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Executives

David Prichard - Director of IR

Sam Scott - Chairman, President, and CEO

Cheryl Beebe - VP and CFO

Analysts

David Driscoll - Citi Investment Research

Kenneth Zaslow - BMO Capital Markets

Heather Jones - BB&T Capital Markets

Vincent Andrews - Morgan Stanley

Christina McGlone - Deutsche Bank

Christine McCracken - Cleveland Research

Ann Gurkin - Davenport

Lance Eddies - Motorock Capital

Corn Products International Inc (CPO) Q3 2007 Earnings Call October 30, 2007 8:30 AM ET

Operator

Welcome to Corn Products 2007 Third Quarter Earnings Call. Today’s call is being recorded.

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

David Prichard

Thank you, Operator and good morning to everyone. Welcome to Corn Products International's conference call to discuss our 2007 third quarter financial results released earlier today.

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

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

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

Now, I have just shifted to chart two, which is our agenda. Cheryl Beebe will present the financials for the third and nine months with appropriate analysis and flavor. Following that, Sam Scott will discuss our outlook for the balance of 2007 and our pathway strategy growth initiatives before we move to take your questions.

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

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

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

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

Cheryl Beebe

Thank you, Dave. Good morning everyone. We are pleased to report another solid quarter of earnings growth. The diluted earnings-per-share for the quarter is $0.66 versus $0.49 last year for a 35% improvement. The $0.66 includes $0.05 for the gain on the company’s investment in the Chicago Mercantile Exchange.

If I exclude the $0.05 from the quarterly results, we would be at $0.61 versus $0.49, or up approximately 24.5%. For a better history, Corn Products just have received at the Board of Trade for many, many years. Guidance remains at the $235 to $255 range for the year including the $0.05 mentioned above. Assuming volumes and net corn costs performed to expectations, we would expect to deliver full year results at the higher end of the guidance range.

I am starting with chart 5, the summary income statement for the quarter ended September 30, 2007, and net sales reached $877 million, up 30% or $203 million versus the same period last year. This is the seventh consecutive quarter of net sales growth. As we will see on the next chart, all three regional businesses contributed to the increase. About $29 million of the net sales growth is from acquisitions.

Gross profit dollars are up 26% or $30 million versus last year. Gross profit margins are 16.2% versus 16.6% last year. Strong pricing action across the three regions offset the significant increase in net corn costs and the smaller increase in total energy cost versus the same period last year. As previously discussed in the first and second quarter calls, we expected to see margins ease off in the second half of the year with higher net corn costs. Again, this quarter, we see continued margin recovery in North and South America.

Operating expenses increased 24% or about $12 million. The increase includes higher variable performance compensation, operating expenses related to the acquisition, and the impact from stronger foreign currencies. Operating expenses as a percent of net sales for this quarter was approximately 7%, which is down from last year's 7.4% and down from the first half of 7.6%.

We are right in line with the forecast of $60 to $65 million per quarter that we made in the second quarter earnings call. Other income of $8 million includes the $6 million pre-tax gain on the CME shares.

Operating income grew 36%, reaching $88 million, versus $64.5 million last year. The operating income margin for the quarter was 10%, versus 9.6% last year. Net financing costs for the quarter were $10 million versus $7 million last year. The $3 million change in net financing costs is attributable primarily to a $2 million reduction in capitalized interest and a $1 million showing in foreign exchange.

Financing costs for the remainder of the year should be slightly lower than the current run rate. The tax rate for the quarter is 33.1% versus the 34.5% last year, and reflects primarily a change in the earnings mix.

Net income grew 38%, reaching $51 million versus $37 million last year. Weighted-average diluted common shares in the quarter were $77 million versus $75.5 million last year. 75,000 shares were repurchased during the quarter at a cost of approximately $3 million.

Turning to chart 6, we can see much of the net sales growth is coming from North America. North America’s net sales grew 32% or $131 million, representing about 65% of the company’s net sales growth in the quarter. South America’s net sales grew 36% or $61 million and represents about 30% of the quarter’s net sales increase. Asia/Africa’s, net sales growth was about 12% or $11 million.

Chart 7 is the net sales variance analysis. Total company net sales were driven by strong pricing actions. Price product mix accounts for about 83% of the net sales increase in the quarter. In dollar terms, this represents about $169 million.

The increase in net sales from translation of our foreign operations contributed about $32 million or about 16% of the net sales increase in the quarter. The volume contribution for the quarter was about $2 million. On a regional basis, North America’s net sales growth of 32% consisted of 29% increase in price product mix followed by a slightly favorable change in exchange rates and volumes.

South America’s growth is predominantly coming from price product mix followed by stronger currencies and slight volume growth. Asia/Africa’s net sales growth was led by a 15% increase in price product mix, favorable currencies, and offsetting the partial decline in volume of 6%. The results in Asia were lower than what we forecasted in the second quarter. We experienced weaker-than-expected volumes in South Korea and China, as well as weaker pricing action in these countries along with Thailand.

Moving on to operating income by geographic segment, chart 8, again, we see North America driving the operating income performance. North America’s operating income increased 55% or $20 million.

The operating income margin was 10.8% versus 9.1% last year. South Americas operating income was up 20% or $4 million. The operating income margin last year in South America was approximately 12.9% versus this year’s 11.4%.

Asia/Africa’s operating income dropped 33% or $5 million. Excluding the South Korean business, the division’s operating income would have been basically flat. Versus last year’s third quarter, the South Korean results were impacted by significantly higher corn and ocean freight cost as well as lower volume. This will continue into the fourth quarter.

Turning to chart nine, the estimated source of diluted earnings-per-share received a changes from operations contributed $0.20; $0.17 for margins and $0.03 from currency. Non-operating changes accounted for a negative $0.03. Financing costs were negative $0.03, while the lower effective tax rate was a positive penny, offsetting a negative $0.01 from the increase in shares outstanding.

Moving on to the nine months result, chart 10. Net sales are roughly $2.5 billion, up 29% from last year’s $1.9 billion. Gross profit dollars increased 43% to reach $443 million, an increase of $133 million. Gross profit margins are 17.8% versus 16% last year. Operating expenses are up 25% or $37 million. This was again from higher variable performance compensation, operating expenses from acquisitions, and stronger foreign currencies.

Operating expenses, as a percent of net sales, declined from 7.6% last year to 7.4% this year. Net financing costs were $33 million, up 58% from last year or $12 million. The tax rate for the nine months was 33.3% versus 36.5% last year. Net income is up 67% or $61 million.

Earnings per share increased 65% to $1.98 or $0.78 higher than last year. Diluted weighted average shares outstanding for the nine months was $76.7 million, up $1.3 million shares from last year.

Chart 11 is the cash flow. Highlights for the quarter, contributing to the positive cash flow from operations, was the strong growth in net income along with the positive contribution from working capital, primarily relating to the reduction of accounts receivable. We invested approximately $35 million in fixed assets in the quarter. Cash used for financing activities was $286 million primarily reflecting the repayment of the July 2007 bonds.

Now, the last financial chart, slide 12, is the key metrics as of September 30th 2007. Debt-to-total cap is 26.7% versus 26.1% last year. Debt-to-EBITDA on a trailing 12 months basis is 1.4 times versus last year’s 1.6 times.

Operating working capital as the percent of net sales was 10.3% versus 9.4% last year, and it reflects investments made to support the business growth. It is also down from last quarter’s of 11.3%. Net debt is $463 million versus $450 million last year.

In summary, we had a solid quarter with strong sales and good margins. This business generated solid cash flows and the balance sheet is in great shape from a working capital and debt perspective.

That wraps up the financial reviews. So, I will pass the button over to Sam for the outlook. Sam?

Sam Scott

Thanks, Cheryl and good morning to everybody. Our third quarter results, excluding the 5% gains in the CME group, shares exceeded our expectations due to even better performance from both our North American and South American regions. However, as you heard from Cheryl, our Asia/Africa results were disappointing and weaker than our earlier outlook due to volume and cost pressures in South Korea.

Now turning to chart number 13, the outlook. Because of our better than expected third quarter results, we remain right on target to deliver an outstanding record year in 2007. We believe our 2007 full year diluted earnings-per-share will be in the upper range of our guidance of 235 to 255, which compares to our prior record year of $1.63 in 2006.

The performance we expect this year continues to create value for our shareholders and in 2007 we expect to exceed our long-term ROCE, or return on capital employed target of 8.5%, as well as our annual net sales goal of at least $3 billion, the objectives we set four years ago to accomplish by the end of 2008 next year.

Moving to chart number 14, our 2007 outlook by region. It’s clear that North America is providing most of the momentum for our earnings and margin growth in 2007. Just as we did in 2006, all three country businesses in North America are contributing strongly. The operating income rebound we are seeing in South America this year was also a key reason for our strong 2007 performance.

This has been led by a very solid recovery in Brazil that really began in the second half of 2006. The Andean region is also delivering another strong performance, led by the Columbian business, and we are pleased with the results to date of our acquisition of DEMSA in Peru in December of 2005.

The Southern Corn continues to wrestle with high corn and energy costs, but it is doing a good job in working through these raw material pressures with some improved pricing and other operating actions.

Finally, we now expect our Asia/Africa region to post a double-digit decline in the operating income in 2007, which is a revision from our generally flat outlook which was discussed in our July call.

While net sales continue to grow at a healthy double-digit rate, the lower profitability predominantly results from a significant decline in operating income in South Korea. This is due to low volume from the ongoing stagnant, which is domestic economy, along with competitive pressures from China.

As long as corn costs and ocean freights continue to increase, we will pursue pricing actions in the market. With the new management team we installed in South Korea earlier this year, we are working on a number of funds to improve the performance of our South Korean business for the long-term.

On the positive side, we are pleased. We are continuing sales and profit growth in Pakistan, which remain one of our best performing countries as far as business goes year in and year out.

Turning to slide number 15, we've set our capital spending for 2007 in the range of $175 to $200 million. All the growth projects I outlined last quarter from Polyol investments in the America's and new modified starch capacity in Mexico through new plant investment in Pakistan, are still planned.

In addition, we are moving forward with the product channel expansion to slide earlier this year in Argentina, Columbia, Pakistan, Mexico and Thailand, as we invest to stay ahead of the GDP growth rate and result in higher demand for our starch and suite of new products in our various countries.

So, as we look to deliver another strong year, improvements in earning, sales, margins and return on capital in 2007, we are investing heavily for our future growth in our base business in many countries of our world. At the same time we are continuing to explore a number of opportunities for geographic expansion in Asia and building our value-added product portfolio with mill ingredients.

Thank you and now, we will be more than happy to take your questions.

Question-and-Answer session

Operator

(Operator Instructions). And our first question will be from David Driscoll with Citi Investment Research.

David Driscoll - Citi Investment Research

Hi, good morning, everyone.

Sam Scott

Hi, Dave.

Cheryl Beebe

Good morning, Dave.

David Driscoll - Citi Investment Research

The stock does appear like it will be half a little bit this morning here nonetheless congratulations on the quarter and on the year-to-date performance.

Sam Scott

Thank you.

Cheryl Beebe

Thanks.

David Driscoll - Citi Investment Research

Just a couple of questions on the guidance, does the guidance include one-time gain?

Cheryl Beebe

Yes, the $0.05 from the CME. Yes, it does.

Sam Scott

Both ways, it’s true, David. Within and without that we expect it still in the upper end of the range.

David Driscoll - Citi Investment Research

I don’t understand that, Sam, what you trying to tell me?

Sam Scott

Well, the upper end of the range is the middle of the range and up. And I am saying with the exercise cents would out at, we still expect to be in the upper end of that range.

David Driscoll - Citi Investment Research

Okay. Can you give us a couple of comments here on '08, I know you’ve not provided any formal guidance, but obviously everybody is keenly interested in just hearing your thoughts on how strong the pricing environment is in North America. Even if you can’t give us some specific numbers, what can you tell us about the strength of the outlook for '08?

Sam Scott

Well, I can tell you that North America, David, as you all know and heard it, that our price increases out there on the table right now. I can’t comment on where they are, but the announced increases are in the range of 15% to 20%, depending upon the existing price this year.

Obviously, we are in contracting right now and I never comment on where it is when we are in the contracting mode. I have said before I think you said it is well that we expect volumes to the supply demand balance to remain in balance as we go into 2008.

It appears that the Mexican border will continue to open up. I have said, I expected managed trade; it looks like I might have been wrong on that. So, that will improve the overall demand pull of the product and again there is in North America to the most part on the world with the exception of our expansion. There is, nothing really is going forward with respect to expansion in the business.

We also said that we had booked a fair amount of our business next year on going forward on multiyear contracts and grain related contracts. So, certainly that keeps of it if out of the mix of contracting for next year. So, that’s a little bit of color on it what I giving specificity around what we expect to see, but certainly it’s a North American column.

David Driscoll - Citi Investment Research

When do you think that you will conclude your negotiation, you have gas?

Sam Scott

I’m hoping it will be by yearend. I expect it probably would be by yearend, but I can’t guarantee that. It’s certainly the last couple of years we have been able to finish it up before the end of the year.

David Driscoll - Citi Investment Research

Back to what you said in your comments on the quarter. So, I think you said in your prepared remarks and in the press release, that the quarter exceeded direct application.

Sam Scott

That’s correct.

David Driscoll - Citi Investment Research

It didn’t raise the full year numbers and that number now seems to include a one-time gain. Can you just say to us, why, if the third quarter exceeded applications? Why when the full year guidance won’t have actually improved?

Sam Scott

The issue is Asia/Africa, David. We are experiencing volume shortfall there. As we said, we are experiencing unbelievable freight increases by the day. And we are seeing that the premium on non-GMO corn in Asia/Africa is going up on top of the increases in corn that are going up on a regular basis. So, we’re just being cautions with what we’re giving you as far as an estimate goes because that can be an issue that we have to -- and that can be, we’re going to fight our way through it. We are working on things, as I said. But certainly those are the issues that are there.

David Driscoll - Citi Investment Research

What are the constraining factors to raising prices in South Korea, I think, you said in your remarks pressure from China, but I wasn’t sure, if you are referring to your Chinese business more pressure on the South Korean market from Chinese competition.

Sam Scott

Pressure in the South Korean market from Chinese competition the strength of the Korean Won with their capabilities or customers capabilities of not being able to export as well because of the strength of the Won. The primary areas as well as in Korea, it was some of our businesses we’ve in Korea has a sugar placed cap, and we are up against that cap now. So, part of it is that, the other part of it is Korea is the more competitive market than some of the other markets in which we operate. So, it’s not quite as easy although everybody is feeling the pressure, as we are.

David Driscoll - Citi Investment Research

Just one final question, on the Mexican outlook for 2008, did you say, you just made a comment there. But could you just reiterate to me what your expectation is for increased trade with United States in 2008. Do you have a volume number that you might be willing to guess for us?

Sam Scott

I don’t have a volume numbers specific, David. But we, I think, what I’ve said earlier was, it looks like the border will open and the capability that the Mexican customers have of being able to shift to fructose will probably be exercised in 2008. We’ve said it right along that this year; we expected about 400,000 tons to go in. And I think, I’ve said, next year that number could be as much as doubled. If in fact, customers can convert that quickly and we believe if that as the possibility that would be on an incremental basis, as we go through the year.

David Driscoll - Citi Investment Research

Well, super. Thanks a lot. I will pass it on from here.

Sam Scott

Thank you, David.

David Driscoll - Citi Investment Research

Thank you.

Operator

And our next question is from Kenneth Zaslow with BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets

Hey, good morning everyone.

Sam Scott

Ken, how are you doing?

Cheryl Beebe

Good morning, Ken.

Kenneth Zaslow - BMO Capital Markets

Pretty well. Just quick question on the operating margins in North America?

Sam Scott

Yes, sir.

Kenneth Zaslow - BMO Capital Markets

They did sequentially declined higher little bit more then we expected particularly given the byproduct sequential improvement. Can you give a little color around why that would happen; it was at the basis or just helps us out a little bit?

Sam Scott

Well, Ken. What we’ve stated earlier was at the beginning of the year, we said that we had hedged our corn throughout the year and the prices are expected to increase quarter-by-quarter, as we went through the year. And I think some people have forgotten we’ve said that.

As that happens obviously, our cost is going up. The other thing is, as you look at the credits that we’re getting from co-products, as I mentioned in the comment to David, we’ve a significant piece of our business that is booked on grain related. And much as we’ve passed the risk of the corn cost to our customers, we’ve also passed the benefit of co-product credits to those customers.

So, the co-products are not across our entire business mix. It’s for the business that we do not have on the grain related contract. So, those are the things that I think perhaps are being missed as you look at the business right now. We are very pleased with the results this quarter. We think we had a damn good quarter from my language. The numbers exceeded my expectations in my largest two regions, and we’ve a problem in Korea right now.

Kenneth Zaslow - BMO Capital Markets

And what are the prospects for corn gluten meal in the EU. I know, Hercules got accepted. But the new crop coming out probably has new technology, is there any fear that that would change the prospect of corn gluten meal or are we fine with corn gluten meal into Europe now?

Sam Scott

That’s called as corn gluten feed.

Kenneth Zaslow - BMO Capital Markets

I’m sorry, you’re right.

Sam Scott

So, that you don’t have, I don’t want anybody confused around that. We are only shipping corn and gluten seed into Europe and you are right the acceptance was for 2006 crop not 2007 crop. I expect that it will probably close back down shortly.

However, the Europeans are working very hard they say, to correct or get approval some of the newer profits are coming out in 2007. As you know they had a drought there, they have major problems on feed supply over there and they need the corn group of feed coming in. So, I can't comment on if and when, but I do know they were working to try to fix the issue right now.

Kenneth Zaslow - BMO Capital Markets

You mentioned that for 2008, the pricing environment I would just corn is expected or contracting out maybe 15% to 20%. What is the pricing that is required to cover the corn cost at this current point including the net corn cost is, that should cover by more than half or?

Sam Scott

That covers it by more than half, yes.

Kenneth Zaslow - BMO Capital Markets

Okay. And then the last question is, what would it take for you guys to be able to turnaround the South Korean operation. What are you looking for things to change, is there environmental, is there management issue. What are the factors that we should see that would start, shown in inflexion point South Korea?

Sam Scott

Kenny, I have a note down here that said Ken as well as is going to ask me what is going to take turnaround South Korea. I knew that would come out.

Kenneth Zaslow - BMO Capital Markets

There is some consistent.

Sam Scott

I appreciate the question. There are a number of things. Number one, as I said, ocean freight is going crazy on us but it’s bulk ocean freights. So, we have to look at all the other things we can do to moderate the freight cost I don’t mean can we build ships. But fairly the other ways to getting the product there we are exploring. We got a little bit of success. We have to add more success on that.

Secondly, as I mentioned earlier, the premium on non-GMO corn has been escalating in a very, very rapid pace. And we have to work with the government and to our customers had to find out whether or not they can accept in some instances GMO. The industrialized businesses have no climate and not be able to accept GMO.

We have two plans. We can change the grind, if we have to. The position China is taken recently, stating that they are not going to allow ethanol. They are not going to really allow much new grain to come on in the country and they are looking to "cutback on exports". In fact, they said they’re going to stop the exports, we’ve not seen that yet. But that is the position the government has taken officially, so that's another piece of it.

The pricing situation where we can, we are going to look to move pricing and move it as well as we possibly can. Even the export environment is something; we are looking at right now because even though our corn costs are very high and our costs so high, there were some countries in the region that can accept our products better than they can accept their own and producing from their own countries.

And then lastly with all of that, we’ve said we changed the management team over there, and we’ve work to do internally. We’ve some issues, we’ve to deal with, and I won’t comment on what they are, but we’re working on those right now.

Kenneth Zaslow - BMO Capital Markets

And when will I not need to ask that question anymore?

Sam Scott

I’m not going to give you an answer on that right now, Ken. It’s a work in progress. I’ll keep you inform though, as of the progress we are making.

Kenneth Zaslow - BMO Capital Markets

Great, thank you.

Sam Scott

Thank you.

Operator

And our next question is from Heather Jones with BB&T Capital Markets.

Cheryl Beebe

Good morning, Heather

Heather Jones - BB&T Capital Markets

Good morning. How are you all?

Sam Scott

Right. How you are doing?

David Prichard

Fine.

Heather Jones - BB&T Capital Markets

Good. I had a question on Mexico, I wanted to confirm that you say that you thought in ’08 it could double with the end customer can switch quick enough.

Sam Scott

Yes. I’ve said that, this year, we are looking at about 400,000 tons going in, and there could be another 400,000ish next year, if the customers can switchover and most of them can.

Heather Jones - BB&T Capital Markets

Sort of given, just, I guess, the same flattish to maybe slight decline here in the US. What you think that could do for pricing in Mexico?

Sam Scott

The pricing in Mexico..

Heather Jones - BB&T Capital Markets

For HFCS domestic pricing for HFCS there?

Sam Scott

I think the pricing in Mexico could be impacted slightly. We’ve said before, when the border opened that we thought it would be beneficial to corn products across the board in North America. But it’s certainly, if we’ve had competition in Mexico, it could mean something. I won’t comment specifically on where it’s going. But I think, certainly with more volume coming in and people coming into the marketplace. We will be very diligent in our pricing philosophy in Mexico.

Heather Jones - BB&T Capital Markets

I may even be misunderstanding, who was coming into the market, did you talk about people coming into market with additional to just see a capacity?

Sam Scott

Yes, the US suppliers are coming into the marketplace now. Obviously, they were into some external already with over 100,000 tons. But with an incremental 400 -- the more US suppliers coming to the marketplace and going to different customers.

Heather Jones - BB&T Capital Markets

Just shifting capacity out of US into Mexico?

Sam Scott

Correct.

Heather Jones - BB&T Capital Markets

Okay.

Sam Scott

That’s part of the support for the pricing in the US right now. We’ve said right long, when Mexico opened up, it would benefit all of the North Americans in totality.

Heather Jones - BB&T Capital Markets

I’m sure, you’ve probably read about this ad nauseam, but what is your stance on ADM’s switch capacity. It seems like they publicly intimated that they maybe around to switch, they’re going to believe they referred to the, when and if Mexico opened.

But, wondering what your opinion is on that where they do it only if at Mexico open fully or if you have any stand from that?

Sam Scott

I’d love to comment on what ADM is doing, but I can’t do that honestly with any kind of confidence or any kind of specificity around that. I will comment that they will protect their business, the way any good solid business person will do that.

And for the amount of volume you are talking about moving into Mexico is not significant enough at all for ADM to risk the rest of their high purchase volume in North America to price it lower. So, I think and all I can is, say if I think that what they were talking about was freeing up some of that volume, if they needed to be able supply the Mexican marketplace.

Heather Jones - BB&T Capital Markets

Okay. And finally, just want to make sure I’m understanding, exactly what's going on in South Korea. So, understand the corn cost issue and freight. But the volume weakness is basically you just have excess of competition from Chinese competitors and they are driving down price there or and I understand that correctly?

Sam Scott

Well, we had a slow environment in South Korea for a number of years that the economy just the domestic economy has not done well. They've been exporting technical electronics, cars, refrigerators with the domestic economy and you heard back a couple of years ago with the credit crunch game and then credit cards in South Korea. So, we’ve not seen growth of that market that we’ve thought we would have seen.

Heather Jones - BB&T Capital Markets

All right.

Sam Scott

On top of that China as they started to produce products in China all products are corn refined products. They have started bringing some of their products around the world. But the closest place for them to ship is Korea. It’s right across the sub China Sea. So, they have gone into some of the markets in paper and corrugating even in some of the food applications with some of the products there and the volume has shifted down somewhat.

My comment about the Chinese government suggestion ruling I don’t know exactly what it was. We’re still trying to interpret what it is. Is it they’ve said they are going to cutback on allowing exports out of the country because they are concerned with being able to feed their own population. It sounds good to me. Whether or not they do it, is their call. Certainly, we’re going to monitor it very carefully and will use it as the marketing situation in South Korea.

Heather Jones - BB&T Capital Markets

Okay. All right. I appreciate it.

Sam Scott

Thank you very much.

Operator

(Operator Instructions). And our next question comes from Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley

Good morning, everyone.

Sam Scott

Good morning, Vincent.

Vincent Andrews - Morgan Stanley

Maybe you could just help me or help us better understand the customers in Mexico, there are some perception and tell me if it's correct or incorrect that the customers in Mexico are largely the same customers in the US.

In other words, it’s really just a derivative of Coke and Pepsi down there. And therefore the opening of the Mexican border is not really that much of a boon, to the US from a pricing perspective. In other words, that the argument is when you see pricing this year in the US, your opportunity is also if you don’t give a choice in the US, you could ship the capacity down to Mexico. And therefore implies at the utilization are actually tighter than they are in the US. How should we be thinking about that?

Sam Scott

Let me believe the answer and I hope I answered the right question.

Vincent Andrews - Morgan Stanley

Okay.

Sam Scott

Basically you are right, that the larger customers in Mexico are the major beverage customers in the US. That is certainly not the all of the customers in Mexico, when there was a limited amount of fructose being sold in Mexico. There was a limited amount of product you can grow to all of the customers, who are out there and the big customers, the Coke and Pepsi with the ones in, in many instances got the lion share.

What we were able to produce for the years that we are the only supplier and also the lion share what was going in because people only had limited amounts; so they were trying to find every modern top customer in Mexico.

Vincent Andrews - Morgan Stanley

Right.

Sam Scott

Today, when it opens up, some of that volume will go increase the amount of volume, the Coke and Pepsi use, but will also starts seeking out both from our competitors and ourselves supplying in the entire market in Mexico.

The next phase of this thing, is the Coke and Pepsi in Mexico. The major bottles in Mexico only approved for fructose of 50% level. In the US and Canada it’s going in a 100%. So, I think overtime and I can’t tell you what that time frame is, but of the some period of time the probability is, that they will approve fructose at a higher level anyway and in that point in time there will be even further demand for fructose in the Mexican market.

But the point of the overall tightening of the market place, is saying that if high-fructose sales in the US had been flat or down slightly, which has been plus or minus, 1% or 2% over the last couple of years. In Mexico, we’re not to come on then there could be pressure on the supply demand balance in the US. With Mexico coming on right now, we’ve taken that supply demand balance in equation off the table, and you have balance in fact this year even if in fact demand were up, and I’m not saying it is, but it will up by 1% or 1.5%, that would be more than offset by what's going into Mexico right now.

So, you’ve got a balance situation here, which is positive for the pricing environment in the US. As I said, it could have a little impact on us in Mexico. But we’ve said for the last eight years, it went in favor of the border opening up. So, that the balance of North America is what we want to see.

Vincent Andrews - Morgan Stanley

Outstanding, but each point of the prior question, I’m very impressed.

Sam Scott

Well, I’m too. Thank you.

Vincent Andrews - Morgan Stanley

Can I just follow-up and ask, you can tell me what the spilt of volume that’s still one can perhaps see in Mexico and what's the demand and perhaps for the other people down there. Do you have any idea of what that is?

Sam Scott

Vince, we’ve not commented on percentages, but as you might guess on the 55 side of the equation they are the lion share of the volume.

Vincent Andrews - Morgan Stanley

Okay. And then my other question was going to be, I forgotten it. But so, let me just shift to how can we then buyback more of your stock in August, when the market melted down and your stock had that really probably for you a very terrifying day. I think you looked it like $35?

Sam Scott

Well, it didn’t get quite bad, but it got to $38 or $39, and we did buy. But as you know, the next day it bounced up almost 7 bucks. So, we had mixed feelings here. We could have bought back more, but it gone further down, but guess what I’m alluding to that. So, I do not expect it to bounce back the way it did. But when it got back into the range of and it went up the next day so fast that there was not even a chance to buy. We just let it.

Vincent Andrews - Morgan Stanley

Okay. And then that leads me to just from a capital structure. Cheryl, you noted that your debt-to-EBITDA is now down to 1.4 times. And I know you are looking to do acquisitions and you are not comment on the progress of those, but any kind of generic thoughts on the capital structure that are any different from what you commented on in the past?

Cheryl Beebe

No. There are still basically the same. That the quality of the balance sheet, the strength of the cash flow all positioned for us to continue to grow the business. In the event that we can't find the right opportunities, then there is no question that we will use that excess cash to buyback some of our shares.

We are focused on creating shareholder wealth. For the long-term, we believe the best way of doing that is, to find businesses or technology or new products to add to the portfolio. And we are still very confident that we can find those.

Sam Scott

In the event, if I can add one comment as Cheryl reminds me everyday as we get closer to bonus time. As we look at what we did with our balance sheet going into refinancing of the bonds.

Vincent Andrews - Morgan Stanley

Right.

Sam Scott

If we have had not strengthened our balance sheet and kept it where it was up to and through the middle of this year. We would not have been able to go after 10 year or 30 year money with the levels that we did.

Vincent Andrews - Morgan Stanley

Oh clearly, yes that was.

Sam Scott

We were very, very intent on making sure that we maintain, what we needed to maintain to get what it is that we got. And as a result of that through June at least, we are not going to do anything anyhow. During that period of time, we were looking at investigating opportunities for growth.

We still are. We've increased the capital spend. The other thing is, during the course of this year we turnoff a significant amount of cash. You noticed our net debt is about the same as it was last year with the kind of spending we talked about and the acquisitions we made. So, big problem we got to figure it out, how to spend this faster.

Cheryl Beebe

And I would add one more comment, Vince, as everybody is well aware, then there is market turmoil, the ability for a non investment grade company to get access to capital and the price of that capital goes through the roof. Given the fact that we’ve stated, we are looking for growth opportunities is really is in the best interest of the shareholder for us to maintain that investment grade rating.

Sam Scott

So, I just wanted to add back to that. I’ve said, I do get reminded of it every now and then.

Vincent Andrews - Morgan Stanley

All right. Well, thank you very much.

Cheryl Beebe

You’re welcome.

Vincent Andrews - Morgan Stanley

I will pass it along.

Operator

And our next question is from Christina McGlone with Deutsche Bank.

Cheryl Beebe

Good morning, Christina.

Christina McGlone - Deutsche Bank

Good morning.

Sam Scott

Good morning. How are you?

Christina McGlone - Deutsche Bank

And I just wanted to raise an accounting question about North American margins. I think most of us were modeling a sequential decline because as you’ve said, declined cost would increase as the year progress.

Sam Scott

Right.

Christina McGlone - Deutsche Bank

But, I think it is the non-matured that at least surprised me, and I guess it can. And you hadn’t really talked about your grain related contracts impacting the co-product benefit in the prior two quarters. So, I’m just curious, why is it such an impact this quarter or if there is something else may be an incremental cost or did basis program to what you are thinking?

Sam Scott

No, I think everyone modeled in because you saw oil prices going up and co-product price is going up more dramatically this quarter. I think folks modeled in the entire impact. And what we’ve said is, it’s for the last three quarters, we are seeing is that, we expect that our corn numbers to increase quarter-by-quarter because we booked it last year, and the carrying costs were going out and we knew that.

We said that we’ve more grain related and multiyear contracts and that will be for which remove the risks from us of the escalated corn. I assume that everybody realizes that side in with the co-product associated with it. I did not say it before the day. But I did read some of the write-ups that we are looking at, where the margins were. Then I wanted to make sure it was clear, in case somebody did miss it but that goes to the customers benefit not to our benefit on the pieces that are grain related.

And I’ve stated constantly that as our numbers go up on sales dollars, but we have significant increases like we have right now. The margin will not remain the same. We’re look at and trying to increase our overall operating income. But the margins on the sales, if we could keep that level and we just add escalating corn cost the way added, our numbers would be over the top.

So, it’s certainly not that kind of a situation and same thing applies South America. We had escalating corn cost that are really going up big time. We’ve been able to improve our overall operating incomes as you have seen. They have gone up 20%. The growth has been in the various businesses. The margins can be and will be impacted.

And I said the same thing about Asia/Africa overtime that, because we are going into newer countries with a pricing and the cost of capital will be lower. Our margins there may come down overtime, but our earnings growth will continue. And that’s where we were focusing on and that’s we have been able to deliver up to this place.

Christina McGlone - Deutsche Bank

Okay. Thank you. I guess the other thing, when you were talking about pricing for next year.

Sam Scott

Yes.

Christina McGlone - Deutsche Bank

You talked about announced pricing, but then you’ve said that you have a significant amount of multiyear and totaling with it. It kind of seems like you wouldn’t necessarily benefit maybe the way we would proceed. Can you tell us what percent is multiyear versus not?

Sam Scott

No. I don’t need to be blunt. That we have never done that nor can I today, but we said right long that we have increased the amount that we’ve had. That was both multiyear and grain related. And I also said that we are not the only player in this marketplace and does that.

Our customers are larger customers, many of them like to have multiyear grain related contracts that rollout to protect them, both from a supply side as well as a pricing side. The many instances they have very sophisticated grain models if they use and they feel like in buy differently and perhaps their mind better than we do.

So, we’ve said right along this is a fair amount that goes out that way and again wanted to make sure that as we clarified or we talked about this issue that as models are being put together people do realize that we do have grain related and multiyears that we will not get the positive impact across the entire breadth of our business that maybe modeled into some of the models.

Christina McGlone - Deutsche Bank

Okay. And then, I guess, last question in the press release you talked about opportunities for expansion in Asia. I’m just curious, I mean, South Korea, China has limited industrial use of corn and now I think that tapioca is losing its competitive advantage because of Thailand ethanol program. Where would you expect to grow in Asia?

Sam Scott

Well, first of all, I don’t see the Thailand situation being the case at all.

Christina McGlone - Deutsche Bank

Okay.

Sam Scott

China, as I’ve said, we’ve to figure out what it is China is doing. But we had looked at before what we can deal with respect to opportunities in China because certainly there were companies there that we can buy as supposed to having to build Greenfield. I don’t think, we’ve ever suggested, we build a Greenfield in China not necessarily anyhow.

We bought the Polyol business that we’re looking to grow, and as I mentioned that in the press release as well as I think, in my prepared remarks may be not the press release that we are looking to grow that in Asia. There are opportunities there.

I think, I've mentioned in one of the calls that I've been to India, we are looking at opportunities there. Indonesia is the big market place. Vietnam exists and it is very close to Thailand. So, we’ve some synergies in that. It’s a big area and it represents two-thirds of the world's population. We still see opportunities to grow it.

Christina McGlone - Deutsche Bank

But Thailand is not being impacted by a step up in the ethanol program?

Sam Scott

We’ve not felt it yet. We’ve felt some impact in Thailand just on crop results. I mean, we’re seeing either it rains too much and you can’t get to the roots outward, rains too little and the roots were little too dry, but that has been a variable. It’s always been in that business. We’re not seeing the lack of availability for roots because of ethanol.

Christina McGlone - Deutsche Bank

Okay. Thank you.

Sam Scott

Thank you.

Operator

And our next question is from Christine McCracken with Cleveland Research.

Christine McCracken - Cleveland Research

Good morning.

Sam Scott

Good morning, Christine. How are you?

Cheryl Beebe

Good morning, Christine.

Christine McCracken - Cleveland Research

Good. And just on Argentina you mentioned that in your remarks that you are managing through, what seems to be a fairly difficult environments for processing. Looking at the energy situation specifically I guess if you could update us on what you are seeing there and that to normalize?

Sam Scott

Well, it’s not normalized and we will probably continue on an upward slope for period of time. As you remember when the government were six year ago, they put a freeze on in Argentina probably at the most inexpensive energy in the world by far. And it has been escalating on a fairly regular basis during the last six year and I expect that to continue.

We have, as a result of that been doing things in the expectation of higher energy cost to reduce our use of energy and to reduce our overall cost situation from the energy point of view. My comment was that, we are continuing to see that. We are continuing to work through it. So, we have some almost cost increases that will be coming add us in Argentina. And we expect, we are planning for those over the next couple of years on the energy front.

Christine McCracken - Cleveland Research

And then just on the corn crop in South America, there has been so much difficult whether thus far and other corns are freeze. Is there any update on and what you are expecting, if you have exposure to any disappointment in South America?

Sam Scott

No. The most recent, well the last crop as you know, is a major and that was a huge above and it was almost 25% of above the prior record crop. This crop, the expectation we have at this point in time will be about, I mean this is very early on.

Obviously, we are planning, it’s about the same size maybe down a little bit, but still close to a record and hope a lot of product. I think the issue on the situation in South America primarily Brazil. Is Brazil is one of the countries in the world, but does have GMO3 production. And as a result, the premium on the corn in Brazil to ship as anyplace it wants GMO3 is growing up. So, we’re experiencing that issue in South America and particularly in Brazil. Obviously our results are still pretty good.

So, we’re able to manage our way through that, and that’s the part of the issue with respect to being able to price in the environment because of the strength we’ve in the environment. But the crop itself, I’ve not heard any inklings or problems yet. And certainly what we do, we’ll have to adjust for that.

Christine McCracken - Cleveland Research

All right. And then, when you take about alternatives, high fructose trade, I’m just wondering what are you referring to that what’s your alternative, is that from…

Sam Scott

We’re shipping corn to Korea?

Christine McCracken - Cleveland Research

Yeah.

Sam Scott

There are a couple of things that are out there, we’re looking at Christine. I don’t necessarily want to comment specifically on them because when I do, all of sudden they closedown, and I don’t want that happening. So, certainly, they’re just things that we’re looking at that we believe we can get some sort of an advantage from maybe in the short-term perhaps in the long-term. But there, I just don’t want to comment on them right now.

Christine McCracken - Cleveland Research

And then, just one final question. When you talk about again a huge double digit increase in high fructose pricing this year coming after a couple of years of the increases? I would assume that your customers aren’t too happy, but relatively expecting I guess, given the commodity environment.

I mean, I’m seeing a lot more lately, I guess the high fructose free products, a lot of resistance in the trades press at least. I’m wondering, are you seeing like any ground flow of resistance for high fructose so is there any kind of I guess, pushback given the pricing now or is it still favorable or not that they’re not pushing back too hard?

Sam Scott

They are still favorable now, Christine. I mean, there is certainly no grants well against fructose.

There are some people that are using a marketing campaign that is saying whatever they want to say about it. It’s not that significant at all. I do think that as the commodity space goes up sugar is going to go back up as well. You look at this country; you look at the price of wheat and look at where we grow beet sugar.

And certainly wheat could take it over and I’d be blowing best some of those beet sugar farms and refining next year and capitalizing on the overall pricing. Certainly the issue here is going to be one of indication of fructose specifically.

Our customers are now and perhaps over the last couple of months who have been pushing through their price increases. As I mentioned earlier, many of them have said that they expect a volume hit for a shorter period of time, but people will go back to buying. It’s just a matter of adjusting to the new price on a package of gum or can of soft drink or whatever it is.

So, we will deal with that. But at the moment the price increases, everybody understands when I look at it, we did into numbers they are and count at the numbers they are, so these number they are. They had recognized it. We have to do something, whether the supply or demand is in balance.

So, they are paying, not to everybody and obviously we have negotiations are little bit harder. But we have been dealing with these people for years and years and years and you sit down, you just discuss what the world is in, you get through it.

Christine McCracken - Cleveland Research

Thanks.

Operator

(Operator Instructions). And our next question is from Ann Gurkin with Davenport.

Ann Gurkin - Davenport

Good morning.

Sam Scott

Hi, Ann.

Cheryl Beebe

Good morning, Ann.

Ann Gurkin - Davenport

Just a couple of things, is it still possible to reach higher teens operating margin in South America. Is that still realistic target looking in a couple of years?

Sam Scott

I think so. That being said, we can have corn at $7 a bushel and do it because we will probably have lower margins is based on the sale numbers. But I mean, God, bless you, Cheryl, -- based on reasonable corn over the long-term I think, we can get those margin.

In addition to that, remember the thing that we’ve said, I’ve not talked about the ingredient strategy movement and some of these ingredients we are looking to, will better have higher margins for us. They are not big. I mean, and certainly, they are not big today, hopefully they will grow. But that will become a larger piece of the overall mix that we’ve in South America, North America and Asia.

Ann Gurkin - Davenport

Right. At least and into the Ployols, how is that going?

Sam Scott

The integration is going very well. As you know, it rolled in February I guess of this year. We had this exciting business was fully integrated into Brazil by I think, it was May or June. The sales numbers Cheryl reported I think, we’ve got $29 million in Brazil, and in North America, probably the same thing as far as sales go.

The North American team has done what it has to do. The plans that we’re working on are moving to our desired scheme and plan. We’ve been able to put some price increases through in the market place on Polyols also, which has helped us out a lot. So,

Ann Gurkin - Davenport

And is it surplus to your accretive to earnings this year?

Sam Scott

This year, yes and next year even more so. If you take out the restructure issue yeah, I’m sorry. Cheryl, corrected me on that one. But we’ve said that also, I think in our release that we would have to, have the restructuring out. Next year, it will be positive and also we are looking as I said earlier in Polyols and other parts of our world.

Ann Gurkin - Davenport

That's great. That’s all I have. Thank you.

Sam Scott

Thank you very much.

Cheryl Beebe

You’re welcome.

Operator

Our next question is from [Lance Eddies with Motorock Capital]

Lance Eddies - Motorock Capital

Before I try to go in slow a little bit, but I know, you can’t comment directly on the pricing that you are talking about negotiations. But our peoples as far as to pushback or people you are negotiating using the threat at least of going to sugar, I think we’ve seen at least with Pepsi’s they are switching light water to sucrose base, instead of high fructose base. Are they saying that well if you’re going to price it bit higher when they switch to sugar, I can switch to sugar?

Sam Scott

Well, the thing that you have to remember sugar is till higher than fructose. So they switch to sugar is not going to do anything except raising the cost. It doesn’t giving the better product. Fructose in general is a cleaner product across the board.

So, we are not hearing that. Obviously, people are investigating what they wanted to do, what they can do in all areas, but [nutritionally] sweetener and soft drinks are big market. The other markets that we sell fructose and corns there have been a big markets and people are working with us to work do things there.

The comment that I always make is a commodity business and what goes up in the commodity space generally comes back down. I can’t say, it’s going to be next year or year after, but eventually the pricing will comeback into the round what we’ve seen in the past or at somewhere in that range.

But if doesn’t and commodities continues skyrocket. Sugar is part of that complex sugar price is going to go up just going to compete the land just like everything else does. So, we maybe looking at a new platform for all of these products at a higher level or we see the commodities space go up and comeback down to a new level, but in all instances...

David Prichard

Operator, I think we are closing in on the bottom of the hour and so we will take one more question, if there is one, before we close it down.

Operator

We’ve one question from Vincent Andrews.

David Prichard

Okay.

Vincent Andrews - Morgan Stanley

Alright, thanks. Thanks for taking the follow-up. I just might the question I forgot before was, if you just comment on what the price gap is in Mexico between sugar and high-fructose corn predicated in Japan?

Sam Scott

The price of sugar in Mexico, yes it is come down somewhat. There is still an advantage, but it’s not as big as it was before. But in Mexico we turn the price very close to the sugar pricing.

Vincent Andrews - Morgan Stanley

Okay.

Sam Scott

Okay.

Vincent Andrews - Morgan Stanley

Thanks a lot.

Sam Scott

Thank you.

Cheryl Beebe

Thank you.

Sam Scott

Thank you, Vincent. Thank you all for your questions. There were good.

David Prichard

Right, I think as a result we do like to end this after 60 minutes. We know you have other calls and earnings reports to deal with. So, with that, we will conclude our conference call and webcast this morning.

I do want to remind you that we have a replay of the webcast. This is through www.cornproducts.com. And we also have a replay of the audio conference call that’s available to you through Friday, November 16th. And you can call 719-457-0820 and use pass code 4291276 that’s pass code 4291276 for an audio conference call replay.

On behalf of Sam Scott and Cheryl Beebe, I want to thank you all for participating in our call this morning. And we look forward to talking with you again early in the new year probably late January or so with our 2007 fourth quarter and full year results. Have a good day.

Operator

This concludes today’s conference call. We thank you for your participation. You may now disconnect.

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Source: Corn Products International Q3 2007 Earnings Call Transcript
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