Corn Products International: Poised for Growth

| About: Ingredion, Inc. (INGR)

On March 12, The Wall Street Transcript interviewed Cheryl K. Beebe, Vice President and Chief Financial Officer of Corn Products International, Inc. (CPO). Key excerpts follow:

TWST: What is Corn Products International?

Ms. Beebe: Corn Products International is a leading global provider of refined agriculturally based products and ingredients. Our primary raw material is corn. We also process tapioca roots. We have a position as the number one worldwide producer of dextrose, which is a sweetener, as well as regional leadership in starch, high fructose corn syrup and glucose syrups. Outside of the US, we typically have major in-country share of capacity, and we have a very disciplined and focused financial policy, which leads to a strong balance sheet and strong cash flow generation. Typically, over any five-year period, we would generate about $1 billion in operating cash flow.

The company has a product portfolio of sweeteners, starches and co-products. The typical products are dextrose, glucose, high fructose corn syrup and sorbitol. They are used in some 60 diverse industries worldwide. For example, the sweeteners would be found in carbonated beverages, sports drinks, frozen desserts, jams, jellies, chewing gums and candy. Starches, which are classified as food starches or industrial starches, are used in the production of consumer products like cereals, puddings, cakes, cookies and crackers. Industrial starches primarily are used in the production of paper, corrugating boxes and textiles. Dextrose, which is also in the sweetener category, is used as a fine chemical in pharmaceuticals. For example, if you have to stay in a hospital and you need an IV drip, it is made with anhydrous dextrose. In 2006, about 55% of our business was broken into sweeteners, about 23% was in starches, and the remainder, 22%, was in co-products. Co-products come from the corn wet milling process, in which you take yellow dent corn kernels, steep them and then separate them. You wind up with three co-products: corn gluten feed, corn gluten meal and corn oil. The industry in the US is made up of four major players - ADM, Cargill, Tate & Lyle and Corn Products.

We have the number four position with about a 10% share. However, in North America, we are the only corn refiner with full-scale sweetener and starch production facilities in Mexico and Canada, where we have the number one positions. We have been operating at our Argo plant, outside of Chicago, for 100 years. So we are the most regional and, in fact, most global pure-play corn refiner. If you proceed outside of the North American market, into South America and Asia/Africa, we have installed capacity in Argentina, Brazil, Chile, Colombia, Peru, Kenya, South Korea, Thailand, China and Pakistan, and we typically are either number one or two in those markets. We also have technical marketing agreements in South Africa and Venezuela. In total, we produce in 15 countries with 35 plants and market to about 70 countries.

The competitive landscape in the US is undoubtedly more intense than the rest of the world because, outside of the US and Canada, we really are the player to beat. We have a lot more control over our own destiny in our South America and Asia/Africa regions, with the exception of China, where we have operated for many decades. We are actually both an old and young company. We started in 1906 as the Corn Refining Company, and for 90 years, we were the foundation of CPC International, or Best Foods, which was a global consumer products company. At the end of 1997, CPC International spun off all of the assets of its corn refining business, both domestically and internationally, to its shareholders, creating a new, publicly traded company called Corn Products International. The existing parent then changed its name to Best Foods and, eventually, became part of Unilever. In 2007, we are in our tenth year as a public company after marking our 100th anniversary in 2006 with record results.

TWST: How much of the fundamentals of the industry can you count on to provide a base growth percentage and how much is through organic growth? What are the opportunities for M&A and how would you approach those?

Ms. Beebe: The majority of our sales - over 60% - come from our North American region, where the majority of growth is margin recovery, led by higher pricing in the US and Canada and a strong, across-the-board performance in Mexico. North American had net sales of about $1.6 billion out of the total record company sales of $2.6 billion last year, which was up 11% from 2005. So North America is predominantly pricing recovery, coupled with offsetting the much higher corn costs we have seen since the fall of 2006 and that persist today. Corn can be 40% to 60% of our cost of goods sold. South America, which is $670 million in annual sales, and Asia/Africa, which is about $363 million, are both expected to show growth over 2006. This is primarily organic growth coming from normal GDP improvement and consumption in the key categories - processed foods, beverages, brewing and animal feed.

We expect that targeted acquisitions will add greater diversity to our product portfolio in the years ahead, and we have significant investment capacity to be able to seek out profitable, on-strategy acquisitions, joint ventures and licensing or sales and marketing agreements. We are sticking with our core strengths and competencies and primarily looking for sweeteners and starches. We completed a small acquisition a few weeks ago with about $100 million in annual sales between our South American region and our North American region, and that's adding to the product portfolio. It's a line of sorbitol products, which are made from corn, and this acquisition gives us a more breadth in the sweetener category since these polyols are low-calorie, sugar-free products. We are now a leading polyols producer in the Americas.

Over the next 12 to 24 months, we will continue to look for acquisition targets, but the growth that we are projecting is primarily from the base business, or organic in nature. Our planned 2007 capital spending level is $145 million, which will exceed depreciation. We expect to spend about $100 million for high-return, select investments in the base business, including projects in Argentina, Mexico, Colombia, Pakistan and Thailand. Our annual maintenance cap ex is about $30-$50 million. So we think we have a really solid business in non-discretionary demand segments, and we have diverse geographic coverage with a broad range of industries and customers. Overall, there are positive industry fundamentals, including rising populations, GDP and per capita income growth, a push for better diets, and relatively high barriers to entry. Despite economic recessions or political turmoil, people continue to eat and drink, which is a positive for us.

TWST: What are the key metrics or events that investors should focus on? What matters?

Ms. Beebe: We publish what our key metrics are. We look to have low double-digit compounded growth at the EPS line. Our return on capital employed, or ROCE, target is between 8.5% and 10%, so not only do we intend to meet our cost of capital, but we also are planning to exceed it. Last year, our ROCE was 7.5%. The total debt to EBITDA will be less than 2.25 times. This keeps us investment grade, which provides liquidity and funding at a reasonable cost, and the balance sheet doesn't become overleveraged. We are currently at 1.4 to 1.6 times for total debt to EBITDA. Our debt to total capital target is 32% to 35%. Again, this is about tying the balance sheet to the income statement and the leverage. At year-end 2006, our debt to total capital was a comfortable 26.7%.

The last metric is operating working capital as a percent of net sales. The target is to be between 8% and 10%, and we are currently at 10%. These metrics are in all of our investor communications, including our Website. We go back and review our progress against these key financial targets once a year. We provide the calculations for four of the five metrics, with the exception of the EPS, which is obviously on the income statement. Again, these calculations are contained in our various investor materials.

TWST: What is it that compels investors to include CPO not only as part of their current portfolios but also as part of their longer-term investment strategies?

Ms. Beebe: I think it's the commitment by the management team to deliver sustained shareholder value coupled with a clear business model that has demonstrated the ability to generate good returns. Our international operating margins tend to be in the mid- to upper teens versus our North American margins, which tend to be in the mid- to high single digits. Our operating cash flow consistency comes from our diverse geographies and the broad range of industries and applications that our products go into. A significant portion of our business is in non-discretionary demand segments, with our leading end markets being processed foods, soft drinks, brewing and animal feed, each of which exceeds 10% of our annual global sales.

We do not have any customer with more than 10% of our sales, again pointing to our diversity and balance. We have a relatively low maintenance capital expenditure requirement annually -$30 to $50 million. We have strong debt protection measures and a lot of financial flexibility. We have a solid balance sheet and a proven business model that should continue to allow us to grow both in good times and in challenging times.

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