Q2 2020 Ingredion Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to ingredients Inc.
Second quarter 2020 earnings conference call.
This time of what to spend lines ARNA listen only mode.
After the speaker presentation, there will be a question and answer session to ask the question. During the session you any to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you acquire any further assistance. Please press star Zero I will now they haven't conference to your speaker today, Tiffany Willis Vice President Investor Relations and corporate Communications Officer. Please go ahead man.
Thank you Victor and good morning, everyone and welcome can greedy on second quarter 2020 earnings call.
I'm ticketing Willis Vice President of Investor Relations and corporate Communications Officer.
On today's call again valley, our president and CEO and Jim Gray, our executive Vice President and Chief Financial Officer.
We issued our results. This morning in the press release that can be found on our website ingredion dot com and the Investor section. The slides accompanying this presentation can also be found on the web site and were posted a few hours ago for your convenience.
As a reminder, our comments within this presentation may contain forward looking statements you.
These statements are subject to various risks and uncertainties.
These statements include expectations and assumptions regarding the company's future operations and financial performance, including the impact of the Cobot 19 pandemic.
Actual results could differ materially from those predicted in the forward looking statements.
An ingredient into no obligation to update them in the future as or if circumstances change.
Additional information concerning factors that could cause actual results could differ materially from those discussed during today's conference call or in this mornings press release can be found in the company's most recently filed annual report on form 10-K, and subsequent reports on forms 10-Q, an 8-K.
During this call we also AFFO to certain non-GAAP financial measures.
Including adjusted earnings per share adjusted operating income and adjusted effective tax rate, which are reconciled to U.S. GAAP measures in note to non-GAAP information included in our press release and in today's presentation appendix.
With that I'm now pleased to turn the call over to Jim Valley.
Thank you Tiffany and good morning, everyone.
Back in early May when we last updated view, our world and our industry, we're all still coming to grips with the impact of the global pandemic.
While the uncertainty has persisted ingredion has remained an essential business in the food supply chain.
Continuing to provide a secure supply of ingredients to customers and meet their changing needs.
I'm proud that over the last six months, our employees have risen to the challenges demonstrating preparedness persistence and resilience, which has enabled us to continue to progress our strategy through these unprecedented times.
The three priorities that we established from the beginning have continued to guide our actions.
Our first priority for employees safety health and wellness has allowed us to operate our facilities and continued to seamlessly meet the needs of our customers, while quickly creatively and productively adapting to new ways of working.
Second our role during these times as a responsible corporate citizen has brought us even closer to the communities in which we operate reinforcing the already strong local bonds and connections we have always had.
Third we have delivered on our commitment to maintain business continuity and I'm pleased that our employees have embraced the necessary changes and disruptions from the pandemic as opportunities to reimagine and reinvent our approach to customers.
And deliver value in new and different ways, all while ensuring supply chain reliability and uninterrupted service.
I could not be more proud and appreciative of the dedication caring and spirit of our global employees and I want to thank them for embodying the essence of our purpose at Ingredion.
To make life better.
Now turning our attention to the second quarter, we operated in an extremely challenging global environment.
As cobot 19 cases increased.
Government responses and consumer behavior shifts significantly reduced food consumption away from home.
Which in turn impacted our results.
For the quarter, our global net sales were down 13% compared to the year ago period.
Absent foreign exchange impacts of $59 million net sales were down 9% versus prior year.
Net sales were impacted across all four regions by volume decline and foreign exchange impacts.
Adjusted operating income for the quarter was down 29% year over year and down 25% absent foreign exchange translation impacts.
The economic pressure from the current environment resulted in adjusted operating income being down year over year in all four regions. However, South America operating income was up 6% absent foreign exchange impacts.
Before moving to region performance I want to emphasize that we continue to execute against our strategic priorities in the quarter.
We've expanded our shared services in Mexico.
Progressed, the structuring of global business services consolidated or potato starch network in North America and closed on our acquisition of pure circle.
In addition, we continue to make solid progress on the startup of our South Sioux City Pea protein isolate facility as it has begun commissioning and certification.
We continue to execute against our cost smart savings program, and our increasing our savings run rate target to 170 million by 2021.
This $20 million increase is a direct result of our teams identifying even more effective and efficient ways to operate our business without compromising quality or service to customers.
Moving to our second quarter regional results, let me begin with North America.
Sales were down 13% for the quarter versus prior year.
The volume decline was impacted by significantly lower consumption of food away from home in both the U.S and Canada.
Sales weakness from out of home channels.
Within further impacted by government mandated brewery shutdowns in Mexico, which occurred early in the quarter and remained throughout.
I'll speak to both of these issues in greater detail in a moment.
Operating income was $101 million down 27% versus the prior year.
Sales declines from the lower consumption of food away from home and the brewing shutdown pressured our bottom line.
Looking closer at North Americas, net sales, we experienced a decline in us and Canada sweetener sales versus prior year.
Which was primarily driven by declines in high fructose sales mainly into foodservice beverages.
While we saw rebound as we exited the quarter. Our total North America net sales reflects this weaker decline in us in Canada.
It also reflects a decline in sales of brewing ingredients throughout the second quarter in Mexico.
Brewing steep decline pressured net sales for Mexico in the quarter.
And while June and July sales to growing in Mexico have picked up substantially.
Recovery of our overall volumes to prior levels prior year levels has not yet developed.
South America exited the quarter with sales down 19% versus prior year.
However, absent foreign exchange sales were down only 1% as favorable price mix offset the majority of the volume decline.
Operating income was $13 billion down 19% versus prior year due to foreign exchange impact and volume weakness.
Excluding foreign exchange impacts adjusted operating income was up 6% as strong price mix more than offset volume decline.
To provide more insight into our South America performance I want to highlight.
Our net sales trend throughout the second quarter.
Our sweetener sales were consistently pressured compared to prior year and our brewing ingredient sales were volatile.
With a very weak April followed by a strong bounced back in May and June.
Carrying through to July we are seeing healthy brewing ingredient sales.
Sweetener sales still lag well below prior year as impulse buying of confectionary through informal channels is constrained by workers not commuting into businesses and children not attending school.
Moving to Asia Pacific sales were down 8% compared to the prior year.
Due to volume decline and foreign currency.
Operating income was $22 million down 4% versus prior year as weaker volumes from stay at home orders were offset by improved tapioca margins and effective management of operating expenses.
Shifting to EMEA, our sales were down 8% for the quarter.
Excluding foreign exchange, our sales were down 2% driven by reduced volume from weakness in Pakistan, primarily in the export driven textile sector.
This impact was mitigated by favorable price mix and strong specialty sales in Europe.
Operating income at $21 million was down 9% for the quarter.
Absent foreign currency operating income was flat complaint compared to the prior year.
Now, let me turn it over to Jim Gray, who will round out the financial review.
Thanks, Jim.
Net sales of $1.349 billion were down 13% for the quarter versus prior year.
Gross profit margin was 20.1% down 110 basis points.
Reported and adjusted operating incomes were $113 million and $127 million respectively.
Reported operating income was lower than adjusted operating income due to asset closures and restructuring costs related to cost Mark.
Our reported and adjusted earnings per share were 98 cents from $1.12 cents respectively.
Second quarter net sales of $1.349 billion were down 13% versus prior year.
We experienced negative foreign exchange impacts of 59 million.
Sales volume decline of 183 million, primarily driven by coven 19 impacts around the world.
Partially offset by $41 million a favorable price mix.
In North America, net sales were down 13%.
Versus prior year due to sales volume decline of negative 15%.
South American net sales were down 19%, primarily driven by a negative impact of 18% from foreign exchange.
Sales volume decline of 11% was nearly offset by 10 percentage points a favorable price mix.
In Asia Pacific net sales were down 8% as pressure was fell from foreign currency weakness and sales volume decline.
Unfavorable price mix reflects lower tapioca raw material costs and off the omni related pricing to customers.
EMEA net sales were down 8%, primarily driven by foreign currency weakness in Pakistan.
Sales volume declines and pockets on outweigh the rest of the region. However, the region did deliver strong price mix.
For the quarter reported operating income decreased by $55 million, while adjusted operating income decreased by 51 million.
The decrease in reported operating income versus adjusted operating income is primarily due to asset closures and our North America potato network, our restructuring costs related to customer.
Operating income income declined in each region as Jim referenced earlier.
The increase in corporate costs for the quarter was driven by higher legal costs.
Continued investments to drive innovation.
Centralization of global business services and the corporate.
In addition, our company incurred incremental covert 19 expense for personal protective equipment.
Sam position and health screening.
As well as an interim appreciation pay program at our us manufacturing facilities, which has ended.
This direct expense amounted to $7 million during the quarter with the majority incurred in North America.
Turning to our earnings bridge on the left side of the pace you can see the reconciliation from reported to adjusted.
On the Rightside operationally, we saw a decrease of 55 cents per share for the quarter, primarily driven by volume decline of 35 cents and a margin decrease of nine cents.
Unfavorable foreign exchange was an eight cents impact to the quarter.
Moving to our non operational items, we saw an increase of.
One penny per share for the quarter driven by favorable tax rate.
Financing costs are higher due to realized losses on FX hedges as well as impacts of hyperinflation accounting.
Underlying net interest expense was lower versus prior year.
Year to date net sales of $2.892 billion were down 6% for the first half.
Versus a year ago period gross profit margin was 20.5% down 40 basis points.
Reported and adjusted operating income for $266 million in $294 million respectively.
Reported operating income was lower than adjusted operating income due to asset closures and restructuring costs related to customer.
Our reported and adjusted earnings per share were $2.08 into dollar 72 cents respectively.
Year to date net sales of $2 billion $892 million were down 194 million from the same period, a year ago Foreign exchange impacts impacts represented a 100 million dollar headwind.
Sales volumes declines of $170 million was partially offset by $84 million a favorable price mix.
The growth product platforms that comprise specialties represent 32% of net sales year to date.
Excluding foreign exchange impacts.
Net sales of specialty ingredients within the product portfolio were slightly positive year over year.
And we will provide another update regarding specialty ingredients at year end.
Through the first half of 2020, we advanced many initiatives under our cost smart savings program to optimize our network and reshape our organization.
During the quarter, we completed the consolidation of our potato manufacturing network in the U.S.
Furthermore, we continue to advance expansion of global business services into the functions of finance and HR.
We're also pursuing opportunities in this new dynamic work environment to reengineer, how we work with one another and with our customers.
We're confident in our ability to deliver on our 2020 run rate savings target of 90 to 100 million.
Which is part of our now increased savings target of 170 million by 2021.
I'd also highlight that our total company expenses year to date are down 1%. Despite the additional coven 19 costs I referenced earlier.
Turning to our year to date earnings bridge.
Operationally, we saw a decrease of 53 cents per share driven by a volume decline of 38 cents.
Which was slightly offset by margin improvement two cents per share.
Unfavorable foreign exchange and other income items represented a negative 13 cents and a negative four cents decline per share respectively.
Moving to our non operational items, we saw an increase of six cents per share year to date, driven by favorable tax rate lower financing costs and other non operating income items.
Moving to cash flow.
Cash provided by operations was $294 million in the first half.
Capital expenditures were $175 million of $19 million from the prior prior year period due to the timing of payments for our growth projects.
During the second quarter, we issued two senior notes aggregating $1 billion in principle, and subsequently paid down a revolving credit facility and substantially lowered our future financing costs.
At quarter end, we had cash and cash equivalents of $1 billion $47 million.
Following the quarter's end, we've used cash towards the acquisition of pure circle and the redemption of our November 2020 senior notes.
Moving from cash flow to our balance sheet, we're well positioned with greater financial flexibility due to our strong balance sheet.
With solid investment grade ratings, and a debt leverage ratio of 1.8 times net debt to adjusted EBITDA for the trailing 12 months.
We have sufficient DAEC capacity and solid credit worthiness to manage through future business cycles.
Turning to the third quarter.
Due to the uncertainty of Coven 19, we cannot reasonably estimate full year results at this time.
During the third quarter, we expect continued adverse impacts from coven 19 on net sales across our operating segment.
With recovery and sales generally correlated with easing of restrictions.
And increased consumer will mobility.
For the third quarter, we expect adjusted operating income for the company to be down in the mid teens versus prior year.
With the greatest range of potential outcomes in South America.
Yes.
We expect sequential improvement in North America.
As the us in Mexico demonstrate greater consumer mobility in comparison to the severe shutdowns experienced in quarter two.
Okay.
In Q3, we anticipate south America's operating income change to be similar to quarter too.
Due to the impact of the prevalence of Coca 19 cases.
And extended country Lockdowns combined with the fact that South America will be at the height of their winter season.
Barring a significant second wave of heightened covert cases, we believe Asia Pacific performance can be down low single digits or better in the third quarter.
We anticipate that EMEA demonstrates sequential improvement assuming the Pakistan has not experienced continued or severe stay at home restrictions.
Regarding pure circle, given the distressed conditions under which it has recently operated.
We will be laser focused on its turnaround for the next 12 months.
And anticipate mid single digit operating losses in the near term as the team works to drive the integration.
For ingredient overall, we anticipate cash flow in line with changes to operating income.
For the year committed capital investments are anticipated to be between 290 million to $310 million.
Our reported effective annual tax rate is anticipated to be between 29% and 33%.
And our adjusted effective annual tax rate is expected to be between 26% 27%.
With that let me turn the call back to Jim.
Thanks, Jim.
As we navigate this challenging environment, we remain steadfast and focused on drive on advancing our driving growth roadmap and positioning our company for long term success.
We have made substantial progress across our specialty growth platforms and I'm very pleased with the increasing breadth and depth of capabilities. We are building for each of them.
Our sugar reduction platform has evolved immensely with the addition of pure circle the acquisition of the leading global player in this devious base will benefit us significantly over time.
Pure circle allows us to further build out our sugar reduction capabilities with an expanded global presence.
Pure circle had revenues ending its fiscal year of June Thirtyth 2020 of $101 million.
We expect to achieve both cost synergies of greater than 10% and additional revenue synergies starting in the second half of this year.
Longer term, we expect to achieve high single digit revenue growth.
At a after a very challenging last 12 months for the pure service organization.
Now, having stability and a bright future to look forward to as part of the Ingredion family opens up a new energizing chapter for the team.
We held an excellent virtual day, one integration kick off and are very impressed with the pure circle talent and expertise.
Turning to plant based proteins are south Sioux City manufacturing facility to produce Pea protein isolated is scheduled to commission in the second half of this year.
I recently had a chance to visit the facility and was very impressed with the overall site progress and caliber of the team that we have assembled at this new location.
The project remains on schedule with primary construction complete and the facility is entering the phases of commissioning and certification.
And I'm looking forward to hosting members of our board at the facility next month.
Our other investment in pulse based flowers and concentrate with variant and Vanscoy, Saskatchewan continues to advance and during the quarter. We further complemented our plant based protein portfolio by forming and exclusive relationship with nor Quinn.
A leader in high value keen while based ingredients.
Turning to country growth opportunities I wanted to highlight that we will be making a significant investment to capitalize on the continued growth in the largest specialty starch market in the world.
In China.
We have we have been operating in China for over 30 years and manufacturing there for nearly 20 years and have developed a very strong reputation for delivering specialty starch solutions.
Given our strong local presence.
And customer preference to sourced locally.
We have committed $85 million over the next two years to more than double our local supply capacity and at the same time.
Optimize our global supply chain.
Before I close I would like to reinforce that we remain guided by our four strategic pillars and have been making solid progress executing against each of them. Despite the circumstances presented by the pandemic.
Specialties growth underpinned by a reputation and heritage for innovation is central to our strategy and we are focused on making specialties, an increasing percentage of our overall portfolio broadening beyond starch.
And beyond corn based ingredients.
Commercial excellence being easy to do business with and reinventing the way, we connect and co create with customers has progressed well. Despite the pandemic as an example, the number of digital customer engagement has increased more than 300% in the quarter and customer training sessions have more than doubled.
Cost smart continues to develop momentum.
Not as an initiative, but as a mindset throughout the organization to drive business process simplification and efficiency with a pandemic being a further catalyst to find new ways to achieve both.
Lastly, our commitment to embody our purpose live our values and invest in and develop our talent has served us extremely well during the pandemic and I am confident it will continue to do so.
We reinforced our value of everyone belongs emphasizing our stance against racial injustice.
And the importance of an inclusive culture.
And we launched a new employee value proposition this past quarter.
We also further strengthened our executive talent.
And I'm pleased to share that we recently announced that Jeremy Zoo.
We'll soon joint Ingredion as senior Vice President and Chief Innovation Officer.
Jerry Jerry Jeremy will succeed Tony Duilio in this capacity, while Tony transitions to lead the integration appear circle.
Jeremy brings more than 20 years of scientific industry experience, serving most recently for four years as president of human nutrition and health at Royal DSMB and for 16 years prior to that at Dupont.
We look forward to Jeremy joining the Ingredion family.
I look forward to providing additional updates on the progress against our strategic pillars in future calls.
Now, let's open the call for questions.
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Ladies and gentlemen, as a reminder to ask the question you need to press star one on your telephone.
To address your question press the pound copy please send battle in composite today roster.
My first question comes line Ben Ben revenue from Stephens you may begin.
Hey, Thanks, good morning, everybody.
Hi, good morning to.
I want to ask first about the North America business. So appreciate the monthly cadence around sales.
Let's just use that kind of June period, and exit rate as a rough proxy for volume.
On a weighted average basis it looks like Threeq, you going to be down kind of mid to low single digits.
If that mass is roughly correct.
It looks like the.
Margin compression implied by your overall guidance that you talked through its substantially less than two Q.
Is that just a function of better fixed cost absorption with volumes being down less than meets all into Q.
The net corn costs could you just elaborate on what looks to be recovery and margins and then any elaboration on.
The severity of the margin compression in Twoq you in North America would be helpful. Because that was surprising to us.
Yes, let me take a shot at that and then turn it over to Jim to maybe give even some more.
Rounded out color on this.
So for North America, with operating income being down 38 million versus prior year. Two thirds of that decrease was driven by the US Canada, where the government restrictions and limited consumer mobility and away from home consumption of food and beverages led to lower sales volumes and unfavorable fixed costs.
Cost absorption.
To partially offset the impact of that lower fixed cost absorption, we did optimize our plant network during the quarter short term shutdowns and reduced discretionary spending and reduced maintenance where possible.
We also incurred in the quarter $5 million directly related to co bid workplace related measures about two and a half million of that was appreciation pay which was given for approximately two months, which rolled off at the end of May.
The remaining of the decrease was driven by Mexico, where the government mandate declaring brewing as non essential really significantly impacted our our sales volumes and fixed cost absorption going forward in quarter three in North America based on the exit rates, we've seen and based on things getting a little bit more steady and normal.
So we see.
Much improved fixed cost absorption.
And Jim I'm going to turn it over to you to talk about the net corn equation sure.
It's been the.
As we saw through the Q2, we would have had placed hedges on corn purchases that we had.
The fall of last year as we see.
Moving into Q3, we will see an improved corn gross corn cost and then also I would say that for coproduct values.
Gluten meal and oil kind of remained elevated.
And then we saw that those values start to decline.
Towards the end of June so youre going into.
To Q3, we will see frivolous and improved net corn costs relative to prior year.
And also sequentially.
And Ben I would just add a little bit more color.
In regards to say the negative surprise for North America in comparison to the outlook. We provided in early May we were coming off of two robust months for food start sales in food consumed at home at the time there was a significant decrease in demand that then manifested itself suddenly in may and we believe that had.
That was related to our customers rebalancing their inventories and possibly less elevated pantry loading and then the Mexican brewing shutdowns at the time in early May we thought we're going to be lifted by the end of May and they continue pretty much through the entire quarter, which was very surprising for us.
Very very helpful. Thank you for the detail.
Corporate expenses were also a bit of a surprise I.
I think last we got an update from you were thinking that line item would be up kind of high single digits for the balance the year.
Is that still the case for the balance of the back half of the year and if if twoq was a surprise to the high if I could you talk about.
Maybe why and.
Is the potential for that to occur in the back half relative to whatever new expectation maybe.
Now I mean corporate costs were not to.
They were in that higher as a.
Rise we.
Prior to the acquisition announcement of pure circle, we incurred.
Legal fees and fees related to the transaction in those hit the quarter then once we announced the transaction anything while we were.
Waiting for the vote and.
And regulatory.
And those expenses will be put towards the acquisition and integration costs. So you had some of that.
Impacting Q2.
Prior to the to the April announcement of the.
Of the that the acquisition.
And other than that what we see is just.
It's just last year, we would have had.
Probably on a property adjustment and bonus accrual.
And this year, we're continuing.
We will look at kind of what our outlook is as we we think about wins the appropriate timing for that.
Okay. Thanks, Jim It so would you in light of that would you expect corporate expenses to still be up high single digits. As you had previously called out.
For Q3, yes that would be in line with where we're we're thinking.
Okay perfect. Thanks, so much I'll get back in the key.
Okay.
Thank you. Our next question will come from line Robert Moskow from Credit Suisse. You may begin.
Hi, Thanks for the question couple. Thanks can you help us quantify.
What the exit rate in sales was in North America, you said it got better in June and better in July.
Maybe it's still down low single digit in July.
Maybe a little more.
Already there.
And then secondly.
Actually there are questions, but the second question. It appears there Paul you call it a turnaround.
You've got a little deeper into what are the problems with business.
Are there also challenges like just the overall the business my senses of has become rabbit commoditize.
So.
Do you have a good line of sight as to what unique mix at that company in order to the permits as well.
Okay. So let me take the North America question, then ask Jim to maybe add some color commentary on that and then I'll take the pure circle and then equally have interest or commentary on that so for North America exit rate.
Obviously sales bounced back very strongly in June and that's carrying through into July.
In the away from home is going to in depressed in our opinion and when we look at what our exposure in North America is to foodservice.
We have estimated that.
Food starches are a little bit more exposed than sweeteners and overall, it's about 25.
So many exit rate in.
The us Canada market was.
I will be down so.
Down low single digits, yes, and in Mexico, and mid single digits, I would say as it declined and Thats expected given the koby case situation in Mexico, So hopefully that helps.
Jim any other commentary in regards to the exit run rate on the go forward, yes, the only thing I'd add is that.
Rob and into our listing what we continue to look at his is how much inventories of our customers products need to be rebuilt on shelves.
As well as customers anticipating.
Whether or not they need to also then build inventories as we look at potential changes in behavior going into Q3, but we have seen I think a strong rebound.
In June as where we were exiting the quarter and Thats right. So that's the type of volume rates that were seeing volume sales volumes.
So far we go to pure circle does that all add up to a low single digit number of North America. In July you give us the components, but we don't know the percentages would be color.
Yes.
Well again, what ominous as in July we what we see Israel.
I think we still see some recovery in industries like brewing and.
And within Mexico, and then as we see different.
Segments within foodservice like QSR start back up you're seeing Youre seeing some Paul.
For different other beverage syrups or other types of ingredients that that support products that go into QSR. Some particular July beverage sales for us in Mexico is actually stronger than prior year.
But again food consumed away from home and reduce mobility is impacting overall volumes in Mexico.
Yes.
Well I'm going to assume.
Down low single digit for North America, Okay. So pure circle.
Okay on pure circle.
Obviously, we're very pleased with the acquisition from a standpoint, the quality of the asset based on credits for ship position in the field of Stevia, it's innovation capabilities and it's.
It's technology that we've we've acquired so we're very very pleased with that it's no secret that pure circle had a very difficult 12 months prior to us acquiring the business.
And what we have seen is a lot of opportunity in relationship to delivering cost synergies to leverage the sales and go to market network of ingredient to expand its global presence and reach and especially.
The reputation with customers because.
The business had been hampered for about 12 months.
With a lot of uncertainty and that uncertainty spilled over to its customers and with us coming in given our reputation and equally some of the ingredients that complement its portfolio for sugar reduction has already.
Helped immensely from standpoint of the customer connectivity and the opportunities that present. In addition on the cost synergy side Theres, obviously opportunities from standpoint of SGN a savings but in addition.
Theres opportunities to improve its cost of goods sold specifically with higher yielding executing on higher yielding agronomic, which we have a lot of experience.
Given our understanding of agricultural commodities and so we believe that those two elements are going to enable us to earn that business around in and in a little bit more in 12 months plus.
Got it Okay, Hi, Mike My last question.
Pretty big capital investment in China, you said, you're doing it because.
Your customers prefer local sourcing.
But it is an operating there for many years and you've been pursuing an export model into China for raw materials.
Well this new model, the lower cost or what the higher cost because I.
I think corn is inherently higher cost in the country.
Yes, no I just want to kind of correct you Rob on the majority of our sales in China have come from locally sourced.
Product other than say tapioca for industrial starts that would make its way into China coming from Thailand, but most of the product was being manufactured at our two manufacturing facilities.
In China. It was just logical given the growth in the country as well as.
The reputation we have with customers and the customers, saying, we would feel most comfortable going forward with you having a low a larger local presence.
And capacity to continue to supply our needs so for us it with logical to expand one of those facilities, which is vertically integrated into the local corn supply chain to produce specialty foods starches for the growing.
Market. It's also noteworthy to point out that over the last 18 months tariffs of modify foods starch into China related to the dispute between China and the US have increased so this obviously would avoid those tariffs so from a delivered cost in country. This will actually be.
More economical for us and allow us to be most competitive and.
Meet the local customer requirements to source more product locally.
Yes.
Frankly last year I remember those as tariffs.
Hurt your business and I was wondering if.
Locally sourcing is.
Obviate that by the issue or not.
It offline, but yes, there is and then there's obviously benefits from a sustainability standpoint in shipping product was the water et cetera. So just.
Overall, the investment made good sense for us.
Thank you very much.
Thank you are up.
Thank you. Our next question comes the line of Heather Jones from Heather Jones Research you may begin.
Good morning, Thank you taking the questions.
They have just have a couple I was wondering and in Mexico.
And this may be impossible, but I just thought I'd asked.
Could you give us a sense of how much of the weakness you're seeing there is.
You know cobot related.
Limitations on movement, the breweries et cetera, and do you get a sense of some of its just the economy is weaker and if you could just parse out those two im trying to.
That with color you know how the how that region will recover and just wondering if you have a sense of what's driving each which of those is driving that.
Yes, I would say that in the quarter. The obviously the government mandated brewing shutdowns hit us very acutely because.
Those growers were just shut down it could not operate now that's been lifted and we're seeing the volume as I just indicated to Rob coming back very strongly with July up even versus prior year.
So thats a good sign.
I do think that the high number of KOVA cases in Mexico.
His hampering mobility and his hampering, obviously travel and that HAMP hampers.
Discretionary spending on things like confectionery and food consumed away from home so you're seeing.
That perhaps a little bit harsher impact than even in us Canada.
For the quarter, but we're seeing it recover and.
Overall I think.
The Mexican food market has always proven for us as a very strong local supplier to be a very robust market.
For the kind of products that we supply so were.
Hopeful that that's going to continue to progress in quarter two.
Okay. Thank you.
And then a quick details question the Q3 guidance for.
A mid teens declining and consolidate EBIT.
I just wanted to make sure that includes the pure circle losses.
Yes, it does.
Okay.
And then finally, just thinking about what you all you got thinking about what's going on within that corn side, what you're doing with pure historical how these different region to recovery like and then what you're doing in your footprint.
Could you give us a sense and I know, it's really early but just based on what you know now.
Could you give us a sense of what you're thinking as far as 21, I mean do you think you will be able to have fully recovered from this cobot impact I'm, just with adapting or just you could this year with as any initial thoughts you're having about 21.
I think that.
As it relates to 21, what we're watching very closely is what the forecasts are for food consumed away from home as well as Hal governments around the world collectively manage the.
The the health crisis, the pandemic and whether we'd have a second wave or not and Thats, where all the uncertainty comes in so those are the keep.
The key determined is obviously the prevalence of koby cases in the countries in which we operate as well as the impact that's going to have on.
Mobility, and foodservice and who consumed away from home. We believe we're going to continue to see elevated levels of consumption of food consumed at home. So our sales to customers that supply for food at retail in at home. We think we're feeling very good about.
We think that industry like brewing will actually do well and have proven to do well.
When there is a bounce back and we think that that will continue so we're pretty confident about that the big question Mark is about how long food consumed away from home will remain depressed.
And there are some forecasts that that will continue at a subdued rate.
But a.
Slightly increased rate.
Year on year in 2021, but not getting back perhaps to 2019 levels till 2022, we're watching those forecasts like everyone else and it's just very hard to predict and everybody's hopeful of course about a vaccine and what thats going to mean, so it's just very hard to predict.
Yes, Heather really is that and Heather I mean thats. The as you think about the topline.
And what we're thinking for 2021 I also would say that in terms of our cost of materials, we're watching the different flow of demands of agro products recently you've seen.
China, making some unprecedented corn purchases from unprecedented soybean purchases and so clearly data has an effect.
And impact on.
Potential values for coal products.
And you and the United States for 2021, so looking at cost and materials.
And obviously thinking about that the corn crop in the size of the corn crop this year and the carryout.
And then also I think the third areas just continue to advancing our growth initiatives.
So where we you mentioned tourist circle on your and your preface to your question.
But really just continuing in in this remote way to being able to advance our growth initiatives wherever they may be in the world and so I think that weve.
Learn in the last.
Four five months, how to work with teams remotely and locally and Luckily we have a great local footprint in many countries with employees in those countries and so that enables us to continue to get in and thing in work things like integrations.
As well as projects, where we're we're restructuring are reshaping organization.
Okay. That's very helpful. Thank you so much.
Okay.
Thank you. Our next question will go for line of Ken Zaslow from Bank of Montreal May begin hey, good morning, everyone.
Okay.
Yes, let me just extend on Heather's question second.
Lets say food service does tend to come down at a certain level, 510% because you don't have a full recovery of the food service sector. How did your model adjust and how do you utilization rates. Just can you be flexing does it change the longer term story or the longer term growth rate here, how do we think about it.
In the event that ill.
Food service capacity likely will not be at the same level it was pre coated.
Yes, I, Jim you want to Teva, Hey, Ken I, just looked at in that with when you're making ingredients.
You know that broadly go into food and beverage.
We're just looking at okay, now, whereas the eating occasion, and how our power our customers adjusting right. So while long term foodservice in 2021 or 2022 might not return fully to the 2019 levels.
Generally the populations are growing and youre going to have consumption. Therefore at home and so we look at to our customers, where theyre going to look at innovation.
And meal preparation in home.
And and and believe that Theres still a desire by consumers.
For healthier ingredients.
And we believe that we can supply those gradients, whether it's bill.
Health based proteins or our food starches or very profitable specialty ingredients into those types of solutions and there are actions also can that we are taking and can take in relationship to the cost side of the equation in our network. So we highlighted for example.
The consolidation of our potato starch network in North America, this past quarter with the closure of one of our facilities and that.
Was a facility that had exposure we supplied coatings into.
Better inbred type products, which find their way into foodservice applications. So.
Those are the kind of things that we also can flex.
To a degree, especially when the volumes are down.
Maybe on foodservice, which is a minor proportion of our overall business.
Maybe mid single digits or or or so so theres a couple of things that we can do and Ken just a highlight it.
I think this was maybe I don't know tagging presentation, almost two years ago.
When you think about what was the challenge in foodservice.
Was as you get more curbside pickup as you get more delivery.
The the temperature.
And the taste of ingredients needs replicate what it is when it's in restaurant serves to your table.
Our ingredients help with that right and so much of the talk within the restaurants and whatnot is.
Do you get.
Temperatures maintaining does it work well in the packaging and I think thats as we've highlighted to that so that provides an opportunity for innovation going forward.
To deliver the highest quality product when it gets to the consumer.
From a standpoint of the convenience factor and contactless pickup and delivery.
Do you think there will be milestones or something that you will have to Korea. Another network optimization or you think that flexing the different parts and being able to adapt in this environment is enough.
Just trying to think about how you think about your entire network.
Over the next one to two years or even longer term.
Yes, now right now I think that we have taken actions in recent years as you know two.
To trim, our network and we think that that's helped us better prepare for a situation like this and we think that we can continue to optimize our manufacturing flex.
Continue to.
Work with the right customers that are going to.
You know develop innovative new products and.
And capitalize on the opportunities presented by the Pandemics. So we're not in the near term do we have any plans like that.
And then the last question is can you just coming on Brazil, and what you're seeing down there and is there.
Stabilization of how you visit is just kind of giving us a parameter for their they'll leave it there. They appreciate it.
Sure. So let me just talk about overall South America for a moment, so south America year over year.
Our net sales were down 19% in the quarter, but that was driven primarily by foreign exchange weakness in Brazil and in Colombia.
The net sales volume was down 11% due to government restrictions, which really hampered the away from home consumption of food and beverages and that was that was offset by very strong pricing with price mix up 10% and.
If it wasn't for the foreign exchange year over year operating income was actually up in South America by 6% for the quarter for the third quarter. We expect sequential improvement in operating income. However that operating income change is still going to be down year on year and a lot really.
A story of South America is related to the prevalence of the virus as you know Brazil has.
More than 2.7 million cases.
Peru has 400000 cases north of 400000 in Colombia, North of 300000 cases, Columbia, just extended its locked down through the end of August so that is hampering just mobility and food consumed away from home.
On a piece of brighter news. This morning, I think we all saw that the Argentine government has reached an agreement with its creditors, so that kind of bodes well for a little bit more of a removes a piece of uncertainty from the Argentine economy going forward, but really the story for South America is we're seeing recovery.
But the pandemic as well as being the winter season down there.
Has made it a little bit challenging and more difficult to predict lets say.
Going forward.
Great I appreciate it.
Thank you Ken.
Thank you. Our next question comes from the line that Adam Samuelson from Goldman Sachs You may begin.
Hi, guys. Thanks, good morning, everyone.
I guess.
I guess first I wanted to just ask and get your view on your customers' inventory.
Yes, you made some comments about the inventories on shelf or the at home products, but more just in terms in there in their manufacturing footprint I guess I'm struck when I look at the monthly sales trends in North America.
It seems like your sales bottomed later than a lot of the sell through in kind of the channel disruptions that would have happened sweetener sales.
And sell through is worse in April years that Youre sweetener sales in bottom until till may and.
Just any center kind of caution around the June recovery being.
Being inventory restocking in the part of your customers in terms of their input purchases or just any framing that.
Yes, I would say, it's just very hard to predict in conversations that I have had with customers.
The supply chain in the food industry is extensive and.
And every one is taking decisions trying to read the tea leaves of the consumer and.
Changing their ordering.
In different ways and Thats rippling through the entire supply chain. So I think we're going to see it be bumpy going forward.
Jim I don't know if you have any color that you'd like to add yet just Adam I mean, the uncertainty around customers in terms of of just how much.
Ingredients might have been needed for food that were going towards in home uses that uncertainty was in March right and so you really saw kind of more of that that demand I think in March and inventory indefinitely building there.
So I don't think it's to the promise of your question I think I think the.
The optimizing the customer inventories was more result of actions taken in March or April.
That that impacted us in may.
Okay. All right. That's that's helpful. And then just a clarification question on pure circle.
Jim Gray I think you'd said mid single digit negative and I wanted to just make sure that that percent margins or EBIT dollars.
I just wanted to make sure that were characterized and that a quarterly number or is that an annual expectation for next 12 months.
It was a.
Op margin.
Number for the for the next 12 months.
Okay. All right. That's that's that's very helpful. I appreciate the color as an opex.
Okay.
Thank you im not showing any further questions at this time.
Let's turn the call back over to Jim's Alley for any further remarks.
Okay.
Thank you for your time today, and I hope everyone continues to stay safe and healthy as we progressed together through this next phase of the pandemic and Jim and I look forward to updating you during our next call.
Thanks very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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