Corn Products International Q3 2007 Earnings Call Transcript

Oct.30.07 | About: Ingredion, Inc. (INGR)

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

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 CapitalMarkets

Heather Jones - BB&T CapitalMarkets

Vincent Andrews - Morgan Stanley

Christina McGlone - Deutsche Bank

Christine McCracken - Cleveland Research

Ann Gurkin - Davenport

Lance Eddies - Motorock Capital

Operator

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

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

David Prichard

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

I am Dave Prichard, Director ofInvestor Relations for Corn Products International. Joining me today to leadthe 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 chartsfor our presentation this morning can be viewed and downloaded from ourwebsite, and they are always available about 60 minutes ahead of our conferencecall. Those of you who are using the website broadcast mode for this conferencecall are in listen-only mode.

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

Now, I have just shifted to charttwo, which is our agenda. Cheryl Beebe will present the financials for thethird and nine months with appropriate analysis and flavor. Following that, SamScott will discuss our outlook forthe balance of 2007 and our pathway strategy growth initiatives before we moveto take your questions.

I have now shifted to chart 3,which is our forward-looking statement. Our comments within this presentationmay contain forward-looking statements. Actual results could differ materiallyfrom those predicted in those forward-looking statements, and Corn ProductsInternational is under no obligation to update them in the future as, or ifcircumstances change.

Additional information concerningfactors that could cause actual results to differ materially from thosediscussed during today's conference call or in this morning's earning pressrelease can be found in the company's most recently filed annual report on Form10-K and reports on Forms 10-Q and 8-K.

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

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

Cheryl Beebe

Thank you, Dave. Good morningeveryone. 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 yearfor a 35% improvement. The $0.66 includes $0.05 for the gain on the company’sinvestment in the Chicago Mercantile Exchange.

If I exclude the $0.05 from thequarterly results, we would be at $0.61 versus $0.49, or up approximately24.5%. For a better history, Corn Products just have received at the Board ofTrade for many, many years. Guidance remains at the $235 to $255 range for theyear including the $0.05 mentioned above. Assuming volumes and net corn costsperformed to expectations, we would expect to deliver full year results at thehigher end of the guidance range.

I am starting with chart 5, thesummary income statement for the quarter ended September 30, 2007, and netsales reached $877 million, up 30% or $203 million versus the same period lastyear. This is the seventh consecutive quarter of net sales growth. As we will seeon 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% lastyear. Strong pricing action across the three regions offset the significant increasein net corn costs and the smaller increase in total energy cost versus the sameperiod last year. As previously discussed in the first and second quartercalls, we expected to see margins ease off in the second half of the year withhigher net corn costs. Again, this quarter, we see continued margin recovery inNorth and South America.

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

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

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

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

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

Turning to chart 6, we can seemuch of the net sales growth is coming from North America.North America’s net sales grew 32% or $131million, representing about 65% of the company’s net sales growth in thequarter. 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 varianceanalysis. Total company net sales were driven by strong pricing actions. Priceproduct mix accounts for about 83% of the net sales increase in the quarter. Indollar terms, this represents about $169 million.

The increase in net sales fromtranslation of our foreign operations contributed about $32 million or about16% of the net sales increase in the quarter. The volume contribution for thequarter was about $2 million. On a regional basis, North America’s net sales growth of 32% consisted of 29% increase inprice product mix followed by a slightly favorable change in exchange rates andvolumes.

South America’sgrowth is predominantly coming from price product mix followed by strongercurrencies and slight volume growth. Asia/Africa’s net sales growth was led bya 15% increase in price product mix, favorable currencies, and offsetting thepartial decline in volume of 6%. The results in Asiawere lower than what we forecasted in the second quarter. We experiencedweaker-than-expected volumes in South Koreaand China, as well as weakerpricing action in these countries along with Thailand.

Moving on to operating income by geographicsegment, chart 8, again, we see North Americadriving the operating income performance. North America’soperating income increased 55% or $20 million.

The operating income margin was10.8% versus 9.1% last year. South Americasoperating income was up 20% or $4 million. The operating income margin lastyear in South America was approximately 12.9%versus this year’s 11.4%.

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

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

Moving on to the nine monthsresult, 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, anincrease 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 highervariable performance compensation, operating expenses from acquisitions, andstronger foreign currencies.

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

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

Chart 11 is the cash flow. Highlightsfor the quarter, contributing to the positive cash flow from operations, wasthe strong growth in net income along with the positive contribution fromworking capital, primarily relating to the reduction of accounts receivable. Weinvested approximately $35 million in fixed assets in the quarter. Cash usedfor financing activities was $286 million primarily reflecting the repayment ofthe July 2007 bonds.

Now, the last financial chart,slide 12, is the key metrics as of September 30th 2007. Debt-to-total cap is26.7% versus 26.1% last year. Debt-to-EBITDA on a trailing 12 months basis is1.4 times versus last year’s 1.6 times.

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

In summary, we had a solidquarter with strong sales and good margins. This business generated solid cashflows and the balance sheet is in great shape from a working capital and debtperspective.

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 morningto everybody. Our third quarter results, excluding the 5% gains in the CMEgroup, shares exceeded our expectations due to even better performance fromboth our North American and South American regions. However, as you heard from Cheryl,our Asia/Africa results were disappointing and weaker than our earlier outlookdue 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, weremain right on target to deliver an outstanding record year in 2007. Webelieve our 2007 full year diluted earnings-per-share will be in the upperrange of our guidance of 235 to 255, which compares to our prior record year of$1.63 in 2006.

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

Moving to chart number 14, our2007 outlook by region. It’s clear that North Americais providing most of the momentum for our earnings and margin growth in 2007. Justas we did in 2006, all three country businesses in North America are contributing strongly. The operating income rebound weare seeing in South America this year was alsoa key reason for our strong 2007 performance.

This has been led by a very solidrecovery in Brazilthat really began in the second half of 2006. The Andean region is alsodelivering another strong performance, led by the Columbian business, and weare pleased with the results to date of our acquisition of DEMSA in Peru inDecember of 2005.

The Southern Corn continues towrestle with high corn and energy costs, but it is doing a good job in workingthrough these raw material pressures with some improved pricing and otheroperating actions.

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

While net sales continue to growat a healthy double-digit rate, the lower profitability predominantly results froma significant decline in operating income in South Korea. This is due to lowvolume from the ongoing stagnant, which is domestic economy, along withcompetitive pressures from China.

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

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

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

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

So, as we look to deliver anotherstrong year, improvements in earning, sales, margins and return on capital in2007, we are investing heavily for our future growth in our base business inmany countries of our world. At the same time we are continuing to explore anumber of opportunities for geographic expansion in Asiaand building our value-added product portfolio with mill ingredients.

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

Question-and-Answer session

Operator

(Operator Instructions). And ourfirst 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 itwill be half a little bit this morning here nonetheless congratulations on thequarter 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 theguidance, 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 rangeis the middle of the range and up. And I am saying with the exercise centswould 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 ofcomments here on '08, I know you’ve not provided any formal guidance, butobviously everybody is keenly interested in just hearing your thoughts on howstrong the pricing environment is in North America. Even if you can’t give ussome specific numbers, what can you tell us about the strength of the outlookfor '08?

Sam Scott

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

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

It appears that the Mexicanborder will continue to open up. I have said, I expected managed trade; it lookslike I might have been wrong on that. So, that will improve the overall demandpull of the product and again there is in North Americato 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 afair amount of our business next year on going forward on multiyear contractsand grain related contracts. So, certainly that keeps of it if out of the mixof contracting for next year. So, that’s a little bit of color on it what Igiving specificity around what we expect to see, but certainly it’s a NorthAmerican column.

David Driscoll - Citi Investment Research

When do you think that you willconclude 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’scertainly the last couple of years we have been able to finish it up before theend of the year.

David Driscoll - Citi Investment Research

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

Sam Scott

That’s correct.

David Driscoll - Citi Investment Research

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

Sam Scott

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

David Driscoll - Citi Investment Research

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

Sam Scott

Pressure in the South Koreanmarket from Chinese competition the strength of the Korean Won with theircapabilities or customers capabilities of not being able to export as wellbecause of the strength of the Won. The primary areas as well as in Korea, it was some of our businesses we’ve in Koreahas a sugar placed cap, and we are up against that cap now. So, part of it isthat, the other part of it is Koreais the more competitive market than some of the other markets in which weoperate. 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 theMexican outlook for 2008, did you say, you just made a comment there. But couldyou just reiterate to me what your expectation is for increased trade with United Statesin 2008. Do you have a volume number that you might be willing to guess for us?

Sam Scott

I don’t have a volume numbersspecific, David. But we, I think, what I’ve said earlier was, it looks like theborder will open and the capability that the Mexican customers have of beingable to shift to fructose will probably be exercised in 2008. We’ve said it rightalong 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 possibilitythat would be on an incremental basis, as we go through the year.

David Driscoll - Citi Investment Research

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

Sam Scott

Thank you, David.

David Driscoll - Citi Investment Research

Thank you.

Operator

And our next question is fromKenneth 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 questionon the operating margins in North America?

Sam Scott

Yes, sir.

Kenneth Zaslow - BMO Capital Markets

They did sequentially declinedhigher little bit more then we expected particularly given the byproductsequential improvement. Can you give a little color around why that wouldhappen; it was at the basis or just helps us out a little bit?

Sam Scott

Well, Ken. What we’ve statedearlier was at the beginning of the year, we said that we had hedged our cornthroughout 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 saidthat.

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

So, the co-products are notacross our entire business mix. It’s for the business that we do not have onthe grain related contract. So, those are the things that I think perhaps arebeing missed as you look at the business right now. We are very pleased withthe 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 aproblem in Korearight now.

Kenneth Zaslow - BMO Capital Markets

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

Sam Scott

That’s called as corn glutenfeed.

Kenneth Zaslow - BMO Capital Markets

I’m sorry, you’re right.

Sam Scott

So, that you don’t have, I don’twant anybody confused around that. We are only shipping corn and gluten seedinto Europe and you are right the acceptancewas for 2006 crop not 2007 crop. I expect that it will probably close back downshortly.

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

Kenneth Zaslow - BMO Capital Markets

You mentioned that for 2008, thepricing 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 thiscurrent point including the net corn cost is, that should cover by more thanhalf or?

Sam Scott

That covers it by more than half,yes.

Kenneth Zaslow - BMO Capital Markets

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

Sam Scott

Kenny, I have a note down herethat 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. Thereare a number of things. Number one, as I said, ocean freight is going crazy onus but it’s bulk ocean freights. So, we have to look at all the other things wecan do to moderate the freight cost I don’t mean can we build ships. But fairlythe other ways to getting the product there we are exploring. We got a littlebit 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. Andwe have to work with the government and to our customers had to find outwhether or not they can accept in some instances GMO. The industrializedbusinesses have no climate and not be able to accept GMO.

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

The pricing situation where wecan, we are going to look to move pricing and move it as well as we possiblycan. Even the export environment is something; we are looking at right nowbecause even though our corn costs are very high and our costs so high, therewere some countries in the region that can accept our products better than theycan 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 dointernally. We’ve some issues, we’ve to deal with, and I won’t comment on whatthey are, but we’re working on those right now.

Kenneth Zaslow - BMO Capital Markets

And when will I not need to askthat question anymore?

Sam Scott

I’m not going to give you ananswer on that right now, Ken. It’s a work in progress. I’ll keep you informthough, 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 fromHeather 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 withthe 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 another400,000ish next year, if the customers can switchover and most of them can.

Heather Jones - BB&T Capital Markets

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

Sam Scott

The pricing in Mexico..

Heather Jones - BB&T Capital Markets

For HFCS domestic pricing forHFCS there?

Sam Scott

I think the pricing in Mexicocould be impacted slightly. We’ve said before, when the border opened that wethought it would be beneficial to corn products across the board in North America. But it’s certainly, if we’ve hadcompetition in Mexico,it could mean something. I won’t comment specifically on where it’s going. ButI think, certainly with more volume coming in and people coming into themarketplace. 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 marketwith additional to just see a capacity?

Sam Scott

Yes, the US suppliers are coming into themarketplace now. Obviously, they were into some external already with over100,000 tons. But with an incremental 400 -- the more US suppliers coming to themarketplace and going to different customers.

Heather Jones - BB&T Capital Markets

Just shifting capacity out of USinto Mexico?

Sam Scott

Correct.

Heather Jones - BB&T Capital Markets

Okay.

Sam Scott

That’s part of the support forthe pricing in the USright now. We’ve said right long, when Mexico opened up, it would benefitall of the North Americans in totality.

Heather Jones - BB&T Capital Markets

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

But, wondering what your opinionis on that where they do it only if at Mexico open fully or if you haveany stand from that?

Sam Scott

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

And for the amount of volume youare talking about moving into Mexicois not significant enough at all for ADM to risk the rest of their highpurchase volume in North America to price itlower. So, I think and all I can is, say if I think that what they were talkingabout was freeing up some of that volume, if they needed to be able supply theMexican marketplace.

Heather Jones - BB&T Capital Markets

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

Sam Scott

Well, we had a slow environmentin South Koreafor a number of years that the economy just the domestic economy has not donewell. They've been exporting technical electronics, cars, refrigerators withthe domestic economy and you heard back a couple of years ago with the creditcrunch game and then credit cards in South Korea. So, we’ve not seengrowth 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 Chinaall products are corn refined products. They have started bringing some oftheir products around the world. But the closest place for them to ship is Korea.It’s right across the sub China Sea. So, theyhave gone into some of the markets in paper and corrugating even in some of thefood applications with some of the products there and the volume has shifteddown somewhat.

My comment about the Chinesegovernment suggestion ruling I don’t know exactly what it was. We’re stilltrying to interpret what it is. Is it they’ve said they are going to cutback onallowing exports out of the country because they are concerned with being ableto 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 useit 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 ournext 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 orhelp us better understand the customers in Mexico,there are some perception and tell me if it's correct or incorrect that thecustomers in Mexico arelargely the same customers in the US.

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

Sam Scott

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

Vincent Andrews - Morgan Stanley

Okay.

Sam Scott

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

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

Vincent Andrews - Morgan Stanley

Right.

Sam Scott

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

The next phase of this thing, isthe Coke and Pepsi in Mexico.The major bottles in Mexicoonly approved for fructose of 50% level. In the USand Canadait’s going in a 100%. So, I think overtime and I can’t tell you what that timeframe is, but of the some period of time the probability is, that they willapprove fructose at a higher level anyway and in that point in time there willbe even further demand for fructose in the Mexican market.

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

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

Vincent Andrews - Morgan Stanley

Outstanding, but each point ofthe 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, youcan tell me what the spilt of volume that’s still one can perhaps see in Mexicoand what's the demand and perhaps for the other people down there. Do you haveany idea of what that is?

Sam Scott

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

Vincent Andrews - Morgan Stanley

Okay. And then my other questionwas going to be, I forgotten it. But so, let me just shift to how can we thenbuyback more of your stock in August, when the market melted down and yourstock had that really probably for you a very terrifying day. I think youlooked 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 itbounced up almost 7 bucks. So, we had mixed feelings here. We could have boughtback more, but it gone further down, but guess what I’m alluding to that. So, Ido not expect it to bounce back the way it did. But when it got back into therange of and it went up the next day so fast that there was not even a chanceto buy. We just let it.

Vincent Andrews - Morgan Stanley

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

Cheryl Beebe

No. There are still basically thesame. That the quality of the balance sheet, the strength of the cash flow allpositioned for us to continue to grow the business. In the event that we can'tfind the right opportunities, then there is no question that we will use thatexcess cash to buyback some of our shares.

We are focused on creatingshareholder wealth. For the long-term, we believe the best way of doing thatis, 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 onecomment as Cheryl reminds me everyday as we get closer to bonus time. As welook 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 strengthenedour balance sheet and kept it where it was up to and through the middle of thisyear. We would not have been able to go after 10 year or 30 year money with thelevels that we did.

Vincent Andrews - Morgan Stanley

Oh clearly, yes that was.

Sam Scott

We were very, very intent onmaking sure that we maintain, what we needed to maintain to get what it is thatwe got. And as a result of that through June at least, we are not going to doanything anyhow. During that period of time, we were looking at investigatingopportunities for growth.

We still are. We've increased thecapital spend. The other thing is, during the course of this year we turnoff asignificant amount of cash. You noticed our net debt is about the same as itwas last year with the kind of spending we talked about and the acquisitions wemade. 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 abilityfor a non investment grade company to get access to capital and the price ofthat capital goes through the roof. Given the fact that we’ve stated, we arelooking for growth opportunities is really is in the best interest of theshareholder for us to maintain that investment grade rating.

Sam Scott

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

Vincent Andrews - Morgan Stanley

All right. Well, thank you verymuch.

Cheryl Beebe

You’re welcome.

Vincent Andrews - Morgan Stanley

I will pass it along.

Operator

And our next question is fromChristina 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 anaccounting question about North American margins. I think most of us weremodeling a sequential decline because as you’ve said, declined cost wouldincrease as the year progress.

Sam Scott

Right.

Christina McGlone - Deutsche Bank

But, I think it is thenon-matured that at least surprised me, and I guess it can. And you hadn’treally talked about your grain related contracts impacting the co-productbenefit in the prior two quarters. So, I’m just curious, why is it such animpact this quarter or if there is something else may be an incremental cost ordid basis program to what you are thinking?

Sam Scott

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

We said that we’ve more grainrelated and multiyear contracts and that will be for which remove the risksfrom us of the escalated corn. I assume that everybody realizes that side inwith the co-product associated with it. I did not say it before the day. But Idid 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 thatgoes to the customers benefit not to our benefit on the pieces that are grainrelated.

And I’ve stated constantly thatas our numbers go up on sales dollars, but we have significant increases likewe have right now. The margin will not remain the same. We’re look at andtrying 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 kindof a situation and same thing applies South America.We had escalating corn cost that are really going up big time. We’ve been ableto improve our overall operating incomes as you have seen. They have gone up20%. The growth has been in the various businesses. The margins can be and willbe impacted.

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

Christina McGlone - Deutsche Bank

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

Sam Scott

Yes.

Christina McGlone - Deutsche Bank

You talked about announcedpricing, but then you’ve said that you have a significant amount of multiyearand totaling with it. It kind of seems like you wouldn’t necessarily benefitmaybe the way we would proceed. Can you tell us what percent is multiyear versusnot?

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 wehave increased the amount that we’ve had. That was both multiyear and grainrelated. And I also said that we are not the only player in this marketplaceand does that.

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

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

Christina McGlone - Deutsche Bank

Okay. And then, I guess, lastquestion in the press release you talked about opportunities for expansion in Asia. I’m just curious, I mean, South Korea, Chinahas limited industrial use of corn and now I think that tapioca is losing itscompetitive advantage because of Thailand ethanol program. Wherewould you expect to grow in Asia?

Sam Scott

Well, first of all, I don’t seethe Thailandsituation 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 lookedat before what we can deal with respect to opportunities in China because certainly there were companiesthere that we can buy as supposed to having to build Greenfield. I don’t think, we’ve eversuggested, we build a Greenfield in Chinanot necessarily anyhow.

We bought the Polyol businessthat we’re looking to grow, and as I mentioned that in the press release aswell as I think, in my prepared remarks may be not the press release that weare looking to grow that in Asia. There areopportunities there.

I think, I've mentioned in one ofthe 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-thirdsof the world's population. We still see opportunities to grow it.

Christina McGlone - Deutsche Bank

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

Sam Scott

We’ve not felt it yet. We’ve feltsome impact in Thailandjust on crop results. I mean, we’re seeing either it rains too much and youcan’t get to the roots outward, rains too little and the roots were little toodry, but that has been a variable. It’s always been in that business. We’re notseeing 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 fromChristine McCracken with Cleveland Research.

Christine McCracken - ClevelandResearch

Good morning.

Sam Scott

Good morning, Christine. How areyou?

Cheryl Beebe

Good morning, Christine.

Christine McCracken - ClevelandResearch

Good. And just on Argentinayou mentioned that in your remarks that you are managing through, what seems tobe a fairly difficult environments for processing. Looking at the energysituation specifically I guess if you could update us on what you are seeingthere and that to normalize?

Sam Scott

Well, it’s not normalized and wewill probably continue on an upward slope for period of time. As you rememberwhen the government were six year ago, they put a freeze on in Argentinaprobably at the most inexpensive energy in the world by far. And it has beenescalating on a fairly regular basis during the last six year and I expect thatto continue.

We have, as a result of that beendoing things in the expectation of higher energy cost to reduce our use ofenergy 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 workthrough it. So, we have some almost cost increases that will be coming add usin Argentina.And we expect, we are planning for those over the next couple of years on theenergy front.

Christine McCracken - ClevelandResearch

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

Sam Scott

No. The most recent, well thelast crop as you know, is a major and that was a huge above and it was almost25% of above the prior record crop. This crop, the expectation we have at thispoint in time will be about, I mean this is very early on.

Obviously, we are planning, it’sabout the same size maybe down a little bit, but still close to a record andhope a lot of product. I think the issue on the situation in South America primarilyBrazil.Is Brazilis one of the countries in the world, but does have GMO3 production. And as aresult, the premium on the corn in Brazil to ship as anyplace it wantsGMO3 is growing up. So, we’re experiencing that issue in South America andparticularly in Brazil.Obviously our results are still pretty good.

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

Christine McCracken - ClevelandResearch

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

Sam Scott

We’re shipping corn to Korea?

Christine McCracken - ClevelandResearch

Yeah.

Sam Scott

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

Christine McCracken - ClevelandResearch

And then, just one finalquestion. When you talk about again a huge double digit increase in highfructose pricing this year coming after a couple of years of the increases? Iwould assume that your customers aren’t too happy, but relatively expecting Iguess, given the commodity environment.

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

Sam Scott

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

There are some people that areusing 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 goesup sugar is going to go back up as well. You look at this country; you look atthe price of wheat and look at where we grow beet sugar.

And certainly wheat could take itover and I’d be blowing best some of those beet sugar farms and refining nextyear and capitalizing on the overall pricing. Certainly the issue here is goingto be one of indication of fructose specifically.

Our customers are now and perhapsover the last couple of months who have been pushing through their priceincreases. As I mentioned earlier, many of them have said that they expect avolume 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 ofsoft drink or whatever it is.

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

So, they are paying, not toeverybody and obviously we have negotiations are little bit harder. But we havebeen 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 - ClevelandResearch

Thanks.

Operator

(Operator Instructions). And ournext 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 itstill possible to reach higher teens operating margin in South America. Is that still realistic target looking in a couple ofyears?

Sam Scott

I think so. That being said, wecan have corn at $7 a bushel and do it because we will probably have lowermargins 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 thething that we’ve said, I’ve not talked about the ingredient strategy movementand some of these ingredients we are looking to, will better have highermargins for us. They are not big. I mean, and certainly, they are not bigtoday, hopefully they will grow. But that will become a larger piece of theoverall mix that we’ve in South America, North America and Asia.

Ann Gurkin - Davenport

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

Sam Scott

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

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

Ann Gurkin - Davenport

And is it surplus to youraccretive to earnings this year?

Sam Scott

This year, yes and next year evenmore so. If you take out the restructure issue yeah, I’m sorry. Cheryl, correctedme on that one. But we’ve said that also, I think in our release that we wouldhave to, have the restructuring out. Next year, it will be positive and also weare 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 [LanceEddies with Motorock Capital]

Lance Eddies - Motorock Capital

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

Sam Scott

Well, the thing that you have toremember sugar is till higher than fructose. So they switch to sugar is notgoing to do anything except raising the cost. It doesn’t giving the betterproduct. 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 inall areas, but [nutritionally] sweetener and soft drinks are big market. Theother markets that we sell fructose and corns there have been a big markets andpeople are working with us to work do things there.

The comment that I always make isa commodity business and what goes up in the commodity space generally comesback down. I can’t say, it’s going to be next year or year after, buteventually the pricing will comeback into the round what we’ve seen in the pastor at somewhere in that range.

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

David Prichard

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

Operator

We’ve one question from VincentAndrews.

David Prichard

Okay.

Vincent Andrews - Morgan Stanley

Alright, thanks. Thanks fortaking the follow-up. I just might the question I forgot before was, if youjust comment on what the price gap is in Mexicobetween 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 bigas it was before. But in Mexicowe 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 allfor your questions. There were good.

David Prichard

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

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

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!