Q3 2019 Earnings Call
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I would now like to hand, the conference over to director corporate Finance and Investor Relations Ryan color.
Good morning, and welcome to ingredients third quarter 2019 earnings call.
On today's call, you'll hear from Jim Sally, our President and CEO and Jim Gray, our executive Vice President and Chief Financial Officer.
Our results were issued this morning in a press release that can be found on our website ingredion dotcom in the Investor section.
The slides accompanying this presentation can also be found on the website and were posted a few hours 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.
An ingredient is under no obligation to update them in the future.
Yes, or if circumstances change.
Additional information concerning factors that could cause actual results to differ materially and those discussed during today's conference call. We're in this mornings press release can be found in the company's most recently filed annual report on Form 10-K . Subsequent reports on forms 10-Q and 8-K.
During this call. We also refer to certain non-GAAP financial measures, including adjusted earnings per share adjusted operating income adjusted effective tax rate and adjusted cash flow from operations, which are reconciled to U.S. GAAP measures in no to non-GAAP information included in our press release and in today's presentations.
Thanks.
I'm pleased to turn the call over to Jim Sally.
Thank you Ryan and welcome to everyone joining us today.
I'd like to begin today's call with my perspective on our third quarter performance.
For the quarter, our global net sales were up slightly.
Absent $52 million of negative foreign exchange impacts net sales were up 4% versus the prior year.
Our pricing actions delivered $50 million favorability in the quarter.
Nearly offsetting all of the foreign exchange impacts versus a year ago period.
Adjusted operating income for the quarter was up 2% year over year.
And up 7% absent foreign exchange translation impacts.
I'm pleased to share that North America returned to profit growth and delivered a 5% increase in adjusted operating income.
During the quarter production utilization increased throughout our network driven by greater reliability and operational efficiencies.
As the rebalancing of stocked in volumes took full effect.
Furthermore, our successful integration of Western Pollner contributed to North America's growth.
We're pleased that specialty ingredients delivered net sales growth across all regions.
Led primarily by starch based texturizers and specialty sweeteners.
Consumer preferred demand continues to grow for specialty sweeteners, including non GMO sweeteners and natural reduced calorie sweeteners such as stevia.
To further align with consumer preference for natural sweeteners. We're excited about the opening in a few weeks of our new Aliya lows production line at our San Juan del Rio Mexico facility.
Our starch based Texturizers delivered solid growth led by specialty potato starch is globally.
We are formulating systems, which include specialty starches plant based proteins and Hydrocolloids for consumer preferred clean label Textural solutions.
For example, we're working closely with customers, both large and small to innovate and co create.
By combining potato starch pea protein.
Comes incur extracts to formulate texturized meat alternatives.
Capitalizing on this collaboration we are actively filling our customer pipeline for plant based protein ingredients.
We are aggressively driving our cost smart program and the results are transforming how we work and deliver value.
We have had to make difficult, but necessary decisions, which will streamline operations to create a more agile business.
For example, we made the decision to move to an import model and cease production at our lane cobalt is really a facility to address among other factors persistent corn cost increases due to water scarcity.
In addition, we initiated a significant restructuring of our South America business to reduce organizational layers and enable quicker decision making.
As stated previously we expect to deliver $30 million to $40 million of 2019 year end cumulative run rate savings and I look forward to updating you on the programs full year delivery at our next earnings call.
Now, let's move to discussing each regions performance during the quarter.
North America operating income was up year over year.
The increase was driven by improved price mix versus the prior year and benefits from our cost Smart savings program, which were partially offset by higher net corn costs due to lower coproduct values.
South America operating income was also up year over year driven by three factors.
Favorable pricing actions, which offset foreign currency impacts.
Higher volume.
And benefits from our costs more savings program.
Our team in South America has done an exceptional job taking aggressive pricing actions against the constantly fluctuating currency environment.
Asia Pacific operating income was down driven by increased operating cost in Australia, and the continuing weakness across northern Asian economies impacted by trade disputes.
Our Korea, and China businesses have experienced increased input costs and intensified competitive pressure.
EMEA operating income was down driven by higher corn costs, primarily in Pakistan and foreign exchange impacts, which were partially offset by strong pricing actions.
Now, let me turn it over to Jim Gray, who will review the financial results in more detail Jim.
Thank you Jim.
Net sales of 1.457 billion were slightly up for the quarter.
Gross profit margin was higher by 60 basis points, driven by favorable price mix, partially offset by higher input costs.
Reported and adjusted operating incomes were 165 million and 193 million respectively.
Third quarter reported operating income was lower than adjusted operating income by 28 million.
Due to restructuring costs related to cost Smart program.
These costs were primarily attributable to the transition of our Australia operations to an import model and plan cessation of production at our Linco facility.
We also initiated a significant organizational restructuring in South America.
Our reported and adjusted earnings per share $1.47 $1.82 cents, respectively.
Q3, net sales of 1.457 billion were up slightly from the same quarter last year.
Unfavorable FX of 52 million was primarily attributable to weaker currency valuations.
Higher volumes accounted for $9 million of sales increase while favorable price and product mix was a $50 million increase or 3% of net sales.
In North America volume was down year over year, driven by volume shed as we seized wet milling and our Stockton facility last November .
Price mix in North America was up 1% driven by product mix and the pass through of higher corn costs.
In South America net sales were up 3%.
Volume was up 5% across the region.
Price and product mix were up 13% as our teams took price increases to recapture some of the foreign exchange impacts and we've been experiencing in Argentina and Colombia.
APAC net sales declined 1% due to foreign exchange impacts and unfavorable price mix. This was partially offset by favorable volume driven by specialty growth.
EMEA experienced lower net sales due to foreign exchange impacts primarily in Pakistan, there were only partially offset by favorable price mix and volume.
For the quarter reported and adjusted operating income increased 10 million and 4 million respectively.
North America operating income increased 7 million due to improved price mix.
Lapping of unplanned outages in the prior year and benefits from our cost Smart program, which were partially offset by higher net corn costs.
South America operating income was up 5 million driven by aggressive pricing actions to offset foreign currency impacts.
Higher volume and benefits from cost savings program.
Asia Pacific operating income was down 3 million from the year ago period, driven by increased operating costs in Australia, and the continuing impact of trade disputes, which have increased input costs and intent intensified competitive price pressures.
EMEA operating income was down 2 million from a year ago, driven by higher corn costs and foreign exchange impacts.
Which were partially offset by strong pricing actions primarily in Pakistan.
Corporate costs were higher by 3 million for the quarter driven by the lapping of prior year adjustments and continued investments to drive innovation and optimize global processes.
Let me turn to the third quarter earnings per share.
On a left side of the page you can see the reconciliation from reported to adjusted.
On the Rightside.
Operationally, we saw an increase of three cents per share driven by margin and volume improvements of six cents and 10 cents per share respectively.
Foreign exchange impacts were an unfavorable 11 cents per share and other income was a decline of two cents per share.
Moving to our non operational items, we saw an increase of nine cents per share for the quarter driven by lower average shares outstanding which contributed a benefit of 12 cents a share.
Financing costs.
Include the impact of hyper inflation and revaluation of Argentina peso denominated balances, which are lapping 2018 initial peso devaluation.
Moving to cash flow year to date cash provided by operations was 490 million.
Capital expenditures were 231 million down slightly from the prior year.
Acquisitions, and investments were 52 million, reflecting investments in western polymer and other ventures.
And we have returned 131 million year to date to investors through dividend payments.
Turning to our income statement outlook.
Due to the expected impacts of trade disputes weakening the economies of our northern Asian businesses.
Political uncertainty in Argentina.
And the postponement of Brexit.
We have lowered our expectations for the fourth quarter.
As a result, we anticipate 2019 adjusted earnings per share in the range of $6.45 to $6.65.
We expect net sales and adjusted operating income to be down versus last year.
FX impact is expected to be a negative 45 cents to 55 cents per share.
Which is an increased impact of a negative five cents over our prior guidance due to the continued currency weakness in EMEA and softer economic growth in northern Asian businesses.
We expect corporate expenses to be moderately higher year over year as we invest in global business process optimization digital capabilities and innovation, partially offset by cost smart savings.
2019 financing costs are expected to be in the range of $85 million to $90 million, including the effects of Argentina, hyper inflationary accounting and revaluation of peso denominated balances impacting the second half of the year.
Our adjusted effective annual tax rate is expected to be between 27 and 28%.
We expect total diluted weighted average shares outstanding to be in the range of 67 to 68 million for the year, considering the impact of the accelerated share repurchase agreement.
As Jim mentioned, we're very pleased with the momentum we have developed behind our cost smart savings program, which is helping to transform our business.
We expect to deliver $30 million to $40 million in 2019 year end cumulative run rate savings.
In North America 2019, net sales are expected to be slightly down and operating income is expected to be down assuming higher net corn costs, which have been negatively impacted by late crop plantings and expected later harvest in the U.S.
Greater cost to move corn across the U.S.
In addition continued crop inventory imbalances arising from the U.S, China trade dispute are expected to depress coproduct values.
Moving to South America full year net sales and adjusted operating income are expected to be down.
Volumes are expected to be up modestly.
Most of the impact from currency weaknesses was experienced in the first half the year. However, we are watching closely the presidential transition in Argentina for any policy changes that may impact our business.
2019, Asia Pacific net sales and operating income are expected to be down due to the impact of trade disputes between the us in China as well as between Korea, and Japan, and foreign currency weakness across the region.
The current weakness the currency weakness of the Korean won has resulted in higher transactional corn costs, which are difficult to pass through other local economies experiencing a slowdown.
In EMEA, we expect net sales to be flat to down.
We expect operating income to be down due to currency impact throughout the region.
Higher raw material costs, and the postponement of Brexit to January next year.
In past conversations we have highlighted that our business experiences some seasonality as a summer month in the northern hemisphere bring greater demand for our ingredients.
Therefore, as we complete 2019, we expect similar seasonal demand to be reflected in our results.
In 2019, we expect cash from operations to be in the range of 600 million to $640 million.
We expect to invest between $335 million at 355 million and capital expenditures of which a significant portion will support our specialty growth platforms.
And as Jim stated in his opening we're committed to returning value to shareholders.
Our 1% dividend increase this year reflects our desire to balance the cash generating capacity of our core business with future investments to fund organic specialty growth opportunities.
That brings my comments to a close let me down turn it back to Jim's Alley.
Thanks, Jim as you heard from US today, we are delivering on our strategy and are pleased that the business demonstrated growth.
The network optimization moves that we have made our.
And our progress improving operational efficiencies are paying off.
We delivered specialty net sales growth across all four regions and our team continues to advance our roadmap for driving growth.
Our recent specialty investments provide new and expanded capabilities that position us even better to meet growing consumer demand serve our customers and deliver net sales growth.
As the leader in starch based Texturizers combined with our new plant based protein offerings, we are broadening our portfolio of consumer preferred clean label ingredient systems.
And doing so enables us to increase our solutions capabilities to co create with customers to successfully drive their growth and hours.
Now, let's open the call for questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key.
Please standby, while we compile the Q and a roster.
And our first question comes from the line of Robert Moskow with Credit Suisse.
Hi, Thank you.
Jim I know that you were in the progress earlier this year to try to educate customers about the impact of falling values for corn by products and what that might mean for for pricing going forward on corn sweeteners and I just want to know if you'd give us an update on on how.
That's being received and whether you think that will help you take the pricing you need and then secondly.
Does it open up any kind of a risk that byproduct values are pretty volatile if they start.
Rising again does it does it open the risk that those customers might demand that pricing to be revoked I guess thanks.
Okay, Let me take it first and then I'll turn it over to Jim Gray. So thanks route for the question as we look ahead to 2020.
To your point, we continue to phase three factors impacting our net.
Current costs, one is certainly the uncertainty of the crop size, leading to higher gross corp cost of corn.
Coproduct values, which remain at a structurally lower level than it has been historically and also the higher costs to move corn, which is reflected in higher basis costs and all three of those factors will certainly be important considerations in our pricing actions and specifically as it relates to the structurally lower.
Corn co product recoveries.
We are carefully looking at all of our customers and analyzing.
Our.
Pricing requirements as we go into contracting for next year, and where we need to.
Don't make adjustments.
With how those pricing contracts are structured and so we're looking to to optimize.
Against.
All three components of the corn cost increase but in particularly what we're doing is educating customers and working with customers to share in the cost increase of something that has structurally impacted the entire industry.
And.
So I think whatever model, we come up with is meant to take into account.
What might happen in the future as well so hopefully that answers. Your question Jim do you want to add anything in addition, I mean I.
I would only add that.
I think when we are heading into 19, having experienced some depressed values for for corn gluten meal and four for corn oil.
We view, we viewed it really as something that was more tempered oral.
And we've continued to experience those lower coproduct values throughout all of all 2019, and so I think when we're having the conversation with the customers you understand corn in the corn structure quite well.
They're facing that choice, which is as we need to be able to figure out how we can't just take a one sided impact to our cost of corn and that would that would defer traditionally what we have done.
In our business and so very much to what Jim said, and we are exploring different options with customers.
In order to being sure that as we go forward.
As you know hopefully as the US China trade dispute on wines and there's more of a rebalancing of how soy ships out of the U.S. and we see some values for our cone our corn Cobra co products return.
The doubt that as a benefit that not just to us, but our or more customers as well.
Okay. Thank you very much thanks, Rob Thank you.
Thank you.
Next question comes from the line of Ken Zaslow with bank of Montreal.
Hey, good morning, guys.
Ken.
Can you frame, how much the U.S., China, and Japan Korea trade issues have depressed 2019 operating profit.
For for Asia Pac the background, so no no for the whole company buffer.
The U.S., China first is kind of the bigger what I think on then you mentioned Korea, Japan.
Japan, but I just want to not just the impact but just for the company. Just so if there was a resolution what would return what wouldn't return how to think about it I guess is tied to the framework on that I think thats kind of way looking to go.
Yes, I think we understand clearly your question and Jim and I are.
Discussing it here, it's actually very good question, because I think what we should do first is just break down for everyone. The components of that so us China trade dispute obviously impacts the.
Sway complex and the impact on co products.
And now we're costs and then equally you have an increase in tariffs on imports going into China, you have a depression related to the economies in Northern Asia, you have trade disputes between Japan, and Korea as well as between the us in China, and we're seeing some macroeconomic impacts there so Jim I'm going to turn it over.
Were to you to try to help quantify that yes parameters around that I mean, I think Ken is we look to.
The impact in the North America business.
From from 18 to 19 in terms of.
The co product values that we think of have not been passed through.
That's probably in excess of 20 million dollar impact.
To the to the region.
On the flip side, when we look at our Asia Pac business.
Clearly what we're seeing.
In China.
As as you have a higher tariff on the imported goods.
That's raising our need to try and price, it's a competitive market in China.
Lots of customers and a couple of local options.
So.
I'd say, that's putting some pressure on China, and then probably more of an impact for us has really been Korea.
And the Creo with the Korean won.
Showing some weakness.
The producers in Korea by corn off of the world market.
That increases the transactional cost of that corn and with the economy slow it's very difficult to price through.
The demand isn't there so I mean, I would probably say that that Asia Pac impact.
If I look kind of year over year is probably in excess of 10 million Bucks.
Right.
Combined.
Great and then May just my second question is in the U.S. you said youre.
Utilization rate had gone up.
Can you talk about where they were where they are now and then how that's impacting.
Pricing into 2020.
Ill leave it there thank you.
I would just say that they have improved significantly based on the focus the intense focus that we have put on up on reliability improvements and operational efficiencies and they are operating at higher levels of capacity utilization and they were certainly in 2018 and in the earlier part of the year and so.
With that along with the three factors that are contributing to the cost increases that are we think very well justified and understood and again, we're doing some educating with customers specifically it positions us as best as possible as it relates to pricing as we go into contracting for 2020.
Okay. Thank you.
Thank you.
Thanks, Ken.
Thank you and our next question comes from the line of Brett Hundley with Seaport Global.
Hey, good morning, guys I wanted to dig in first on your volume performance in South America during the quarter.
Can you just give us some added color on.
Where this is coming from other from other countries or product standpoint.
As you do take pricing across the region and then.
How sustainable you think this is just given all the headline challenges in place across the region.
Yeah, I'll, just make a quick comment and in turn it over to Jim I think that one of the things that we were pleased about was that are in Brazil adjunct volumes.
For us were up mid to high single digits for the quarter.
I think the brewing sector had a.
And a weaker quarter.
But we did.
Look positive on we did pretty well on volume so.
So that was that was one and.
I would say, what we've done that necessarily related to volume, but we've just done an exceptional job really to South America team in light of.
Incredible Forex headwinds have put through.
Significant pricing.
To offset and to mitigate that forex impact specifically in Argentina.
And in Brazil, and obviously, even Colombia has been impacted by four x. devaluation, and we're doing that there as well so Jim do you want to make some additional comments I think maybe the only obviously into this and the growth that we saw in Brazil, and Andy and.
It may be surprising was is that you have to step back in Argentina to Q3 in Q4 and 18.
And the consumer was really shell shocked.
By the devaluation of the pay so it wasn't wasn't plan there wasn't expected.
It was post kind of the traditional national wage increases and so I think it really left consumers in Argentina really tight on their pocketbook and what we've seen now here in Q3 in Q4 is actually some better volume.
Into the types of.
Beverage and food products, even though there's still uncertainty in the peso.
A return of the consumer to somewhat of the return of the consumer to the grocery store and what I might characterize as a normal grocery cart I think the some of that's occurred because we are seeing volume increase in Argentina. The other thing that I would just add to that is just as it relates to the outlook.
One of the things that I'm sure you all saw is the progress in Brazil that pension reform did pass and it now.
We will become law and so thats, leading the government to now look to fiscal reform on top of pension reform and so that.
Has put a little bit of an upward trajectory from neutral I would say to positive because of the.
The progress in Brazil, So we're hopeful that.
Stimulate economic growth not in the.
The 1% range, which it has been for the last year or two but something a little bit higher as we head into next year and that'll stimulate more volume growth.
So I would just thats, what I would add to that.
I appreciate those comments and then.
My second question.
Yeah.
Actually on the M&A environment so.
You guys. Obviously have your stated goal of mixing towards specialty overtime and.
You are certainly affecting that strategy internally by developing capabilities on plant protein alley lows et cetera.
But but obviously M&A does need to be a sizable part of that conversation at least in my opinion in an effort to de risk and grow the business on a faster timeline.
While also acquiring new technologies and expertise on the topic of maybe more meaningful M&A.
Do you guys think that the deal market has become.
More challenged in recent times one of the main reasons I'm asking too is one of my other ingredient companies has had a hard time enacting a similar M&A strategy moving towards specialty and it now appears they're gonna go private with the help of private equity in order to compete better for future targets. So I wanted to get your perspective on.
The deal market for specialty ingredient companies right now it seems like they are out there, but it also seems like theres a avoided activity. Thank you.
Yes, I mean I think that.
For us we.
We remain very focused on.
Building out the five growth platforms that we've identified that are very much on trend and we're looking to.
To add onto those value propositions that underpin each one of those growth platforms with either.
Business acquisition M&A or.
Through technology capabilities that we are adding and as it relates to the market at large.
I think that.
Certainly.
Over the last number of years multiples have increased and that makes it more challenging too.
Get the math to work from a standpoint of making sure that you're deploying shareholder.
Assets wisely to make sure that youre going to get a return so.
But that being said what I would say for US is we have still a very active M&A pipeline.
When you think about five growth platforms that are very on trend and so we are evaluating.
At any one time always a number of opportunities and so we have active discussions in meetings, but at the same time want to make sure that the.
The value and the terms and conditions would be beneficial to us so.
Thats, how I would answer it I mean, I read I would just add that.
It sometimes it's easy to focus back on the U.S market or the western Europe market for ingredients companies.
But our footprint and our connections.
With customers and with distributors and with kind of other competitors around the world really leads us to a lot of different opportunities. So so.
We absolutely are looking at Asia Pac we're looking at South America, we're looking at the rest of the reason through EMEA and so we think about very active discussions in our pipeline. We're looking at where we can add and those various in those various geographies to our existing business.
I think really the benefit of.
Of coming up with the driving growth roadmap and be very clear about where we want to go.
As really also than helped US a line with other companies that may actually look at ingredient as a strategic partner.
Or ultimately someone to collaborate with yes, I mean in the other thing is that we are also looking to partner with companies and specifically in the area value close we partner with the Japanese company that had great technology that enabled us to.
To enter that market. So there's a variety of opportunities I think open to us to continue to grow both organically and inorganically.
Thank you.
As Brett.
Thank you. Our next question comes from the line of Heather Jones with Heather Jones. Your line is now open.
Good morning, Thank you second question.
Sure Good morning Heather.
Hi.
So.
I guess.
Two questions.
With.
Give us a sense.
Based upon your analysis of the region.
Prince regions at all.
Yeah.
Basis trend for corn and.
Mark going into 2020.
Yes, we could weaken thoughts.
Yes, we can answer that I think.
We're sitting here in Chicago This morning on Halloween and it is snowing outside in summary, some parts may get five inches of snow today. So and this is the second pretty significant snowstorm here in the early part of the fall. So that has added to the late corn harvest, which everyone was worried about and.
Now, it's about being able to move and transport corn, so actually we're seeing an increasing trend towards basis as we head into contracting in 2020, Jim do you want to add some I mean thats.
It is I think it's spread a little broader right in that.
Given the late plantings early on I think there was some some issues in the eastern part of the corn belt to move corn kind of maybe across our but obviously.
As is the moisture content as higher on the corn and farmers desire to leave it on the field.
And not not pull it off necessarily and have to.
Absorbing type of discount for that corn.
What that is a bit of a to and fro is that you need a dry field and yields and needs and lovely drive fall weather to dry out that corn.
And so you've had a blizzard and the upper plain States you now having chicago across the kind of the broader mid part of the.
The corn belt and so.
I just don't think that things are necessarily setting up for anything that's going to.
Improve the immediate availability of corn and drive basis, a little bit lower.
And.
How you purchase your specialty.
I have to deal with basis, there as well.
So.
Okay.
Yes, yes.
So we.
Generally with our Aurs are different varietals of specialty Corns. We're just we're we're prearranging was sure with farmers to make sure that their dedicated.
The acres.
To planting that and they get a they get a small premium.
For that commitment to us and that corn is typically grown in very close proximity to those plants that are specialty plants. So transportation costs can be.
A little bit lower in that regard yes.
Okay, and then going back to your comments about.
The contracting season for 2020, and your conversations with customers.
As far as the.
LNG is on the byproduct recovery side.
In discussing this and sharing.
The burden of that challenge.
Ingredion moving more towards a higher tolling mix or.
I mean is that essentially what youre talking about.
I think historically.
Next is done.
Thanks.
With this.
This be shifting you more towards tolling are you talking about some other kind of arrangement.
Yes, just to kind of correct one of those assumptions.
Historically, what we've said is about half of our business in US Canada is fixed versus.
What we call fee or toll business and what I said is.
The input cost increases that were seeing in the industry is seeing.
Is in some ways unprecedented in relationship to the decoupling of coproduct values from the cost of corn and so that does require us as we head into 2020 to look across the entire.
Segmentation of our customers and where we have either fixed or toll and look at what makes the most sense based on those educational discussions and those exploratory discussions that we're happy with customers to share in that cost increase, especially as it relates to the cost of co product recoveries.
Whereas any increases in gross corn cost or basis is clearly well understood. So I think I would just say that we're taking a very analytical and methodical.
Segmentation approach to our customers.
Since we see something has structurally changed and it really requires us to do that and have those discussions with customers going forward.
Yes.
Okay. Thank you for that question.
This is a big yes.
If we assume the forex.
Dave alive.
Not any dollar weakness but to stabilize.
What does that add to 2020 earnings for you just to be able to catch up on price and not happen.
No not costly playing catch up.
How much do you estimate.
2020, then.
Yes, let me make an opening comment and I'm going to turn it over to Jim. So I just want to remind everyone that if you look at our year to date Forex headwinds that we've had to offset in price we've priced year to date through 75% in the quarter.
We had.
$50 million, a price increase against 52 million a fourx so.
We are.
Getting through the pricing increases that we need to get through so and we've gotten I don't say better, but certainly stronger muscles in regards to.
Dealing with something that's been such a significant headwind for us if that were to stabilize Jim going forward well.
If I guess it depends on what point in time you choose.
Okay, Okay, the dollars not going to move versus the variety of currencies in different territories in which we do business.
Let's just say, though that if you held at here, we're still going to have some first half headwinds.
If you look at the European currencies, and a little bit in terms of where more of the northern Asian currencies are those are really have adds kind of some additional weakness.
Here more in the second half of 19.
And then.
You always have are kind of two bigger movers, which are what happens within Pakistan and what happens with Argentina, I would say the pocket sounds a little more stable.
Given the country's view towards the IMF then.
And their choice towards or their monetary policy, but Argentina I think is still always a question mark so.
Got a hold off on kind of quantifying it we can follow up.
On that because I think it's still early in the year to be calling kind of 2020 impacts.
Due to FX, but I do I very much appreciate the sentiment and it's probably does weigh on investors' minds.
In terms of Hey, when does this amazing strengthen the dollar that we've seen start to just flatten relative to some other developed or emerging economy.
Yeah, Yeah. Okay. Thank you so much I appreciate it.
Thank you.
Thank you.
Last question comes from the line of Ben be in venue with Stephens.
Hey, good morning, guys.
Very good morning welcome.
Welcome.
Hi, Thank you.
Ask.
If you could provide some color on your comments around the restructuring.
South Americas business any collaboration you can provide on whether that pertains to capacity adjustments or otherwise would be helpful.
The understanding what's going on there.
Just a reminder over the last few years, we've taken some restructurings in relationship to some asset consolidations in South America. In fact, we closed two facilities back about three years ago.
That late that led to $68 million of savings if I remember this is a more comprehensive and sweeping.
View across.
Both operations and go to market. It does not involve any asset consolidations or closures organization organization, it's much more around organizational agility, reducing spans and layers clarifying lines of accountability and.
Also operating as one South America region, because we do have three sub regions when we'd be Brazil, the largest country largest sub region.
You have the southern cone and then you have the Andean region and so what we've done is we have.
Consolidated and example would be around manufacturing and supply chain excellence.
Two now have that operate as one operations function.
Streamlining the direct lines of reporting to share best practices and drive one.
Management operating system for manufacturing operations supply chain and procurement for example, and it's.
Really been met with a lot of very positive receptivity.
And and that's going to be a major driver for us as we head into 2022, not just deliver savings but also.
Drive efficiencies.
Great very helpful. Thanks.
My second question relates to capital allocation, we've talked about M&A, but I'm curious what is your thought process on embracing a more aggressive buyback strategy in light of.
Current challenging fundamentals weighing on valuation juxtaposed with still good cash generation pretty solid balance sheet.
Jim do you want to take that yes or had been so when we I think what I've described to.
Yourself and investors is that we look at our overall cash from operations each year.
And we're trying to target.
Both first our capital investments necessary to maintain our existing plants, but also our putting some capital towards organic growth opportunities those organic growth opportunities tend to have very attractive.
Returns and and and.
Hey back relative to the investment timeline.
There are also kind of the lease risky because usually it's an area where our team has a lot of familiarity with the capabilities and capacities that we're adding.
Second we think very much about the dividend and then we have.
The remainder, which is typically 30% to 40% of our cash from operations.
And that's going to be more strategic cash flow. So if an M&A opportunity is available and it has appropriate synergies and attractive return in fits and our strategy.
We will pursue that because that's going to be a higher return that our whack.
But we'll also look at that cash flow and.
Conversations with the board think about how we approach share repurchase and enhance the total return the total payback.
To our shareholders.
But generally we're going to prioritize.
Organic opportunities.
And growth and M&A, that's attractive accelerating against the five.
Growth platforms first at tends to be a better return for our overall shareholders were very.
Attuned to the dividend as.
As one way of reflecting the cash generative capabilities of our company and.
And our quite proud that we are for five years in a row now with the consecutive dividend increase.
And then we'll always make sure that we're looking at devaluation of the stock and thinking about share repurchase.
Okay fair enough understood. Thanks best of luck.
Okay. Thank you.
Thank you and our next question comes from the line of Adam Samuelson with Goldman Sachs.
Yes, thanks, good morning, everyone.
Yes.
I was hoping first to really make sure we were clear on kind of the components of the tempered kind of full year outlook and usually most thats baked into Fourq, you and if you could just kind of bucket it amongst the key drivers of what.
We came more pressured in the business between FX seems like FX.
Higher corn costs in North America.
And the but kind of below the line financing tax components in the mix of earnings are the biggest drivers, but if you could just bucket and quantify those a little bit and just maybe expound on how many how much of those we should think about as.
Continuing into into 2020, whether its financing whether it's kind of how corn cost looks like the laying out into next year.
Yes.
All up.
Happy to Adam because.
I think this is important so as we finished the year, we expect our full year earnings guidance to be impacted really by three factors.
And in this order so within our higher financing cost reported line item.
You get the impacts of hedge gains or losses. This is also aware.
Changes in balance sheets, particularly in Argentina with hyperinflation those changes in the balance sheet now under hyperinflation County impact the impact the piano and that's where it impacts the BNL so instead of going to.
All other comprehensive income it impacts the PNM. So first is the impact of Argentina hyper inflation.
Really at.
As a reminder, that we revalued that that balance sheet in Argentina, and pesos back to dollars and so thats. The first impact that will be felt really in little bit in Q3, but in Q4.
Number two then it's just our effective tax rate.
Really just due to the mix of earnings is really between 27 and 28%.
So thats just I think it's a little bit net higher than where we have previously guided and that's just how the the income generation is earning across the different businesses.
And then finally, our adjusted operating income is expected to be flat to slightly down.
Really driven by lower expectations for for Asia Pacific really due to the higher raw material costs in Australia.
It's very expensive corn crop this year, and Australia and weaker gross margins across our northern Asian businesses due to higher input costs.
So each of those drivers are contributing approximately one third of the change in our EPS guidance.
Okay.
And just to be clear in North America, then so year.
You are seeing the the impact of North America of the higher corn costs into late harvest.
Basis in the freight costs, the you're absorbing.
That is not dramatically worse than you previously contemplated as mature clear on that point, yes, Thats Chrysler I mean in Q2, and all we really talked about oil.
Anticipating that North America might finished the year stronger and kind of updated our outlook for operating income to be down what we were really considering was really just a higher net corn cost.
Both in Q3, but particularly in Q4, so I think we previously had head to head and.
Kind of guided to that.
Okay.
That's helpful. And then follow up as we think about as we think about next year and there's been a lot of ground covered on contracting already but just wanted to make sure.
Would you characterize how would you characterize the contracting progression kind of to date I mean at the end of October would you say that we're on schedule of things are slower than normal faster than normal.
And just how kind of the receptivity to some of these changes on kind of co product and basis and the impact that that has on price just how how do how you feel that's being received by by your customers.
Yes, I mean, I'll make a comment as best I can typically we don't make comments in relationship to contracting for the full year, but what I would say is that because of the.
Corn situation in relationship to.
The uncertainty around the crop the elevated basis levels.
I think you're seeing customers.
Moving more slowly in relationship to commitments that they would like to make in hope that there may be some.
Relief related to which way the weather would break.
For some of the input costs that they're being educated on and they do understand themselves. So I would say that contracting is slower than it may be against say, a five year historical norm, but it will get done it typically gets done in a flurry towards the end of the year.
But I think it's slower this year, but then that will.
Be.
Catalyzed by I think.
Companies that have only so much supply to locate and we'll need to complete contracting in a more compressed time period. So.
But it's a little bit slower I think out of the gate than for those reasons that I just described.
Maybe just at a rate I mean customers.
I think generally across the us they do understand year to year change in just the gross cost to corn that can look at what the forward strip might say and just the forward strip on corn is higher this year and a lot of customers might just choose to waited for an opportune moment.
Yeah.
So we're not worried about it we just think it's a little that's just a little bit slower in it and it's it's human nature on the part of the customers to behave the way they are.
Given the way corn has has increased from a net corn standpoint, all of its components.
Okay I appreciate that color I'll pass it on thanks.
Thanks, Adam.
Thank you.
Im showing no further questions at this time I will now turn the call back over to President and CEO , Jim Sally for closing remarks.
Thank you.
I would just like to thank everyone today for their time and we all hope to see you again in the very near future in our travels so thank you so much.
Ladies and gentlemen think this concludes todays conference call. Thank you for participating you may now disconnect.