank Securities

Christine McCracken – Cleveland Research

Ken Zaslow – BMO Capital Markets

Heather Jones – BB&T Capital Markets

Corn Products International Inc. (CPO) Q3 2009 Earnings Call October 27, 2009 8:30 AM ET

Operator

Welcome to the Corn Products Third Quarter Earnings call. At this time, I will turn the call over to John Barry.

John Barry

Good morning everyone and welcome to Corn Products International's conference call to discuss our 2009 third quarter financial results that were announced earlier today. I'm John Barry, Vice President of Investor Relations for Corn Products International. Joining me today to lead the call are Ilene Gordon our Chairman, President, and Chief Executive Officer and Cheryl Beebe our Chief Financial Officer.

This is an open conference call simultaneously broadcast on our website at www.cornproducts.com. The charts for our presentation this morning can be viewed and are downloadable from our website and they're always available about 60 minutes before our conference calls. Those of you using the website broadcast mode for this conference call are in listen mode only.

Ilene Gordon and Cheryl Beebe will deliver this morning's presentations. They will indicate as they move from chart to chart so that those of you using our slides from the website can easily follow the presentation. I have just shifted to chart 2, which is our agenda. Ilene Gordon will provide a general strategy update and an overview of our Q3 performance and the business outlook and guidance for Q4. Following that Cheryl Beebe will present the financials for the third quarter with appropriate analysis and flavor. We will then move on toward your questions.

I have now shifted to chart 3, our forward-looking statement. Our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties. Actual results could differ materially from those predicted in those forward-looking statements and Corn Products International is under no obligation to update them in the future as or if circumstances change.

Additional information concerning factors that could cause the 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 10-Q and 8-K. Finally, statistical and financial information reconciliations of non-GAAP numbers from this presentation are also available on our website at www.cornproducts.com, and as you will see are included as an appendix to this morning's slide presentation.

Moving to chart 4 I am now pleased to turn the conference call over to Ilene.

Ilene Gordon

Good morning everyone and thank you for joining our third quarter earnings call. I want to give you a brief progress update on our strategic planning process and then provide an overview of our business performance in the third quarter and the outlook for the balance of the year. Please turn to chart 5.

I have had another three months to review our operations and meet with customers. I continue to be impressed with our safety record, the quality of our management team and our operations. Despite some volatility caused by swings in currencies and fluctuating commodity prices, I believe we have a very good business model that can generate good shareholder returns and strong cash flow. But there's always room for improvement.

Following the example of our South American business, we need more focus on product innovation and markets. As a first step in that direction, we recently reorganized our United States and Canadian business to be better aligned with the markets we serve. Business managers will have responsibility for the strategies, tactics and profitability of their particular markets. Additionally, we have fully integrated our U.S. Canada Health, Nutrition and Specialty Products groups.

Moving on to chart 6, we have completed a fairly granular review of our current business to get a clear fact-based understanding of our economic profit drivers by country, market and profit line. This process has served to confirm the success of our previous strategy and much of what our very experienced management team believed. This process has also given me a strong foundation for conversations with our Board of Directors.

As the management team, we have a clear view of the business opportunities available to us, and therefore, where our priorities should lie. We are also identifying additional opportunities and investment alternatives. We're currently in the process of analyzing those potential investments and opportunities to narrow our list down to those alternatives that we expect to deliver the highest economic profit and shareholder value.

Later this quarter we will be reviewing our plans and recommendations with our Board of Directors. At this point, we do not expect a radical departure from what has been a very successful business model. Rather, we expect that our plan will prioritize those options we think may provide the greatest returns to our shareholders. I'm also pleased to announce that we expect to host an analyst day in New York City on March 23, 2010 at which time we will provide more details around our strategy, so please save the date.

I will now cover our third quarter performance and the outlook for the balance of the year. Moving on to chart 7, while down from the record $1.15 EPS we reported last year, our third quarter EPS of $0.70 was the fourth best quarter in our history. We saw a significant rebound during the third quarter as we had worked through higher corn costs in the first half of the year. Our volumes continue to show weakness and foreign currencies were still weaker than last year's third quarter.

At chart 8, on a total company basis our third quarter 2009 volumes were down 2.4% from third quarter last year. South American volumes recovered nicely lead by Brazil and the Andean region. South America's third quarter volumes not only show 2009 sequential improvements, but growth over 2008. Most encouraging is that the growth over 2008 accelerated as we moved through the third quarter. In North America and Asia/Africa, the volume recover is progressing slowly.

North America's volumes were down 5.7% from third quarter 2008. The Mexican volumes improved lead by high fructose corn syrup, and we had better volumes across most of the categories in Mexico. Asia/Africa's third quarter 2009 volumes were slack compared to last year. We saw a recovery of high fructose corn syrup volumes in South Korea. Offsetting South Korea, however, was a decline in Pakistan. The Pakistani government's power rationing program continued to impact our customers limiting demand and takeaway.

Moving on to chart 9, with the business performance in the third quarter we are narrowing our full-year earnings guidance to $1.80 to $2.00 per share excluding the impact of impairment and restructuring charges.

I will now turn the call over to Cheryl for review of the third quarter numbers.

Cheryl Beebe

The third quarter represents our most difficult comparison against last year given the outstanding 2008 results. While our numbers are down from the same period last year, they show significant sequential improvement from the previous two quarters. Quarterly EPS was $0.70 in Q3 versus $0.34 in Q2, obviously excluding the after-tax impact of the impairment and restructuring charges we took in the second quarter, and $0.22 in Q1.

As Ilene already stated, this was our fourth best quarter on record. In general, volumes were still challenging especially in North America. Net corn costs were significantly higher than last year largely due to lower corn oil prices. Foreign currencies, while stronger than Q2, were still significantly devalued from last year.

Turning to chart 11, our summary income statement for the quarter ended September 30, 2009. Net sales of $971 million were down 10% or $113 million from last year. Approximately 62% of the net sales decline is attributable to lower co-product values. The impact of co-products and volumes can be seen in the gross profit line, which declined 25% to $153 million from $204 million last year.

Gross corn costs per ton were down 5% from the same quarter last year, while net corn costs per ton increased 12%. Gross profit margins were 15.8% down from 18.8% last year, but sequentially improved from 11.2% and 12.2% in the first and second quarters of 2009. Operating expenses for the quarter were $66 million down 1% or $1 million from the same period last year. The operating income for the quarter was $88 million compared to $148 million last year. The 2008 Q3 operating income included $4 million from an insurance settlement and a $3 million gain from a land sale.

Net financing cost were $9 million down $1 million from last year due to $3 million lower net interest expense offset by a $2 million unfavorable foreign currency swing. The third quarter tax rate of 31.2% was down from 34.9% last year reflecting an effective tax rate of 34% partially offset by approximately $2 million in discreet items this quarter.

The net income for the quarter was $53 million or $0.70 per diluted common share compared to $88 million or a $1.15 per share last year. The weighted average shares outstanding in the quarter of 2009 declined 1% to 75.7 million shares from 76.3 million shares in the same quarter last year.

Turning to chart 12 net sales by geographic segment, we see North America's net sales declined about 9% or $61 million against the same quarter last year, while South America declined 11% or $34 million and Asia/Africa declined 15% or $18 million for again a total company decline of 10% or $113 million.

Moving to chart 13 the net sales variance, we see North America's drop of 9.4% came from a volume decline of about 5.7% or $38 million, a negative price product mix of 2.8% or $18 million with a negative 0.9% from weaker Canadian dollar for a negative $5 million. The decline in price mix was due to co-products which declined by approximately $34 million compared to the same quarter last year.

Excluding the impact of co-products, sweetener and starch price mix was positive compared to the prior year. South America declined 11.1% or $34 million mainly from currencies. Volumes improved 4.2% or about $13 million. Price mix was a negative 4.4% or $14 million reflecting lower net corn cost and the exchange rate impact was a negative 10.9% or $33 million.

Asia/Africa declined 15% or $18 million from lower exchange rates of about 9.6% or $12 million. Lower price mix of 5.1% or $6 million reflecting lower net corn cost and marginally weaker volumes. Volume improvement in South Korea was largely offset by weakness in Pakistan.

I am now moving to chart 14 operating income by geographic segments. We can see that versus the same quarter last year the North American operating income declined 42% or $44 million. The biggest impact on North America's operating income was a 46% increase in net corn cost reflecting the significantly lower benefits this quarter from corn oil, corn gluten seed and corn gluten meal prices versus last year and the 5.7% lower volumes than Q3 '08.

South America's operating income was down 15% or $7 million from Q3 '08 largely due to weaker currencies. Last year's operating income included a $3 million gain from a land sale. Asia/Africa's operating income dropped 63% or $6 million due to weaker gross profit margins throughout the region caused by the weak pricing environment in South Korea and Southeast Asia and the weaker demand in Pakistan, China and Kenya.

Corporate expenses were up 28%. The increase was primarily due to the mark-to-market impact of $1.6 million on the deferred compensation program and $1.2 million amortization of equity grants.

I am now onto chart 15 estimated sources of diluted earnings per share. We can see that the impact of changes from operations of a negative $0.51 as price margins declined $0.11, co-product recoveries were a negative $0.21, exchange rate was a negative $0.06, volume was a negative $0.04 and the change in other income/expense was a negative $0.09. Non-operating changes added $0.06, $0.04 from a lower effective tax rate and $0.01 each from changes in non-controlling interest and shares outstanding.

Turning to the cash flow highlights for the first nine months of 2009 chart 16, cash flow from operations was $368 million. The net loss of $11 million for the period was offset by the non-cash nature of the $124 million write-off of impaired assets taken in the second quarter. We saw a positive swing in our working capital number of $154 million.

We fulfilled business contracts for firm price business and we recovered $121 million from our margin account. We invested $98 million in fixed assets. Cash used for financing activities reflect $180 million decrease in debt and $34 million in dividend payments.

Chart 17 shows our key metrics, debt to cap was 29% down from 29.4% last year, the debt to adjusted EBITDA on a trialing 12-month basis was 1.9 times versus 1.2 times last year. Operating working capital as a percent of net sales was 11.7% or on a dollar basis $424 million and shows the improvement versus last year.

Net debt was $534 million versus $612 million last year and $759 million at year-end. We've paid off the $150 million in long-term bonds due August 15, 2009 on their due date. We continue to expect cash flow from operations in the range of $425 million to $525 million in 2009.

We continue to maintain a strong balance sheet and we are well positioned for 2010. We expect to keep our capital expenditures at approximately $150 million in 2009 with $98 million spent in the first nine months. As we have said before, much of the capital this year represents projects carried over from 2008.

Ilene and I will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Driscoll – Citi Investment Research.

David Driscoll – Citi Investment Research

A couple of questions here just wanted to start off with North America and then go over to South Korea. In North America the sequential volume, it didn't improve quite perhaps as much I thought it would. My belief here would be that the improvement in industrial production combined with I believe it was on the first couple of conference calls you guys called out inventory destocking.

So with the redemption of industrial production inventory restocking seemed like it should have happened, yet when I just look at the year-over-year changes in the volume numbers on a sequential basis you can't see anything it doesn't look like there is any change there. Can you give me some thoughts around this and maybe a bit more color as to what's happening within the volume side in North America?

Ilene Gordon

Yes, David, it's Ilene. I think there are a couple of trends going on here and we've studied as an example the corrugated trends. And it's interesting when we looked back in June we thought that we saw some trends that that was turning around in terms of the shipment of corrugated boxes, and certainly we ship our products to both paper and the corrugators.

But if you look at the data that's comes out form the Fibre Box Association, volumes continue to decline year-over-year and that even year-to-date box shipments are down 9.8%, though I will say that September was down 4.8% year-over-year, though I understand September 2008 was a particularly low year. So while in the summer we thought we saw some glimmer of those shipments coming up, I continue to see weakness in that whole industrial area.

If you look at the beverage and food area, of course we're seeing some improvements in high fructose corn syrup as you know, especially with shipments down into Mexico because of high sugar prices. But when I look at shipments of our other products into the food industry, I still see not a lot of improvement.

And if you read the reports of the food companies, it's still a little bit lackluster and I do think that people are still in the mode of trading down, going to private label and maybe we'll see a move to mid price restaurants away from fast food, but a lot of that has not happened yet.

Cheryl Beebe

Dave, you're absolutely right. We were looking at the end of the second quarter we were looking for or anticipating the second half of the 4% below last year, and obviously the North American volumes were down more than that, which is again part of why we've narrowed this range.

David Driscoll - Citi Investment Research

In South Korea specifically, you made comments here that you were seeing a pickup in volumes there. In the second quarter you took the big write-off of your South Korean assets. So can you talk to me a little bit about that environment? Has it changed materially and do you expect to see a significant pickup in HFCS consumption continuing, or did you just get a one step up bump here in Q3?

Ilene Gordon

Dave, I think what we're seeing in South Korea is we're seeing a slow improvement in high fructose corn syrup demand and obviously again with high sugar there. The customers are moving over to high fructose. So we think that will continue to be a gradual improvement over the next 12 months, though I don't think the economy there is more robust than we see in some of the other mature economies, such as in North America.

So I would say that we're seeing a slow improvement. We're feeling better about the situation there and certainly our position there is positive, but it's not the fast growth that you might see over in China and in some of the areas of Asia.

David Driscoll - Citi Investment Research

Maybe I should have asked can you just give me a sense as to what the gap is between fructose and sugar prices in South Korea at this point given spot prices.

Cheryl Beebe

Dave, that's a little bit challenging to do, it's still favorable. Fructose pricing would be favorable but as you said we took the write-off of the intangibles or the goodwill in the second quarter. We're not expecting to get the full fructose volume back that we've had in the past. And what we've seen while it was sequentially improved in the third quarter, it's still not as robust as we would expect. We're only getting the secondary brands back.

Operator

Your next question comes from Vincent Andrews - Morgan Stanley

Vincent Andrews - Morgan Stanley

I'm wondering if we can kind of start to take a little bit of a look forward into next year. And I'm just wondering if you can comment at all based on where things are today whether you think your operating profit per unit overall is likely to increase.

Ilene Gordon

Well, that would be the ultimate forward-looking statement, Vince. Let's talk about things that would improve unit pricing. If we look at the corn cost today using the strip, they're about equal to what they were a year ago. Currencies are bopping all over the place, but they are more favorable then what we've seen through the first nine months of 2009.

Volume, I don't think anybody's ready to make comments on volume for 2010. I think we'd all like to be optimistic that the economic recovery will speed up in 2010 but it's still a bit early to be making any forecasts on it.

Vincent Andrews - Morgan Stanley

Okay, maybe we could then dig a little bit into plant utilizations. I mean, with volume trends continuing to be down, at what point do you, from a utilization perspective, start to – your unit costs or your fixed costs or however you want to look at it, start to get onerous if volume continues to decline like this.

Ilene Gordon

Well, I think that we're operating at a level now with the opportunity to ship high fructose corn syrup into Mexico where our plants are all operating. We could ship more volume but they're all operating pretty well. And true utilization this year is not as strong as it was a year ago, but I think that we see the opportunity going forward.

We see that eventually the volume is going to pick up again. And it's really what I think what everybody is waiting for is when it's going to happen. So maybe when the food companies and the people start buying food and the jobs are created, that's the period where we're going to start to see the pickup, but I see that it's several months off.

Vincent Andrews - Morgan Stanley

Okay, maybe last question before I pass it on, Ilene. You talked a little bit about the private label, the trend towards using private labels affecting you and then how some of the shifts in the out of home dining are affecting you. Maybe you can just kind of walk us through.

It's unclear to me at first blush why somebody buying private label versus a branded product would impact you. And then I would imagine you're best served if people are eating more McDonald's because they're probably consuming more Coca-Cola there. But just help us understand how you benefit or don't benefit from shifts in out of home dining.

Ilene Gordon

Well, I would say two things. First of all, private label purchases buy our products in the food area, so we benefit from both private label and the branded. Now if you go to the beverage side, obviously there's a different mix of product being bought by private label beverage companies versus the branded. And so it just changes the mix of what we sell.

In terms of the restaurant side, actually in the mid price restaurants there are more ingredients purchased in the mid price restaurants that would help us, whereas in the high end restaurants obviously it's a different level of cooking. And in the fast food side of the business, again, it's not necessarily our products. So the midsize, there's lots more batters bought, sauces and solutions that use our ingredients. So we feel that that trend will help our business.

Operator

Your next question comes from Christina McGlone - Deutsche Bank Securities

Christina McGlone - Deutsche Bank Securities

I just wanted to explore the volume a bit because I know, Cheryl, you said it's too early obviously for next year. But if demand were to hold steady so you didn't have any pickup in casual dining or pickup in branded food and beverage, but yet we see the pickup in volumes in Mexico and also less competition from Mexico and sugar coming in the U.S. Wouldn't that be a positive environment for your volumes?

Ilene Gordon

Well, it would be in that we all are trying to ship more down into Mexico. But the other thing I would say, we spend a lot of time talking about North America but South America is an important part of our business. And I'm very excited about what I see going on in Brazil and Argentina and Colombia in that the demand there, I mean the brewers are ordering quite a lot of product.

And as I said in my comments, it's accelerating. So I think we're on the upswing certainly in South America. And in North America, we'll get a little bit of uptick from the Mexico piece and hopefully the North American the U.S. piece will come back, but we just don't see the U.S. piece increasing right now.

Christina McGlone - Deutsche Bank Securities

Ilene, am I wrong in thinking that there would be less competition for Mexican sugar because if you look it looks like Mexican sugar has eroded some HFCS-42 share and that if we don't have that sugar coming in then you can see 42 volumes grow. Am I wrong in thinking that way?

Cheryl Beebe

Christina, I don't know that we've seen the impact of Mexican sugar eroding the 42 volume in the U.S. That's your question, is it not?

Christina McGlone - Deutsche Bank Securities

Yes.

Cheryl Beebe

What we've seen is more just the lack of consumption and 42 winds up going into the canning industry, whether it's fruits or vegetables or sauces, and we haven't seen the competition from sugar there.

Christina McGlone - Deutsche Bank Securities

Okay. And then I guess last questions, Coke products seem to be a little bit better than I expected this quarter. Are you still looking for a negative 120 to 140 for the year?

Ilene Gordon

No, it's actually narrowing. As you probably know, the meal prices and the oil prices are actually better at today's prices than they were in the fourth quarter of 2008. So if you look at the way the co-products went this year, we had $0.28 in the first quarter, $0.47 in the second, $0.21 in the third and it's conceivable that we could actually see the swing in the fourth quarter where we would actually have a positive by a couple of pennies.

Christina McGlone – Deutsche Bank Securities

So even with better co-products, better FX, the guidance really just tightened it didn't improve at all, and is that because of volume?

Ilene Gordon

That's correct. If you look at what our forecast had in the second quarter, the outlook was for North American volume we expected them to be down. We expected them to be down by around 4% and we're running at 5.7%. The swing in the Asian volumes, we expected to see low double digits as the HFCS sales in Korea returned in the third quarter.

What we actually saw happen was that the demand in Pakistan, because of the power rationing by the government to all industries, has really dampened the demand. And so the increase that we saw in Pakistan was basically mitigated by the decline we saw in Pakistan.

Operator

Your next question comes from Christine McCracken – Cleveland Research.

Christine McCracken – Cleveland Research

A quick follow-up I guess on the Pakistan situation. Did you mention whether or not those policies were continuing, or is that something that is hard to predict? Is that getting better?

Ilene Gordon

Well, the power outages are continuing and we think it's going to take another six or eight months to work itself through in the country and that investments and infrastructure weren't made to keep up with demand. And so we're experiencing in the order of four hours a day where power is not available and we have to be very creative on how we move our utilization time around. And the same thing is happening to our customers. So we think that the infrastructure that's being built will come online slowly and we'll be out of this by next June.

Christine McCracken – Cleveland Research

Then we've seen a lot of volatility in the corn markets here recently, a lot of concerns I guess about the harvest, even though it's expected to be record large, I guess. Last time we got into this situation you saw some of your customers, I think, start to get a little nervous and come to you a little earlier than they had in the past. Have you seen anybody come to you starting the process of negotiating for high fructose?

Ilene Gordon

I would say it's still too early in contracting to know that. And I read the corn reports like you do and I guess 28% is harvested. And I think there were some customers who are getting ready. But, again, it's too early to say will they make it happen.

Christine McCracken – Cleveland Research

Lastly, I guess, on the re-org in North America, any color around whether or not we could expect some cost saves out of that? Maybe just a little bit more around that or is that something you're going to cover at the analyst day in March?

Ilene Gordon

Well, we'll cover more when we talk about the strategy, but it's definitely not a move to save money it's to grow the business. And by reorganizing and focusing teams on the dairy business or health and nutrition or the farmer or confectionary, we believe that we will have opportunities to bring our ingredient strategy and solutions provider to our customers and add more value.

So it's all about growing in the areas where there are growth opportunities rather than any type of particular cost savings. I mean, the end result is if we sell more business, our plants will be more efficient. But the goal is really to grow where there are opportunities.

Christine McCracken – Cleveland Research

Is that going to require any additional talent you expect, or is that kind of still too early to tell?

Ilene Gordon

Well, we've moved some talent around. We have some very good people and refocused some people. But we've also had some opportunities to bring in some outside talent in some key marketing spots. So we're in the process of doing that.

Operator

Your next question comes from Ken Zaslow – BMO Capital Markets.

Ken Zaslow – BMO Capital Markets

Just a couple, I think easy ones. The Pakistan impact, how much was that on EPS?

Cheryl Beebe

We didn't break it out.

Ken Zaslow – BMO Capital Markets

Was it big, small or medium?

Cheryl Beebe

Well, you can look at the change in the operating income for Asia/Africa, and a fair portion of that change is – or a piece of that, not a fair portion, but a piece of that related to Pakistan. We don't break out the individual company operating –

Ken Zaslow – BMO Capital Markets

No, I understood. I just didn't know if, because it seems to be something that I wouldn't say one time in nature, but it'll last for a year and then it'll be gone.

Cheryl Beebe

That's correct.

Ken Zaslow – BMO Capital Markets

That's why I just wanted to figure out what actual earnings power is. I guess is what I was trying to get at. That's what I was trying to get.

Cheryl Beebe

Let me think about it, Ken, and see if there's a way to answer it.

Ken Zaslow – BMO Capital Markets

Okay, great. Did you say you have not started contracting for high fructose corn syrup this year, yet?

Cheryl Beebe

No, I don't think that's what Ilene said. She said it was too early to comment on the contracting season.

Ken Zaslow – BMO Capital Markets

Okay, but you have started?

Ilene Gordon

Yes, it's started, but again it's early stages. It's too early to say how it will come out, but it's definitely started.

Ken Zaslow – BMO Capital Markets

Okay. I guess the other issue is South American pricing. Can you talk about how long it's going to take to start to see your ability to get pricing in South America to offset the recent foreign currency hit? Is it still a couple quarters back? Are you seeing any sort of positive signs? Can you just give us a little way of thinking about it?

Cheryl Beebe

Well, Ken, if I think about the rate at which corn has declined versus the change in the price mix as we show on the third quarter net sales variance the price mix for South America was 4.4% negative. Yet when you look at the body of the press release, you see that the net corn costs were actually favorable.

So that says we do have pricing power. And I think relative to where the [rei] is today versus where it was in the fourth quarter, it will work itself out as we go through the last quarter of this year and into 2010.

Ken Zaslow – BMO Capital Markets

So, first half of 2010 we may be able to see positive South American pricing?

Cheryl Beebe

It's possible.

Ken Zaslow – BMO Capital Markets

Is it probable?

Cheryl Beebe

I don't know that I'm willing to make that forward-looking statement yet.

Ken Zaslow – BMO Capital Markets

I was just trying because again, over time you guys are usually able to get the pricing through and this quarter is still negative. I didn't know if there would be an inflection point in first half of next year or are we still going to wait until – just kind of getting a base. I'm not going to hold you to the –

Cheryl Beebe

Ken, if everything stayed equal from today, we would see favorable price mix given the fact that the currencies have revalued or the currency has revalued for the Brazilian [rei] and the Columbian peso. And so just on a comp basis from where they stand today and nothing else moved you would see a favorable trend.

Ken Zaslow – BMO Capital Markets

Okay. And how much is natural gas part of your cost of goods sold?

Cheryl Beebe

I don't think we've ever broken it out. It impacts the North American numbers more so than the Asian/African or the South American. As you recall, our three Canadian plants are all natural gas. Argo runs natural gas and our Mexican plant runs natural gas.

Ken Zaslow – BMO Capital Markets

I know, as you said, it's not large but the reduction in natural gas prices has been pretty large. Have you seen a material benefit from that?

Cheryl Beebe

No, because as you will recall we're hedgers, so we're not seeing a benefit in the 2009 numbers.

Ken Zaslow – BMO Capital Markets

But 2010 you would.

Cheryl Beebe

I would expect where we were not hedged we would see a benefit.

Operator

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

Heather Jones – BB&T Capital Markets

A few quick questions, one going back to U.S. question, or a North American question I should say. Given that I believe you said Mexico improved during the quarter. My impression was Mexico was up year-on-year for the quarter, is that correct?

Cheryl Beebe

That's correct.

Heather Jones – BB&T Capital Markets

So, U.S. and Canada worsened on Q3?

Cheryl Beebe

Yes.

Heather Jones – BB&T Capital Markets

And you mentioned the industrial side, and if I remember correctly industrial is not a huge component of U.S. So the food and beverage side for the U.S. and Canada, was that where the worsening was? Or if you could just give us more color about what happened during the quarter.

Cheryl Beebe

The U.S./Canadian numbers were down almost across the board whether we're talking paper corrugated, processed foods, beverage. If I look at the entire North American, what we had was only two segments that were up and that was, obviously, the beverage and that's the Mexican situation, and bakery was positive. Everybody else, all other market segments were basically down.

Heather Jones – BB&T Capital Markets

And did they all weaken across the board sequentially as well, or did one category weaken more than the other?

Cheryl Beebe

No, I think they're all basically, they all are down and there hasn't been the sequential improvements that we were hoping for.

Heather Jones – BB&T Capital Markets

But there wasn't a sequential decrease?

Cheryl Beebe

Correct.

Heather Jones – BB&T Capital Markets

But there was a sequential worsening on a year-on-year basis?

Cheryl Beebe

No. And you're talking from the second – Heather, just let me make sure. You're talking versus the second quarter?

Heather Jones – BB&T Capital Markets

Well, Yes, I have that volume for North America was down [5.7%] on year-on-year basis in Q2, similar to Q3, but yet Mexico was up on a year-on-year. So it sounds as if on a year-on-year basis, U.S. and Canada did get worse.

Cheryl Beebe

That's correct.

Heather Jones – BB&T Capital Markets

So what I'm asking is that year-on-year deterioration getting worse was that broad-based across all the categories or did one category in particular getting worse on year-on-year.

Cheryl Beebe

No, it's broad-based.

Heather Jones – BB&T Capital Markets

Okay. To finish up that conversation did the U.S. and Canada, did that improve as we went through the quarter or was September just as weak as July?

Cheryl Beebe

Heather, we don't typically look at the numbers on a month-to-month basis, we look at quarter-over-quarter.

Heather Jones – BB&T Capital Markets

Okay. As far as the corn cost, you had mentioned looking towards 2010 that at this point looking at the strip, corn costs are essentially equal to a year ago. But if I remember correctly, you locked in a lot of your corn for North America for '09 year relatively early in '08. So on that basis, I mean, where we see net corn costs currently where we estimate you must have lost a fair amount of it for '09, it's still a positive delta if all things stayed equal the way they are now. I was wondering if you could speak to that.

Cheryl Beebe

If all things stay equal, so that would say that there's no pricing give back relative to net corn costs, which there shouldn't be in a rationalized market. And we're talking North America, correct?

Heather Jones – BB&T Capital Markets

Yes.

Cheryl Beebe

And so if I look at 2010 relative to the pickup, it's going to be, if pricing stayed the same and our net corn costs are actually better than 2009, then yes the comparable would be favorable.

Heather Jones – BB&T Capital Markets

Okay. Then real quick on the opportunity in Mexico, given the pickup there and everything that we're reading would point to pretty tight sugar supplies into the fall of 2010. Is it your experience and your expectation that that should keep utilization relatively tight here?

Ilene Gordon

Well, we started looking at what kind of consumption of tons in Mexico might one expect, and it's up significantly. If you look in 2007, the TRQ said it was 500 tons and we expect that in 2010 to probably double. It'll help utilization, but of course we have all the different dynamics in North America to deal with at the same time, so I wouldn't expect utilization in 2010 to be worse than 2009 and hopefully better.

Cheryl Beebe

And if you add in the last component of that, which was the ethanol, is more favorable today based on oil prices and net corn costs, so hypothetically one would think that between the Mexican demand as well as the blending at the current rate is that things should be pretty balanced.

Heather Jones – BB&T Capital Markets

Well didn't one of your competitors shut down a plant in June?

Cheryl Beebe

One of the competitors earlier in the year shut down a plant which was estimated to be 2% to 3% of the grind.

Heather Jones – BB&T Capital Markets

Okay. Then my final question is the dollar has weakened considerably. It's weakened it seems disproportionately relative to the [rei] but against most of your currencies. If everything stayed the way it was today, the dollar relative to and all those, is your expectation that you should be able to get back in '10 the negative hit that you experienced during the first three quarters?

Cheryl Beebe

If you keep the currencies where they are today and there was no change in pricing, then the $0.25, which is the year-to-date number, $0.10 for the first quarter, $0.09 for the second, and $0.06 in the third my answer would be yes.

Operator

Your next question comes from David Driscoll – Citi Investment Research.

David Driscoll – Citi Investment Research

I wanted to go back to a couple of follow-ups on the corn curve. If I recall, Cheryl, last year the contracting did complete earlier than typical and by the end of the third quarter you actually had done a fair amount of contracting? Is my memory accurate on that?

Cheryl Beebe

That's correct. If you think about coming through the third quarter of 2008 before the fourth quarter decline because people were concerned that corn costs were going to increase, and so they chose to take off their book of business earlier.

David Driscoll - Citi Investment Research

So then we've got two major effects going into 2010. The first one is, is that if corn prices stay about where they are the gross corn cost should go down quite significantly? That doesn't say anything about the net corn, but the gross corn cost should go down rather significantly. Again, would you agree with that? Am I missing anything?

Cheryl Beebe

Correct.

David Driscoll - Citi Investment Research

So then big picture looks like 2010 then still shapes up to be a much better year. I think you just quantified, and I want to make sure I get this right, that if things stay constant and we get back the $0.25 in foreign exchange hit that we've taken so far this year.

Cheryl Beebe

That's correct.

David Driscoll - Citi Investment Research

Then add the next part of it, which would be in 2009 I believe, and Cheryl tell me if this is right, but I believe that 2009 goes down as a historically negative deviation between co-products and the gross corn cost that you had locked in your North American business, negative meaning that this was a huge negative impact to EPS versus what we would expect on kind of a normal historical relationship between corn and co-products.

Cheryl Beebe

I would agree, and it's not only 2009, it's 2008 because the 2008 numbers had a co-product credit close to $2. And so the normal relationship on a net corn cost recovery tends to be around 30% to 40% versus 50% to 60%, so you got the year-over-year swing.

David Driscoll - Citi Investment Research

Right, so if we just stop at this point and we say we've got a foreign exchange benefit going into next year and a normalization of the relationship between corn and the co-products, then those two factors alone are enormously positive swing factors to the numbers.

Cheryl Beebe

They are with the exception, Dave, is that if you think about where the margin enhancement and margin erosion occurs, it's what happens to the co-product from the time at which we book the firm price business. And so the year-over-year comparison may not be as attractive as I think you would estimate and it relates to where are those firm price contracts resetting?

And so hypothetically if the net corn cost on those firm price contracts were $3 then the pricing was based on $3. If net corn costs come down to $2, the pricing should reset based upon the $2. And then it becomes a question of is there margin enhancement or margin erosion in the pricing model. And remember that we've generally said the book of business in North America is around 50% grain related and 50% firm price. So out of grain related it's going to pass right back through the system.

David Driscoll - Citi Investment Research

Well, I think that we're going to need some more information on contracting to really dial into exactly the specifics and would you anticipate that you'll have contracts completed by the January conference call?

Ilene Gordon

We would hope so, which would be early February, so we would expect so.

Operator

Your next question is a follow-up from Vincent Andrews – Morgan Stanley.

Vincent Andrews – Morgan Stanley

Could I just ask, I'm reading a lot about as the corn crop moves through the harvest there are moisture issues and there are quality issues, from a co-product perspective what effect, if any, will that have on co-product availability or pricing. Also hearing the farmers might delay harvesting through the winter. Is this something that's on your radar screen at and is material if any of it takes place?

Cheryl Beebe

It's not on the co-products as much as is the question about starch yield. Will you have a degradation in the starch yield because it's taking longer to get the corn crop out of the fields? So if you normally have a 66%, 67% starch yield from a bushel, does that decline? And if that does decline, then that increases your corn costs because you'll need more starch to get the same amount of finished product out.

Vincent Andrews – Morgan Stanley

That, obviously, would affect you only on 50% of your book of business in the U.S., right?

Cheryl Beebe

That's correct because you go back to the grain-related you would pass that through on a grain-related, but on a firm price it would be on our nickel.

Vincent Andrews – Morgan Stanley

And presumably that's something that's being discussed in contracting right now, but it's hard to quantify, right?

Cheryl Beebe

It's hard to quantify. I mean they're thinking one of the analyst's reports out this morning there was a comment about one of our competitors making a comment that they're not looking to necessarily contract until the end of November because of the volatility around this corn crop.

Vincent Andrews – Morgan Stanley

So that's probably broadly consistent with both what buyers and sellers. People want more clarity on that issue.

Cheryl Beebe

I would agree.

Vincent Andrews – Morgan Stanley

Can you give us any sort of sense of if normally the starch yield is 60% to 67% if you go back in the history of wet crops how low that yields ever been.

Cheryl Beebe

I don't think I have, Vince, I don't have that number. I don't think we've seen something like this before, but I can go back to our commodity group and see if there's any stats.

Vincent Andrews – Morgan Stanley

Is there any sort of ballpark concept of how that would affect your costs to good sold?

Cheryl Beebe

I can't quantify it.

Vincent Andrews – Morgan Stanley

My last question would just be in terms of the negotiations this year, what do you think the most important driver is? Is it going to be the return of industrial demand or where that lies or is it going to be how much HSCS is going to go down to Mexico year-over-year or is it something else?

Ilene Gordon

Well, I think it's going to be a combination of food companies looking at their purchases to satisfy demand of the consumers. Certainly the beverage side in terms of the continued shipment to Mexico will be a positive. And as we said earlier, industrial part of the business in terms of paper and corrugated is not a large part of our business. I think that's going to be slow to come back. It will be steady.

So what I look to is the opportunity to drive more ingredients in both the beverage and the food and the pharmaceutical side, and that's certainly North America. And then, of course, in South America the brewery business the demand is extremely strong and growing. We're entering to that season and so that we see in South America the ability to ship into the brewery industry and food, obviously, is very positive. So I think those are the key factors.

Vincent Andrews – Morgan Stanley

I'm just thinking more, and Cheryl you sort of alluded to this earlier when you said in a rational industry price would hold. So I'm just trying to isolate across the industry which of those variables is most important to utilizations and which would be the one that might cause somebody to make – what would appear to the other players to being a rational decision.

Ilene Gordon

I think we would take – if we had to pick the one factor it would be the shipments to Mexico. I mean that's certainly something that we're experiencing now that we didn't have a year ago and that's a positive on demand and utilization. So I would say that that is probably the one swing factor that you're looking for.

John Barry

Operator, we have time for one more question. We're just about running out of time.

Operator

Your final question is a follow-up from Christina McGlone – Deutsche Bank Securities.

Christina McGlone – Deutsche Bank Securities

Just to touch on what Vincent was talking about, about the state of the crop and the delayed harvest. How should we be thinking about basis because it seems to be unusually firm for this time of year? Is that a headwind at all or is that something that you've already locked in?

Cheryl Beebe

It could impact us. If the crop doesn't get out of the field it could impact basis through November December. I think it will resolve itself as we get into 2010. But you're absolutely right, basis has moved substantially over the last four weeks.

John Barry

Okay, Operator. If that was our last question we're going to close down our conference call and our webcast this morning. As a reminder, there's a replay of the webcast at www.cornproducts.com and also an audio conference call replay is available through Tuesday, November 10. The phone number for the audio replay is 719-457-0828 and the pass code is 6446801. Thank you for participating in this mornings call.

Operator

That does conclude our conference call. Thank you for your participation.

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Source: Corn Products International Inc. Q3 2009 Earnings Call Transcript
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