Corn Products International's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.28.11 | About: Ingredion, Inc. (INGR)

Corn Products International (CPO) Q3 2011 Earnings Call October 27, 2011 9:00 AM ET

Executives

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

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

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

Analysts

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

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

David Driscoll - Citigroup Inc, Research Division

Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division

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

Christina McGlone - Deutsche Bank AG, Research Division

Christine McCracken - Cleveland Research Company

Heather L. Jones - BB&T Capital Markets, Research Division

Vincent Andrews - Morgan Stanley, Research Division

Operator

Good day, everyone, and welcome to today's Corn Products International 2011 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Aaron Hoffman, Vice President of Investor Relations and Corporate Communications for Corn Products International. Please go ahead, sir.

Aaron H. Hoffman

Great. Thanks, Melody. Good morning, and welcome to Corn Products Third Quarter 2011 Earnings Call. Joining me on the call this morning are Ilene Gordon, our Chairman and CEO; Cheryl Beebe, our Chief Financial Officer.

Our results were issued this morning in a press release that can be found on our website, cornproducts.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 those forward-looking statements, and Corn Products International is under no obligation to update them in the future as or if circumstances change.

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

With that out of the way, I'll turn the call over to Ilene.

Ilene S. Gordon

Thanks, Aaron, and let me add my welcome to everyone joining us today. We appreciate your time and interest.

We continue to see strong performance across the business, and the year is playing out largely as we had described in February when we first issued 2011 guidance. At that time, we indicated that 2011 would be front-end loaded. Looking back, the adjusted EPS for the first quarter was $1.28. That was followed by $1.10 in the second quarter, though that included the Argo maintenance. Today, we reported $1.20 of adjusted EPS and are guiding to $1.05 to $1.15 in the fourth quarter.

The primary reason for the sequential decline in EPS is the layout of our hedged corn costs with the cheapest corn coming early in the year and rising as we move through 2011. I'm pleased to see that our team and our business model proved resilient. We delivered our plans and commitments in spite of tough macroeconomic conditions and volatile commodity markets. And I see this performance as all the more impressive given the significant workload the organization has undertaken to successfully and swiftly integrate National Starch. We are on plan to complete the integration by the end of 2012. By implementing certain integration programs more quickly, we are in a position to achieve an incremental $30 million of cost savings in 2012. And we remain focused on the long-term growth prospects that underpin our strategy, expand our portfolio of products and extend our geographic reach. We have recently committed approximately $100 million of capital to support the long-term growth of our specialty ingredient platforms and for geographic growth.

The addition of National Starch's R&D capability enhances our go-to-market position. It gives us long-term opportunities to enhance our mix of products. While the strategic fit of the acquisition is outstanding, the financial implications are also compelling. During 9 months of 2011, our adjusted EPS has increased by $1.38, roughly 2/3 of that amount came from National Starch net of financing costs. At the same time, that leaves significant growth having come from organic business performance. In fact, that implies double-digit EPS growth on an organic basis in spite of the headwinds that I discussed earlier.

Let's now shift from a broad view of the first 9 months to some thoughts about how the business performed in the quarter. I'll take this from a fairly high level. Let's start with North America.

We continue to see stable demand in North America as we have for most of the year in spite of the general economic challenges. We have also seen significant price increases take hold to offset rising raw material costs. On our second quarter earnings call, we reported that contracting had begun a bit early and has continued through the third quarter. We'll update you further on our year-end call when we've wrapped up the contracting season.

And manufacturing optimization is progressing well. This is the process of integrating the Corn Products and National Starch manufacturing footprints to maximize efficiencies and minimize costs. It should represent an important part of our integration cost savings in 2012.

Turning to South America. We continue to see strong food, beverage and brewing demand, reflecting positive economic conditions. At the same time, we have made capital investments in the region this year and will continue to do so next year in anticipation of long-term opportunities. As in North America, you can see in our press release today that we've taken significant pricing actions in South America to offset higher input costs.

Turning to Asia Pacific. Demand remains balanced with a mix of growth and decline in different countries. The volume growth we saw was driven by the acquisition. Demand is also stable overall in our EMEA region, though Pakistan continues to see robust pricing trends that are offset by energy issues. And we're pleased to see ongoing margin recovery in Europe after some input cost challenges in 2010.

In summary, we are very pleased about how the year has come together and anticipate a good finish. Now I'll turn the time over to Cheryl to take you through some of our financial results. Cheryl?

Cheryl K. Beebe

Thank you, Ilene. As usual, let me add context and color around the quarterly performance. Organic volume remained relatively stable in line with expectations. Economic weakness across the world combined with the impact of higher commodity cost and in some cases, stronger currency has dampened demand. We expect this to continue into the fourth quarter.

Acquired business volume contributed about $337 million of net sales in the quarter, which is pretty consistent with the previous 2 quarters' results. This quarter marks the fourth quarter of CPO ownership. The trailing 4 quarter net sales from the acquired business amount to approximately $1.4 billion. The estimated operating income associated with the acquired business is around $190 million. Obviously, this acquisition has created a substantial amount of value for our shareholders. Now that we have passed the one-year milestone, we will no longer breakout the acquired business.

Moving on, we continue to see significant pricing actions in response to rising input costs. The third quarter gross in net corn costs are up versus last year and are sequentially the highest so far this year. This is the pattern we discussed previously with the first quarter having the lowest corn costs and increasing as the year went on causing the first half to be stronger than the second half.

On the foreign exchange side, the strengthening of the dollar occurred late in the quarter. At the current levels, we would expect the comparison to be negative in the fourth quarter by roughly $0.02 to $0.04. The third quarter has a positive effect on currencies of about $0.02. This year's effective tax rate is lower due to the NAFTA settlement. Without that, we would estimate the tax rate to be around 31% to 32%. And finally, we bought back 1 million shares in the quarter under the company's stock repurchase program. We have 3.7 million shares remaining on the authorized program.

Moving on to the quarterly results. Net sales increased $608 million or 60% versus last year. Gross profit increased by $104 million. The gross profit margin was up 20 basis points, reflecting the increase in net sales. Reported operating income was up $53 million and adjusted operating income increased $49 million. Reported earnings per share increased to 133% or $0.64 per share. Adjusted EPS was up 48 % or $0.39 per share. Please see the reconciliations at the back of the press release.

The $608 million increase in net sales from a year ago is approximately $337 million from the acquired National Starch business, $243 million from price/mix and $26 million from foreign exchange. Organic volume was basically flat.

North America showed a net sales volume improvement of 2% against last year, up from a negative 2% last quarter and flat in the first quarter. South America's organic volume was up in sweetener sales but lower in feed and corn oil sales in Brazil, which drove the number for the region negative this quarter.

Asia Pacific was down 2% versus last year, but improved from the negative 6% in the second quarter and negative 1% in the first. Lower starch demand and exports and the loss of one-time sales volumes in liquid dextrose are behind decline in Asia Pacific.

EMEA's organic volume was flat this quarter versus last year compared to a 5% increase in the second quarter and the 19% increase in the first quarter.

Adjusted operating income was $151 million, up $49 million. To get back to the reported operating income of $142 million for the quarter, we subtract integration and restructuring costs of $9 million. All 4 regions continued to contribute to the growth.

Getting back the $0.33 of charges to the 2010 third quarter reported EPS brings us to adjusted EPS of $0.81. Changes from operations contributed $0.44. This is derived from volume of $0.35, $0.08 in market improvement, $0.02 from foreign exchange and a negative $0.01 of other income. Nonoperational changes amounted to a negative $0.05, $0.04 from higher financing costs, $0.02 from a higher share count and $0.01 from a favorable tax rate. That brings us to the adjusted EPS of $1.20.

Taking into account the integration restructuring cost of $0.08, brings us to the reported EPS of $1.12. On a year-to-date basis, the net sales are up $1.7 billion, reflecting about $1 billion from the acquired business and $722 million from price/mix volume and foreign exchange. Gross profit dollars increased by $368 million, and the gross profit percentage increased 190 basis points.

Synergies and integration costs are tracking well. We are running a bit better on the synergy number and a bit higher as well on integration costs. For the first 9 months, operating expenses increased by $175 million, of which $138 million relates to the acquired business.

Reported operating income is up $268 million and adjusted operating income is up $195 million. On an EPS basis, reported EPS has increased by $2.57 per share and is up $1.38 on an adjusted basis.

Adjusting for $0.66 of restructuring and acquisition costs, the year-to-date 2010 adjusted EPS was $2.19. Changes from operations has added $1.71, $1.29 from volume, $0.36 for margins, $0.07 from exchange rates and a negative $0.01 from other income. Nonoperational changes amounted to a negative $0.33. Higher net interest expense associated with the acquisition financing increased $0.34. The higher share count impact was $0.08 and was more than offset by the lower tax rate. The year-to-date adjusted EPS was $3.57. We add back the NAFTA settlement of $0.75 and subtract $0.22 for integration and restructuring charges to get us to the reported EPS of $4.10.

Moving on to cash flow highlights. The story here is the impact of higher commodity prices on inventory and receivable values. We have invested $279 million in trade working capital and $59 million in the margin accounts. Capital expenditures year-to-date are $158 million. Cash provided by financing activities was a positive $17 million.

With 3 quarters behind us, we have tightened the guidance range by bringing up the bottom of the range from $4.85 to $5.05 while the top end of the range remains at $5.15. The adjusted range is $4.62 to $4.72.

The guidance for the fourth quarter on an adjusted basis is expected to be in the range of $1.05 to $1.15, excluding the $0.10 of integration and restructuring cost. The guidance incorporates the forecast of weaker currencies and softer demand. Both of these are expected to be offset by lower financing costs and a lower tax rate. Again, as we have said on the prior 2011 quarterly calls, corn costs are expected to be higher than the fourth quarter 2010.

On a regional basis, we expect North America's operating income to be down versus last year based on higher input costs and softer volumes. In South America, we expect operating income to be up on favorable price/mix. The forecast incorporates weaker currencies and soft demand as we continue to trade price per volume.

The outlook for Asia Pacific is flat compared to last year on an operating income basis and incorporates higher costs and soft demand. We expect to complete the integration of our operations in Thailand this quarter. With respect to EMEA, the outlook is for an improvement in operating income over last year as we anticipate a favorable price/mix will more than offset the higher cost. We're expecting demand to be relatively stable. I will pass the call back to Ilene for closing comments.

Ilene S. Gordon

Thanks Cheryl. As I've done end previous calls, I'll wrap up with our strategic blueprint, which continues to guide our decision-making and strategic choices with an emphasis on value-added ingredients for our customers. Looking at the blueprint, we've seen real operational excellence this year in generating savings in various initiatives, while integrating a sizable acquisition. As I mentioned earlier, we've seen growth from both the organic business and from the acquisition. We have delivered this strong performance in spite of difficult economic situations around the world. This is a testament to our prudent thoughtful approach to managing risks, building our business and the talent of our dedicated employees. And now we'll be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ken Zaslow with BMO Capital Markets.

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

My first question is how much visibility do you have to have for 2012 and 2013?

Cheryl K. Beebe

Well, Ken, the visibility as we said in the second quarter call, the fundamentals for North America are positive. We have very tight supply or high utilization. That bodes well for strong pricing. We look at the synergies that we expect, and that's positive. And again, that's coming from our manufacturing optimization and procurement savings. There's a little bit of regional SG&A. There are some costs that will offset the $30 million as we continue to deliver those synergies. If I look at the currencies, there are a bit of a headwind. As we were relatively stronger in the first three quarters of this year and, obviously, weaker in the fourth quarter, so that will make the comps a little bit more challenging next year. But when I look at it in total, I think the environment is positive. It's a bit too early. I can appreciate why everybody would love to have numeric guidance for 2012 given all the volatility that's occurring in the market, but I think we're just a little bit too early to do that, and we'll stick to our normal pattern of doing it on the fourth quarter call, early in the first quarter of next year. But I think the environment is generally positive. The one unknown is, what is the demand factor given the economic challenges around the globe. I am relatively positive. I don't think we're back in the 2008 environment where we saw our, because of the U.S. economic crisis, demand just fall off the table in the first and second quarters of 2009. I think there's less inventory in the consumers pantry and on the retail shelves. So I think we're talking a couple of percentage points, plus or minus, Using the best guess I have at this point in time. Ilene, would you like to add anything?

Ilene S. Gordon

Well, I think that the other thing is, is that we have made some capital investments that expand capacity in places like South America and around the world. And those are -- we're in the process of making those investments now and some have already occurred earlier in the year. And so those will start to come onstream in late 2012, 2013. So that will give us the added capacity for some of those growth in ingredients in other parts of the world, and we'll be ready for 2013.

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

So let me ask you straight up then. If you were to deliver anything less than $5, would you be highly be disappointed? Let's take the midpoint of your range of $4.67 or whatever that is. It seems like the things that you said and I just take in the $0.20, the $0.26 of cost synergies plus the $0.12 gets me above $5. And if everything else is a loss, you're still above $5. Is that not, at least, the way to the starting point from my point of view?

Ilene S. Gordon

Ken, it's Ilene. No, I think that's right. I think when we look at the arithmetic of the maintenance shutdown that we won't have next year and then the anticipated synergies, I think that would be a fair statement that we ought to be able to make that type of improvement. And if demand is reasonable, more than that.

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

And this is not a fair question to you, Ilene, and I apologize, because this is probably more for Cheryl. I get the question all the time. Look at 2009 results and kind of -- the issue is, look, we're going to another macro issue globally. Can you talk about what the difference is between '09 and going forward and how that will not repeat itself and kind of draw that conclusion, because I think that was also kind of created a little concern. If you could resolve that, that would be helpful.

Ilene S. Gordon

Well, again, I go back to a piece that Cheryl touched on, this whole de-stocking. And the customers that I've met with and have talked with again reiterate that they don't see the current headwinds like it was in 2009 in that in the supply chain and the consumer's cupboard, they don't -- nobody came back and built up all that inventory. And so any type of slowdown that you might be seeing now in consumption is really just people's concern or maybe trading down in some food items. But people are still eating, and they're going to work. And they are attending what they need to do in their daily lives, and so people continuing to consume food products. So I think what's different is definitely that jolt that the system had, which had a couple of months of incremental inventory in 2008, 2009, that came out. It never was rebuilt, and so what we're seeing today is just a response to people being a little bit nervous.

Cheryl K. Beebe

And, Ken, I would add a little bit more color as well, is that when I look at where the 2009 impact was, it was really the U.S. economic issue. And then when I look at the size of our portfolio in the new combined business, all right, this time it's Europe who is having the economic crisis, and Europe is the smallest of our 4 regions.

Operator

Next we'll hear from Christina McGlone with Deutsche Bank.

Christina McGlone - Deutsche Bank AG, Research Division

I guess just to follow on Ken's questioning. Two areas that I worry about. One in particular, Paper and Corrugating, I mean when you just talked about people are eating and that kind of thing. I know that it's only 10% of sales, but I just wanted to understand your exposure more maybe from a volume perspective because what I would worry about is if that area is slowing, which we starting to see a little bit, then what does that do to your utilization? So if you can kind of frame that exposure.

Cheryl K. Beebe

Christina, it's Cheryl. I think for us, the exposure is probably the least because, as you said, it is about 10%. But as I think about our manufacturing optimization going back to our largest region in North America, part of what we're doing in the manufacturing optimization is we're actually moving [indiscernible] Away from the industrial and into the food.

Christina McGlone - Deutsche Bank AG, Research Division

That's helpful. That's really helpful. And then I guess, in Europe, it is your smallest region, but I think about driver international starts like clean label demand. And I'm curious in this kind of economic environment if that just dissipates because people can't afford it?

Cheryl K. Beebe

I think that the consumers -- we have a couple of different types of consumers around the world and certainly in Europe, and we're continuing to see the demand for the clean label products in what we call our wholesome category. And so it's true that some consumers are trading down to more basic products, We continue to see that demand and we've added capacity in our global network to address that type of demand. So I think that it may not grow as fast as we would like it to. On the other hand, I do see some growth there.

Christina McGlone - Deutsche Bank AG, Research Division

Okay, and then just last one. When you were giving the outlook, there was a lot of kind of soft demand, maybe stable demand. Is this demand elasticity to the pricing that you put through or is it weakness over and above that elasticity?

Cheryl K. Beebe

No, I think the majority of it is relative to the pricing. If I look at South America, they have had to continue to take strong pricing actions as corn continue to rise throughout 2011. North America is 50% firm price and 50% grain related. And so they took the pricing action based upon how the book of business was done at the early part of -- end of 2010, early part of 2011. So this is really the trade-off of maintaining that pricing and will sacrifice the volumes.

So I see that both in South America, and I see a piece of it in the Asia Pacific as well. The other piece is that up until the end of the third quarter, the strong currency -- so the weak U.S. dollar and I'll be very specific with regards to Brazil. The strong Brazil real was impacting and probably will continue, until it clears the system in the fourth quarter, to impact our customers' ability to export. And that's mostly in the confectionary line.

Operator

Our next question comes from David Driscoll with Citi.

David Driscoll - Citigroup Inc, Research Division

Just a quick question. On the guidance itself in the press release, you basically say that you were just tightening the guidance or something like that. But somehow I think it's different than that. Was it not that the charges, the $0.32 number, is higher? It used to be $0.25. And at the top end of the range as of last quarter was something like $4.65 after we exclude all the various items?

Cheryl K. Beebe

If you do -- the reported number, we took up the bottom of the range. We did not adjust the top end of the range. You're absolutely correct on the adjusted, and part of what moved the adjusted was the fact that there was an increase in the integration costs, as you have pointed out.

David Driscoll - Citigroup Inc, Research Division

Then that would suggest to me if you can keep the other number the same, if the integration cost go higher, then really there's a positive answer here regarding the underlying operations. And if I've got that correct, can you just describe simply kind of what it is?

Cheryl K. Beebe

Sure. Absolutely. There's -- basically, we are not changed at the, what I'm going to call, the above the line. So from the operations side of it, we are having a little bit better result through the mix on the tax rate, which is part of that. And the other was a little bit of lower operating expenses. While higher than this quarter, they're a little bit down from what I was expecting in the fourth quarter.

David Driscoll - Citigroup Inc, Research Division

Interest expense, Cheryl, can you talk about the numbers there? We were looking for something a fair amount higher. So what's the sustained capability [ph] The new interest expense run rate?

Cheryl K. Beebe

Well, the interest -- let's talk about the interest rate this quarter. We are down about $5 million from where I suspect everybody was forecasting based upon the guidance that the company had given. What occurred in the fourth quarter is that we had a $5 million FX gain, which reduced the net interest expense. I do not expect that to occur in the fourth quarter with the larger operations. We do get some volatility from the movement in the exchange rates. So for the fourth quarter, we will be back up to $18 million or $19 million in the financing costs. I think that is a one-time issue as the currencies moved at the end of September.

Ilene S. Gordon

But that $5 million was for the third quarter.

Cheryl K. Beebe

That was for the third quarter.

David Driscoll - Citigroup Inc, Research Division

Final question for me is just this foreign exchange issue in South American pricing. Cheryl, we've gone through this for years. Normally, if my memory is right -- I'm going to make this a statement, but it's really a question. In historic past, there was like a number of quarters that would go by while the company was recovering pricing to offset big foreign exchange devaluations. If the past is true, then it would suggest to me that like Q4, Q1 have some foreign exchange headwinds that are not fully recovered by local pricing. Would you see the situation today the same way or do you think the pricing would come faster or slower?

Cheryl K. Beebe

I think I see it the same rate. I think with the high price of corn, and let's make the assumption that the corn stays around this level, we don't see a lot of volatility as we go into 2012. I don't think we're going to see corn prices decline, but let's hope that they remain stable. Then I think the historic pattern will occur here, and we will continue to reprice not only for the corn prices, but also for the FX.

Operator

[Operator Instructions] We'll go next to Heather Jones with BB&T Capital Markets.

Heather L. Jones - BB&T Capital Markets, Research Division

On the interest expense, I just want to make sure understand this correctly, you were at a $12.7 million this quarter but you had $5 million [indiscernible], essentially at a $17.5 million quarterly run rate right now.

Cheryl K. Beebe

Yes, the $17 million I rounded to $18 million.

Ian Horowitz

Okay. And you would anticipate that to go down in 2012?

Cheryl K. Beebe

Yes, I would. And really why I would expect it to go down is that we have -- when I look at the margin account and the increase in inventories, which is really the main driver behind the trade working capital change, I don't expect to see that type of investment in 2012. So that's free cash flow, or cash flow from operations, for us to either pay down debt, go buy something or to buy back shares.

Heather L. Jones - BB&T Capital Markets, Research Division

And what's your preference at this point, those 3 things that you just mentioned?

Cheryl K. Beebe

I always prefer to have growth opportunities. Our balance sheet is in good shape. We -- from a bank's covenant standpoint, we are at slightly below the 2x debt to EBITDA, so that says we're strong. We have good cash flow generation so I don't feel the need to pay down debt. But if there's no other choices from a growth standpoint and the growth standpoint acquisitions are easy to do on paper, harder to actually deliver value, then I think Ilene has raised the bar that the acquisitions have to be very positive for us to go down that path.

Ilene S. Gordon

And the other thing I would add is, it's Ilene, that of course the use of cash, we see capital projects. Now that we are bigger company and on our way to being integrated, we see a lot more organic investment opportunities around the world: Asia, Europe, South America. And therefore, that's really been the priority on funding those projects that add capacity to areas where we can get value added for our customers. And of course, what also supports that is our R&D effort to come up with product development. And we had to make those products to get them to customers. And so that's really always been our first priority.

Heather L. Jones - BB&T Capital Markets, Research Division

Well, in your CapEx guidance, if I remember correctly, was $280 million, and now it's brought down. Is that a timing issue or did you make a calculation that share repurchase was more accretive to shareholders than CapEx? Or if you could just walk us through that.

Ilene S. Gordon

Yes, this is Ilene, and I'll it turn to Cheryl. But it definitely was a timing issue. In other words, we have plans to spend the money. We are trying to do it in a very prudent organized way. And from a physical point of view, we have just been a little bit slower in implementing and getting those projects built than -- we thought we had an appetite for it. So it's really just the timing and pushes some of that spending into the first quarter.

Heather L. Jones - BB&T Capital Markets, Research Division

And unfortunately, one of those things that I think still is a focal point for investors as far as the CPO story is co-products. And the impact of those on your results. Going back to the 2008, 2009 change in earnings, I was wondering, Cheryl, if you could just explain because I'm sure you'll do a better job than me, why this environment is different than '08, '09, and we shouldn't expect that large a delta year-on-year because I think that's something that continually hangs up investors with this name?

Cheryl K. Beebe

Okay. Let's go back to the fundamentals of 2008, where there was a shortage of oil to address the change in the marketplace with regards to trans fat. Corn was relatively stable, but the value of corn oil tripled. And so it really was a one-time benefit to the 2008 numbers, and we pulled it out and drew it to everybody's attention. Now let's fast forward to 2011. While oil, feed and meal prices are up significantly on a year-to-date basis, and even on a quarterly basis, the rate at which the co-products changed was not enough to cover the rate of change of the gross corn costs. So hypothetically, if the gross corn costs went up by, say, year-over-year 65%, all right, on a year-to-date basis, the value of the co-products did not keep up with that change. And so that's why it's a different story in 2011, and we have said in the first quarter call -- second quarter call that incrementally on a total company basis, we have not gotten a benefit. We haven't been hurt, but we haven't had a benefit either. And it's really a North American story as opposed to necessarily the rest of the world, where we do not get the benefit of co-products. So in the case of Asia Pacific, our corn grinding is in Korea. That had no benefit. It actually had a hurt, but again to the total company. That's not the driver, but there was no benefit in Asia Pacific. Thailand is tapioca. I go to South America, South America's rate of change far exceeded anybody's else as they had to reprice on a consistent basis follow it every 30 days, every 45 days. And North America, again 50%, roughly at the book of business is grain related so we get no benefit for that. Last but not least is in order to manage the volatility in the North American firm price book of business, we are hedged somewhere between the 65% to 100% ratio. We never disclose what the Pacific -- specific ratio is but to the extent that you're trying to manage the volatility, they're going to be somewhere between those 2. But you still have to buy some gross corn. Does that help explain the difference, Heather?

Heather L. Jones - BB&T Capital Markets, Research Division

It totally does. So don't have that unusual gain you're lapping in 2012?

Cheryl K. Beebe

No, no. I would point out that the fourth quarter and they're market numbers, when you look at the fourth quarter co-products as we lapped, last year they started to increase, the amount of difference will decline. But that's all factored into our guidance.

Heather L. Jones - BB&T Capital Markets, Research Division

Okay. And finally, are you -- Ilene, do you remain confident that because of tight utilization, the pricing umbrella from sugar that you should be able to, at least, pass on all of the net corn costs increase to at least maintain your dollar margins going into 2012 in the North American business?

Ilene S. Gordon

Yes, I think given the tightness in the capacity, the tight capacity utilization and the demand factors from Mexico and as you said in sugar and the price difference, we are confident that we'll be able to pass on corn costs. And of course, we're in the middle of that right now, but we're confident we'll be able to do that.

Operator

We'll go next to Morgan Stanley's Vincent Andrews.

Vincent Andrews - Morgan Stanley, Research Division

I just have a follow-up on the co-products question. I just want to make sure I understand that. Cheryl, you laid out -- I get it. It was from a total company perspective. But if as we look at '12, I just want to make sure that I understand what you're suggesting, which was that in '11, the benefit, whatever it was that you had in the U.S., was offset largely by a loss or entirely by a loss on co-products or negative variance on co-products, in particular in Brazil in 2011. Is that correct?

Cheryl K. Beebe

No. When I look at the total company or I even look at it by region, all right, and I know, Vince, you like the recovery ratio, our recovery ratios were not stronger in 2011. They were actually weaker no matter where I looked, North America, South America, the EMEA or Asia-Pacific. And so that's why on a total company basis, there's no benefit. I think the part of what you're looking for is how is the net corn cost? If you had an increase in co-product values, but your gross corn costs remain stable, you would have a lower net corn cost in 2012. How do you then adjust in your market pricing for that? And it's the opposite, is that your gross corn goes up and your co-products go down, you have a higher rate of increase in your net corn costs. And what we look for is any change in the net corn costs to be covered plus in our negotiations, which go on each year in North America. I am not expecting any surprises in the 2012 numbers from co-products as we sit here today.

Vincent Andrews - Morgan Stanley, Research Division

Okay. I'll leave it at that. The other question I had was just and -- I apologize if you mentioned this. I dropped off the call for a moment. But did you sort of give an outlook for where the full year cash flow is going to come in or just go through sort of what was happening with the working capital?

Cheryl K. Beebe

The working capital. I don't expect the working capital to improve significantly in the fourth quarter. Most of the working capital investments did occur in the first quarter of this year. There was a slight improvement in the second quarter. And the third quarter, really, the change is from the margin account as it is now a $59 million investment, which is reflective of the positions that we have. So I don't expect those investments in working capital to dramatically change as we go through the fourth quarter.

Vincent Andrews - Morgan Stanley, Research Division

And into next year, barring some change in cost of inventory, its function of corn prices, we would expect to be running at a similar rate. Is that correct?

Cheryl K. Beebe

No. Actually, if corn prices stay where they are, then I would expect the only increase in the working capital would be coming from the increase in net sales?

Vincent Andrews - Morgan Stanley, Research Division

Right, if volume moves?

Cheryl K. Beebe

Yes, if volume moves.

Vincent Andrews - Morgan Stanley, Research Division

And then lastly I just want to clarify. Cheryl, your prepared remarks, you talked about softer demand in some of the regions. And I think what Ilene was clarified, I believe, was that you were talking about -- you're talking more about de-stocking rather than an underlying change in demand. Is that correct?

Ilene S. Gordon

Well, I think it depends on what region. We're saying that's it's not de-stocking, that it's just a little bit of a slowdown in a couple of areas. So as Cheryl mentioned in Brazil, we still see high demand for the food and for the brewery, but as an example she mentioned confectionary was a little bit -- our customers -- confectionary customers were a little bit slow because they're not able to export because of the exchange rate. So I don't know whether you call that a slowdown in demand. It's not really de-stocking.

There were other areas where demand seems to be okay, but not as high as it was. As we said, Argentina is one of those areas where we've seen demand continue to be strong, as well as in Pakistan. And you saw the North American growth was 2% this quarter.

Operator

Next we'll hear from Christine McCracken with Cleveland Research.

Christine McCracken - Cleveland Research Company

Just a couple of follow-up questions. First, I know you suggested that you would provide an update on the high fructose contracting here in the fourth quarter. It's still underway, but is there anyway to get a sense as to how much business really got done before prices -- corn prices fell, so we can have a rough idea on pricing for next year as a percentage at a higher level?

Ilene S. Gordon

That's not information that we really look at or give out. We're just in the middle of it, and so it's been continual since we mentioned that comment during the second quarter. There was a little bit of early contracting done then, but it continues now.

Christine McCracken - Cleveland Research Company

All right. And then just in Thailand, there's been some flooding lately. Is that anything that would impact your operations there?

Cheryl K. Beebe

It's Cheryl. What we're seeing with the flooding in Thailand is that the impact -- our plants are fine. We have 3 plants in Thailand. It's the impact of our customers because Bangkok is flooded. So it is impacting the ability for local producers around the Bangkok area to get in and out of their facilities and run their production, which will impact us, which is factored into our fourth quarter guidance.

Christine McCracken - Cleveland Research Company

Is it material?

Cheryl K. Beebe

No, it's not material.

Christine McCracken - Cleveland Research Company

All right. And then just the pricing. They've done a good job as they always do in South America getting the pricing. Just curious if there's any specific area, you mentioned a little bit of weakness, I guess, in the industrial side where they've had some resistance to pricing or is it pretty much business as usual?

Cheryl K. Beebe

No, I think in the South American context, the industrial side, again, is some of the exporting relative to local production in Brazil. In Columbia, there was an oversupply of bananas, and there's not as much demand as they thought there was going to be. So there's a weakness in the Corrugating there as well.

Operator

We'll go next to Akshay Jagdale with KeyBanc.

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

I just -- Cheryl, I guess this one's for you. Actually either one of you could answer this. But if I'm looking at the North American business and I exclude what happened at the Argo, the $13 million cost from last quarter, we see a sequential decline in North American margins now for 3 straight quarters. Is that just, very simply put, net corn cost going up? And if that's the case, was that in line with sort of your expectations?

Cheryl K. Beebe

The answer is yes and yes. As we laid out the year, we expected, and I think we may have made a comment both in the first quarter and the second quarter, is that it was very front-end loaded for North America. And so when I look at the absolute dollars, third quarter, we're basically flat for the legacy CPO business, and the increase is coming from the NS [ph] and that is strictly a function of the layout of the corn cost. Year-over-year, the legacy CPO business in North America will be up.

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

And then if I -- in that context, if we just look at next year, and I think of the comments you've made and you said you're relatively positive. And Ilene also referred to a $5 EPS which should talk to at least stabilizing if not improving outlook.

But why should -- so if we are -- if you're seeing a sequential decline in margins, in percentage margins, and the expectation is that corn costs are going to up again next year, is there any reason to believe that operating conditions above the line, as you call them, would actually improve. Like, what would make you feel positive relative to, let's say, a $5 number or relative to the margin structure that you have in place today? And then what would make you feel a little bit more concerned about that? So what are the positive factors that sequentially could drive your margins up from here knowing what you know and what are the some of major wild cards out there on the negative side as well?

Ilene S. Gordon

Well, this is Ilene. I'll make some comments and Cheryl might add something. I think that -- certainly we're repricing all the contracts now in North America. And so as I said earlier, we expect to pass on corn costs and that we have a tight capacity utilization. But when I think about the overall numbers for next year, of course, and even the fourth quarter, we always talk about what's the upside, what's the downside. And I think the demand factor is important here because there's a little bit of nervousness globally around the economy. But I still see positive GDP growth in Brazil of, I don't know, closer to 4%. We have some strength in Argentina. And even in North America, it's not that robust, but it's considered to be positive rather than negative. So it's that type of demand that would increase what we see in terms of volume and certainly, hopefully in the margin side. And of course the converse is true if we see some weakness. Now of course, as you look at the margins, you can't just look at the percent, it's really the margin dollars that we're driving. And of course the percent varies depending on the corn costs, which gets into the price, and so you get the ratio. But I think what you need to think about is it's not so much the margin here. We're going to get our corn costs. It's really the demand side. And the consumer product companies, they're raising prices, and they talked about this in many different places. But they're trying to create value for consumers and maybe it's a smaller pack or maybe it's a higher value. But again, the consumers will pay more and so therefore, what we think about is how will that affect demand. And we do have different types of consumers. And so the consumers will continue to buy food and beverage products. But again, it really depends on how strong they feel about the environment.

Cheryl K. Beebe

That's actually a very good question relative to just reminding everyone that we do have an unusual pattern in the 2011 layout with the first quarter being the strongest, the Argo maintenance in the second quarter, third quarter being sequentially down, and the fourth quarter. So as we go into next year, those first quarter comps are going to be very difficult because I wouldn't expect the same thing to occur. I would expect the normal distribution, which is corn costs do rise through the year, but I wouldn't expect a dramatic change that we had in the first quarter of 2011.

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

One last follow-up for Ilene just on the demand side. Is your expectation for demand, which I hear you, it's positive, right, so it's up year-over-year because global GDP projections, I guess, are still showing positive numbers. But if I was to ask you what that demand outlook was 6 months ago, I'm assuming you're a little bit more cautious. Would that be a fair statement?

Ilene S. Gordon

Yes, I think it would be fair to say cautious, a little bit more cautious. They revised the Brazilian numbers probably 6 months ago. And so again, they were much higher, but they're still robust. We have a couple of big sporting events coming in Brazil, and things begin to flow there very well. But I think that there's a little bit more cautiousness now than there was 6 months ago, but we still feel very good about what we see going forward. And we've added capacity in anticipation of that.

Operator

We'll go next to Ann Gurkin with Davenport.

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

I apologize, I joined the call lately. So have you talked about capital spending for '12?

Cheryl K. Beebe

No, we haven't, but I wouldn't expect it to be significantly different than the level that we were expecting this year. So somewhere between $280 million and $320 million. But the fact that we are spending a little less this year than we thought won't bump the number up. Again, it's a timing issue and just the flow of getting the projects done.

Operator

And that will be from Jeff Farmer with Jefferies & Company.

Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division

I just wanted to come back to pricing for a second. You've commented several times that you've been successful in quickly passing along the higher corn costs that you've seen in the U.S. and internationally. I'm just trying to reconcile that with some of the elasticity comments you made, you made some demand destruction [ph] comments as well. As you get into 2012, I guess especially outside of the U.S., do you think you're going to have the same amount of pricing power that you did in 2011?

Cheryl K. Beebe

The pricing power relative to...

Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division

Passing along higher corn costs, in particular.

Cheryl K. Beebe

Yes, absolutely. Yes, that's our expectation.

Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division

Okay. Again, just coming back to the elasticity comments that you seem a little bit more -- again sensitivity to higher prices and then on the demand side, so again you think you're still in good shape in 2012 on that front?

Cheryl K. Beebe

Yes, we do, based upon what we're seeing.

Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division

Okay. That's helpful. In terms of the -- you touched of this, but the co-product recovery ratios especially outside of the U.S., can you give us some sense of what you're seeing in South America in particular?

Cheryl K. Beebe

South America, the recovery ratios were down on a South American region basis versus a year ago. And so again, they're the ones taking the most hit relative to current corn costs.

Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division

Okay. And then final question for me. If you look at your volume comparisons, at least your organic volume comparisons in all 4 regions, much more favorable in 2012 than they were in 2011. A little bit of a tailwind there, but how should I think about that more favorable backdrop as I'm looking to model 2012 volumes keeping in consideration when you said about some of the demand headwinds?

Ilene S. Gordon

Well, we haven't said that much about demand in 2012. I mean we feel, overall, a positive outlook depending on where you look in the world. And so 2011 we feel good about the year. It's been a challenging year. We've had a lot going on, but we continue to feel good about going into 2012.

Ilene S. Gordon

So this is Ilene. This is a a quick sign-off. We're almost out of time here. I think that we believe to continue to see Corn Products as an outstanding investment and we have a history of good EPS growth and a prudent risk management strategy. We've demonstrated financial discipline and strategic acumen with the acquisition of National Starch, so we're very happy about that. The acquisition provides additional avenues for portfolio and geographic growth that are highly complementary. And we talked a little bit about the R&D side of that. And we've proven to be return-focused and disciplined in our capital expenditures, which generate strong returns. And these points all support our overriding goal of driving shareholder value over the long term, and I believe we're very well positioned to do so. So that brings our third quarter 2011 earnings call to a close. And we'd like to thank you again for your time today. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference. We thank you all for joining.

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