Feb 6, 2014
Executives
Aaron H. Hoffman - Vice President of Investor Relations & Corporate Communications Ilene S.
Gordon - Chairman, Chief Executive Officer and President Jack C. Fortnum - Chief Financial Officer and Executive Vice President
Analysts
Brett M. Hundley - BB&T Capital Markets, Research Division Farha Aslam - Stephens Inc., Research Division Kenneth B.
Zaslow - BMO Capital Markets U.S. Akshay S.
Jagdale - KeyBanc Capital Markets Inc., Research Division Cornell Burnette - Citigroup Inc, Research Division Adam Samuelson - Goldman Sachs Group Inc., Research Division Matthew J. Korn - Barclays Capital, Research Division Vincent Andrews - Morgan Stanley, Research Division
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Ingredion Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.
And I would now like to turn the conference over to your host, Aaron Hoffman, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.
Aaron H. Hoffman
Good morning, and welcome to Ingredion's Fourth Quarter 2013 Earnings Call. Joining me on the call this morning are Ilene Gordon, our Chairman and CEO; and Jack Fortnum, our Chief Financial Officer.
Our results were issued this morning in a press release that can be found on our website, ingredion.com. The slides accompanying this presentation can also be found on the website and were posted about an hour ago for your convenience.
As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties.
Actual results could differ materially from those predicted in the forward-looking statements, and Ingredion is under no obligation to update them in the future as, or if, circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Form 10-Q and 8K.
Now I'm pleased to turn the call over to Ilene.
Ilene S. Gordon
Thanks, Aaron, and let me add my welcome to everyone joining us today. We appreciate your time and interest.
I will go deeper into the fourth quarter in a moment, but first, I'd like to look back on 2013. Clearly, the year did not resolve as we had planned initially and we've kept you posted on the changes over the past several quarters.
However, we ended largely in line with our fourth quarter expectations and, on the whole, turned in a good year. North America faced the challenges of a historical drought, low sugar prices in Mexico and weak consumer volumes to still deliver operating income of $401 million, just a few million dollars short of the region's all-time high of $408 million in 2012.
I'm pleased with how our team dealt with these issues to still deliver a solid year. We expect to see operating income growth in 2014.
South America, as we consistently communicated throughout the year, created the majority of the shortfall compared to our expectations. Of the $88 million decline in total Ingredion adjusted operating income this year, $82 million can be traced to South America and almost 3/4 of that related to Argentina.
The situation in Argentina continues to be unstable. While costs for raw materials, energy and labor remain very high, pricing opportunities are limited by government restrictions on consumer prices that impact our customers and, therefore, us.
At the same time, the official rate for the Argentine peso remains far below the unofficial blue market rate. This disparity creates challenges, notably that farmers choose to limit their corn sales in the fear that the peso they receive will devalue rapidly.
We anticipate further devaluation. However, we are clearly not in the position to predict the timing.
Jack will talk about our views on Argentina and how we've incorporated them into our guidance later on our call. We also saw weak brewing demand in Brazil, though it has shown improvement as the year progress.
For now, I will note that we do expect operating growth in South America in 2014. Moving along to Asia-Pacific, this region delivered another year of volume and operating income growth, validating our view that the region is healthy and represents a good opportunity for our specialty food starches.
We expect further growth in 2014. Finally, in the EMEA region, volume strength was offset by ongoing energy cost and availability challenges in Pakistan.
In spite of these issues, like our other 3 regions, we are forecasting operating income growth in 2014. While the year had its challenges from an operational perspective, we can conclude that outside of Argentina our strategy and business model continue to deliver solid performance.
Beyond the operations, we continue to utilize our cash flow in shareholder-friendly ways. Between the third and fourth quarter, we bought back 3.4 million shares, exhausting our previous authorization.
Our Board of Directors put a new authorization in place for 4 million shares. This gives us the ability to be opportunistic in the future.
We also raised our dividend twice during the year, by 46% in the first quarter and 11% in the fourth quarter. This took the rate up by more than 60% in total during the year.
We continue to appropriately invest in capital projects to ensure that we can execute cost savings and process improvement projects, as well as add capacity for future growth. As always, we see our strong balance sheet as a real asset and we will deploy capital in ways that we believe best enhance our business and position us for long-term growth.
Let's now spend a minute on each of the regions and our fourth quarter business performance. After a strong first 9 months, North America had a weak fourth quarter, volumes fell more than we had anticipated.
Beyond our decision to exit some low-value industrial business, low sugar prices in Mexico and some trade inventory adjustments late in the quarter pressured our sales. While we took numerous actions to manage controllable costs, at the end of the day, we experienced unfavorable fixed cost absorption that results in operating income being below last year's all-time record of $108 million.
I've already covered some of the high-level issues in South America. In the quarter, though, we saw some positive trends in Brazil that we believe are indicative of a better 2014.
Volumes in the region rose 3%, as strength in Brazil offset some erosion in Argentina. We've pointed out that Brazilian food and industrial volumes had been positive throughout the year and that the decline was based on weak sales to the brewing industry.
Our volumes to the brewing industry turned positive during the fourth quarter providing momentum as we head into next year. Operating income, while still down substantially, showed some sequential improvement compared to the third quarter.
And as I already discussed, the issues in Argentina persist. Asia-Pacific delivered solid revenue growth behind good specialty starch sales in Thailand and China, 2 of our key markets in the region.
South Korea, which faced pricing challenges for its HFCS in the third quarter, saw some relief as lowered corn prices narrowed the gap with sugar. In EMEA, volumes have been relatively stable in spite of the ongoing impact of the recession.
We've opportunities in the market for our specialty food starches and have brought capacity online to capture the incremental demand. In Pakistan, volumes remain strong, although that benefit has been muted by energy issues in the country.
We've taken steps to mitigate the problem, but the cost to acquire various energy inputs remains quite high. I'm pleased to now turn the time over to Jack, who has quickly and effectively taken on his new role as CFO.
I'm very pleased by the operational perspective he brings to the table, along with his extensive financial background. Jack?
Jack C. Fortnum
Thank you, Ilene. Good morning, everyone.
It's a pleasure to be on the call for the first time after listening to them since we went public in 1998. As I take you through the results, I'll focus in on some of the more noteworthy items.
So starting off on the summary chart, we'll deconstruct these line items in a moment. But you can see the sales decline carries through to the gross profit and operating income and then down to the EPS, though the benefit of the lower tax rate and share count mitigated some of the potential declines.
Looking at the components of the $145 million sales decline, we experienced a continuing currency devaluations that we expected, particularly in Argentina and Brazil, but also in Pakistan and Thailand. Volumes fell, driven in large part by North America, as Ilene discussed.
And we started to see pricing fall, reflecting the lower raw material costs as the new record corn crop in North America came to market. I will address how we see lower prices playing out in 2014 a bit later.
If we take a look at the regions, we see a more granularity. You can see the sharp FX hit in South America, then the negative volume in North America, and then the turn to positive volume in South America for the first time this year.
And in North America, you can see the price/mix decline driven by much lower corn prices than we saw a year ago. As you may recall, about half of our contracts in the region are grain related, and the lower priced corn prices pass through quickly.
Operating income fell $26 million, as North and South America both were down substantially and only partially offset by some favorability in corporate cost and good performance in Asia-Pacific. The favorable result in corporate expense reflects our ability to actively manage our cost as the year progressed.
We'll wrap up the quarter with the earnings per share. On the left side of this page, you can see the reconciliation from reported to adjusted.
I think this is pretty self-explanatory. The real story is on the right side, where we illustrate the factors impacting the year-over-year change in earnings per share.
Operationally, we saw a hit of $0.23 per share, driven by the items Ilene and I have been discussing: margin erosions, volume declines and foreign exchange headwinds. The nonoperational items provided a partial offset to the $0.23, most notably a favorable year-over-year tax rate and the impact of our third and fourth quarter share repurchases.
I'll talk more about the tax rate in the context of the full year, as that's really how we managed our tax position. The tax and share count benefits were partially offset by slightly higher financing costs and a modest negative impact of noncontrolling interest.
This resulted in an $0.11 per share benefit. Let's now roll back to our summary chart and look at the full year.
The P&L has a similar flow, with sales down, reduced gross profit and operating income leading to lower earnings per share. Breaking down the roughly $200 million decline in sales, we see that foreign exchange and volumes were significant headwinds, offset by a substantial increase in price/mix that reflects the very high raw material costs throughout most of 2013.
Moving to the sales bridge for the regions, we see the strong headwinds from currency devaluations in Argentina and Brazil, as well as Pakistan. Volume was down in 3 of the 4 regions, with a small increase in EMEA.
And price/mix was favorable around the globe as we passed on higher raw material costs. I would point out that we were quite effective in appropriately pricing increased costs in those markets, but came up short in South America, and especially Argentina.
As the economic circumstances, they are superseded our normally good ability to price. That point about South America plays out clearly on this slide, as the vast majority of our operating income declined occurred in South America and, again, particularly in Argentina.
As Ilene discussed, we faced a severe cost crunch and have been able to -- and have not been able to fully recover higher costs through pricing. Looking again at the right side of the EPS slide, we see the impact of margin contraction and negative volume largely caused by South America.
The currency headwinds came in at a negative $0.19 per share, which fell a bit under the range of $0.20 to $0.25 per share that Cheryl had provided during the year. Her forecast is a little conservative, but still quite accurate.
Net-net, operational items were negative $0.79 per share. Partially offsetting that impact was $0.27 benefit from nonoperational items, largely due to the lower tax rate.
On a year-over-year basis, we've seen the tax rate come down to 26.3%, which is probably a little lower than our expectations going forward. For 2014, we're expecting earnings per share to be in the range of $5.35 to $5.75, equating to a 6% to 14% growth.
The major variable in that range is no surprise, Argentina, which I'll touch on in a moment. In terms of the quarterly flow, I won't provide you with specific guidance but I will point out that the first quarter is likely to be down in the neighborhood of 25%.
First, the comparison in Argentina is going to be a very challenging and more like the declines we saw in the third and fourth quarters of 2013. Around half of this, the first quarter decline, is expected to come from Argentina.
Second, the North American business will start slow, with a tough comparison to the first quarter of 2013, when we had extremely favorable corn costs. In addition, North America will likely also be impacted by the cold weather affecting transportation, energy cost and consumption.
As the year goes along, I believe that the year-over-year earnings per share results will improve sequentially. Quickly, for your modeling purposes, I expect corporate expenses will be directionally in line with 2013, and the tax rate should be slightly higher than 2013, but still around the 27% to 28%.
We are also expecting headwinds largely from Argentina of about 20% and 25%. In North America, we expect sales to decline significantly, as we have passed along much lower corn cost -- corn prices to our customers.
Volumes for the region should be down slightly, as pressure in Mexico from lower sugar prices and the newly implemented tax on sweetened beverages hurts volumes in the short term. This negative impact should be offset by volume increases in the U.S.
and Canada as lower prices stimulate consumer demand. We expect operating income to increase in North America, driven by our ability to slightly expand our dollar margins, as well as the mix benefits of selling more specialty product.
We also continue to effectively manage our costs as an integrated organization as well. Mexican volume softness should mute the level of increase, particularly in -- early in the year, as I mentioned.
South America sales are expected to increase as volumes grew in the region. We anticipate improved results from both Brazil and Colombia.
For Argentina, we have factored in assumptions that the currency continues a fairly rapid devaluation. The low end of our assumption is predicated on a very significant devaluation and a slow, roughly 6-month recovery.
A better scenario would be a quick complete devaluation soon and more speedy recovery, perhaps 3 or 4 months instead. As we see the devaluation, we're looking for a scenario where farmers begin to release more corn into the market, bringing prices down, and making corn-based sweeteners more competitive with sugar.
We would also look for peso-denominated costs to come down, providing relief to the cost crunch I discussed. Ultimately, this is an unpredictable situation and political and economic risk remains.
We believe we've captured significant further downside in our guidance but we do see some scenarios, where our Argentine business holds its ground in 2014; Asia-Pacific, to continue to deliver top and bottom line growth behind an attractive portfolio of especially starches, sold in a balanced mix of mature and emerging geographies; EMEA should also see top and bottom line improvements. In particular, the new specialty starch capacity we've installed in Hamburg should help drive volume and profit levels, helping overcome the energy cost issues in Pakistan.
Moving on to cash flow. Let me start with the 2013 results.
In spite of operating income and net income being down during the year, our cash flow provided from operations was strong at $619 million. This good result allowed us to repurchase $227 million worth of stock, pay $112 million in dividends and spend $56 million to further fund our pensions and still execute on our capital plans.
At the same time, our cash balances balance only modestly declined, as you can see on the balance sheet slide in our earnings release. This speaks to a very healthy business that has the ability to both reinvest and return capital to shareholders, which we'll continue to do.
Looking to 2014, we expect another strong year from cash from operations potentially exceeding our record 2012 figure. And we'll continue to invest in capital projects for growth, as well as cost process improvements around the world.
We view capital as the lifeblood of our business and have historically seen very good, generally controlled returns on these projects. Our strong balance sheet and cash generation gives us -- gives the proverbial high-class problem of deploying our cash.
And most of you know, we are a patient and conservative team around here and I don't think this will change. We seek to be acquirers of complementary businesses that add long-term value to our portfolio.
We remain actively engaged in a potential M&A, but I will stress, as I always have, we will be disciplined buyers. We will look for the right strategic fit at an appropriate price.
Regardless of whether or not acquisitions materialize, we maintain the ability to opportunistically repurchase shares. We expect to buy back the creep from our auction issuance and as far -- that's as far as I'll go at this time.
So we are well-positioned to act if we choose to do so. That brings my section of the presentation to close.
So now, I will turn the time back over to Ilene.
Ilene S. Gordon
Thanks, Jack. As we've said a few times this morning, our business model, which is reflected in the strategic blueprint, is working.
In the case of Argentina, we are in a short-term severe situation that we expect will right itself over time. Elsewhere, in spite of challenges, our business is doing well.
North America is well positioned to return to growth. South America has real opportunity for improvement, as Brazil appears to be getting back on track and should benefit from the World Cup in June.
Asia-Pacific continues its good trajectory. And EMEA has a solid growth profile that will be augmented by new capacity.
We've also demonstrated a track record of good stewardship of shareholder capital. Share dividend increases in 2013, along with a significant level of share repurchase, demonstrate our ongoing commitment to our shareholders.
We sit today with a strong balance sheet and a disciplined team executing a clearly defined strategy. We believe this is a position that will continue to benefit our shareholders in the year to come.
Taken together, we believe in our prospects and in our ability to deliver shareholder value over the long term. And now we're glad to take your questions.
Operator
[Operator Instructions] And our first question today comes from the line of Brett Hundley with BB&T.
Brett M. Hundley - BB&T Capital Markets, Research Division
You guys called out volume growth in South America and, Ilene, you talked about brewing volumes in Brazil getting back on track during the quarter and increasing. And you gave your outlook language but I'm wondering if you can talk more specifically in the near term.
Have we seen that continued overall into Q1 here?
Ilene S. Gordon
Yes, I mean, good question, Brett. On brewing, we've actually, as I said, we saw it to turn in the quarter year-over-year and, in fact, I think in some of the local papers, there's talk of increased brewing sales in the first quarter and the reason is you may have heard that there's a lot of hot weather, almost a little bit above average for this time of the year, and, of course, the World Cup anticipation.
And actually, having the Carnival and Easter being late, I think everybody feels that it's a bigger kind of summer season. And so we are starting to see that improvement.
Brett M. Hundley - BB&T Capital Markets, Research Division
Okay, great. And then, so, Jack, I mean, what kind of currency are we talking here for Argentina in the guidance?
I mean, does the low point assume a 13, a 15? I mean, can you give a little bit more color on just what we're throwing in the guidance here with Argentina?
Jack C. Fortnum
Sure, Brett. I think, if you think about Argentina, it continues to be unstable and unpredictable.
We've modeled various scenarios based on the rate and level of devaluation. In the middle of our range, we built about a 40% reduction in our earnings from the $45 million that we have in Argentina right now.
And then our worst case, it brings it to the bottom end of our earnings per share range, though Argentina would still be slightly profitable. It doesn't account for a complete collapse of the economy or anything like that at this point in time.
And so if you think about -- I think one of the things I want to highlight is that the valuation is also -- that happens in terms of the translation in the near term. But we also have, like, what I would call as the inflationary impact and the timing of that, and that's how our business will respond in terms of getting the prices back up and in line with the inflationary rates.
And so we will still see some cost crunch with the inflation and things as we value this. But as we look through it, we've taken it right down to almost different -- 3 or 4 different scenarios, where we've taken the peso down dramatically, and then we have to look at the inflation rates within the country, what that does to the release of corn and how competitive it does to how it frees up the sugar in terms of the export market as well.
So I'm fairly comfortable that in the middle of the range there, that we've taken our earnings projections down about 40% and are at the bottom of the range. We basically got just a slight little earnings of Argentina in it.
And we walked through so many different scenarios, I think I'm fairly comfortable with that at this point in time. I know I didn't give you specific rates of devaluation, but it's really predicated on the different assumptions in terms of inflation in the country as well.
And it's the matching of those 2 that becomes very critical.
Brett M. Hundley - BB&T Capital Markets, Research Division
That's actually really helpful. I appreciate it.
And then just my last question. I want to talk about the North American market, because South America is difficult, with the impacts from Argentina and they're out of your control.
But in North America, I think you have a situation where, overall, it should be very beneficial and you talked to that with growing operating income year-on-year. And given the drop in corn, and especially what co-products are doing over the short term here, I wanted to look at the revenue side for a second.
And everyone focuses on HFCS and I do want to touch on it here, but I wanted to look more broadly as well. So my question on HFCS is regarding contracting for 2014, do you think that the season went too long, comparatively speaking?
Do you think the season went too long for INGR in specific? And then, can you just talk about contracting for the other products that you produce?
And maybe not even contracting, but just how you're set up from a margin standpoint or what the outlook is for, say, dextrose, specialty starches, high maltose syrups, things like that. I really appreciate it.
Jack C. Fortnum
Brett, I'm going to take that. This is Jack.
I hate to say that I have a little bit of experience in this area but, unfortunately, I probably know a little bit more than I'd like to share with you. But I will give you a fair amount of insight into how I see contracting happening.
If you think about the sweetener market, obviously, there were some compressions in margins that we've seen, both in Mexico, as well as generally here in the U.S. But it was really at the tail end of contracting that, that started to happen.
And it was on a small volume of the fixed-price contracts that it materialized. And so with North America being up, I think it's kind of correlates very closely to what you see with the rest of the business, is that we have a number of different ingredients in our portfolio.
Many of them are specialty ingredients and so what we've seen is, is the margins actually expand a little bit there and actually came out with a fairly, I'd say -- I would say a positive result in terms of our contracting. Obviously, we will have a little bit of volume reduction in Mexico because of the exports into Mexico declining a little bit.
But all in all, I think the contracting went on a little bit longer than I like. I don't sleep too well during the contracting period.
But, in general, I think we're fairly pleased with the result of the contracting. Near the end there it got a little bit compressed in terms of some of the sweetener margins, but it was on a small percentage of the volume.
Ilene S. Gordon
So I think, Brett, this is Ilene -- so I'd further that as we look at those other sweetener products and we talk about having 1,000 ingredients and, as you do point out, the dextrose and maltodextrin and those others, we do see opportunities for growth in those areas, as well as the specialty starches. And the one thing that we didn't mention is, while Jack talked about a little bit of a down volume in Mexico in HFCS, we are looking to grow our specialty starches in Mexico with the new heightened awareness with their new obesity laws.
And so I look at that as the big opportunity over the next couple of years.
Operator
And we do have a question from the line of Farha Aslam with Stephens, Inc.
Farha Aslam - Stephens Inc., Research Division
I have a question regarding your balance sheet and the cash on your balance sheet. Given your share repurchases, how much of the cash is here in the U.S.
and how much of it is in the international markets?
Ilene S. Gordon
This is Ilene and then I'm going to turn it over to Jack. I think on the last call, Cheryl gave kind of a detailed answer.
And I believe it was about 1/2 was outside the U.S., a little more, and spread around in a number of different places. So I think she gave a little bit of the details.
I don't know, Jack, anything to add to that?
Jack C. Fortnum
I think that's about correct. It's about 50% is outside the U.S.
50% is here in the U.S. Is there anything else you're specifically looking at?
Farha Aslam - Stephens Inc., Research Division
Well, I'm trying to figure out how you repatriate your cash and how you can use your cash to buy back shares or pay dividends, because you do have a significant cash balance. And so, therefore, you should be able to afford to buy back a significant amount of shares.
The only thing that I can imagine that would limit your share repurchases is that the cash is housed outside of the U.S. and for some reason you don't want to repatriate it.
And so, therefore, you don't have the ability to sort of buyback shares here in the U.S. Are you at all restricted in terms of using your cash to buy back shares?
Ilene S. Gordon
The answer is that is not the restriction. I mean, of course, we're always looking to optimize shareholder value in terms of how we move cash around and not pay above and beyond what we should do in terms of the losses you have if you move cash around.
The reality is, is that we do have a very robust cash flow. And I think as I said on calls before, we always look at our opportunities to use the cash and our primary one has always been, number one, to fund the capital needs of the businesses, which we do either locally or around the globe, so we're not constrained.
We have a good cash flow to support our growth. Number two, we are looking for growth opportunities.
And M&A is something that I think that there's an opportunity for us to grow both geographically in a number of areas, where we don't have a position or to build on our position, and equally it's important to broaden our portfolio with other ingredients that built on texturizers or adjacencies that make us more important to our customers. At the same time, we do believe in a strong dividend, which we've demonstrated.
And we have used share buybacks in places where we want to buyback certainly any kind of creeper dilutions and opportunistically. So it's not any -- it's not related to any capital constraint around the world and where the cash is, but rather, the decisions that we're making to build long-term shareholder value.
Farha Aslam - Stephens Inc., Research Division
And in terms of M&A, could you just share with us the M&A landscape that you see? Are there opportunities that are available and look attractive?
And Ingredion has not done any material acquisitions since that National Starch acquisition. Is it really valuation or opportunities that haven't presented themselves?
Ilene S. Gordon
Well, it's interesting. So the National Starch was about 3 years ago and, of course, we spent a number of years to make sure we integrated that well, and that did go very well, and have a very cohesive organization.
Looking at opportunities, the reality is that there are opportunities out there. For a period of time, the ones that we had seen worth price appropriately to create shareholder value, or any availability was not that great.
I would say that I see that increasing, the availability of acquisitions. And part of it is families deciding to sell or large companies selling a division or some smaller companies.
I do see that opportunity increasing but, again, it comes back to value. And we are very much adamant on paying the appropriate price to create shareholder value over the long term.
But that landscape, as I said before, I think there are geographies and the broadening of portfolio as we've become more successful with our customers in reformulating products and in formulating for new products, this trend of health and wellness that our customers are all focused on has really opened up our thought process to what kinds of ingredients would make us more healthful and successful with our customers and so the portfolio of opportunities in my mind has grown in the way we think about them. But again, always want to be disciplined buyers.
Operator
And we do have a question from the line of Ken Zaslow with BMO Capital Markets.
Kenneth B. Zaslow - BMO Capital Markets U.S.
Ilene, my first broad question is can you talk about your view on the long-term growth algorithm? Obviously, '13 and '14 are below your expectations of growth.
Where do you -- how do you regain -- first of all, I guess, is the growth algorithm still in play? Second is, where do you regain your growth in '15 and '16?
Ilene S. Gordon
Okay. As I've said before and I continue to say, I think the growth algorithm is still there and that we believe long term in the 10% to 12% EPS growth off the 2012 base.
Now I know that arithmetically puts pressure on the outer years, certainly, of that range. But I think that if you think about the different growth areas that we've talked about, people do believe that South America, with its GDP, and if you look beyond 2014, there's certainly a return to growth in that area.
We are the leader. We ought to be able to organically grow with the GDP growth.
Asia certainly falls into that same category, with healthy growth coming in a number of different regions. EMEA, because we have a specialty product, a specialty portfolio of specialty starches that are very much focused on clean label and other on-trend issues in Europe, again, we're a leader, very well-positioned.
And then North America, the mature economies are the ones that are really driving and focused on this health and wellness. And again, you can't pick up a paper in North America without seeing the focus on what people want to eat and the new product development that's being worked on by the food companies.
So that's all kind of the organic side. We always said with that growth trajectory that we thought that we -- that 2/3 of that growth would come from organic or things that we would be doing with our R&D and our capital investments.
And the other 1/3 would be from a good use of cash. And while we've demonstrated dividends and some share buyback, as I just talked about a moment ago, I think the M&A field is pretty rich with some opportunities.
And so we would use our strong balance sheet and 1/3 of that to drive some of the growth with some of those opportunities.
Kenneth B. Zaslow - BMO Capital Markets U.S.
So which division, I guess, would be the one that you would recapture the growth in? Is it -- I understand the health and wellness, but is there a certain division or is it just South America that would actually be restored to historical levels and move forward, or where would be the outsize growth -- which division would have the outsize growth to recapture your algorithm?
Ilene S. Gordon
Well, I look at the growth in all the regions. As we talked about in 2014 and beyond, obviously, North America is a big piece of the company, 50% plus.
And so the health and wellness will certainly be driving some of the growth in U.S., Canada and then, of course, I talked about Mexico. And the Mexico GDP, while there's a short-term hit in one sweetener product, the high fructose corn syrup competing with sugar, the other sweeteners and other specialty starches are really in demand from the growth of the GDP that will come in Mexico.
It's over 3%. And the awareness of obesity for health and wellness products is really creating a great environment.
So I wouldn't pick one area versus another in terms of the arithmetic. I mean, I'm sure you could model that and come up with slightly different numbers.
But the emerging nations really still, long term, we believe in them with the rise of the middle class, the GDP growth, as well as the demand for health and wellness in the mature economies.
Kenneth B. Zaslow - BMO Capital Markets U.S.
My final question is, have you changed at all the way that you're going to be allocating CapEx? Because you're still keeping it relatively strong at $300 million, $350 million?
Is there a change to how you think about your projects, are you retrenching certain areas, are you expanding other areas relative to your initial expectations?
Ilene S. Gordon
Well, certainly, some of the capital we're spending were from decisions that we've made in the last 12 months and so we're funding different projects. And as I've said before, where one adds capacity, it takes a number of years.
In other cases, we look at cost reduction projects. I would say, the only thing we talked about a couple of years ago where we've invested in Brazil $75 million to $100 million and we added some capacity.
And I would say that I would not be adding large amounts of capacity in South America now because you -- we need to wait for the GDP to kind of come back in Brazil as it's forecasted to be; Argentina to stabilize a little; Colombia is another great opportunity with the free trade agreement. So that's where I think we would temper some investments and get that in line.
But the rest of the world has some great opportunities and we continue to be good stewards and make sure that we improve our processes and add features which will, again, make it more successful to customers.
Operator
And we do have a question from the line of Akshay Jagdale with KeyBanc.
Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division
Can you give us a little bit more color on North America? I think you mentioned the contracting season implied some compression into the tail end of the season.
And I believe you said a slight increase in EBIT there. But with lower corn, can you just help us understand that dynamic?
I mean, you would expect this year with the change in the net corn cost being a significant as it is in favor of your company, you'd expect to see a lot more EBIT growth. But can you just help us understand that dynamic this year and sort of what -- where you might make that up perhaps in future periods?
Jack C. Fortnum
Yes, so just a couple of comments. I think, if I could re-summarize what your question is from my vantage point as kind of like a recap of the contracting in North America and with lower corn prices.
I think that you've hit one of the key points, is lower corn prices is good for our industry in general. And I'd say the industry in general.
It makes us very competitive on the sugar side of the equation from the perspective that we are now competitive with sugar as it falls in pricing as well. And as well on the consumption side, I think it's very good as well, because this should get passed on to the customer level, so we're anticipating some volume improvement due to that.
In terms of the specifics of the contracting, I think I kind of summarized it before is, as the sweetener margins got a little compressed during the contracting phase the rest of the business did extremely well and that included our industrial business, from a math perspective. We were fortunate to have our industrial business contracted fairly well.
And so I think in the very tail end of the sweetener business, we got a little compressed margins and the market got a little challenged. But I think in general, we were fairly pleased with the way it turned out.
And so the North American business is going to be up this year. And obviously, we believe it will be up based on what we we're seeing in terms of contracting.
This first quarter has been a challenge as we indicated it as well just because of the weather. So we would like to see that come back a little bit.
And I think the other side of the equation is I think why I'm -- this a good opportunity for me, perhaps, to address one of the issues in terms of our quarterly layout as well. Each year as we lay in our corn on the fixed-price contracts, the layout can be significantly different.
I think Cheryl's alluded to this in the past as well, where she's commented that you really have to look at the full year in terms of contracting of how it materializes because it's really that margin that you look at on those fixed-price contracts right across the entire year. And this year is one of those years where it's a little bit reversed from prior year, where the first quarter layout of the corn is a little bit more expensive than the latter portion as in our projections against the fixed price business in particular.
So I think that kind of helps you with the quarterly layout as well, if I could comment on that.
Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division
And just a point of clarification, when you talk about margin compression, are you talking about percentage margins or dollar margins?
Jack C. Fortnum
In this case here, we always talk about dollar margins. The reason being is that because of the fact that corn is largely a pass-through on the grain-related formulas as well as in many of our fixed price business, the actual percentage.
Our percentages will be up this year because our denominator of the revenues will be down just naturally. So I think that, that kind of gives you a -- it's all dollar that we're talking about here per unit.
Ilene S. Gordon
But remember, we've also said that in the North America contracting, while there was some late compression in dollar margin in high fructose, we did see an interesting and more positive environment as an example in the industrial business and in other types of sweeteners. And so, again, you've got to think of the total portfolio and that's why our outlook for 2014 is certainly positive.
Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division
So just again on North America, what was that idea where it seems that Mexico was a major issue? And weakness in high fructose, not only Mexico, but also in America, in the U.S.
is an issue. So barring those 2 issues, you would have expected that -- or you would expect much better growth there?
Is that sort of the 2 main issues that are holding you back from a dollar growth perspective in North America this year?
Jack C. Fortnum
I think that summarizes it fairly well. I would like to point out, though, that Mexico's -- we are one of the few producers that are in all 3 countries throughout the North American region, including Mexico.
And Mexico, our local production is still very strong, even in terms of HFCS, as it's competitive across the board. And we probably have the -- I guess I'm taking some pride here a little bit, but we probably have the best supply chain and delivery capabilities all throughout Mexico and that will continue to be a growing economy.
And so I'm actually very bullish in Mexico for the long term as well. We see some of our customers investing heavily in Mexico.
And I actually think that the Mexican volumes will be very solid coming forward as well.
Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division
So just one last one. What kind of environment would it take for these challenges to reverse if it's -- do we need better carbonated soft drink consumption in the U.S.
along with high sugar prices in Mexico and in the U.S. for -- and then better food and beverage industry volumes for the U.S.
or the North American sweetener business to have a little bit more momentum? Is that -- are these the main factors you would say from macro perspective that you would like to see turn around to really get the business going faster than it is?
Ilene S. Gordon
What I said before is this is an industry where there's been no new announced capacity. So that's been pretty stable.
The, obviously, better demand helps the dynamics and the Mexico sugar extreme glut, obviously, future harvests will impact that. At the same time, as Jack said, these lower grain prices that have been in the market because of the large crop should benefit the food companies and the consumers and that should drive the volume.
And that is the expectation as we go forward. We just came off that severe drought, the 50-year drought.
So with the lower corn prices going into the market right now that should be a very positive help, depending on how the food companies pass that on to the consumer, as we go forward. So I think, we don't expect more supply, so better demand obviously in the total system would be a help.
And of course, our focus on specialty products is a unique piece for us and it also helps take advantage of that health and wellness trend in Mexico as well as U.S.-Canada.
Operator
And we do have a question from the line of David Driscoll with Citi Research.
Cornell Burnette - Citigroup Inc, Research Division
This is Cornell in for -- with a few questions for David. Just the first one here is, just looking at share repo activity.
The company bought back 3.4 million shares in '13 and with shares down year-to-date and a very strong balance sheet, it would appear that there's good opportunity for further share repo in 2014. So in that vein, I wanted to know, of the 4 million share authorization that you have, how much of that is embedded in the EPS guidance for 2014?
Jack C. Fortnum
At this point in time, it's really just the option creep that we're really looking at buying back. Maybe we can do something incremental from an opportunistic basis if we desire, which would be incremental to the current guidance predicated on just buying back the creep.
Cornell Burnette - Citigroup Inc, Research Division
Very good, very good. And then in South America, earlier, Jack, you gave a really good detail on the number of different scenarios.
And which the way that things can play out especially in Argentina, you spoke about kind of the currency devaluing, which would enable farmers to begin selling their crop more and then also you talked about the recovery and FX translation. So, one, I just wanted to know, what was the ideal level that you look for in terms of the exchange rate between the peso and the dollar in order to get farmers to start selling.
And then, two, in your best case scenario, I think you had indicated that you could possibly price through the currency impacts in 3 months, which is a little bit faster than the normal 6-month period that it takes, and so under those circumstances, kind of what kind of gives you the confidence that in the best case scenario that could indeed occur?
Jack C. Fortnum
I think -- first of all, let me just say, let me set up several different scenarios that we walk through. And each one of these were predicated on different devaluation rates, different inflation rates and different assumptions about how the farmers would react with respect to their corn, as well as what would happen in the sugar market in Argentina as well.
So they're not mutually exclusive in any way, shape or form, because each one of these are codependent in terms of the other assumption. I think what I was highlighting is that as the devaluation takes place there will always be a lag a little bit with the inflation rates.
Some of this as it gets back into what I would call a more normalized equilibrium, where it becomes almost like a dollar-based economy. And I hate to put it in those terms, but it almost become dollar-based because of the corn equation, the sugar equation and the energy equation.
It starts to become, shall I say, more stable. It will take -- I don't see in the near term -- when I say the near term, the next several -- few months, it actually playing out exactly like that.
I think we had the 1 devaluation already in January. And I think that it will require some further devaluation that to really get into the view where the devaluation is actually exceeding the inflation rates to catch up a little bit on the cost competitiveness from an Argentine worldview perspective and a purchasing power perspective.
But I do see several scenarios where that will work. And that sounded a little complicated, but I'm working through about 3 or 4 different scenarios and so I'm not too sure how else to describe it in a generality perspective.
Ilene, I don't know whether you have any other comments pertaining to that?
Ilene S. Gordon
Well, I think that the question about why could it be 3 months to kind of rightsize the economics, there is a harvest coming out in April and May. And that should promote some of the push to get the corn going in the right direction.
But the other thing is, I mean, Jack said 3 to 4 months, but I think there's been such extremes in the country that any large movement in currency will drive people to make the right decision, the farmers, and get back to getting some cash in their pocket because they can only hold off so long and then they have to monetize it. So I think that, that type of devaluation will send the right signal to the farmers and then they'll get to it and then some of the exports will start up again, especially for sugar, which will drive the prices higher.
Operator
And we do have a question from the line of Adam Samuelson with Goldman Sachs.
Adam Samuelson - Goldman Sachs Group Inc., Research Division
A lot of ground has been covered. Maybe first, just some clarifications on some of the guidance.
In South America, I think you said that sales are going to be up for the year and I'm just trying to make sure I understand how that's possible given some of the FX headwinds you're facing. Or maybe I'm misinterpreting what's on the slides.
Ilene S. Gordon
We talked about operating income being up. I'm not sure we gave anything specific on the...
Adam Samuelson - Goldman Sachs Group Inc., Research Division
Sales are expected to increase on the slides, that's why I'm just...
Ilene S. Gordon
But I think Brazil is a big country, a big piece of that. And Colombia, yes.
Jack C. Fortnum
Colombia is 1/4 of the region and we're expecting sales are up there. Brazil is 1/2 of the region and we're expecting growth there.
So 75%, you're right, there with some translation risk and certainly on the Argentine side, but that 3/4 of the business is expected to grow, both OI and top line.
Ilene S. Gordon
So going back to the very first question about the brewing industry and looking to grow with that during the year in Brazil and then the continued food and industrial for both Brazil and in Colombia should, obviously, be where you'll see some of the growth. And GDP, I mean, the GDP forecast for the country -- I mean, Brazil is 2.5%.
So, again, that's where you'd see some of the growth.
Adam Samuelson - Goldman Sachs Group Inc., Research Division
Okay. I guess I'm -- and maybe I'll take that offline because I struggle to see how that reconciles with some of the translation headwinds you'd face.
And then in North America, what's the impact of kind of exiting the industrial starch business? How big is that?
And then, what's the expected volume hit from exiting that portion of the business?
Jack C. Fortnum
It was less than 0.5% of volume in 2013, and that program is essentially over in 2013.
Adam Samuelson - Goldman Sachs Group Inc., Research Division
Okay. And then maybe finally, in North America, the -- how would you characterize the industry -- the pressure -- maybe the prospect for more margin competition in some of the more specialty and non-HFCS parts of the business?
I mean, clearly in aggregate, industry capacity is still -- is all here. And demand in aggregate with HFCS down is not really growing.
And how do you see some of your competitors maybe trying to shift some of that capacity away from HFCS and some of the loss volumes from Mexico into some of the other parts of the business?
Ilene S. Gordon
Well, I'll start. As part of the specialty products, those are situations where you work with customers to help formulate and test for the product and then do shelf-life testing and get it out into the market.
So, it takes R&D and product development to work with customers to be successful. And so we've been doing that for many years and that's what the National Starch acquisition brought us.
So, some of it uses a similar grind, but it takes different channels in the different facilities. So there are, obviously, different types of players in that market.
Everybody has a different portfolio. But again, it's customer working with customers over longer period of time to deliver that growth and that's part of our strategy that we've been talking about.
Jack C. Fortnum
The only thing I'd like to add, too, is just from a network perspective in North America, where we have fairly dispersed facilities in all 3 countries, and so effectively we can take advantage or slow down some of our smaller facilities from a capacity perspective, if necessary, and really work the network as much as possible, as well as have the close shipments within Mexico or Canada is a nice outlet for our products.
Adam Samuelson - Goldman Sachs Group Inc., Research Division
And then maybe just lastly from me, just quickly, what's the expectation for corporate for 2014?
Jack C. Fortnum
It is principally in line with the current year numbers. We don't expect that much growth in it at all.
Operator
And we do have a question from the line of Matthew Korn with Barclays.
Matthew J. Korn - Barclays Capital, Research Division
I just want to confirm one thing. The topic has been raised a few times.
But back last fall when lower corn prices were the main theme, it seemed like a lot of the view towards higher op income for the whole enterprise is kind of predicated on this volume elasticity response, got to lower corn prices or sales prices and the consumers are going to respond. I'm just wondering, have you, in fact, seen that play out at all so far year-to-date in a kind of meaningful way?
Or is really -- is this year going to be more dominated by the level of economic growth or changes in consumer taste or availability in pricing of sugar substitutes and the rest? Like, what's -- I mean, we just talked about cold weather being an impact.
Like, is that elasticity going to happen still and have you seen any signs of that so far?
Ilene S. Gordon
I would say certainly, we're-- it's only January and it has been cold. So it's really too early to say what we've seen or not seen and, of course, you know that those price impacts only became effective in January.
So it's really too early to say. I think if you look at certainly the way the fourth quarter ended in terms of restaurant sales and retail grocery, I mean, those were both up at the end of the year 3% to 4%.
So people are going out to eat, they're buying different products and certainly the CPIs were pretty low. So that momentum and people still going out and buying their food, that's one thing I like about being in the food business, is that people have to eat and it's -- obviously, people want to eat healthy and so there's competition within the grocery store between fresh food and packaged food.
But the food companies, they've gotten that message and they're working on a lot of new product development with companies like us to make sure that the products that are being brought to the market are what the consumers want. So, again, too early to tell, but I think that the consumer environment should be there with unemployment coming down, people having jobs and the ingredient prices being a little bit better than they were last year.
Matthew J. Korn - Barclays Capital, Research Division
And also quickly, I just saw like in, I think it was earlier this month, in San Francisco, they're proposing, I think, a $0.02 an ounce sugar tax for beverages. I mean, San Francisco -- clearly, we're still kind of on the frontier of these things, but is there any sense, depending how the policies could go in the U.S., to develop, I don't know, some type of an acceleration or any type of contingency plan like, look, this is a growing political trend.
It's an increasing secular trend. It's accelerating directions for sweetened beverages more than we'd expect it to where it's like we really need to shift over our spend or strategies more towards specialty, more towards other places outside of that business?
Is that something in the early stages of consideration? Is that something you're watching closely?
Ilene S. Gordon
Look, when we put our strategic blueprint together, when I came in 4.5 years ago and we executed the National Starch acquisition, it was all about looking at all food trends, and what the opportunities are around the world. And so our thrust to grow our specialty starches and sweeteners has been part of our strategy.
So we continue to accelerate that. And certainly, investments that we have in R&D and product development, both in our New Jersey center as well as around the world, are part of that and adding capacity in specialty starches in places like Europe and Mexico and even Brazil have all been part of that.
So we just think that certainly, we're not investing in high fructose. And I said there's no new capacity in high fructose in North America.
For us, the growth is all about specialty ingredients to support our being a global ingredient company. And, again, our strong business model and our balance sheet are allowing us to do that and be very successful.
Operator
And our last question of the day comes from the line of Vincent Andrews with Morgan Stanley.
Vincent Andrews - Morgan Stanley, Research Division
Just a couple of quick questions. The tax rate for next year, is this where we should expect your tax rate to be going forward?
Or is this a geographic shift? Or what's driving it and how should we think about it sort of medium term?
Jack C. Fortnum
In the medium term, we're in that -- we guided towards the 27%, 28%. It does really depend on where the earnings are coming from actually.
So, it is a geographic shift to a certain extent. And we don't really expect that many -- anything unusual in our tax rate from that vantage point.
So, from a midterm perspective it may be at the low end of the range. It may creep up to the 29% depending on the weighting of the country and things.
So if you're looking like 2 or 3 years out in your model, it may creep back up a little bit depending on how the earnings shift and things. So I'd maybe tend towards the upper end of that tax rate in your modeling.
Vincent Andrews - Morgan Stanley, Research Division
Okay. And then just one other question.
General Mills came out and said that they're going to have non-GMO Cheerios and leaving aside the fact that there's no GMO wheat, what do you make of that? To me, it seems like it's just sort of marketing ploy but are you worried about sort of GMO backlash?
I mean, I'm just kind of assuming you're using a lot of GMO corn and what's the sort of internal discussion about that issue?
Ilene S. Gordon
We believe in providing the right raw materials for our customers. And we actually provide both GMO and non-GMO corn.
In fact, we're one of the only people in North America who have access to non-GMO and we use some of that to fund our operations, to feed it in both U.S. and in Europe.
But we believe that whatever the consumer trends are, we ought to be there to provide and be partnered with our customers. I think if you look at the health and wellness trend, and it's different types of consumers.
I mean, I think you find that in all the different products and so, I think, there will be demand for a lot of different types of products. The clean label in Europe demand a certain labeling on the products and that they be very much physically modified, which is what our product does rather than use enzymes.
And so again, that's just 1 example and that's a non-GMO product in Europe. I just think that I see the demand for many different types of products as many different consumers will be there.
The key will be what are consumers willing to pay because some of the products can require higher prices. And while consumers might say they want it, when they go to the store, they don't spend the money.
And so, again, there's many different types of consumers all over, certainly, U.S., Mexico, Canada and other parts of the world. But we just want to be there with our customers to provide all of them.
Okay, so just to quickly close up, as we're at the end of the time. Before we sign off, I just want to reiterate our confidence in our long-term outlook in our business model.
And we remain keenly focused on shareholder value creation and we're really committed to deliver shareholder value. So that brings our fourth quarter 2013 earnings call to a close.
We'd like to thank you again for your time today. Thank you.
Operator
And, ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service.
You may now disconnect.