Q3 2022 Ingredion Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good day and thank you for standing by welcome to the third quarter 2022 ingredients incorporated 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.
You will then hear an automated message advising your hand is waste please.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Noah Wise, Vice President of Investor Relations and corporate communications.
Please go ahead.
Good morning, and welcome to ingredients third quarter 2022 earnings call.
Noel White, Vice President of Investor Relations.
Delighted to have joined ingredient at such an exciting time for the company and I'm glad to be part of such a terrific organization. It.
It is great to connect with you all virtually this morning and for those I haven't met yet I look forward to meeting you soon.
On today's call are Jim <unk>, our president and CEO and Jim Gray, our executive Vice President and CFO .
The press release issued today and the presentation, we'll reference for our third quarter results can be found on our website and greedy on dot com in the investors section as.
As a reminder, our comments within the 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.
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.
<unk> can be found in the company's most recently filed annual report on Form 10-K, and subsequent reports on Form 10-Q and 8-K.
During this call. We will also reference 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 two non-GAAP information included in our press release and in today's presentation Appendix now I'm pleased to turn the call over to Jim Sally.
Thank you Noah and good morning, everyone.
We had a another strong quarter and I'm pleased to discuss our continued progress and the momentum we are building in the business.
For the third quarter, we delivered excellent top line performance, achieving 15% net sales growth up 19% on a constant currency basis.
Our team has continued to do an outstanding job managing inflation by offsetting higher corn and other input costs as well as foreign exchange impacts.
Our third quarter results validate that these efforts we expanded our gross margins and grew adjusted operating income by 17% year over year.
Which was up 23% on a constant currency basis.
Looking at our net sales performance in a little more detail.
Across all four regions comparable net sales demonstrated considerable strength in the third quarter.
Notably a few of our businesses achieved record all time sales levels, including Brazil, and China to name two of our most important markets.
Our commercial teams addressed head on persistent global challenges such as input cost inflation.
Lauren exchange weakness.
And continued supply chain pressures.
Our operations and supply chain teams remained intensely focused on getting our ingredients to our customers when and where they need them.
Now turning to our strategic pillars.
Our four strategic pillars continue to guide our execution and drive our business momentum and I am once again proud of what our team accomplished during the quarter.
Starting with specialties. This business grew mid double digits in the first nine months and continued to demonstrate strong topline growth in the quarter.
All five growth platforms performed well with texture rising ingredients and sugar reduction as standouts.
Additionally plant based protein sales were up strongly in the quarter and are now more than 145%.
Greater year to date.
Excitingly, we also commissioned our Shandong China production facility in July and are ramping up both production and sales.
This plant has come online at a perfect time as it enables us to leverage and flex our new network capacity to support our European customers, who are concerned about anticipated industry shortages for some starch products due to the severe summer drought.
Yes.
Moving to commercial excellence, our teams remain nimble in adapting to a fluid business environment.
Our pricing centers of excellence have been instrumental in managing in year inflationary pressures.
To deliver almost $950 million and price mix increases year to date. Additionally.
Additionally, we expanded our online customer portal to provide better tools and deeper engagement with our customers, enabling them for example to readily access real time order and shipping details.
Regarding our third strategic pillar cost competitiveness through operational excellence.
As I mentioned last quarter, we have implemented expanded hedging strategies to reduce the in year volatility of corn costs.
Since February and has started the Ukraine conflict, we have witnessed a global increase in the cost of corn and other agricultural commodities.
We believe our hedging strategies have flattened our exposure to raw material cost fluctuations both in Q3.
And for the remainder of the year.
And our global operations, we have deployed a digital capability to model supply chain flows that minimize costs and maximize returns under different considerations, such as excess demand and capacity or service constraints.
This allows us to optimize our cost to serve while meeting demand and managing supply constraints.
Additionally, we are mitigating regional disruptions of grain supplies due to weather related events and the Ukraine conflict by leveraging our global procurement and supply chain network to address gaps quickly as they arise.
This is a significant achievement on the part of our global AG supply business continuity team and I'd like to recognize their extraordinary efforts during these times.
Lastly, as it relates to our purpose driven and people centric growth culture. Among the highlights during the quarter. Our ultra performance line of plant based protein concentrates was selected best plant based sustainability winter for product innovation at the World plant based Expo.
This is a tremendous testament to our team's ability to innovate and meet consumers' changing needs for nutrition and sustainability in this product category.
Now I'd like to speak to a few examples of how we're creating future growth momentum in specialty <unk> and sugar reduction as well as creating value from our sustainability partnership efforts with customers.
First I want to emphasize the notable achievement of our China team to commission, our new specialty modified facility in Shandong, China on time.
Overcoming numerous challenges such as Covid lockdowns and equipment delays.
In July we commenced production at our new facility, which significantly expands our capacity and capabilities for specialty modified starches.
We are now the largest producer of modified starches in China, which positions us well to meet the growing customer demand for these highly functional texture rising solutions.
And as a reminder, as we noted at our Investor day.
Modified starch consumption per capita in China is significantly less than the U S, where Europe , thus with a consumer market.
$1 5 billion people. This is an exciting long term growth opportunity for our company.
Turning now to sugar reduction, we delivered strong double digit growth in the quarter led by pure circle.
Customer wins effective pricing strategies and innovative solutions produced 19% net sales growth and positive operating income.
And we are continuing to see strong growth for our sugar reduction franchise worldwide.
Supporting future momentum.
We recently received EU approval for our buyer for our bio converted stevia Reb M. Further positioning us to grow in Europe , which currently accounts for approximately 25% of pure circles net sales.
This approval adds to our excitement about our growth prospects for high intensity natural sweeteners in Europe .
Consistent with our strategic intent and our agreement when we acquired pure circle. We are pleased to share that we have further increased our ownership of pure circle, 285% from our original 75% ownership stake.
And we anticipate additional increases to our ownership over the next three years.
Turning now to our sustainability progress.
In the third quarter, we achieved 42% sustainably sourced agricultural inputs up from 33% at the beginning of the year. Our goal as you may recall is to achieve 100% sustainable sourcing.
Four or five priority crops by 2025.
In addition.
As part of our sustainability efforts ingredient is pleased to be the first major food ingredients company to engage with how good the world's largest data platform for sustainable food beverage and personal care offerings.
Our relationship will deliver increased transparency through scorecards for our ingredients.
Ultimately this will help our customers by giving them the critical data they need to select ingredients that meet sustainability targets for the products they are developing.
We anticipate that transparency around our ingredients will better enable our customers to innovate for the growing demand for more sustainable products.
Let me now comment on the macro environment and highlight some of the risks and opportunities we see on the horizon.
As you heard today, our teams have done a great job of offsetting inflationary and foreign exchange headwinds, while overcoming supply chain challenges to deliver growth.
We expect these pressures to continue but we believe we are well positioned to manage them.
First while COVID-19 related lockdowns and restrictions in China, where less of an issue in quarter three.
Intermittent supply chain challenges remain.
Rail labor issues, along with sporadic reductions to our preferred shipping mode have at times required us to spend elevated amounts to deliver products to customers on time or.
Our supply chain and commercial teams continue to navigate this dynamic environment.
Second regarding inflation, we remain committed to offsetting additional cost through a combination of pricing and productivity improvements from operations.
We have demonstrated a track record of effectively managing price risk.
And this remains a priority.
Third foreign exchange continues to be an increasingly important factor for global companies as the dollar strengthens.
Our business model has historically allowed us to offset currency impacts quite well over a three to six month period, and we're confident in our ability to continue to do so.
Lastly, we are watching very closely consumers' buying behavior and price elasticity.
It is important to remember that we serve customers across both branded and private label as.
As well as across retail and foodservice.
That diversity mitigate volume risk by enabling us to benefit when one sector strengthens while on other contracts.
With that let me hand, it over to Jim for the financial overview Jim.
Thank you, Jim and good morning to everyone.
Starting first with our Q3 regional performance nor.
North American net sales were up 17% when compared to the same period in 2021.
The increase was driven by strong price mix.
Which was achieved in two parts.
<unk> during contracting last fall, which anticipated inflation and.
And second due to dynamic and your price adjustments for freight costs and spot pricing for volumes beyond contract commitments.
North America operating income was $126 million up $6 million versus the prior year.
The increase in operating income was driven by strong price mix more than offset changes in input costs.
In South America reported net sales were up 13% versus prior year.
Which includes the impact of the Argentina JV presentation change.
On a comparable basis net sales in the quarter would've been up 21%, excluding the contribution of.
Argentina to the JV in the prior year.
South America operating income was $48 million up $13 million with favorability being driven by stronger performance in India, and Brazil, as well as positive contribution from the Argentina JV.
Excluding foreign exchange impacts adjusted operating income was up 43% in the quarter.
Moving to Asia Pacific net sales were up 13% in the quarter absent foreign exchange sales were up 23%.
Asia Pacific operating income was $27 million up $6 million versus prior year with favorable price mix more than offset higher input costs and foreign exchange impacts.
Excluding foreign exchange impacts adjusted operating income was up 43% in the quarter.
In EMEA net sales increased 9% for the quarter and absent foreign exchange impacts net sales were up 27%.
EMEA operating income was $30 million for the quarter up $7 million compared to prior year due to a resilient performance in Europe , which was partially offset by higher corn costs and supply chain challenges in Pakistan as well as foreign exchange headwinds.
Excluding foreign exchange impacts adjusted operating income was up 52% in the quarter.
Moving to our net income statement net sales of $2 $23 million were up 15% for the quarter versus prior year.
Gross profit dollars and margins were higher year over year up 20 basis points from Q3 last year.
Reported operating income was $182 million and adjusted operating income was $191 million.
Reported operating income was lower than adjusted operating income primarily for costs pertaining to the work stoppage at our Cedar Rapids facility.
Importantly, the plant is now operating well under our business continuity plan and is steadily increasing production to meet customers' needs.
Our third quarter reported and adjusted earnings per share were $1 59, and $1 73, respectively for the period.
I'd like to spend a moment highlighting gross profit performance is there I think there are some aspects of this part of our story that can be easily missed.
As I have mentioned previously our business model when measured by gross margin percentage is impacted by rising and falling corn prices.
And rising corn price cycles, historically, our pricing has lagged the change in the cost of corn and consequently, our gross margin percentage has been impacted.
What was evident in this quarter.
We have been working pricing and our hedging strategies to flatten the impacts of changing corn values on the quarterly layout of our costs.
Here you can see.
That we've expanded gross profit margins, even though the corn costs increased year over year by 16% as measured by the change in the U S benchmark.
Turning to our Q3 net sales bridge, we achieved strong price mix of $335 million, including the pass through of higher corn and input costs.
The sales volume increase of $14 million was driven by volume increases in each of the regions.
And offset by $18 million decrease due to the presentation change related to the Argentina joint venture.
On slide 18, we highlight net sales drivers.
Of note foreign exchange was a 4% headwind in the quarter with significant headwinds in EMEA and Asia Pacific.
Reported South America results include the impact of the presentation change of the Argentina JV within the volume call.
South America net sales grew 21% on a comparable basis, excluding the impact of the Argentina JV noted below.
Turning to our earnings bridge on the left side you can see the reconciliation from reported to adjusted earnings per share.
On the right side operationally we saw.
Moving to our non operational items.
We had a decrease of 27 per share in the quarter.
This decrease compared to the prior year was primarily driven by a higher adjusted effective tax rate, having a 20 <unk> impact and higher financing costs of <unk>.
Now, let's move to a brief review of year to date results.
Net sales of almost $6 billion were up 16% versus prior year.
Year to date reported operating income was $605 million and adjusted operating income was $619 million.
Reported operating income was lower than adjusted operating income primarily due to restructuring and other costs.
Our year to date reported earnings per share was $5 63.
And adjusted earnings per share was $5 80.
Turning to our year to date net sales bridge, 16% net sales growth has been led by $946 million of price mix improvement primarily from North America.
The sales volume increase of $156 million was driven by volume increases in each of the regions, primarily in north and South America.
<unk> offset by a sales volume decrease of $146 million from.
The presentation change related to the Argentina JV.
These sales increases were offset by significant foreign exchange headwinds of $136 million for the first nine months of the year.
Turning to our 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 51 per share year to date.
The increase was driven by margin improvement of 89.
Offset by foreign exchange of 20, <unk> and lower volumes of 2014.
Moving to our non operational items, we saw a decrease of 29 per share year to date.
Driven primarily by a higher tax rate of 25.
Per share and higher financing costs of <unk>.
Moving to cash flow year to date cash from operations was $80 million or.
Our cash from operations has benefited from increasing net income.
It has been offset by rising working capital investment.
Our working capital balances are higher due to increased invoice prices reflected in our accounts receivable and rising corn costs reflected in our inventory values.
As a reminder, our accounts payable balance does not rise as much as our inventory value due to the very short payment terms when procuring corn.
Net capital expenditures were $196 million up $10 million from the prior period due to the timing of spend.
And in line with our 2022 expectations for capital commitments.
With respect to acquisitions and investments in the quarter, we acquired additional shares appear circle from minority shareholders for $13 million, which as Jim mentioned takes our ownership percentage to 85%.
And the first nine months of the year, we paid $133 million of dividends to ingredient shareholders at <unk>.
Purchased $112 million of outstanding common shares.
During the quarter, we also authorized a new stock repurchase program for up to 6 million shares through December 2025, replacing our previous program.
Now I'd like to address our updated outlook.
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 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 <unk> 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.
<unk>, primarily higher incremental borrowing costs.
Our adjusted effective annual tax rate is anticipated to now be between 28, 5% and 29, 5%.
Cash flow from operations is now expected to be in the range of 225 million to $275 million.
Reflecting greater working capital investments as a result of higher invoice prices reflected in our accounts receivable.
And higher corn costs reflected in our inventory values.
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 now expect our full year 2022, adjusted EPS to be in the range of $7 to $7 45.
Up from the previous 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 total diluted weighted average shares outstanding to be in the range of $67 million to $68 million for the year.
For our regional outlook 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.
Excuse me.
Operating income is expected to be up low to mid double digits, driven by favorable price and product mix more than offsetting higher input and corn costs.
For South America, we now.
We expect net sales to be up 10% to 15%, 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 high double digits, driven by favorable price mix.
In Asia Pacific.
<unk>, we anticipate net sales to be up 10% to 15% versus the prior year.
We now expect operating income to be up mid single digits compared to the prior year driven by pure circle growth.
For EMEA, we expect net sales to be up 10% to 15%, which includes K Tec and we now expect operating income to be flat.
To up low single digits, driven by favorable price mix, partially offset by higher corn and energy costs and negative foreign exchange impacts.
That concludes my comments, let me hand, it back to Jim.
Thanks, Jim.
Before we open the call for Q&A I would like to conclude today's remarks by reflecting on how we perceive both the near term navigation of the macro environment, while we pursue the long term opportunities inherent in our driving growth roadmap.
As I mentioned earlier, our growth roadmap is centered around the customer.
And the breadth and diversity of our customer base is a tremendous asset in times like these.
We sell across the many end use markets of retail private label and foodservice.
And to thousands of local customers as well as large multinational CPG companies.
With our broad core and specialty food ingredients portfolio our products benefit.
Regardless of consumer product price points for example, with our consumer is economizing demand for core sweeteners is strong and our customers also find uses for specialty starches when formulating for affordability.
Of particular relevance as it applies to the largest component of our specialty sales the global market for <unk> is growing 3% to 5% and generally experiences consistent demand through different economic cycles.
This is due to their versatility their functionality.
And there are affordability.
Therefore to ensure we have capacity, where we anticipate it will be most need. It ahead of growing demand we are investing a $160 million over three years to support our texture is our growth.
I am pleased to say that we have already invested about a third of that amount supporting the growth of our clean label franchise and we are localizing more production in all four regions. These.
These investments offer attractive returns with low execution risk.
In closing our third quarter was very strong and exceeded our expectations.
Sales growth operating efficiencies and our agility to more than offset inflationary headwinds underpinned our performance.
As we close out 2022, and we look forward into next year. We are confident that the company is well positioned to deliver long term growth and value for shareholders.
And now let's open the call for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Ken Zaslow with BMO. Your line is now open.
Hey, good morning, everyone.
Hi, Ken Hi, Ken.
A couple of questions. The first one is can you talk about your opportunities for pricing into 2023.
If you go through 2022, it looks like you are.
The 15% to 20% pricing across your businesses do you expect to be able to take another pricing across the businesses will there be ones that have greater pricing ability. How do you think about that into 2023 broadly.
Alright, let me take a shot at that first and then Jim can add some color commentary so.
With respect to inflation in the U S. So my comments are specific to the U S. We're seeing both corn as well as some other input costs being up so as it relates to corn inflation as an example.
If you look today at the comparable U S future strip, it's up about $1 to $1 20, a bushel, which is approximately 20% from our prior year contracting reference point.
And so if you look at that and then you look at other input cost inflation for example, energy and packaging, we're seeing mid single digit inflation in chemicals and packaging energy costs will be up considerably, but we're largely hedged for 2023 and that will all be taken into consideration into our.
<unk> 2023.
Pricing so as it relates to contracting and it's early to talk about that we will be seeking price increases, which will pass through the expected cost of inflation and I think there's general acknowledgment to all of those elements that I. Just described but those are just real input costs that are going up year on.
Year. The other thing Thats again, very noteworthy is in our industry.
Grind utilization still is at very high levels of 89% for example, and typically.
When that's the case along with the environment that I just described.
That.
Acknowledgment and that enablement.
<unk> pricing does continue.
So that's how I would describe I guess, how we're thinking right now about 2023 pricing curve.
Great and then just on Pakistan.
Are you able to deliver.
It's a very strong number in EMEA I'm, assuming that the Pakistani.
Did you quantify the impact of Pakistan and I'm, assuming it's not going to repeat next year.
Is that a fair way and I'll leave it there.
I'm going to let Jim Gray take that one sure.
Previously.
When we are finished in Q2, and we were kind of noting that there had been some significant flooding in Pakistan.
We're somewhat cautious we didn't know how broadly.
Flooding kind of throughout.
Kind of one of the major rivers in Pakistan would impact both customers and largely I think that we've seen that has rolled through September and we were really modestly impacted.
Obviously, they are a temporary road closures in some of our customers were closed.
Really work through that so.
So not really not too much impact.
Ken to your point, maybe lost $7 million of impact to EMEA during the quarter I think maybe more going forward as some of the flooding had an impact on the cotton crop.
And.
A portion of our starches are sold into textile industry in Pakistan, which then exports gray cloth and materials to Europe into the U S.
We're going to see that slow down just because of the the domestic availability of cotton.
So we will watch that a little bit, but not as concerned about that I think more broadly when we look at Pakistan. We're just concerned about the corn cost or the corn cost has risen significantly.
And what we're finding is that our team is quite agile on the ground.
As an example, you know overall inflation is probably in the 23% range.
In September of this year, and we're probably looking at food inflation that maybe even north of 50%.
So we are at a sensitive in terms of watching the cost of corn.
Washington, our energy costs in Pakistan, and making sure that we.
And recognize that in our pricing that we need in the country.
Great I really appreciate it thank you guys.
Okay.
Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.
Yes, thanks, good morning, everyone.
Good morning, Adam Adam.
So I guess.
First question is I think about.
The.
The volume outlook.
Across the business into the fourth quarter and into the first part of 2023, Jimmy Chen just made the illusion to kind of corn grand utilization being being high in the I think you said, 89% if I heard if I heard correct, but can you just talk about what you're seeing kind of by different product types categories regions on the on the volume side.
Overall volumes in the quarter were flat I know, there's some moving pieces you have the the strike in Cedar Rapids wishes I can't imagine, helping kind of utilization.
Utilization and throughput.
So just maybe some color on what youre, what youre seeing in different categories.
And any sense on customers that maybe.
Looking at their inventories in a different way than they were six months ago.
Sure sure. Thank you for the question Adam So I would say first just starting from where we.
Just finished.
Through quarter, three volumes have been steady and robust we're certainly carefully watching the impact of continued inflation on customer demand and the potential.
Its still out there for a resurfacing for example of our rail strike in the U S. In November .
I would say there are some signs that foodservice demand is bifurcated right now with quick service demand increasing at the expense of full service and fast casual we're certainly seeing at the retail level that <unk>.
Private label is growing both in Europe as well as in the U S. At the expense of some of the branded type products, which is typical in a.
Somewhat recessionary environment.
Interestingly corn sweetener demand has been particularly strong and are.
<unk> demand has continued to be very strong.
And we believe that.
Those products lend themselves to affordable.
<unk>.
What I would also say is in relationship to your comments around Cedar Rapids.
Manned for paper, making starches are also robust.
And that continues.
And as it relates specifically to the Cedar Rapids facility.
After an adjustment months I would say in August after the work stoppage began August 1st.
The plant is now operating actually very well under business under our robust business continuity plan and we're steadily increasing production to meet customer needs.
We're currently in active discussions with the Union, we continue to bargain in good faith, and we're hopeful that we'll reach a mutually beneficial agreement there that will allow us to continue to service.
The paper, making market and also a corrugated box market.
Going forward, where again demand.
Certainly paper, making on uncoated freesheet remains strong.
And corrugated is a little bit soft just related to the overall economy, but nonetheless.
We're we're in good shape there.
I would say that it is just important to remember coming back to food that we have a broad customer base again and we service.
Both branded and private label food service.
Large cpg's many many local companies given our breath and 120 countries around the world.
And.
Typically our products go in at such small levels.
They are.
Theyre very multi functional and versatile and.
I think they weather typically not any kind of.
Feast or famine type.
Demand.
Moves.
Just based on history of going through different recessions.
So hopefully that gives you some color for how im thinking about volume.
No. That's awesome. So really helpful color and then just a follow up on cash flow.
The outlook for cash from ops kind of was trimmed down on working capital intensity.
Greg maybe just help us think about the implications of that into into 2023 and is there reason to believe that there is.
So were some working capital release that would be likely next year absent.
Another step up in corn prices and inflation or how does that actually flow through.
The balance sheet and cash flow statement over the next 12 months.
Yes sure Adam.
I think what we're seeing is is that when we look at the cash from ops read Thats in our are supporting tables.
Taking the endpoint at 2021.
And I think at that time, both corn was lower.
As well as as we move through we've seen corn costs rise globally.
Since the beginning of the Ukraine conflict.
What we're now seeing I think in our.
As a kind of a steady run rate. So if I look at the I'm looking at the end of Q1 to Q2. The end of Q2 to end of Q3 and accounts receivable is relatively in line with our quarterly sales and so I'm encouraged there I think we are still.
Seeing some of the corn cost pass through our inventory.
And then also just recognize that this is a seasonal type of the year. So most of the harvests are done.
In the northern Hemisphere, and so this is when we have some markets, where we have to buy our corn.
And so for example, like Pakistan, we bought a lot of spring corn.
Much of that is on our balance sheet and so I think as we just roll forward.
We will finish out Q4, and then we'll look at the beginning of 2023.
Likely there'll be price increases that will still be rolling through some of our invoicing, but I generally see the net demand for working capital to be much much less than what we've experienced in the first nine months.
And then and Thats kind of assuming that the overall global corn market stays elevated kind of reflecting in the U S strip price.
Mid six's per bushel right.
And then just for everybody on the call.
Post the 23 crop size in the U S. As we get into a feeling for the Carryout in next year or even 24, if we see corn coming down and that usually is a.
Are beneficial to our working capital.
That's all helpful color I'll pass it on thanks.
Thanks, Adam Thank you.
Yes.
Your next question comes from the line of.
Rob Moskow with credit Suisse. Your line is now open.
Hi.
Hey, guys I have a few questions.
One is.
On the plant based business can you give us an update on how you're doing versus your internal targets. I know you said, 145% sales growth, but that was off a very small base last year. So I'm interested to know is.
I think you said it would be a drag on operating profit. This year and then may be better next year, So maybe an update there.
My second question is about.
Your FX outlook for the year, maybe I missed it but do you have higher headwinds from FX to your EPS than you thought.
But how.
How does that impact your your EPS guidance, if at all and then maybe I'll wait for a follow up.
All right I'll take the Pvp question or paste proteins, which is the acronym we use here and Jim will take the Forex question.
So as it relates to plant based proteins, specifically as it relates to your direct question.
For 2022, our revenues are trending within the range, we provided at the beginning of the year, albeit on the lower end, but they are trending within the range that we had provided.
With regards to the anticipated operating improved operating income improvement, we continue to improve our production each month in fact.
Two facilities in October we had record production months from a standpoint of quality of inventory and saleable product and we have we will have a much more complete.
Look at the go forward in relationship to the operating income improvement at the end of the year and probably be providing an update on that in quarter. One as it relates just to the entire plant based protein category I would say that.
I would remind.
Everybody that.
<unk>.
Approach that we've taken is to build a broad portfolio across protein flours concentrates and isolates across four types of pulse based protein. So we're not dependent for example, just on.
Pea protein isolate that goes into alternative meats.
It's a systems approach, it's a formulation approach.
And while there has been weakness in demand for certain portions of the market. We're not dependent on sales into one product category exclusively for example, alternative meats and we were not from the beginning.
A large supplier to any one of the large alternative meat producers.
So we still have a very robust project pipeline with many customers.
And we're monitoring the category just like everybody else is and clearly price points and perhaps other questions around clean label formulating et cetera for alternative meat have dampened the demand there, but we still believe that this is a trend not a fad that's supported by.
Significant sustainability drivers.
And that.
At the end of the day, it's going to be about formulating great tasting.
Great texture.
And highly nutritious products and we think our formulation approach across flours concentrates isolates along with.
Our fifth growth platform, which is food systems that whole approach.
Is what ultimately will serve us well in this category.
So we're in.
In it for the long haul and we're still optimistic and it does make us a more complete supplier. When you think about us being a leader in texture rising a leader in sugar reduction and a leader in plant based proteins. They all support one another from a standpoint of innovative new product development opportunities for customers.
And some of our wins right now that we're seeing are in alternative snacks for example, or protein fortify snacks and bakery.
And alternative dairy as opposed to say dependent upon alternative meats. So again more fulsome update in quarter, one on the exact financials.
Rob that's how I would answer that.
And I'll turn it over to one of the Forex question.
Yes.
Rob you had a follow up on plant based proteins.
Go ahead please.
Okay. So on FX.
I think as we have seen the dollar really strengthened.
Obviously, we're absorbing that foreign exchange impact and we're pretty clear on our tables I would say that our.
Our full year.
Updated outlook.
Does kind of include where the dollar is at today relative to kind of other foreign currencies that are key in our markets.
It's part of our business model and we've consistently been able to try and offset foreign exchange headwinds because.
It impacts the cost of corn, which is traded globally in dollars and so that's going to show up.
Our local pricing models as.
As we're looking at changes in the value of corn, I think it's somewhat well understood by our customer base.
And maybe just to highlight Helen pretty noteworthy that both South America, and EMEA, which had a fair amount of foreign exchange weakness.
Had expanding gross margins.
So.
What we're trying to do Rob is has really become tight and resilient on seeing that.
FX change seen that impact on our raw materials, which is either energy or corn, and then being able to be pretty agile influx and passing that through we're still going to have lags.
But just I think we have built some low muscles on our execution around that.
Okay My follow up.
You said that you are now at the lower end of your range for your plant protein revenue.
Is that is that because the alternative meat category has softened.
Not specifically because again, our projections were across the entire platform of.
Of applications that I described and customer base. So we were never entering the space to be.
Sure.
Yes.
Supply of Magic bullet for one product for one category that again has not been our approach or strategy I. Just think that if you remember we had at the beginning of the year little bit of challenges just ramping up into entirely new product category for us.
But we've demonstrated each and every month improvements in our production and our ability to make food grade products at the highest quality and so I think it's a timing issue related to that but look the category is evolving and going through changes and we'll continue to monitor it so for the long term.
We're still optimistic about the plant based protein category.
Got it thank you.
Thank you Rob Thanks, Rob.
Your next question comes from the line of Benjamin Theurer with Barclays. Your line is now open.
Thank you very much good morning, Jim and Jim.
Congrats.
So just two questions. So one and this was just a couple of weeks ago. When you talked about some of the potential risks in EMEA and more specific within within Europe .
Given the developments that we've seen in some of the country's speed, Germany, and France, and so on in efforts to try to bring electrics.
Electricity prices down.
Supplied to support of industries consumers et cetera.
Are you feeling more comfortable within your outlook as to not running into shortages and actually getting some government support and how do you think this is going to play out particularly into <unk>, maybe in a little bit into <unk>. If you could give us a little bit of a sneak preview. So just what are your expectations on.
On Europe , NRG side, and the risks associated with that that will be my first question.
Okay, let me take that and.
What I would say is that we're obviously very pleased with our performance in quarter three for EMEA in total as it relates specifically to Europe , we are cautiously optimistic in relationship to the energy <unk>.
Situation.
As you highlight it compare to the peak of energy costs in Europe . They have declined sharply since the summer peak.
And.
It is though noteworthy that they still are two to three times higher than they were at the beginning of 2021 prior to the Ukraine conflict and they still sit six times the level of the U S from a standpoint of gas prices.
What we are seeing and I think that everybody is encouraged by the fact that the EU and solidarity has built gas storage to levels approaching 90% to 100% and that is including Germany.
At this point, we do not foresee any government curtailment of natural gas in Germany for the winter.
And we're.
Anticipating that.
We will be able to manage through.
The situation as it continues to develop Europe also has been impacted as you know by a tough summer drought and that has impacted the corn crop as well as the wheat crop for example.
And.
We though one of the comments that we made.
The presentation is that we've looked at our contingency plans and business continuity plans to support our customers leveraging and flexing our global network.
And we genuinely believe that given some of the decisions we took to.
Say go long on our corn positions and our specialty.
Corn crop positions not just in Europe , but also in the U S.
As well as now the new network capacity from China.
All of that allows us to flex and leverage that global network.
On behalf of our European customers that are concerned about potential shortages.
<unk>.
Of.
Say grain that can be turned into starch for their needs.
Going forward, we believe we're actually going to be able to support them.
Leveraging our network.
All that being said, what we are I think.
Concerned about is.
How much and how much of the inflationary increases that we're all reading about that are impacting.
The EU at 10% just this past month today I believe it was announced that the U K just is at 11% inflation in the month.
What that's going to do to the consumer ultimately.
<unk>.
And how that affects consumer buying behavior, and thats kind of hard to predict at this point in time, except to say that.
We're in the food industry and at the end of the day again, we've weathered recessions.
Based again on the diversity of how diversified our products are that go into all the different elements of.
Food consumption.
Okay.
And that actually nicely brings me to my second question was kind of interesting to see if we take a look into the volume.
So if we think about APAC Dawson South America volume growth was definitely on the positive side.
Within EMEA and in the U S. We've seen in a negative side and.
I've heard a lot from some will be every company is out of Latam et cetera, just talking about how there Dave.
Dave lift with inflation for much longer rates I mean, your operation in Argentina. They know what inflation is about.
<unk> really is have you seen significant differences in how your customers accept price increases and actually Kim <unk> and even consumers just look through it by being a little less sensitive to price increases lower willingness to cities, maybe in some of the emerging markets and that.
In the end has been a benefit to you just given your global footprint between emerging markets developed markets and how do you think how resilient that consumer down in South America and APAC actually is given all the price increases you've been pushed through.
I'll, let Jim take a shot at it and I'll add any color commentary Jim.
Ben as you know it and I think we've noted when we think about <unk>.
<unk> economies, particularly some of the South American countries.
I'd also add Pakistan to that where we have.
It looks like <unk> emerging <unk> kind of more developing economies.
And you've seen inflation and inflation is as an ongoing presence in daily life, you get price price changes clearly both our customers.
Are more open to an agile and looking at while the cost of the ingredient from ingredient has changed how do I work that into my my costing and therefore, how do I think about my pricing going forward.
So to the extent that unless you have.
Real true economic disparity in one of those more developing economies generally youre going to see consumer acceptance.
And kind of absorption of that higher pricing and we were definitely have kind of more resilience.
And the populous as well as some of our customer base.
You move to more of a slower growth economy that may be more developed like can you get the U S. Maybe northern Asia.
And you get these changes in the cost of the underlying raw material and it's a big part of our Cogs. We then have to work through those pricing centers of excellence with those customers to introduce and explain why is our cost changing wide as our price to them for our ingredients needed to change.
And that's what we work on.
Our commercial teams as well as our pricing centers of excellence and.
And advertising that.
And to the extent that I think that our customer base.
What I would call lower growth historically lower inflation economies is now becoming much more for us.
Giles and accepting that while yes, we're seeing the change in the energy we're seeing the change in the raw materials.
And I think thats kind of a.
Contributed to our success in putting pricing through this year.
Okay perfect. Thank you very much Jim.
Your last question comes from the line of.
Ben Bienvenu with Stephens. Your line is now open.
Hey, Thanks, good morning, guys.
Hey, good morning.
I wanted to ask about the guidance.
And in particular, recognizing that you guys did narrow the range a little bit for the year, it's still the implied range for the fourth quarter is still quite wide and so I wanted to.
Unpack a little bit of kind of the elements of variability that you see ahead and what ultimately.
Prompted you all.
Obviously narrowed the range, but still leave it as wide as it is.
Sure Ben.
I'll take that and I deserve to be beat up for that one.
I think when we look at.
Our business, which largely is manifest in the northern hemisphere, and we've come through the year. We can look at the layout of the corn, we can look at the spring crops and kind of what to anticipate what the harvest is going to be so we get better I think consistency and view into the business for Q2 and Q3 in terms of the poll.
Traditionally or at least historically, what we've seen in our customer base.
As we finished the year.
Particularly with multinationals CPG firms has been what's their focus on their inventory levels as they are closing out there their fiscal year, if that happens to coincide with the calendar year.
And so, particularly in some of our specialty ingredients.
What's their stocking behavior I think one of you asked previously I.
Do you see that I think inventory levels are going to be carried a little bit higher into the end of the year just because there has been.
Some various supply chain disruptions either in moving ingredients either around a country or continent.
Yes <unk>.
Across across oceans, and so we're a little bit of it well. So we see somewhat elevated inventory levels I think some of our procurement officers that our customers are saying, yes.
That makes sense, it's prudent.
Mark.
It's a little bit against what we've probably seen in maybe the last five or six years, where we've usually seen a little bit.
Kind of more of a drawdown on inventory to try and post a lower number so we are anticipating.
That inventories will carry through but that could be a downside I think most of them.
Probably more importantly, Ben is that there still is and in particularly in the U S. Some supply chain issues were going to get through the midterm elections.
There is still rail union labor issues to be resolved.
And that is November 19th as the deadline for.
A number of the rail.
In the U S to say either they agree or they don't agree.
And that causes all sorts of potential truck and intermodal disruption.
And then you still have a port issue on the West coast.
And so those things I think are just they're not and are not in our center cut guidance. We think we're going to be able to get through those but if you look at the range I think it's also helpful for.
For you all to understand that some of us are looking at that and saying that that could have an impact.
Yes, so low probability, but it could have an impact.
That's exactly what I would say I would say that we just are.
Taking a.
Our cautious view towards the.
There's still uncertainty in relationship to.
That rail situation again November 19th some big date, we'll see if there is either a slowdown or potentially a strike hopefully the government again can intervene and avoid something like that.
Forex timing, Jim right, we say three to six months.
The dollar continues to remain very strong so that's kind of factored in I think just a timing issue related to that and as Jim said.
It's just I think commonsensical to assume.
That companies.
We'll be making some year end adjustments to their inventory positions probably for working capital reasons as well and so we've kind of reflected on all of that and factor that into the go forward guidance here for the full year okay.
Okay, Great makes perfect sense.
My second question is just related to margins.
Taking into account.
Roughly the midpoint of.
The guidance implied in the fourth quarter.
There is still material sequential compression in operating margin, but year over year, you seem to be making progress on margin expansion and I would think that will continue to be a trend as we move into next year margin expansion year over year. So can you talk about the things that when you look out on the horizon.
And.
The.
Visibility that you have.
Can you talk about the path back to.
2021, or 2020 margins and how you get there.
So Jim and I can tag team on that Jim do you want to go.
I think Ben you touch on a great question and I have had a conversation with a number of you on how we think about the corn layout and how it impacts each quarter previously we've talked about our hedging strategy, which may have left us a little bit more exposed in Q3 are particularly Q4, which I think is what we felt.
And the end of 2021, when kind of corn started to rise up here you get into 2022, we're expanding our hedging strategies.
And we have not exactly all the kind of the evenness of the coverage over all of the quarters and so as the Ukraine conflict impacted as Jim mentioned corn is probably up between a box to a buck 20, a bushel year over year. There is still a little bit of that compression that is in Q4, but.
Largely largely we've mitigated a lot of that impact as we even further kind of mature.
And dial in what we were what we're hedging relative to our contracting, particularly for U S. Canada business and the 2023 I really think the layout of that that kind of net corn impact is even going to be smoother right. So it's been what we're trying to do with respect to some of the AG movement is.
It really get to a consistent base level of either gross profit our Oi that you all can see and then for us moving forward and getting to higher levels of gross margin, it's really focused on where's the value and either specialty ingredients and can be focused on the value of upgrading.
Some of our core ingredients into enter new uses.
As well as really focus on operating and operating inefficiencies, but.
Yes, I'll turn it to Jim to I would say we have.
Margins.
A key key performance indicator that is.
Very strongly and focus for our leadership team and that's.
Mix enhancement on the specialty side, and we have an intense focus to grow our food systems business, which we believe.
It has a lot of.
Things going in its favor from a standpoint of more integrated.
Systems and solutions to offer to customers that typically.
Come with a higher margin thresholds so upgrades in our specialties, but also also upgrades in our core from a standpoint of trading up on the margins there for that grind utilization, which is again operating at the higher levels of historical norms.
Our industry and we do see opportunities and we are already capitalizing and pursuing on opportunities for that two thirds of our business.
To move up the margins in that core as well.
A very significant.
To emphasize.
In addition to specialties and not just think about it in our specialties way.
The other thing I would say is that you can't count on Forex and certainly we don't because we've lived for the last X number of years since I've been in my role with significant dollar strength, but at some point the dollar will moderate and all of the hard work we've put in when that does moderate will all.
So help our margins so I think that for all those reasons.
We think that we will see.
Certainly.
Modest improvements in our margins going forward, we're working on it we're very very focused on it.
As we've said in the past.
We're at the height of corn price cycle right.
So we are witnessing some of the highest corn costs that we've seen in years right and then as we get hopefully that higher corn prices.
Farmers to grow relative to other AG inputs and as we get better Carryout and maybe crop sizes right.
That's kind of that's going to help us.
I think as we've seen it makes one it makes our products more attractive because we do pass through some of that corn cost decrease when that occurs.
But generally it's also then we're holding onto our gross profit dollars per ton and then that is gross margin expansive.
Very good. Thank you so much and good luck with the fourth quarter.
Thank you Ben.
Okay.
There are no further questions at the queue I will now turn the call back over to Jim Sally for closing remarks.
Alright, thank you.
And I want to thank everyone for joining us this morning.
We look forward to seeing many of you at our upcoming investor events.
And I just ingredients.
The continued interest in ingredients.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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