Q2 2023 Ingredion Incorporated Earnings Call
Okay.
Good day and thank you for standing by welcome to the ingredients second quarter 2023 earnings call. At this time, all participants are in a listen only mode.
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.
He will then hear an automated message advice in your hands raised.
To withdraw your question. Please press star one again.
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. Please go ahead.
Good morning, and welcome to <unk> second quarter 2023 earnings call I know my wife's Vice President of Investor Relations. Joining me on today's call are Jim <unk>, our president and CEO and Jim Gray, our executive Vice President and CFO .
The press release, we issued today as well as the presentation, we will reference on our second quarter results can both be found on our website ingredient dot com in the investors section.
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 actual results could differ materially from those estimated in the forward looking statements and ingredient assumes no.
To update them in the future as or if circumstances change additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports.
On Form 10-Q and 8-K during.
During the call. We will also reference 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 with that I will turn the call over to Jim Sally.
Thank you Noah and good morning, everyone.
As we enter the second half of the year I am pleased to report that sales and profitability remained strong with net sales up 4% for the second quarter absent foreign exchange impacts driven by solid price and customer mix management across all regions adjust.
Adjusted operating income was up 17% due to pricing and mix improvements, which helped us overcome inflationary input cost pressures that have been a headwind over the last two years.
Additionally, gross margins have recovered nicely due to effective customer contracting and disciplined operational execution.
And this quarter's performance is the fourth consecutive quarter of gross margin expansion.
Our performance this quarter demonstrates the value of a diversified portfolio.
We're north Americas strength in core ingredients and EMEA as strength in specialties contributed to record second quarter net sales and operating income.
These results are particularly noteworthy given the strength of last year's second quarter performance.
And demonstrate that we maintain our ability to price and pass through significant raw material inflation.
Our results also demonstrate our ability to be responsive to shifting market dynamics and deliver continued profit growth.
Turning now to our specialty ingredients growth highlights.
During the quarter specialty ingredients net sales grew 3% due to better price mix, even as continued inventory rebalancing throughout the entire supply chain led to softer volumes.
Increased collaborations with customers seeking to improve the affordability of recipes helped drive new business momentum throughout the quarter.
Historically in times of higher commodity cost inflation, our customers look to ingredient to leverage the functionality of our solutions capabilities to reduce their formulation and production costs.
Our teams are actively engaged with customers to co create new food products, leveraging our proprietary Atlas product simulator, which accelerates innovation using digital prototyping, helping our customers reduce their R&D expense and increase their own new product.
<unk> efficiency.
Recently, our team also created and launched our Snacking center of expertise, which seeks to capture additional growth opportunities for ingredient in the global snacking category, which has been growing three 5% year over year for the last five years, the snacking category presents an excellent.
<unk> to leverage our complete solutions capability across specialty starches plant based proteins and sweeteners or.
Our snacking experts have deep technical proficiency that allow them to engage with customers in new ways, providing proprietary insights and market ready prototypes across a variety of snack applications.
This collaboration has helped us develop more projects with larger snack companies globally and has created a multimillion dollar pipeline tapping into the snacking categories high growth potential.
Lastly, our stevia solutions continued to gain momentum and subsequent to the close of the quarter, we increased our overall ownership of pure circle to 88%.
Taking a closer look at specialty ingredient net sales growth over the past 12 months, South America, and EMEA specialty ingredient sales have increased as a percentage of their total net sales, while North America and Asia Pac held steady on.
On a consolidated basis specialty ingredients now make up 34% of overall company sales and continue to comprise an increasing proportion of company profits.
It is important to note that core ingredients net sales growth over the past few quarters has been significantly higher than historical averages, which is indicative of strong industry fundamentals.
Turning now to our sugar reduction and specialty sweeteners portfolio.
Ingredient is the global leader in natural high intensity sweeteners for sugar reduction.
An estimated $5 billion market, which is growing at 6% compounded annual growth rate.
Our growth in this market is attributable to our acquisition of pure circle three years ago.
Pure circles advanced technology in stevia leaf breeding and enzyme chemistry is bringing natural sweetener solutions to the market for companies like Coca Cola Danone, Nestle and others, who are actively looking to reduce the sugar content in their products.
Since acquiring pure circle, we have leveraged ingredients global go to market capabilities to add approximately 185, new customers for high intensity natural sweeteners.
We are proud to say that these advancements have helped consumers remove an estimated three three trillion calories from their diets since 2020.
We are very pleased with our strategic investments in sugar reduction and continued to focus on expanding our pipeline of projects and new solutions.
As an example over the next few months, we will be ramping up a significant expansion of our stevia bioconversion facility in Kuala Lumpur.
Now turning to our strategic pillars.
Our teams continued to do an outstanding job executing against our four strategic growth pillars.
Beginning with specialty ingredients.
Year to date net sales growth once again grew double digits on a constant currency basis.
It is worth noting that these year over year increases are being achieved while lapping a strong level of net sales growth in the first half of last year.
Additionally, more than half of our specialty ingredients growth platforms increased our net sales by double digits on a year to date basis.
Turning to commercial excellence or value based pricing approach to product and customer mix management continues to drive profit growth and positively impact margins.
Our teams around the world.
Leverage our regional centers pricing centers of excellence to continuously assess the value that our ingredients bring to a recipe and price accordingly.
Additionally, the investments we have made to increase the visibility of order tracking for customers and improve warehousing logistics is being reflected in increased net promoter and customer satisfaction scores across all regions.
We are also actively tracking consumer purchasing channel movements that could impact our customer channel demand. So we can respond to changes in buying behavior to maximize volume opportunities.
Against our cost competitiveness strategic pillar our operations team continues to do a superb job mitigating the impact of fixed cost absorption by tightly managing fluctuations in production schedules and ensuring we meet service delivery requirements of customers.
While input cost inflation continued in the second quarter the rate of increase has started to moderate.
This positive development combined with ingredients productivity initiatives.
We will continue to support margin growth.
Additionally, our global operations team is in the early stages of driving a connected factory strategy to increase productivity.
As an example.
Our team in Hamburg is leveraging artificial intelligence capabilities to optimize batch cycle times.
These efforts are delivering up to a 5% increase in asset utilization and over time this capability will be expanded to other facilities.
Finally, acknowledging our purpose driven and people centric growth culture.
We are pleased to have been named as one of the 2023 2024 best companies to work for by U S News and well report.
And we were named to USA today's inaugural climate leaders list, which aims to recognize companies that have reduced emissions intensity over.
Over the last few years.
Now, let me turn it over to Jim Greg for the financial review Jim.
Thank you, Jim and good morning to everyone.
Moving to our income statement net sales of approximately $2 1 billion were up 1% for the quarter versus prior year.
But close to 4% absent FX impacts.
Gross profit dollars grew 13% versus prior year, driven by a combination of factors.
It is encouraging that gross margins are above 20% again this quarter.
And are beginning to reflect historical averages, especially as corn costs fluctuate globally at high levels.
Reported and adjusted operating income was $251 million.
The increases were driven by favorable price mix, partially offset by higher raw material and input costs and lower volumes.
Our second quarter reported and adjusted earnings per share or $2 42.
And to $2 32, respectively for the period up 14% and 19% sorry, 9% respectively from the prior year.
To highlight in this quarter's results reported EPS benefited from a <unk> tax rate reduction.
Due to a strengthening in the Mexico peso during the quarter and the subsequent valuation impact to our U S dollar denominated working capital balances in Mexico.
We adjust out this tax benefit for non-GAAP adjusted EPS.
Turning to our Q2 net sales bridge, we achieved strong price mix of $297 million, including the pass through of higher corn and input costs.
This was partially offset by decreased volumes of minus $225 million and foreign exchange impacts of minus $47 million.
Turning to the next slide we highlight net sales drivers for the second quarter.
Foreign exchange was a minus 3% headwind in the quarter was most most of the impact in EMEA, particularly in Pakistan.
Sales volume was down minus 11% as customers continued to work through elevated inventory levels.
<unk> are moving towards just in time delivery as supply chains normalize.
Contributing to net sales growth price mix was up 15% due to value based pricing and customer mix optimization.
Compared to the second quarter of 2022.
It is worth underscoring that the second quarter 2023 results.
Not only surpassing the previous high for second quarter 2022.
But also represent a record revenue second quarter from an absolute sales perspective.
Given the breadth of our product and customer base.
When we assess the volume declines that we're seeing we conclude the consumers.
Retailers foodservice outlets.
Distributors and packaged goods manufacturers are all experiencing a demand pullback.
We show here a volume index based upon our 2019 quarterly shipment averages X.
Excluding high fructose corn syrup, and adjusting for changes in our portfolio since 2019.
This plot of quarterly volumes illustrates in 2021, and 2022, the higher shipments and buildup of ingredients inventory in our customer base as consumer demand ran up and supply chains were disrupted.
As we exit this quarter.
We are already seeing signs that inventory in some segments has started to bottom.
While we can't predict the exact slope of the volume recovery.
We do know from some conversations with customers that inventory levels are already too low.
We anticipate a gradual increase in the rate of orders in the back half of the year.
Turning now to gross margins.
On a year over year basis, we improved gross margin by 220 bps.
To 21, 3%.
Driven by a catch up pricing actions taken during last fall's contracting cycle to offset higher inflation.
With regard to our pricing centers of excellence.
We continue to pursue price for value, which has led to higher profitability in total while trading off some volume loss from lower margin transactions.
While our operations experienced under absorption of fixed costs from weaker volumes, we mitigated the impact by flexing production at certain plants and taking other cost reduction actions.
Okay.
Although inflationary input cost increases continue through the second quarter the rate of increase has started to moderate.
We view our productivity initiatives as margin supportive and we will continue to highlight achievements as we progress.
Let me turn to a recap of our Q2 regional performance.
North American net sales were up 5% when compared to prior year.
The increase was driven by strong price mix as well as strengthening core ingredient sales.
North America operating income was $197 million up 22% versus last year.
In South America comparable net sales were down 11% versus last year and down 8% on a constant currency basis.
South America's operating income was down 41% to $23 million driven primarily by the impact of higher inventory carrying costs in Brazil from last season's corn costs.
Some lower volumes and foreign exchange headwinds and the Argentina JV results.
Moving to Asia Pacific net sales were down minus 3% for the quarter and were flat on a constant currency basis.
Asia Pacific operating income was $27 million up.
Up 29% versus prior year with favorable price mix, partially offset by lower volumes.
Excluding foreign exchange impacts adjusted operating income was up 33% for the quarter.
In EMEA net sales increased 4% for the quarter and absent foreign exchange impacts net sales were up 15%.
EMEA operating income was $42 million in the quarter up 42% compared to the prior year.
Driven by favorable price mix, partially offset by lower volumes higher input costs and foreign exchange impacts, particularly in Pakistan.
Excluding foreign exchange impacts adjusted operating income was up 59% in the quarter.
Turning to our earnings bridge on the left side of the slide you can see the reconciliation from reported to adjusted earnings per share.
On the right side operationally, we saw an increase of <unk> 40 per share for the quarter.
The increase was driven primarily by an operating margin increase of 75.
Partially offset by unfavorable volume of minus 21.
And unfavorable impact of foreign exchange of minus <unk> <unk> per share.
Moving to our non operational items, we had a decrease of minus <unk> 20 per share in the quarter.
Which was primarily driven by higher financing costs of minus <unk> 15.
Year to date net sales of $4 2 billion were up 7% versus prior year.
Most profit margin was 22, 1% up 260 basis points.
Year to date reported operating income was $542 million and adjusted operating income was $547 million.
Reported operating income was lower than adjusted operating income.
Primarily due to the final costs related to the U S based work stoppage at our Cedar Rapids facility recorded in the first quarter.
Our year to date reported earnings per share was $5 27.
And adjusted earnings per share was $5 12.
Reported EPS was higher than adjusted EPS, primarily due to the tax benefits from the valuation of the Mexican peso against the US dollar in the period.
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 $1 28 per share year to date.
The increase was driven by margin improvement of $2 18.
Offset primarily by lower volumes of minus <unk> 57, and.
And foreign exchange of minus 20.
Moving to our non operational items, we saw a decrease of minus <unk> 22 per share year to date.
Driven primarily by higher financing costs of minus <unk> 23 per share.
Okay.
Moving to cash flow first half cash from operations was $279 million up.
<unk> from an operating loss of $4 million in the same period last year.
As working capital investment has begun to normalize following two years of significant raw material inflation.
Through the end of Q2, our net working capital investment is $218 million and we expect this investment to remain relatively flat or improve for the balance of the year.
Net capital expenditures were $153 million in line with our full year expectations.
In the first half of the year, we paid $95 million in dividends to shareholders.
And as you will have read this morning, we announced a 10% increase in our dividend to <unk> 78 per share up from 71 per share.
This is the ninth consecutive year of an increase in our quarterly dividend and reflects.
The continued strength of our business.
Through dividends and growth in the dividend, we are increasingly returning cash to shareholders as we execute our driving growth roadmap.
Next I'd like to address our updated 2000 to three outlook.
We now expect net sales to be up mid to high single digits, reflecting softer sales volume and the anticipated lay out of corn costs.
Additionally, cash from operations for full year 'twenty three is now expected to be in the range of $600 million to $700 million.
We have raised our full year 2023, adjusted EPS guidance and now expect it to be in the range of $8 80 to.
To $9 40.
Lastly, we have increased slightly the diluted weighted average shares outstanding to be between 67% and 68 million shares.
In terms of our full year regional outlook.
North American net sales are expected to be up 5% to 10% driven by favorable price mix.
Operating income is expected to be up 20% to 25%.
With price mix, continuing to outpace lower volumes and increasing costs.
South America, we now expect net sales to be flat to down 5%.
Afflicting lower volume, partially offset by favorable price mix.
South America operating income is expected to be down mid to high single digits with higher input costs being partially offset by favorable price mix.
In Asia Pacific, We now anticipate net sales to be flat versus the prior year and we expect operating income to be up high double digits driven by favorable price mix.
For EMEA, we continue to expect net sales to be up 10% to 15% in.
And operating income to be up 40% to 50% due to favorable price mix.
Corporate costs are expected to be up high single digits.
For the third quarter.
We expect ingredient net sales to be up mid single digits and operating income to be up high single to low double digits when compared to the third quarter last year.
That concludes my comments and I'll hand, it back to Jim.
Thanks, Jim.
Before we go to the Q&A.
Just a few final thoughts on how we see the business outlook for the remainder of the year.
We are seeing softer volume demand across the food and beverage supply chain driven by inventory rebalancing, which we are describing as a move from just in case to just in time.
We are also seeing consumers economizing in response to price inflation.
That said.
We expect to see gradual but bumpy pickup in volumes throughout the second half our full year guidance reflects this volume demand outlook and its impact on fixed cost absorption.
After two years of historically high supply chain costs and raw material inflation, we are steadily seeing our gross margins recover to pre pandemic levels.
While we are pleased with this progress we are actively pursuing additional levers that we can pull to further improve the quality of earnings and reduce earnings volatility all of which align with our long term strategic goals.
Now, let's open the call for questions.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced can withdraw. Your question. Please press star one again.
Please stand by while we compile the Q&A roster.
Our first question comes from the lineup Ben <unk> of Stephens, Inc. Your line is now open.
Hey, Thanks, good morning, guys.
Good morning.
I'd like to start.
Kind of where you left off Jim on the volume front could you talk a little bit about.
With what you saw in the second quarter, how did that compare to your expectations for volumes in the second quarter and then Jim Gray I think you mentioned that you expect to see the rate of orders to pick up in the back half of the year.
Should we interpret that to mean that volumes are still negative across the global footprint and then potentially turn positive in the fourth quarter or how should we think about the outlay there.
Yes, Yes go ahead and take the first part.
So.
What we're seeing is that the lower volumes. We believe are primarily due to downsizing of inventory as the food supply chain at large move.
Moves from a situation.
Where people were operating to build inventories just in case.
There were supply chain issues or disruptions.
Two now with interest rates and the holding cost of inventory increasing to more of a just in time approach.
We're.
Perhaps.
The industry is.
Over indexing on that siding, having safety stocks be reduced to say dangerously low levels potentially.
As <unk>.
Companies try to manage their working capital and again.
Believe that the supply chains are.
Back to normal.
We do believe we're seeing demand bottoming.
And we do believe we will see a gradual but bumpy pickup in demand over the coming quarters. It.
It is.
Noteworthy I guess to highlight that in contrast to those comments one source of steady volume demand has been syrup shipments for example, primarily into beverages as we have seen.
A very modest falloff there.
This is likely driven by relatively steady restaurant traffic.
<unk> fast casual which has been relatively flat in the first half. We also believe we're seeing a bottom in industrial starch volumes and.
North America as packaging and paper to a lesser degree have shown.
Some signs of recovery.
So our current view now assumes that volumes remained soft through Q3.
And start to gradually recover in quarter four.
Okay fair enough.
And your guidance update update today you did also raise your cash flow from operations forecast.
<unk>.
Thinking outside of organic growth investment in the business you upped your stake in pure circle.
Can you talk about some of the other priorities that you have and what the M&A landscape looks like versus potentially buying back your stock as we move forward given that youll have nice free cash flow generation.
Yes, maybe I'll take it and then maybe maybe Jim can add in terms of the view of the M&A landscape.
Our capital allocation priorities are still one around the organic growth opportunities, we see obviously.
If volumes pause then we have a little bit more head space in front of US, which is great as our teams continued to pursue growth and texture.
And as well as in nutrition, and as well as we look at sugar reduction.
We are we are going to then look at M&A as well as minding the dividend as I pointed out we have raised the dividend again for the October .
Declaration and really just demonstrating that we believe in the future growth free cash flow in the company as.
As we look forward to 2024, and 2025 and just as a reminder, Ben in for everybody. We are really targeting a long term dividend payout ratio in the upper <unk> to 40% of our adjusted EPS. So so this move gets us there, but we really look at the dividend as our primary means to returning cash to shareholders.
With regard to M&A.
We're still again, we have a very wide M&A net globally as we have many relationships around the world and I think we are seeing.
Some opportunities for again, probably more tuck in type of M&A opportunities, where we really think that we can further secure our market share and our market positions and the types of businesses that we want to be in.
What I would just simply add is that what we've been emphasizing for the last few years is that ingredient is not the same company that it was say five six years ago, we really have transformed from a starch and sweetener company.
Two what we are today and what we will be more of in the future, which is a texture and health solutions company.
And anything from an M&A standpoint, that's going to enhance the value propositions for texture and health solutions. I think you can expect to see us pursue.
Okay, great. Thanks very much.
Thank you one moment please for our next question.
Our next question comes from the line up Andrew <unk> of BMO capital markets. Your line is now open.
Hey, good morning, Thanks for taking the questions.
My first one Andrew Welcome South America.
Thank you very much.
Just wanted to start by digging in on South America.
Yeah.
I heard some of the reasons that you've talked about.
For some of the pressures in the quarter.
Yes.
Totally understand why there was such a dramatic fall off in the margins with the corn costs have been.
That different.
Looking at our price mix, where the increases weren't quite as meaningful as they have been or are you seeing any.
From a pricing perspective in South America, and then lastly, I guess on the speed.
If my math is correct the margin.
Supply is a pretty quick snapback in margins to kind of that mid teens level. So I guess the confidence there and the quake recovery are you already seeing that just would love to better understand that.
Yes, I'm going to tag team with Jim on this one Jim why don't you take the corn piece, yes sure sorry.
Andrew.
Sometimes in our business when we're towards the end of.
Our corn inventory that were holding.
And the new crop harvest is about to come to market in the.
The market participants can see whether or not that was a bountiful crop and what it implies for prices of corn in the marketplace that all happened in Q2 within Brazil, So really really strong corn crop prices had come down we were carrying some corn through Q1.
And our pricing had really reflected at a higher level the cost of that higher corn kind of at the end of Q1 as you start to see the.
The balance of full crop coming through prices of finished goods start to adjust downward and we're continuing to adjust those prices, but we're moving through that old corn. So you just had a bit of margin compression.
As we look forward now we're going to enjoy the lower cost of the corn as we go into Q3 and Q4.
As well as we've done our job through our pricing centers of excellence to maintain our margins and manage our margins.
As we continue I think on top of that we also had some transitions from our energy complex.
In Brazil, we moved from natural gas to biomass boilers and in so doing that just had some some onetime nat gas costs.
That were higher than we don't expect to repeat as we go forward, yes that last point was not an insignificant impact in the quarter, but it was the right thing to do it's consistent with our sustainability commitments, but it's a big.
Investment from a standpoint of energy transition, which is hitting.
It hit in quarter, two in just a little bit of remanence, I guess in quarter three as well.
But that was probably like $3 million to $4 million just to just kind of a one timer to put out there right and then also what I would say just more generally related to take our largest market in South America, Brazil, we are seeing a slowdown in branded branded product consumption such as beer for example.
And the Brazilian government has pulled back on consumer subsidies and interest rate tightening has also slowed economic growth.
And in our second largest market Colombia.
We experienced a shutdown to our plant as the natural gas supply to the surrounding community was temporarily disrupted so that was another one.
Onetime event I guess in in.
In the quarter. So that's the reason why there's optimism for the forward outlook for South America.
I mean, we're also coming out of winter going into spring and summer right. So traditionally when you look out the layout and the phasing of South America. Your largest quarter is always going to be Q4, and the calendar year.
Got it Okay. That's all Super helpful color and my second question.
Just give us a sense for utilization rates in North America, obviously with the volume softness year.
<unk> been talking about.
We've enjoyed a very tight utilization rate environment.
For a while here, we're going from inflationary cost environment to a deflationary environment as we approach kind of contracting season.
Any thoughts around utilization as we head into kind of a key period.
In North America.
Yeah. So I mean, maybe just remind everybody that we report.
A change in sales volume right and so therefore, when you look at sales volume may be impacted by more by higher priced or higher value tons. The underline, particularly in the U S. As Jim noted there has been pretty steady demand at least for sweetener volume.
Throughout at.
At least the first half of the year.
Seeing pretty steady foodservice traffic, there's nice Paul for for HFF.
Very modest.
Flat, if not maybe down 1%. So I think that's acting as a stabilizing factor.
When we look at U S utilization for example is one instance.
So as we go forward I still think that we're not seeing kind of.
Not yet at least or or any type of broad significant recessionary impact that's impacting consumers and how they feel about eating out I think it's a little bit bumpy as Jim referenced.
But we're still seeing decent USR traffic fast casual.
Traffic and I think that pulls for foodservice and that's a decent part of our volume.
Only.
Exception to that I would say is Europe does.
Feel softer than the rest of the world right now and so that's something that we obviously, we'll watch carefully for the second half of the year, but I would say Q2 volumes in Europe .
Where.
Were soft.
Less so in North America.
Got it okay. Thank you very much I'll pass it on.
Thank you.
Thank you one moment please for our next question.
Our next question comes from the line of Cody Ross of UBS. Your line is now open.
Good morning, Thank you for taking our questions.
Hey, good morning zero.
Good morning, I wanted to zero in on North America for a second your profit there is up really nicely. So far this year. However, your guidance implies a significant sequential step down in the margin to the tune of about 300 to 400 basis points based on our math I asked that.
I don't know if I'm seeing the same margin decrement that you may be calculating coatings. So we probably can take it offline I would comment that generally as we go through the year. We always are going to look out the layout of our corn costs. We're also going to look at.
Now kind of maybe the layout of our hedges.
But we should see generally kind of continued profit growth in North America.
As we've as we definitely move into Q3 and Q4.
Okay, maybe we can take that offline.
Yes, I just wanted to move over to your to your gross margin specifically on corn prices right now they are down about 20% recently I know you've changed your hedging practices a few years ago at what point do you expect to receive a benefit from the lower corn prices and do you expect that to affect your pricing negotiations as they come up on a couple of months.
Why don't you take the mechanics, and I'll take the outlook, yes, yes, yes.
Definitely I mean, so while seaborne prices are decreasing our corn costs are will remain a bit higher for the balance of year as we've hedged kind of late and late last year of the fall of 2022, and those hedges will show in that loss position, but that is reflected fully in our guidance. So in the second half.
Last year, while we had rising corn costs, our expanded hedging practice showed a gain to mitigate some of that increase that we had in 2022 from the start of the Russia, Ukraine conflict. So net net we do not see a notable benefit from the decrease in cost of physical corn in the second half of this year still seeing basis and.
Premiums are a bit elevated.
For co products, we are anticipating a modest decrease in value in the second half following really lower market cost and again that is factored into our full year guidance.
So for me I think it's just important to note and expanded risk management practices should really limit earnings volatility, whether corn or co products increase or decrease significantly from quarter to quarter for for next year.
Let Jim talk about contracting but generally.
As an idea if we see lower seaborne futures or lower cost of corn.
That's going to work into how we quote prices.
And then also how we place hedges for 2024.
Yes.
It relates to contracting for next year I mean, we will have a better idea of how 2024 is shaping up.
As we get more data points in the coming months say for volume.
But we historically.
Akeley.
Have.
Transparently communicated with customers regarding rising or falling raw material costs, and we anticipate some pass through of lower corn costs in 2024, if the markets.
We remain with a similar similar outlook as they as they are today.
And Cody I, just wanted to make add Suez is people listen to the call right. So our dollar profit per ton that we make on products. We believe that that is sufficient for us to earn the return that we need to invest capital and to continue.
Covering all of our operating costs and so we really look at if theres a change in the cost of the raw material or the corn.
We're going to be transparent with customers about that but we firmly believe in the dollar profit that we earned per ton is paying us for the value add that our ingredient solutions bring as well as <unk>.
Incentive to us to continue to invest in assets in the business.
Thank you I appreciate it I'll pass it on.
Thank you one moment please for our next question.
Our next question comes from the lineup Adam Samuelson at Goldman Sachs. Your line is now open.
Yes, Hello, good morning, everybody. This is actually stepping in for Adam.
Thank you I'm wondering if you could provide some additional color on.
Fixed cost absorption during the quarter on that and their expectations.
For the balance of the year.
Fixed cost absorption and impact.
In the quarter and for the year, so as Guillermo as we said.
When we had volumes decline in Q2, and we had actually talked about this in Q1 as well.
That what we were anticipating is that we would be able to reduce some some of our semi variable costs.
Such as the amount of hours of overtime or the amount of expediting freight costs those costs disappear and then those costs have been prevalent in our and our.
In our P&L and about 'twenty, one as well as in 2022, so so while we've had.
Some higher fixed costs due to lower absorption, but we've also been able to run the plants kind of with with cost less at the French and so we've been able to reduce some of those extra costs.
That always come at a marginally higher rate and so we really I think have done a nice job mitigating cost as.
As we go forward.
When we anticipate Q3 volumes being soft as well as then some recovery in Q4 that unabsorbed fixed cost is in our guidance for the balance of the year.
Okay.
Thank you very much Jeff.
I'll follow up.
You can describe a little bit into more detail.
Scenario under which you would keep each and I'll take items for the remainder of the year, what do you need to see over the balance of that yet.
Okay guidance. Thanks.
Yes sure.
I think on the on the on the risk side. We're just obviously, we're a little bit cautious on what the volume mix is as Jim pointed out.
The I think the shape of the European economic growth or recession is still a little bit to be forming.
On the I think on the positive side, though we really think that there are potentially some even stronger volume recoveries.
As we see into into Q4.
As well as we're looking at some of the cost of the spring corn maybe.
May be beneficial to us as we think about the second half of the year.
That's super helpful.
Thank you very much.
Thank you one moment please for our next question.
Our next question comes from the line of Ben Theurer of Barclays. Your line is now open.
Hey, good morning, Jim and Jim.
Thanks. Good morning, Thanks for taking my question and congrats on the results.
Wanted to dig into what Youre seeing on the plant based side and your venture Dare I know that that's been one of the topics we've talked a lot about in the past, but didn't came up that much in the more recent ones. So often in light of some of the comments we've heard from some of your peers and softness in some of our company's results maybe.
What are you seeing on the demand for the ingredient side and how do you feel about plant based in general that would be my first question.
So we believe the plant based trend is a long term enduring trend the <unk>.
Market right now continues to be soft in the U S quarter to IRI plant based milk and meat sales were down, 10% and 18% year on year, respectively.
And we simply remain focused on building, our customer pipeline and meeting new specification requirements for customers, that's where we think the opportunity is going to be for us because.
The consumers are going to be very discerning with these products.
Related to the perception of there.
Clean label status as well as the price points. So as we can help.
The leading companies in that space in those spaces.
To deliver on high degrees of protein fortification, great texture, great taste.
Along with.
The clean label aspects, which we believe our products can help enable and its not just the plant based proteins piece, but it is the other texture risers that typically are part of those formulations. It's more of a solutions approach to the plant based.
Sector that we expect to grow revenue and optimize our cost structure.
And.
And be a significant player in that space, but right now.
The market does continue to be soft.
Okay. Thanks for that and then my second question is really about the ability around pricing and what youre seeing with your customers in regards to potential pushback or sensitivities around pricing because obviously, we saw a very good momentum still on pricing.
But at the same time volume in each region somewhat.
Some more and some a little less but meaningfully impacted so what are your customers, saying to you as you as you look into the back half and maybe into.
Call. It next 12 months or so as it relates to pricing and some of the input costs coming down are you seeing like first request for discounts et cetera. So how should we think about the price mix in light of the volume weakness.
Yes, I think it's really too early to tell about.
How all of the factors that are going to impact <unk>.
Market pricing for 2024 takes shape and why do I say that is because.
While some commodity cost inflation.
Is subsiding.
You have.
Food inflation still sticky in other.
Areas and.
People are trying to determine.
What's going to be the outlook for food inflation in energy inflation, especially as it relates to say oil prices now going back up.
So it's.
Quite cloudy and murky in relationship to the.
Input cost side of the equation and I think it's one of the reasons why the markets are somewhat.
Jittery in relationship to where.
Weather.
Inflation.
May resurface.
That's why I think the next.
Few months are going to be very important to see how volume and demand.
<unk> itself because if.
The.
Total.
Food supply chain network.
Has over shifted from again adjusting case to adjust in time.
And inventories do have to be replenished.
That along with what we're seeing right now with an uptick in oil prices and some aspects of food inflation increasing.
That could tightened things and so I just think it's too early right now to give a clear picture.
That outlook for us.
We.
Certainly want to retain the benefits that we have achieved from our pricing centers of excellence and the great job. Our go to market teams have done in delivering value through pricing.
So that'll be our focus, but we want to do that in a very thoughtful considerate way.
But regardless we are developing.
Developing levers that we can pull.
To again focus on quality of earnings and drive growth in the business and that's why on the cost competitive this side of the house. We're also driving a lot of productivity initiatives.
Thank you very much Jim.
Thank you.
Thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to the draw. Your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Operator, I don't know if theres any other questions coming.
Alright.
At the moment, yes, we do not see any other questions. At this point I would now like to turn the conference back to Jim Daly for closing remarks.
Thank you and to everyone I just wanted to thank you for joining US. This morning, we look forward to seeing many of you at our upcoming investor events and I want to thank everyone for your continued interest and ingredient.
That concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Hum.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Uh huh.
[music].
Yes.
Okay.
Yes.
Yes.
Yeah.
Okay.