Q2 2022 Ingredion Inc Earnings Call

August 9, 2022

Thank you for standing by and welcome to the Ingrid Jan incorporated second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone.

As a reminder, today's program may be recorded and now I'd like to introduce your host for today's program, Jason <unk>, Vice President of corporate Finance and interim Vice President of Investor Relations. Please go ahead Sir.

Good morning, and welcome to ingredient second quarter 2022 earnings call.

Jason <unk>, Vice President of corporate Finance and interim Vice President of Investor Relations on today's call are Jim <unk>, our president and CEO and Jim Gray, our executive Vice President and CFO .

We issued our results today and our press release that can be found on our website and radeon dot com in the investors section.

Slides accompanying this presentation can also be found on the website and were posted today 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 and include expectations and assumptions regarding the company's future operations and financial performance.

Actual results could differ materially from those estimated in the forward looking statements and ingredient assumes 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 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 and adjusted effective tax rate, which are reconciled to U S. GAAP measures and note to non-GAAP information included in our press release and in today's presentation appendix.

Now I am pleased to turn the call over to Jim Sally.

Thank you, Jason and good morning, everyone.

We are pleased to discuss ingredients second quarter performance and continued business momentum.

We delivered outstanding top line performance of 16% net sales growth for the second quarter.

Our pricing centers of excellence continue to offset higher corn and other input costs, including foreign exchange impacts.

Combined with a better product mix, our second quarter adjusted operating income grew 3% over last years very strong second quarter.

And just to note. This year's second quarter performance is now the strongest quarter, we've delivered since 2017.

Looking more closely at our top line performance.

Across all four regions comparable net sales grew double digits in the second quarter.

As I mentioned, our commercial teams continue to successfully manage the terms of our customer contracts to address higher corn and input costs and continue to take actions to offset foreign exchange impacts as the U S. Dollar continued to strengthen.

Of note, we offset more than $40 million of foreign exchange sales headwinds in EMEA and Asia Pacific combined.

Regarding customer demand.

I would like to note that on a comparable basis, our shipped product volumes.

Are now ahead of pre pandemic levels for the same quarter in 2019.

This is an important milestone for us given the impact the pandemic has had on the industry and our business over the last two years at.

At the same time net sales have grown significantly and specialty ingredients have increased as a percentage of both volume and net sales, reflecting a higher value mix.

Now moving on to our strategic pillars.

We continue to make great progress against each of the four pillars that are shaping our growth strategy.

Global specialties once again exhibited strong topline growth up mid double digits in the quarter.

Specialties performance was robust across all five growth platforms with texture rising ingredients and sugar reduction leading the net sales dollar increase.

Additionally plant based protein sales were up strongly in the quarter and are now up more than 185% year to date.

Moving to commercial excellence.

While challenges remain across global supply chains, we've implemented several process improvements to best respond to customer demand.

With regard to cost competitiveness through operational excellence, we have expanded our hedging programs and.

<unk> continued to build our capability to address commodity risks primarily in North America.

As a result, we anticipate significantly less commodity volatility in the second half of the year.

We also maintained momentum against our fourth strategic pillar.

Accelerating our purpose driven and people centric growth culture.

We published our 2021 sustainability report, making life, better which details our progress against our 2030 global sustainability goals to address important societal and environmental sustainability challenges.

During the quarter, we advanced several sustainability initiatives to drive positive lasting impact in the communities, where we live and work.

One such example that I would like to highlight is a pilot program that ingredient ingredient in Brazil is leading.

Working with Heineken and several other suppliers, we are teaching and training farmers to adopt regenerative farming practices.

This pilot program resulted in a 25% reduction of emissions in scope and increase the amount of carbon captured in the soil by 40%.

Separately.

To further reduce our global carbon emissions, we have successfully exited coal usage at our Argo plant in Illinois, which resulted in an 8% reduction in our total zone one.

And two carbon emissions.

This change delivered nearly a third of the reduction is needed to meet our 2030 greenhouse gas emissions goal.

Also in the quarter, we published our 2021 diversity equity and inclusion report, which highlights our broad efforts to increase representation across our employee population.

We are committed to.

To creating a growth culture focused on diverse talent inclusiveness and community partnerships.

As I mentioned specialty.

Specialty delivered very strong growth this quarter across all four regions.

And net sales grew double digits over and above the strong growth we experienced in the first half of 2021.

While the growth was led by our texture rising portfolio. We also generated strong growth from our sugar reduction and specialty sweetener ingredients and plant based proteins.

Notably our first half specialties net sales results are above.

Our expected.

<unk> four year net sales growth outlook, which we outlined at our recent Investor day.

Now, let me spend a moment to update you specifically on sugar reduction, which grew 20% in the second quarter led by pure circle, where customer wins drove 28% net sales growth and positive operating income.

Fewer circles continued momentum.

Demonstrates its market leadership for high intensity natural sweeteners in a rapidly growing market for reduced sugar foods and beverages.

And we are pleased to share that we have increased our ownership of pure circle from 75% to 82% in the quarter. We anticipate further increases to our ownership of pure circle over the next three years.

As we look ahead to the second half of the year, we are focused on navigating the challenges in the current business landscape.

First we continue to remain committed to offsetting inflationary increases through a combination of pricing.

And productivity improvements from our operations we.

We have demonstrated an ability to do this well in the first half and we expect to be able to offset additional cost increases as they arise.

Second supply chain challenges continue to be impacted by labor availability COVID-19 restrictions and the Ukraine conflict. Our teams are operating with agility to overcome these challenges to ensure continuity of supply and service to customers.

Third energy prices remain elevated and there is increasing concern around the potential natural gas supply disruptions in Europe . We are currently developing contingency plans to mitigate possible impacts in the region.

And lastly, while foreign exchange impacts have been relatively benign over the past two years. We are currently experiencing higher foreign currency weakness on the back of a strengthening U S dollar.

Our pricing centers of excellence have served us well and we will continue to price through raw material cost increases as well as foreign exchange.

Now, let me hand, it over to Jim Gray for the financial overview Jim.

Jim Good morning to everyone.

Starting first with our Q2 regional performance.

North America net sales were up 20% when compared to the same period in 2021.

The increase was driven by strong price mix, primarily as a result of last fall's contracting season as well as dynamic in your pricing.

North America operating income was $161 million up 8% versus the prior year.

The increase in operating income was driven by strong price mix more than offset inflationary input costs, including higher corn.

In South America reported net sales were up 8% versus prior year.

Which includes the impact of the Argentina JV presentation change.

On a comparable basis net sales would have been up 42% versus prior year.

Primarily driven by strong price mix and volume across the region.

South America operating income was $39 million up $6 million.

Operating income favorability was driven by stronger performance in <unk> and Brazil.

As well as a positive contribution from the Argentina joint venture.

Excluding foreign exchange impacts adjusted operating income was up 15% in the quarter.

Moving to Asia Pacific net sales were up 11% in the quarter.

Absent foreign exchange sales were up 19%.

Asia Pacific operating income was 21 million.

Down $3 million versus prior year.

Strong performance in <unk> was more than offset by weakness in Korea due to higher input costs.

It impacts in China related to Covid disruptions.

Negative foreign exchange also impacted the region during the quarter.

In EMEA net sales increased 10% for the quarter.

And absent foreign exchange impacts net sales were up 24%.

EMEA operating income was $29 million for the quarter down $3 million compared to the prior year.

EMEA operating income was down as higher corn and input costs in Pakistan as well as foreign exchange headwinds.

More than offset resilient performance in Europe .

Excluding $5 million of foreign exchange impacts EMEA as adjusted operating income was up 6% in the quarter.

Moving to our income statement net sales of $2 billion $44 million were up 16% for the quarter versus prior year.

Gross profit dollars were higher year over year, while gross margin was 19, 1% down 170 basis points.

Mostly attributable to price mix lagging higher corn and input costs, primarily in Pakistan in Korea.

Reported operating income was $213 million and adjusted operating income was $215 million reported operating income was lower than adjusted operating income due to restructuring expenses.

Our second quarter reported and adjusted earnings per share were both $2 12 for the period.

Turning to our Q2 net sales bridge, we achieved strong price mix of $328 million.

Largely attributable to strong contracting and dynamic in your pricing in each of our four regions.

With notable increases in North America, and South America.

The sales volume decrease of $5 million was driven by the impact of the presentation change.

Related to the Argentina joint venture.

Partially offset by strong volume increases in each of the regions.

On the next slide we highlight net sales drivers.

Of note foreign exchange was a 2% headwind in the quarter with.

With significant headwinds in EMEA and Asia Pacific.

Reported South America results include the impact of the presentation change of the Argentina joint venture within the volume column.

South America net sales grew 42% with volume up 15% on a comparable basis, excluding the impact of the Argentina JV.

Turning to our earnings bridge on the left side of the page you can see the reconciliation from reported to adjusted earnings per share.

On the right side operationally, we saw an increase of <unk> <unk> per share for the quarter.

The increase was driven primarily by an operating margin increase of 24.

Partially offset by lower volumes of minus 11.

An unfavorable foreign exchange of minus seven.

Moving to our non operational items EPS was flat to prior year <unk>.

Primarily driven by lower financing costs of <unk>, <unk> and favorable outstanding shares benefit of <unk>.

Mostly offset by a higher adjusted effective tax rate of minus three.

Year to date net sales of $3 $936 million were up 17% versus prior year.

Gross profit margin was 19, 5% down 180 basis points.

Year to date reported operating income was $423 million and adjusted operating income was $428 million.

Reported operating income was lower than adjusted operating income primarily due to restructuring costs.

Our year to date reported earnings per share was $4 four.

And adjusted earnings per share was $4 six.

Turning to our year to date net sales bridge, 17% net sales growth has been led by $612 million of price mix improvement primarily from North America.

The sales volume increase of $14 million was driven by volume increases in each of the regions, primarily in north and South America.

Largely offset by a sales volume decrease of a negative $128 million from the presentation change related to the Argentina joint venture.

These sales increases were offset by foreign exchange headwinds of $66 million in the first half.

Turning to our year to date earnings bridge on the left side of the page you can see the reconciliation from reported to adjusted.

On the right side operationally, we saw an increase of 22 per share year to date.

The increase was driven by margin improvement of 44.

And other income of <unk> <unk>.

<unk> offset by lower volumes of minus 13, and foreign exchange of minus 11.

Moving to our non operational items, we saw a decrease of minus 6%.

Minus <unk> <unk> per share year to date.

Driven primarily by a higher tax rate of minus three and higher financing costs of minus <unk> <unk>.

Okay.

Moving to cash flow.

Quarter cash from operations was essentially breakeven.

Cash from operations increased versus prior year.

Driven by higher working capital usage as a result of higher input costs flowing through inventory values and accounts receivable.

Net capital expenditures were $137 million.

Up $35 million from the prior year due to the timing of spend.

We are in line with our 2022 expectations for capital commitments.

In the first half of the year, we paid $86 million of dividends to ingredient shareholders and repurchased $83 million of outstanding common shares.

Finally, we acquired additional shares of pure circle from minority shareholders for $27 million.

We expect our full year 2022, adjusted EPS to be in the range of $6 90.

To $7 45.

This excludes the impact of acquisition related integration and restructuring costs as well as any potential impairment charges.

We expect net sales to be up mid double digits, driven by strong price mix and volume growth on a comparable basis.

We expect full year operating.

Sorry, we expect full year reported operating income to be up significantly as the prior year reflects the impact of the net asset impairment charge related to the contribution of our Argentina operations to the joint venture.

We expect adjusted operating income to be up low double digits compared to last year.

2022 financing costs are expected to be in the range of $88 million to $93 million, reflecting primarily higher incremental borrowing costs.

Our anticipated adjusted effective annual tax rate is expected to be between 28 and 29%.

Which reflects a decrease in the top end of the range from prior guidance.

Cash flow from operations is now expected to be in the range of $300 million to $360 million, reflecting greater working capital investments.

As I noted previously.

Net capital investment commitments are expected to be between $290 million and $320 million.

Of which approximately $85 million will be invested to drive specialty growth.

We expect total diluted weighted average shares outstanding to be in the range of $67 million to $68 million for the year.

In terms of our regional outlook nor.

North American net sales are expected to be up 15% to 20%.

Driven by favorable price mix and higher volumes.

Operating income is expected to be up low to mid double digits, driven by favorable price and product mix and higher volumes more than offsetting higher corn and input costs.

For South America, we now expect net sales to be up low double digits, reflecting strong favorable price mix.

More than offsetting the impact of the presentation change for the Argentina joint venture.

South America operating income is also now expected to be up low double digits driven by favorable price mix.

In Asia Pacific, We anticipate net sales to be up 10% to 15% versus the prior year.

We continue to expect operating income to be flat to prior year.

Driven by higher corn costs in Korea related to the Ukraine conflict.

And the impact of Covid Lockdowns in China.

Offsetting stronger growth from pure circle.

For EMEA, we expect net sales to be up 10% to 15%.

And we expect operating income to be flat to down low single digits.

Driven by higher corn, and energy costs and negative foreign exchange impacts.

For the third quarter 2022, we expect an increase in net sales to be in the high teens.

And operating income growth to be up high single digits, when both are compared to the prior year.

That concludes my comments and I'll hand, it back to Jim.

Thanks, Jim.

While there are a number of variables that could impact our expected results in the second half.

We believe we have developed a solid pricing playbook and have significant experience in managing inflation.

Additionally, our teams are taking actions to mitigate earnings volatility through our expanded risk management program and are working to limit our exposure to corn price movements.

All of which is expected to support margin expansion in the second half relative to the prior period.

We are also carefully monitoring potential changes in consumer behaviors and spending.

Which could impact sales volume.

Amidst a possible recession.

We are positioned well since the ingredients. We produce are used in a broad range of food and beverage categories and are consumed across many different types of eating occasions. For example, we benefit from resurgent strength in both foodservice.

And private label sales in the U S and Europe .

In closing our second quarter results were very strong we grew our top and bottom quarter despite significant inflation.

And.

Continued and despite the significant inflation and continued supply chain disruptions, we advanced progress against our strategic pillars.

We exit the first half with solid momentum and we expect to deliver continued growth in the second half.

Now, let's open the call for questions.

Certainly ladies and gentlemen quick question at this time. Please press star one one on your telephone one moment for our first question.

Okay.

And our first question comes from the line of Adam Samuelson from Goldman Sachs. Your question. Please.

Yes.

Good morning, everyone.

Good morning, Adam.

So I guess.

My first question is just trying to make sense of.

Kind of how the forward outlook is.

<unk> has changed.

In the quarter. Your op income performance came in above kind of what you thought.

The guidance range.

Didn't really budge.

A couple of a little bit at the low end.

And so I'm, just trying to get a sense of kind of.

Is it more caution on currency on the on cost play out.

Make sure Im understanding kind of the moving pieces of kind of how the first half performance.

It doesn't seem to be fully flowing through in the back half of the year if at all.

Yes.

Yeah, Hey, Adam This is Jim I'll take a first shot I think first just to remind everybody that.

As we look at the corn layout.

Clearly in the beginning of the year, we saw rising corn as we were laying on hedges and getting.

Basically Q2, Q3, and Q4 covered we will incur a little bit more in terms of corn costs. In Q3 Q4, so that is reflected.

And our assumptions, but I think maybe more to your point as we are.

Looking at.

Whats kind of changed is that we're really we're somewhat cautious about Europe .

And in the kind of the situation there with regard to energy supply so as Jim mentioned on the call. We're putting in plans now to kind of mitigate if there is any type of gas curtailment.

And how we would move product around.

And so we're a bit cautious on that and then also I think that as we look to <unk>.

Asia Pac we've had a COVID-19 disruption in China.

We seem to be coming out of that quite strongly.

And in the beginning of Q3, but we're also just cautious about the cost of corn.

As it impacts us in Korea, and I think Thats also kind of reflected in.

Our second but I mean overall EBIT is up.

I mean year over year EBIT will be up.

Both.

Obviously, Q3, Q4, EBIT will be very strong relative to last year's relatively weaker lapse and then overall in total EBIT for the full year will be up a bit.

Slightly higher than we previously forecasted.

That's helpful. And then maybe zeroing in on North America volumes up one and I guess specialties are growing and that I guess, we're also hearing.

About parts of some of the more commodity products and core products that are.

And quite tight supply at the moment and I'd love to get any thoughts you have about kind of the demand trends in some of those core products in North America and how that.

Frames your view of supply and demand going into contracted for 'twenty three.

Yes, maybe I'll comment on Syrups, and then maybe Jim can comment on more kind of dextrose.

So what we're seeing for syrups is generally a poll within North America as you've seen really strong foodservice.

Takeaway both in Q2, probably continuing all throughout summer.

Youre seeing strong pull for beverages and Youre also seeing strong pull from from brewery.

And then also just.

To add.

Mexico.

Most throughout last year was still kind of came out of Delta <unk> kind of hit in.

I would say that the bounce back in Mexico in 'twenty, one was a bit subdued.

And what we're just seeing is I think a nice.

Recovery full full volume recovery in Mexico, as we go through through the year.

And with regard to kind of more.

Kind of value added core products, Chris crystalline dextrose, as Ben and strong demand.

Throughout throughout the whole year I think demand.

Continued to be strong in the second quarter and orders continue to remain robust right now our visibility Adam at this point.

Vacates strong demand continuing through quarter, three which is typically a strong quarter tie.

Tied to customers' pipeline filling for holiday offerings, that's not meant to imply that quarter four will soften we just don't have visibility that far forward just yet.

So what we see is still strong demand from food service private label strength and strong orders through quarter, three and it remains to be seen obviously quarter four will continue.

And as a reminder, our customer base is broad with sales across all the different categories, whether it be branded grocery private label food service.

As well as we have a very strong distributor network really around the world.

<unk>.

We certainly would say foodservice appears robust through the end of the summer for sure.

So that's about as much visibility as we have and that's all positive at this point in time from a demand forecasting standpoint.

Okay. That's all very helpful color I'll pass it on thank you. Thank.

Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Robert Moskow from Credit Suisse. Your question. Please.

Alright. Thanks.

I was hoping you could be a little more specific on.

On your fill rates for customers because just anecdotally we've heard about some shortages I think in the starch complex.

Do you expect those service, where youre surface issues now and do you expect them to keep getting stronger.

And then a follow up.

Yeah. Thanks, Thanks, Rob.

What I would say is that the industry at large.

Has experienced supply disruptions for certain products, which has strained product availability.

And demand has continued to be strong for a number of the products. We supply and this has been the case since the rebound from the depths of Covid going back to quarter three of 2020.

And as we indicated during.

Presentation sales volumes are now back to 2019 pre pandemic levels and we're operating at high levels of capacity utilization.

Through this period, we've worked closely with customers to overcome many of the global supply chain issues and our teams have been really working diligently to meet the.

Increased demand.

We've made.

Investments in how to.

Digital investments basically from a standpoint of automation of order receiving product allocation order confirmation et cetera.

To make sure that we're focused on those customers that are the most strategic from a relationship standpoint to us to optimize that.

Timely and efficient delivery of product.

And also what we've done to help address some of the tightness in the supply issues, it's noteworthy that.

We have very high demand for example for our clean label texture is yours.

And we accelerated the capacity expansion of these products at our Indianapolis facility and that capacity is now online and we're shipping two products shipping to customers around the world.

And Thats.

In addition to a significant expansion of specialty starch production in China that is commissioning right now in quarter three so.

The industry at large I would say has been tight there has been a number of issues that have impacted.

Service across the industry, whether it be chemical shortages or some force majeure wars that have been declared in various.

Sure.

Chemical supplies.

As well as just the overall impacts of.

Tightness with.

Truck drivers labor et cetera that we all know about but.

From a standpoint of the look forward for the remainder of the year, we see the situation steadily improving in the second half.

As supply chains normalize over the remainder of the year.

Okay and maybe.

Update on your plant based protein.

Past the expansion.

<unk> orders you gave some very specific.

Detail on profit impact I think last quarter.

Any update there.

Yes, we had actually a very strong quarter.

<unk> has us on track at this point in time, we've got.

Challenging second half comparable from a standpoint of what our internal targets are but.

From a standpoint of our portfolio it remains very well positioned for growth given the breadth of our product portfolio across protein flours concentrates and isolates and across four different types of pulsing pulse ingredients.

This really doesn't make us dependent on sales into one product category such as alternative meats with say just isolates for example.

We have a very robust project pipeline with many customers across multiple consumer product categories, such as alternative dairy alternative snacks and bakery and we really have strong relationships that we've built with leading players in each of those categories and are focused on.

Delivering the innovation to them, we really strongly believe that the plant based trend is built on long term sustainable fundamentals.

And what we're focused on is delivering great taste and texture as well as high quality nutrition, along with clean and simple labeling we really believe that's the recipe for long term success in this category and our facilities are running well now.

And again the portfolio of products that we've developed we think our leading edge products from a taste and protein content standpoint.

So the interest in our products is great and we had a good second quarter and the team is just running real hard to deliver a solid second half.

Jim just to be more specific I think its operating below breakeven. This year does that mean that there is an opportunity for.

Kind of a rebound year or strong profit growth comparisons in 'twenty three yes, yes youre absolutely.

Totally right, we're running breakeven because we just commissioned the plant towards the end of last year.

And what we have as a target to remind everybody is a $10 million operating improvement.

Year on year improvement from a standpoint of our operating income from those facilities and right now we're on track to deliver that plus the sales growth that I referred to so.

As with any new startup.

Obviously incur operating costs until the plant is the plants in this case, our fully loaded Jim any other comments, yes, I think Rob as you look from 2022, and where we will finish the year to 2023.

We anticipate to kind of build even more on the net sales and 23 versus the foundation that we've laid in 2022 that helps us amortize more of the fixed costs in that facility and we have yet to say, what our 'twenty three kind of expected improvement in the operating margin from plan.

Based proteins will be but we're heading in the right direction and we're seeing notable improvement in 2020 two's operating loss versus 2021.

Great. Thank you.

You got it thanks, Rob.

Thank you and our next question comes from the line of Ken Zaslow from BMO. Your question. Please.

Hey, good morning, guys.

Hey, Ken.

Just curious.

As you're starting to set up for 2023. It seems like you have more capacity going online.

<unk>.

Later.

The manpower you seem very comfortable with the demand outlook and then you also have pretty tight utilization rates, how does that play out for 2023 are you looking.

How do you think about it just seems like your growth algorithm it seems to be pretty doable going into 2023, if not even better can you just give some parameters that I know, it's a little early but how does this year setup for next year.

Well.

Let me, let me take a shot first and then I'll turn it over to Jim What I would say is.

Right now we're <unk>.

Seeing demand strong.

And.

And then if you just think about navigating pricing we've done a very good job I think year to date being able to navigate.

Pricing offsetting corn cost and other input cost inflation and foreign exchange.

And we are anticipating continuing to be able to do that going forward the.

The industry capacity utilization is.

Right for.

The ingredients that are starch based derivative based.

And we see that at this point in time continuing.

Going forward.

So.

It's really early Ken too.

It really put any kind of an outlook on 2023, but I think one thing that I would say that I think everybody is tracking is our corn prices and looking at today's corn futures outlook and the 2023 strip pricing, we would anticipate that.

Any required pricing actions would imply an increase versus today's increased level, but those levels would be certainly much less than what was required in 2022.

So.

From a standpoint of that hurdle to be able to get that pricing through.

I don't think its going to be as severe as it has been.

As required at what it was in 2022.

Anything else Jim.

I would just add in terms of what the entire team here is working towards us.

When we look at our specialty ingredients greater functionality and greater value and a recipe we highlighted that in our investor day.

That carries with it higher average prices that customers really value the ingredients and always working towards higher gross margins.

In our portfolio mix and then I think the <unk>.

Addition, that we've seen is really in some of our core products is that you do have this.

The shifts that we've made looking at high fructose corn syrup, we've really moved more towards kind of glucose and others specialty dextrose.

And I think that that has its own demand as we head into 'twenty, three and I know I know Ken Oftentimes, we end up on these calls talking about North America predominantly but it is also noteworthy to say that we anticipate really steady demand in the second half from Mexico and South America.

With events such as the World Cup later in the year so.

Both of those businesses have done extremely well for us over the last few years and so.

From that vantage point volumes.

Volumes look to remain strong in the second half of this year as we head into 2023.

And then just my follow up question here is how much capacity additional capacity do you have coming on in 2023 and to what extent do you think youll get a return on that.

And that would be.

And this is my follow up question here is how much capacity additional capacity do you have coming on in 2023 and to what extent do you think youll get a return on that.

That would be where I'd leave it. Thank you.

Well our operations team is very focused on improving.

On stream effectiveness OE.

To squeeze more pounds out of our plants because right now and the situation has been this way for quite a while we can sell every pound we make so we've been very focused on.

Operational excellence, we've made the investment in the FBR.

Indianapolis, which has.

Expanded our clean label texture rising portfolio that came on in record time.

The team did a phenomenal job and.

Our expansion in China.

It has really been remarkable from a standpoint of that facility is actually shipped its first product to customers and so that plant is coming on stream with significant capacity for that local market and potentially some export opportunities as well within that region, which relieves.

Export requirements from other regions into Asia, freeing up some capacity. So we've taken a number of steps and we also announced and I will just draw you back to.

The announcement, we made at Investor day of $160 million of capital investments specifically in texture risers.

To expand volume growth.

And that's across a variety of downstream refining assets for the more highly valued specialty texture rising ingredients and thats across the.

The pre.

<unk> Coldwater swelling category that's across.

The clean label texture risers that I mentioned.

As well as different bases as well, so whether it be potato based or rice based.

<unk> seen strong growth so we're expanding capacity there, but in the downstream, finishing channels not necessarily in the grind capacity around Jim.

Ken.

As we outlined in our in our four year outlook for.

For us to look at our texture risers, we really need to plan for volume growth is going to be in the mid single digits.

So while Jim highlights a number of our areas, we have a pretty comprehensive capital planning to make sure that as we're looking forward to the next year and the year after that.

That as we anticipate customer demand.

Texture risers that we're really planning ahead to accommodate that growth.

Great I appreciate it thank you guys.

Thank you Ken.

The Q1 moment for our next question.

Yes.

Our next question comes from the line of Seth Goldstein from Morningstar.

Morningstar Your question please.

Hi, Good morning, guys. Thanks for taking my questions.

I don't also thanks.

How would you as the new contract structures work in a scenario where commodity prices were to fall and particularly in specialty would you be able to maintain higher prices or would there be some sort of a pass through.

To reflect the commodity price declines.

Well for a more specialty products those are sold on a value added basis.

From a standpoint of the performance they are delivering in that application.

Yes.

Prices typically for those ingredients don't necessarily fall.

Paul will come down associate it with say corn cost inputs to the same degree or if at all in comparison to.

More of the core ingredients of the core bulk sweeteners for example.

That doesn't typically happen.

And so those margins remember our minimum in GP two X.

The core ingredient margins.

So that's typically how pricing works with those those products and it's different also depending on the region.

North America is a little different than Asia Pacific, which is a little different than South America and EMEA for example.

Okay, that's really helpful.

<unk>.

What percentage of the EMEA.

EMEA sales come from the two facilities in Germany, just trying to size up.

Potential risks that you're trying to mitigate should there be natural gas shortages.

So the two facilities, we have one <unk>.

Facility, a consequence, which is in Homburg, Germany, we have a smaller facility related to the <unk> operations, which we most recently acquired last year.

Out of EMEA as entire sales.

Half of it approximately or a little more than half is from Europe itself.

And from that.

Facility, maybe 25, 30% of the sales comes from that German facility.

Okay, Great I'll pass it on thank you very much.

Thank you Seth.

Thank you and our next question comes from the lineup and Sir from Barclays. Your question. Please.

Yes.

Thank you very much for taking my questions just wanted to follow up a little bit on the outlook into the second half, obviously and one half we've seen very strong pricing momentum in essentially volumes being call it plus or minus flat.

Have you seen amongst your customers and the analysts to see any pushback I mean, you've talked about the.

The order book into Q3, but how do you feel about the pricing needs and the ability to put through pricing just given the general inflationary environment.

Yes, I think for this calendar year, we remain confident in the ability to pass through pricing through the remainder of this year based on the visibility we have for the demand outlook.

Beyond.

This year, we really can't.

At this point.

Comment because we don't have obviously visibility that far forward.

But we feel pretty confident because we have been.

<unk> been able to put through not only price increases related to our typical contracting period, which goes back to say last fall even into say January of this year, which is the typical contracting period, but we have put through multiple across multiple regions dynamic in year price increases.

Related to incremental inflationary cost increases we've incurred and as we've demonstrated we've been able to more than offset those.

Through pricing actions this calendar year and its not been an insignificant proportion of the pricing that we've obtained for total 2022 that has come from in year dynamic 2022 pricing in comparison to what we had to put through related to typical contracting.

At the time, when we had visibility to our cost structures as we headed into 2022.

So that's.

That's that's what I would say, but we are monitoring like everyone else, we're monitoring very closely.

Consumers behavior.

And spending.

And.

Watching very closely at this moment in time, we don't see softness for the ingredients, we supply given we believe the diverse diversified usage of those ingredients across multiple channels.

As I was mentioning.

The Covid rebound everybody is obviously.

<unk>.

Enjoying summer holidays in foodservice and food away from home, we benefit from foodservice equally as consumers trade down.

Private label increases, we equally benefit there and Thats just the nature of the diversified.

The nature of the products, we sell and the reach of those products.

Okay, and then just following up.

You made some comments about Asia Pacific obviously been impacted.

Because of some of the Lockdowns.

Can you share maybe a few anecdotes of how things have started to recover because it obviously, if we take a look at the guidance.

Operating income to be flat for the year that needs to be some some good acceleration into the back half in terms of growth rate. So just how confident are you and are you seeing anything on the ground, but just confirms that your your positive view here to get somewhat.

First half minus 12, he presented to flat.

Yeah. So.

For Asia Pacific operating income, we're expecting operating income to be relatively flat for the full year.

And.

And that's and we've got a significant year on year improvement related to pure circle in there.

From a standpoint of the bottom line remember we also are incurring startup costs for the new China.

<unk> starch plant so for US quarter, two was I would say the low watermark for the Asia Pacific business related to the severity of the impact of the Covid lockdowns in the second quarter as well as.

The incurring of the higher corn and energy costs in Korea.

But right now we are also enduring.

Foreign exchange weakness in a number of those currencies, but the team is putting through in year pricing pricing, which is going through significantly right now in the second half.

And we see demand strong our tapioca franchise is doing exceptionally well.

The <unk> business is doing extremely well and believe it or not China is picking up nicely and again, we're shipping products from the new plant.

Currently two customers that plant is ramping up and so we have.

<unk>, our outlook with a brighter outlook for the second half in comparison to what we've endured in the first half and specifically quarter. Two was the low watermark, we think for the year and it's just getting going to just get better and improve in the second half.

Ben I would only add to what Jim said is that while the Ukraine conflict created a corn availability shock for Korea.

A quarter for the team to secure their corn for the second half and then plan on pricing increases and so now we will see the pricing increases impact the second half an offset.

The higher cost of that corn in Korea, and so thats really.

Yes.

Really the anticipated improve.

Improvement in the second half and in Asia Pac along with the other things that Jim mentioned.

Alright, perfect. Thank you very much.

Got it.

Thank you and then as a reminder, if you have a question at this time. Please press star one one on your telephone one moment for our next question.

And our next question comes from the line of <unk> from Stephens. Your question. Please.

Hey, Thanks, good morning, guys.

Hi, Ben.

I wanted to ask about.

Capital allocation specific to what is a really strong balance sheet positioning.

Continued progress on the integration of pure circle.

And your updated guidance today it looks like.

So youll continue to have your dividend payments, but theres not going to be.

Considerable repurchase activity on the buyback.

Has your appetite for incremental M&A, just given the progress that you've made on your circle integration.

And the cash generation of the business.

Jim do you want to talk about just the cash in year and how you see that.

Playing out and then I can maybe take the last question sure.

Hey, Ben and for all.

When we look at a kind of a rising corn market or inflation market.

We're going to we're going to be paying more for that corn, it's going to wind up in our inventory values as we make sales to customers thats going to be reflected in higher prices on invoices.

And that increases.

Our overall.

The two pieces of our working capital. So we've seen this in the past.

We've actually had a a.

Significant reversal of that benefit in 2020.

We've invested in working capital in 'twenty, one we're investing in working capital in 'twenty two as our revenue.

As well above kind of $8 billion.

And so thats somewhat normal for our business, we do expect it to flatten out as we get into 'twenty, three and 'twenty four.

And therefore, we won't be putting as much investment from from cash into working capital.

And we do expect kind of cash from operations to be returning to that kind of $700 million.

Kind of a run rate level.

And from that then we prioritize.

Very strong organic capital growth projects.

We prioritize the dividend and that leaves us dollars leftover for strategic deployment on M&A Joe.

I think thats, well said and we obviously continue to work an active M&A pipeline.

And we believe that.

This situation will sort itself out as we go through next year.

Okay.

My second question is related to the EMEA segments and more specifically the trends you're seeing in Pakistan.

You cited it as a source of cost pressure in the quarter.

Obviously, we've seen currently come under considerable pressure there if you could just talk about what's going on there and the broader economy.

And the business trends and implications for.

For you guys that would be helpful.

Yes, no. Thank you for that question, we don't often talk about the Pakistan business, which is a significant business for us in the EMEA region.

<unk> seen as you said is experiencing significant cost inflation like everywhere else, particularly in corn and energy as well as unfavorable foreign exchange.

Corn crop prices are continuing to increase indicating that prices may increase up to an additional 10% on top of increases of over 40% versus the prior year in the first half of 2022.

And you mentioned the rupee the rupee has devalued more than 14% against the dollar. This year. So the team is working very hard we have a.

Very solid market position in Korea.

<unk> Im sorry, Im sorry in Pakistan I should say the team has realized significant price increases in the first half of the year and we'll continue to adjust pricing to capture higher cost in the second half I think like everywhere else, where we're going to have to watch is the magnitude of price increases that are required due to these.

Extraordinary circumstances, whether they be agricultural input cost inflation or energy cost inflation and then the impact that has on consumers and.

That is an emerging market to a degree and it's a solid market for us, but we're going to just have to watch that over time.

Given the magnitude of the price increases that are required to offset those those inputs that I just talked about but so far so good in the first half.

It's having an impact, but it's a muted impact.

And the team is working very hard to keep that the same way in the second half.

Okay, great. Good luck with the rest of the year. Thanks, guys. Thank you so much Ben Thanks Pam.

Thank you.

This does conclude the question and answer session of today's program I'd like to hand, the program back to Jim <unk> for any further remarks.

I just would like to thank everyone for joining us. This morning, we look forward to seeing many of you.

At our upcoming Investor events this fall.

And I just want to conclude by saying Thank you to everyone listening for your continued interest in ingredient.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

The conference will begin shortly.

As Johan during Q&A, you can dial one one.

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Thank you for standing by and welcome to the <unk> incorporated.

Incorporated second quarter 2022 earnings conference call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone.

Under today's program May be recorded and now I would like to introduce your host for today's program Jason based.

Vice President of corporate Finance and interim Vice President of Investor Relations. Please go ahead Sir.

Good morning, and welcome to ingredient second quarter 2022 earnings call I'm, Jason <unk>, Vice President of corporate Finance and interim Vice President of Investor Relations on today's call are Jim <unk>, our president and CEO and Jim Gray, our executive Vice President and CFO .

We issued our results today in a press release that can be found on our website and radeon dot com in the investors section of <unk>.

Slides accompanying this presentation can also be found on the website and were posted today for your convenience.

Actual results could differ materially from those estimated in the forward looking statements and ingredient assumes 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 forms 10-Q and 8-K.

Now I'm pleased to turn the call over to Jim Sally.

Thank you, Jason and good morning, everyone.

We are pleased to discuss ingredients second quarter performance and continued business momentum.

We delivered outstanding top line performance of 16% net sales growth for the second quarter.

Our pricing centers of excellence continue to offset higher corn and other input costs, including foreign exchange impacts.

Combined with a better product mix, our second quarter adjusted operating income grew 3% over last years very strong second quarter.

And just to note. This year's second quarter performance is now the strongest quarter, we've delivered since 2017.

Looking more closely at our top line performance.

Across all four regions comparable net sales grew double digits in the second quarter.

Of note, we offset more than $40 million of foreign exchange sales headwinds in EMEA and Asia Pacific combined.

Regarding customer demand.

I would like to note that on a comparable basis, our shipped product volumes.

Now ahead of pre pandemic levels for the same quarter in 2019.

This is an important milestone for us given the impact that pandemic has had on the industry.

And our business over the last two years.

At the same time net sales have grown significantly and specialty ingredients has increased as a percentage of both volume.

And net sales, reflecting a higher value mix.

Now moving on to our strategic pillars.

We continue to make great progress against each of the four pillars that are shaping our growth strategy.

Global specialties once again exhibited strong topline growth.

Up mid double digits in the quarter.

Specialties performance was robust across all five growth platforms with texture, <unk> ingredients and sugar reduction leading the net sales dollar increase.

Additionally plant based protein sales were up strongly in the quarter and are now up more than a 185% year to date.

Moving to commercial excellence.

While challenges remain across global supply chains, we've implemented several process improvements to best respond to customer demand.

With regard to cost competitiveness through operational excellence, we have expanded our hedging programs.

And continue to build our capability to address commodity risks primarily in North America.

As a result, we anticipate significantly less commodity volatility in the second half of the year.

We also maintained momentum against our fourth strategic pillar.

Accelerating our purpose driven and people centric growth culture.

During the quarter, we advanced several sustainability initiatives to drive positive lasting impact in the communities, where we live and work.

One such example that I would like to highlight is a pilot program that ingredient ingredient in Brazil is leading.

Working with Heineken and several other suppliers, we are teaching and training farmers to adopt regenerative farming practices.

This pilot program resulted in a 25% reduction of emissions in scope and increase the amount of carbon captured in the soil by 40%.

Separately.

To further reduce our global carbon emissions, we have successfully exited coal usage at our Argo plant in Illinois.

Which resulted in an 8% reduction in our total zone one.

And two carbon emissions.

This change delivered nearly a third of the reduction is needed to meet our 2030 greenhouse gas emissions goal.

Also in the quarter, we published our 2021 diversity equity and inclusion report, which highlights our broad efforts to increase representation across our employee population.

We are committed.

To creating a growth culture focused on diverse talent inclusiveness and community partnerships.

And as I mentioned specialty.

Specialty delivered very strong growth this quarter across all four regions.

Net sales grew double digits over and above the strong growth we experienced in the first half of 2021.

While the growth was led by our texture rising portfolio. We also generated strong growth from our sugar reduction and specialty sweetener ingredients and plant based proteins.

Notably our first half specialties net sales results are above our expected four year net sales growth outlook, which we outlined at our recent investor day.

Fewer circles continued momentum.

Demonstrates its market leadership for high intensity natural sweeteners.

Rapid Lee growing market for reduced sugar foods and beverages.

And we are pleased to share that we have increased our ownership of pure circle from 75% to 82% in the quarter.

We anticipate further increases to our ownership of pure circle over the next three years.

As we look ahead to the second half of the year, we are focused on navigating the challenges in the current business landscape.

First we continue to remain committed to offsetting inflationary increases through a combination of pricing.

And productivity improvements from our operations we.

We have demonstrated an ability to do this well in the first half and we expect to be able to offset additional cost increases as they arise.

<unk> energy prices remain elevated and there is increasing concern around the potential natural gas supply disruptions in Europe . We are currently developing contingency plans to mitigate possible impacts in the region.

Our pricing centers of excellence have served us well and we will continue to price through raw material cost increases as well as foreign exchange.

Now, let me hand, it over to Jim Gray for the financial overview Jim.

Jim Good morning to everyone.

Starting first with our Q2 regional performance.

North America net sales were up 20% when compared to the same period in 2021.

The increase was driven by strong price mix, primarily as a result of last fall's contracting season as well as dynamic in your pricing.

North America operating income was $161 million up 8% versus the prior year.

The increase in operating income was driven by strong price mix that more than offset inflationary input costs, including higher corn.

And South America reported net sales were up 8% versus prior year, which includes the impact of the Argentina JV presentation change.

On a comparable basis net sales would have been up 42% versus prior year.

Primarily driven by strong price mix and volume across the region.

South America operating income was $39 million up $6 million.

Operating income favorability was driven by stronger performance in India, and Brazil as.

As well as a positive contribution from the Argentina joint venture.

Excluding foreign exchange impacts adjusted operating income was up 15% in the quarter.

Moving to Asia Pacific net sales were up 11% in the quarter absent foreign exchange sales were up 19%.

Asia Pacific operating income was $21 million down $3 million versus prior year.

Strong performance in <unk> was more than offset by weakness in Korea due to higher input costs and.

It impacts in China related to Covid disruptions.

Negative foreign exchange also impacted the region during the quarter.

In EMEA net sales increased 10% for the quarter.

And absent foreign exchange impacts net sales were up 24%.

EMEA operating income was $29 million for the quarter down $3 million compared to the prior year.

EMEA operating income was down as higher corn and input costs in Pakistan as well as foreign exchange headwinds more than offset resilient performance in Europe .

Excluding $5 million of foreign exchange impacts EMEA as adjusted operating income was up 6% in the quarter.

Moving to our income statement net sales of $2 billion $44 million were up 16% for the quarter versus prior year.

Gross profit dollars were higher year over year, while gross margin was 19, 1% down 170 basis points.

<unk> is attributable to price mix lagging higher corn and input costs, primarily in Pakistan in Korea.

Reported operating income was $213 million and adjusted operating income was $215 million reported operating income was lower than adjusted operating income due to restructuring expenses.

Our second quarter reported and adjusted earnings per share were both $2 12 for the period.

Turning to our Q2 net sales bridge, we achieved strong price mix of $328 million largely attributable to strong contracting and dynamic in your pricing in each of our four regions with notable increases in North America and South America.

The sales volume decrease of $5 million was driven by the impact of the presentation change related to the Argentina joint venture partially.

Offset by strong volume increases in each of the regions.

On the next slide we highlight net sales drivers.

Of note foreign exchange was a 2% headwind in the quarter with.

With significant headwinds in EMEA and Asia Pacific.

Reported South America results include the impact of the presentation change of the Argentina joint venture within the volume column.

South America net sales grew 42% with volume up 15% on a comparable basis, excluding the impact of the Argentina JV.

Turning to our earnings bridge on the left side of the page you can see the reconciliation from reported to adjusted earnings per share.

On the right side operationally, we saw an increase of <unk> <unk> per share for the quarter.

The increase was driven primarily by an operating margin increase of 24.

Partially offset by lower volumes of minus 11.

An unfavorable foreign exchange of minus seven.

Moving to our non operational items EPS was flat to prior year.

Primarily driven by lower financing costs of <unk>, <unk> and favorable outstanding shares benefit of <unk>.

Mostly offset by a higher adjusted effective tax rate of minus three.

Year to date net sales of $3 $936 million were up 17% versus prior year.

Gross profit margin was 19, 5% down 180 basis points.

Year to date reported operating income was $423 million and.

<unk> operating income was $428 million.

Reported operating income was lower than adjusted operating income primarily due to restructuring costs.

Our year to date reported earnings per share was $4 four.

And adjusted earnings per share was $4 six.

Turning to our year to date net sales bridge, 17% net sales growth has been led by $612 million of price mix improvement primarily from North America.

The sales volume increase of $14 million was driven by volume increases in each of the regions, primarily in north and South America.

Largely offset by a sales volume decrease of a negative $128 million from the presentation change related to the Argentina joint venture.

These sales increases were offset by foreign exchange headwinds of $66 million in the first half.

Turning to our year to date earnings bridge on the left side of the page you can see the reconciliation from reported to adjusted.

On the right side operationally, we saw an increase of 22 per share year to date.

The increase was driven by margin improvement of 44.

And other income of <unk> <unk>.

<unk> offset by lower volumes of minus 13, and foreign exchange of minus 11.

Moving to our non operational items, we saw a decrease of minus 6%.

Minus <unk> <unk> per share year to date.

Driven primarily by a higher tax rate of minus <unk>, <unk> and higher financing costs of minus three.

Moving to cash flow second.

Second quarter cash from operations was essentially breakeven.

Cash from operations increased versus prior year.

Driven by higher working capital usage as a result of higher input costs flowing through inventory values and accounts receivable.

Net capital expenditures were $137 million.

Up $35 million from the prior year due to the timing of spend.

We are in line with our 2022 expectations for capital commitments.

In the first half of the year, we paid $86 million of dividends to ingredient shareholders and repurchased $83 million of outstanding common shares.

Finally, we acquired additional shares of pure circle from minority shareholders for $27 million.

We expect our full year 2022, adjusted EPS to be in the range of $6 90.

To $7 45.

This excludes the impact of acquisition related integration and restructuring costs as well as any potential impairment charges.

We expect net sales to be up mid double digits, driven by strong price mix and volume growth on a comparable basis.

We expect full year operating.

Sorry, we expect full year reported operating income to be up significantly.

As the prior year reflects the impact of the net asset impairment charge related to the contribution of our Argentina operations to the joint venture.

We expect adjusted operating income to be up low double digits compared to last year.

2022 financing costs are expected to be in the range of $88 million to $93 million.

Reflecting primarily higher incremental borrowing costs.

Our anticipated adjusted effective annual tax rate is expected to be between 28% and 29%.

Which reflects a decrease in the top end of the range from prior guidance.

Cash flow from operations is now expected to be in the range of $300 million to $360 million, reflecting greater working capital investments.

As I noted previously.

Net capital investment commitments are expected to be between $290 million and $320 million.

Of which approximately $85 million will be invested to drive specialty growth.

We expect total diluted weighted average shares outstanding to be in the range of <unk> $67 million to $68 million for the year.

In terms of our regional outlook nor.

North American net sales are expected to be up 15% to 20%.

Driven by favorable price mix and higher volumes.

Operating income is expected to be up low to mid double digits, driven by favorable price and product mix and higher volumes more than offsetting higher corn and input costs.

For South America, we now expect net sales to be up low double digits.

<unk> strong favorable price mix.

More than offsetting the impact of the presentation change for the Argentina joint venture.

South America operating income is also now expected to be up low double digits driven by favorable price mix.

In Asia Pacific, We anticipate net sales to be up 10% to 15% versus the prior year.

We continue to expect operating income to be flat to prior year.

Driven by higher corn costs in Korea related to the Ukraine conflict.

And the impact of Covid Lockdowns in China <unk>.

Offsetting stronger growth from pure circle.

For EMEA, we expect net sales to be up 10% to 15%.

And we expect operating income to be flat to down low single digits.

Driven by higher corn, and energy costs and negative foreign exchange impacts.

For the third quarter 2022, we expect an increase in net sales to be in the high teens and.

And operating income growth to be up high single digits, when both are compared to the prior year.

That concludes my comments and I'll hand, it back to Jim.

Thanks, Jim.

While there are a number of variables that could impact our expected results in the second half.

We believe we have developed a solid pricing playbook and have significant experience in managing inflation.

Additionally, our teams are taking actions to mitigate earnings volatility through our expanded risk management program and are working to limit our exposure to corn price movements.

All of which is expected to support margin expansion in the second half relative to the prior period.

We are also carefully monitoring potential changes in consumer behaviors and spending.

Which could impact sales volume.

Amidst a possible recession.

And private label sales in the U S and Europe .

In closing our second quarter results were very strong we grew our top and bottom the quarter despite significant inflation.

And.

Continued and despite the significant inflation and continued supply chain disruptions, we advanced progress against our strategic pillars, we exit the first half with solid momentum and we expect to deliver continued growth in the second half.

Now, let's open the call for questions.

Certainly ladies and gentlemen.

At this time, please press star one one on your telephone one moment for our first question.

Okay.

And our first question comes from the line of Adam Samuelson from Goldman Sachs. Your question. Please.

Hi, yes good.

Good morning, everyone.

Good morning, Adam.

I guess my.

My first question is just trying to make sense of.

Kind of how kind of the forward outlook is.

Has changed in.

In the quarter. Your op income performance came in above kind of what you thought.

The guidance range.

<unk> really budge.

A couple of a little bit at the low end.

And so I'm, just trying to get a sense of kind of.

More caution on currency on the on cost play out.

Sure I am understanding kind of the moving pieces of kind of how the first half performance.

Doesn't seem to be fully flowing through in the back half of the year if at all.

Yeah, Hey, Adam This is Jim I'll take a first shot I think first just to remind everybody that.

As we look at the corn layout.

Clearly in the beginning of the year, we saw rising corn as we were laying on hedges and getting.

Basically Q2, Q3, and Q4 covered we will incur a little bit more.

A corn costs in Q3 Q4, so that is reflected.

And our assumptions, but I think maybe more to your point as we are.

Looking at.

Whats kind of changed is that we're really we're somewhat cautious about Europe .

And in the kind of the situation there with regard to energy supply so as Jim mentioned on the call. We're putting in plans now to kind of mitigate if there is any type of gas curtailment.

And how we would move product around.

And so we're a bit cautious on that and then also I think that as we look to Asia.

Asia Pac we've had a COVID-19 disruption in China.

We seem to be coming out of that quite strongly.

And in the beginning of Q3, but we're also just cautious about the cost of corn.

As it impacts us in Korea, and I think Thats also kind of reflected in our second but I mean overall EBITDA.

I mean year over year EBIT will be up.

Both.

Obviously, Q3, Q4, EBIT will be very strong relative to last year's relatively weaker lapse and then overall in total EBIT for the full year will be up a bit.

Slightly higher than we previously forecasted.

That's helpful and then maybe zeroing in on North America.

Volumes up one and I guess specialties are growing and that I guess, we're also hearing.

About parts of kind of some of the more commodity products and core products that are in.

And quite tight supply at the moment and I'd love to get any thoughts you have about kind of the demand trends in some of those core products North America and how that.

Frames, your view of supply and demand going into contracting for 'twenty three.

Yes, maybe I'll just comment on syrups, and then maybe Jim can comment on more kind of dextrose.

So what we're seeing for syrups is generally a poll within North America as you've seen really strong foodservice.

Takeaway both in Q2, probably continuing all throughout summer.

Youre seeing strong pull for beverages and Youre also seeing.

Strong pull from brewery.

And then also just.

To add.

Mexico.

Most throughout last year. It was still kind of came out of Delta <unk> kind of hit in.

I would say that the bounce back in Mexico in 'twenty, one was a bit subdued.

And what we're just seeing is I think.

Nice recovery full full volume recovery in Mexico, as we go through through the year.

And with regard to kind of more.

Kind of value added core products, Chris crystalline dextrose, as Ben and strong demand.

Throughout throughout the whole year.

Demand continued to be strong in the second quarter and orders continue to remain robust right now our visibility Adam at this point.

Indicates strong demand continuing through quarter, three which is typically a strong quarter.

Tied to customers' pipeline filling for holiday offerings, that's not meant to imply that quarter four will soften we just don't have visibility that far forward just yet.

So what we see is <unk>.

<unk> strong demand from food service private label strength and strong orders through quarter, three and it remains to be seen obviously quarter four will continue.

And as a reminder, our customer base is broad with sales across all the different categories, whether it be branded grocery private label food service.

As well as we have a very strong distributor network really around the world.

<unk>.

We certainly would say foodservice appears robust through the end of the summer for sure.

So that's about as much visibility as we have and that's all positive at this point in time from a demand forecasting standpoint.

Okay. That's all very helpful color I'll pass it on thank you. Thank.

Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Robert Moskow from Credit Suisse. Your question. Please.

Alright. Thanks.

I was hoping you could be a little more specific on.

On your fill rates for our customers because because anecdotally we've heard about some shortages I think in the starch complex.

Do you expect those service, where youre surface issues now and do you expect them to keep getting stronger.

And then a follow up.

Yeah. Thanks, Thanks, Rob.

What I would say is that the industry at large.

Has experienced supply disruptions for certain products, which has strained product availability.

And demand has continued to be strong for a number of the products. We supply and this has been the case since the rebound from the depths of Covid going back to quarter three of 2020.

And as we indicated during.

Presentation sales volumes are now back to 2019 pre pandemic levels and we're operating at high levels of capacity utilization.

Through this period, we've worked closely with customers to overcome many of the global supply chain issues and our teams have been really working diligently to meet the.

Increased demand.

We've made.

Investments in how to.

Digital investments basically from a standpoint of automation of order receiving product allocation order confirmation et cetera.

To make sure that we're focused on those customers that are the most strategic from a relationship standpoint to us to optimize that.

Timely and efficient delivery of product.

And also what we've done to help address some of the tightness in the supply issues, it's noteworthy that.

We have very high demand for example for our clean label texture risers.

And we accelerated the capacity expansion of these products at our Indianapolis facility and that capacity is now online and we're shipping two products shipping to customers around the world.

And Thats.

In addition to a significant expansion of specialty starch production in China that is commissioning right now in quarter three so.

The industry at large I would say has been tight there has been a number of issues that have impacted.

Service across the industry, whether it be chemical shortages or some force majeure wars that have been declared in various.

Sure.

Chemical supplies.

As well as just the overall impacts of.

Tightness with.

Truck drivers labor et cetera that we all know about but.

From a standpoint of the look forward for the remainder of the year, we see the situation steadily improving in the second half.

As supply chains normalize over the remainder of the year.

Okay and maybe.

An update on your plant based protein capacity expansion customer orders you gave some very specific.

Detail on profit impact I think last quarter.

Any update there.

Yes, we had actually a very.

Strong quarter, which has us on track at this point in time, we've got a.

Challenging second half comparable from a standpoint of what our internal targets are but.

From a standpoint of our portfolio it remains very well positioned for growth given the breadth of our product portfolio across protein flours concentrates and isolate and across four different types of pulsing pulse ingredients.

This really doesn't make us dependent on sales into one product category such as alternative meats with say just isolate for example.

We have a very robust project pipeline with many customers across multiple consumer product categories, such as alternative dairy.

Turning to snacks and bakery and we really have strong relationships that we've built with leading players in each of those categories and are focused on.

Delivering the innovation to them.

We really strongly believe that the plant based trend is built on long term sustainable fundamentals and what we're focused on is delivering great taste and texture as well as high quality nutrition, along with clean and simple labeling we really believe that's the recipe for long term success in this category.

And our facilities are running well now.

And again the portfolio of products that we've developed we think our leading edge products from a taste and protein content standpoint. So the interest in our products is great and we had a good second quarter and the team is just running real hard to deliver a solid second half.

Jim just to be more specific I think its operating below breakeven. This year does that mean that there's an opportunity for.

Kind of a rebound year or strong profit growth comparisons in 'twenty three.

Yes, you're absolutely right, we're running breakeven because we just commissioned the plant towards the end of last year and what we have as a target to remind everybody is a $10 million operating improvement.

Year on year improvement from a standpoint of our operating income from those facilities and right now we're on track to deliver that plus the sales growth that I referred to so.

As with any new startup you, obviously incur operating cost until the plant is the plants in this case, our fully loaded Jim any other comments, yes, I think Rob as you look from 2022, and where we will finish the year to 2023.

Land based proteins will be but we're heading in the right direction and we're <unk>.

Any notable improvement in 2020 two's operating loss versus 2021.

Great. Thank you.

You got it thanks, Rob.

Thank you and our next question comes from the line of Ken Zaslow from BMO. Your question. Please.

Hey, good morning, guys.

Hey, Ken.

Just curious.

Are you starting to set up for 2023. It seems like you have more capacity going online you have greater.

Demand for oil you seem very comfortable with the demand outlook and then you also have pretty tight utilization rates, how does that play out for 2023 are you looking.

How do you think about it just seems like your growth algorithm seems to be pretty doable going into 2023, if not even better can you just give some parameters that I know, it's a little early but how does the year setup for next year.

Well.

Let me, let me take a shot first and then I'll turn it over to Jim What I would say is.

Right now we're.

We're seeing demand strong.

And then if you just think about navigating pricing we've done a very good job I think year to date being able to navigate.

Pricing.

Offsetting corn cost and other input cost inflation and foreign exchange.

And we are anticipating continuing to be able to do that going forward.

The industry capacity utilization is tight for the ingredients that are starch based derivative based and we see that at this point in time continuing going forward. So.

It's really early Ken to.

Really put any kind of an outlook on 2023, but I think one thing that I would say that I think everybody is tracking is our corn prices and looking at today's corn futures outlook and the 2023 strip pricing, we would anticipate that.

Any required pricing actions would imply an increase versus today's increased level, but those levels would be certainly much less than what was required in 2022.

So.

From a standpoint of that hurdle to be able to get that pricing through.

I don't think its going to be as severe as it has been as.

As required at what it was in 2022.

Anything else Jim.

I would just add in terms of what the entire team here is working towards us.

When we look at our specialty ingredients greater functionality and greater value and a recipe we highlighted that in our investor day.

That carries with it higher average prices that customers really value the ingredients and always working towards higher gross margins in our portfolio mix and then I think the <unk>.

Addition, that we've seen is really in some of our core products is that you do have this.

A shift that we've made looking at high fructose corn syrup, we've really moved more towards kind of glucose and others specialty dextrose.

And I think that that has its own demand as we head into 'twenty, three and I know I know.

No Ken Oftentimes, we end up on these calls talking about North America predominantly but it is also noteworthy to say that we anticipate really steady.

<unk> in the second half for Mexico, and South America, especially with events such as the World Cup later in the year. So.

Both of those businesses have done extremely well for us.

Over the last few years and so.

From that vantage point volumes.

Volumes look to remain strong in the second half of this year as we head into 2023.

And this is my follow up question here is how much capacity additional capacity do you have coming on in 2023 and to what extent do you think you'll get a return on that.

And that would be.

And as my follow up question here is how much capacity additional capacity do you have coming on in 2023 and to what extent do you think you'll get a return on that.

And that would be where I'd leave it. Thank you.

Well our operations team is very focused on improving.

On stream effectiveness OA.

To squeeze more pounds out of our plants because right now and the situation has been this way for quite a while we can sell every pound we make so we've been very focused on.

Operational excellence, we've made the investment in the FBR in Indianapolis, which has.

<unk> expanded our clean label texture rising portfolio that came on in record time.

The team did a phenomenal job and.

Our expansion in China.

<unk> has really been remarkable from a standpoint of that facility has actually shipped its first product to customers and so that plant is coming on stream with significant capacity for that local market and potentially some export opportunities as well within that region, which relieves.

Export requirements from other regions into Asia, freeing up some capacity. So we've taken a number of steps and we also announced and I'll just draw you back to <unk>.

Announcement, we made at Investor day of $160 million of capital investments specifically in texture risers.

To expand volume growth.

And that's across a variety of downstream.

Refining assets for the more highly valued specialty texture rising ingredients and thats across.

The pre.

<unk> <unk> Coldwater swelling category that's across.

The clean label texture risers that I mentioned.

As well as different basis, as well, so whether it be potato based or rice based.

We have seen strong growth. So we're expanding capacity there, but in the downstream, finishing channels not necessarily in the grind capacity around Jim.

Ken as we outlined in our in our four year outlook for.

For us to look at our texture risers, we really need to plan for volume growth, that's going to be in the mid single digits and so while Jim highlights a number of our areas. We have a pretty comprehensive capital planning to make sure that as we're looking forward to the next year and the year after that.

That as we anticipate customer demand.

Texture risers that we're really planning ahead to accommodate that growth.

Great I appreciate it thank you guys.

Thank you Ken.

The Q1 moment for our next question.

Yeah.

Our next question comes from the line of Seth Goldstein from Morningstar.

Morningstar Your question please.

Hi, Good morning, guys. Thanks for taking my questions.

I don't also thanks.

How the new contract structures work in a scenario where commodity prices were to fall and particularly in specialty would you be able to maintain higher prices or would there be some sort of a pass through.

To reflect the commodity price declines.

Well for a more specialty products those are sold on a value added basis and from a standpoint of the performance they are delivering in that application and.

Prices typically for those ingredients don't necessarily fall, where come down associated with say corn cost inputs to the same degree or if at all in comparison to.

More of the core ingredients of the core bulk sweeteners for example that doesn't typically happen.

And so those margins remember our minimum in GP two X.

The core ingredient margins.

So thats typically how pricing works with those those products and it's different also depending on the region.

North America is a little different than Asia Pacific, which is a little different than South America and EMEA for example.

Okay, that's really helpful and.

What percentage of the.

EMEA sales come from the two facilities in Germany, just trying to size up.

Potential risks that you're trying to mitigate should there be natural gas shortages.

So the two facilities, we have one <unk>.

<unk> facility, a consequence, which is in Hamburg, Germany, we have a smaller facility related to the <unk> operations, which we most recently acquired last year.

Out of EMEA as entire sales.

Half of it approximately or a little more than half is from Europe itself.

And from that.

<unk> facility, maybe 25, 30% of the sales comes from that German facility.

Okay.

Okay, Great I'll pass it on thank you very much.

You said.

Yes.

Thank you and our next question comes from the lineup in Sir.

Barclays. Your question please.

Good morning, and thank you very much for taking the questions just wanted to follow up a little bit on the outlook into the second half obviously.

Have we've seen very strong pricing momentum.

Essentially volumes being call it plus or minus flat.

Have you seen amongst your customers and analysts to see any pushback I mean, you've talked about the.

The order book into Q3, but how do you feel about the pricing needs and the ability to put through pricing just given the general inflationary environment.

Yes, I think for this calendar year, we remain confident in the ability to pass through pricing through the remainder of this year based on the visibility we have for the demand outlook.

Beyond.

This year, we really can't.

At this point.

Comment because we don't have obviously visibility that far forward.

But we feel pretty confident because we have been.

Related to incremental inflationary cost increases we've incurred and as we've demonstrated we've been able to more than offset those.

At the time, when we had visibility to our cost structures as we headed into 2022.

So that's.

That's that's what I would say, but we are monitoring like everyone else, we're monitoring very closely.

Consumers behavior.

And spending and.

Watching very closely at this moment in time, we don't see softness for the ingredients we supply.

Given we believe the diverse diversified usage of those ingredients across multiple channels. So as I was mentioning.

The Covid rebound everybody is obviously.

<unk>.

Enjoying summer holidays in foodservice and food away from home, we benefit from foodservice equally as consumers trade down.

Pivot label increases, we equally benefit there and Thats just the nature of the diversified.

The nature of the products, we sell and the reach of those products.

Okay, and then just following up.

You made some comments about the Asia Pacific, obviously be an impact that.

Because of some of the Lockdowns.

Can you share maybe a few anecdotes of how things have started to recover because it obviously, if we take a look at the guidance.

If you hear to get from what the first half minus 12 30 presented was flat.

Yeah. So.

For Asia Pacific operating income, we're expecting operating income to be relatively flat for the full year.

And.

And that's and we've got a significant year on year improvement related to pure circle in there from a standpoint of the bottom line remember we also are incurring startup costs for the new China.

Modified starch plant so for US quarter, two was I would say the low watermark for the Asia Pacific business related to the severity of the impact of the Covid lockdowns in the second quarter as well as.

The incurring of the higher corn energy costs in Korea.

But right now we are also enduring.

Foreign exchange weakness in a number of those currencies, but the team is putting through in year pricing pricing, which is going through significantly right now in the second half.

And we see demand strong our tapioca franchise is doing exceptionally well.

The <unk> business is doing extremely well and believe it or not China is picking up nicely and again, we're shipping products from the new plant.

Currently two customers that plant is ramping up and so we have phased our outlook with a brighter outlook for the second half in comparison to what we've endured in the first half and specifically quarter. Two was the low watermark, we think for the year and it's just getting going to just get it better and improve in the second half.

And Ben I would only note and add to what Jim said is that while the Ukraine conflict created a.

Corn availability shock for Korea.

It took a quarter for the team to secure their corn for the second half and then plan on pricing increases and so now.

We will see the pricing increases impact the second half an offset.

The higher cost of that corn in Korea, and so thats really.

That's really the anticipated.

Improvement in the second half and in Asia Pac along with the other things that Jim mentioned.

Alright, perfect. Thank you very much.

Got it.

Thank you and as a reminder, if you have a question at this time. Please press star one one on your telephone one moment for our next question.

And our next question comes from the line of Ben <unk> from Stephens. Your question. Please.

Hey, Thanks, good morning, guys.

Hi, Ben.

I wanted to ask about.

Capital allocation specific to what is a really strong balance sheet positioning.

Continued progress on the integration of pure circle.

And your updated guidance today it looks like.

So youll continue to have your dividend payments, but theres not going to be.

Considerable repurchase activity on the buyback.

What is your appetite for incremental M&A, just given the progress that you've made on your circle integration.

And the cash generation of the business.

Jim do you want to talk about just the cash in year and how you see that.

Playing out and then I can maybe take the last question, yes sure.

Hey, Ben and for all.

When we look at a kind of a rising corn market or inflation market.

We're going to we're going to be paying more for that corn, it's going to wind up in our inventory values as we make sales to customers, it's going to be reflected in higher prices on invoices.

And that increases.

Our overall.

The two pieces of our working capital. So we've seen this in the past.

Actually it had a <unk>.

Significant reversal of that benefit in 2020, we.

We have invested in working capital in 'twenty, one we're investing in working capital in 'twenty two as our revenue is well above kind of $8 billion.

And so thats somewhat normal for our business, we do expect it to flatten out as we get into 'twenty, three and 'twenty four.

And therefore, we won't be putting as much investment from from cash into working capital.

And we do expect kind of cash from operations to be returning to that kind of $700 million.

Kind of run rate level.

And from that then we prioritize.

Very strong organic capital growth projects.

We prioritize the dividend and that leaves us dollars leftover for strategic deployment on M&A Joe.

I think thats, well said and we obviously continue to work a an active M&A pipeline.

And we believe that.

This situation will sort itself out as we go through next year.

Okay.

My second question is related to the EMEA segments and more specifically the trends you're seeing in Pakistan.

You cited it as a source of cost pressure in the quarter.

Obviously, we've seen currency come under considerable pressure there if you could just talk about what's going on there in the broader economy.

On the business trends implications.

For you guys that would be helpful.

Yes, no. Thank you for that question, we don't often talk about the Pakistan business, which is a significant business for us in the EMEA region.

<unk> seen as you said is experiencing significant cost inflation like everywhere else, particularly in corn and energy as well as unfavorable foreign exchange.

The summer corn crop prices are continuing to increase indicating that prices may increase up to an additional 10% on top of increases of over 40% versus the prior year in the first half of 2022.

And you mentioned the rupee the rupee has devalued more than 14% against the dollar. This year. So the team is working very hard we have a.

Very solid market position in Korea.

<unk> I'm, sorry, I'm, sorry in Pakistan I should say the team has realized significant price increases in the first half of the year and we will continue to adjust pricing to capture higher costs in the second half I think like everywhere else, where we're going to have to watch is the magnitude of price increases that are required due to these.

Extraordinary circumstances, whether they be agricultural input cost inflation or energy cost inflation and then the impact that has on consumers and.

That is an emerging market to a degree and it's a solid market for us, but we're going to just have to watch that over time.

Given the magnitude of the price increases that are required to offset those those inputs that I just talked about but so far so good in the first half.

It is having an impact, but it's a muted impact.

And the team is working very hard to keep that the same way in the second half.

Okay, great. Good luck with the rest of the year. Thanks, guys. Thank you so much Ben Thanks Pam.

Thank you.

This does conclude the question and answer session of today's program I'd like to hand, the program back to Jim <unk> for any further remarks.

I just would like to thank everyone for joining us. This morning, we look forward to seeing many of you.

At our upcoming Investor events this fall.

And I just want to conclude by saying Thank you to everyone listening for your continued interest in ingredient.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Q2 2022 Ingredion Inc Earnings Call

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