Q3 2023 Ingredion Incorporated Earnings Call

November 7, 2023

Yeah.

Okay.

Yeah.

Thank you for standing by and welcome to ingredients third quarter 'twenty to 'twenty three earnings conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

To ask a question at that time, Please press star one on your telephone.

Be advised today's call is being recorded.

Now I'll turn the conference over to your House, Mr. Noah Wise, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to <unk> third quarter 2023 earnings call I know wise, Vice President of Investor Relations. Joining me on today's call are Jim Zelie, our president and CEO and Jim Gray, our executive Vice President and CFO.

Press releases issued today as well as the presentation, we will be referencing for our third quarter results can both be found on our website ingredient dot com in the investors section.

As a reminder, our comments within this presentation may contain forward looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance actual results could differ materially from those estimated in our forward looking statements and ingredient assumes.

No obligation to update them in the future as or if circumstances change additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and such.

Sequencers reports on Form 10-Q and 8-K.

During this call. We will also refer to certain non-GAAP financial measures, including adjusted earnings per share adjusted operating income and adjusted effective tax rate, which are reconciled to U S. GAAP measures and note to non-GAAP information included in our press release and in today's presentation appendix with that I will turn the call over to Jim.

Ali.

Thank you Noah and good morning, everyone.

As we enter the last part of the year I am pleased to report positive sales growth and strong profitability in the third quarter driven by solid price mix, partially offset by volumes, which are recovering sequentially across all regions.

Adjusted operating income was up 15% as we were able to mitigate the impact of cost increases through multiple levers, including pricing and mix improvements.

Operational excellence.

Productivity initiatives.

Our business is stronger and more profitable today as a result of the continued execution against our strategic roadmap for growth.

Let me update you now on the progress against each of our strategic pillars.

Beginning with specialty ingredients year to date net sales have grown 6% along with continued gross margin expansion.

Additionally, starch based texture, risers pharma and personal care and food systems, all experienced double digit growth year to date against a strong performance in the prior year.

Turning to commercial excellence, our sales teams secured multiyear contracts.

With some of our larger global customers.

These contracts, which provide a sizable base load of volume.

Should support margin expansion.

In 2024.

Additionally, the work, we completed to enhance our logistics systems and overall supply chain fulfillment capabilities.

Has been rewarded with higher net promoter scores.

And positive customer feedback.

So looking to quarter four we are excited by the opportunity to further improve our warehouse operations and reduce customer pickup times.

And freight costs.

An increasingly important part of the commercial excellence agenda, we have with our customers.

He is dedicated to shared value creation from sustainability initiatives.

The regenerative agriculture projects, we continue to collaborate with our customers is generating incremental value across the supply chain for farmers ourselves and our customers.

We are also engaging to develop a regenerative agricultural framework for the food and beverage industry as a proud founding member of S. AI platforms program.

In the area of cost competitiveness.

We have done a very good job of balancing production against changing customer demand.

Our supply chain team has worked closely all year with both the commercial organization and operations to ensure our customer demand is met while maintaining sufficient yet not excessive finished goods inventory.

Our operations team continues to do a fantastic job managing production inputs to help offset inflation and absorb fixed costs.

It is worth noting that year to date, our teams have faced more than $50 million of higher allocated costs allocated fixed costs due to lower volumes and have largely offset these cost challenges through their productivity efforts.

Additionally, I'd like to recognize the tremendous job our operations team.

That they have done driving employee and contractor safety performance. This year ingredient has historically operated at world class levels of safety performance, but this year is particularly notable given a step change reduction in recordable and lost time case rates.

Finally, acknowledging our purpose driven and people centric growth culture for.

For the ninth consecutive year ingredient in Mexico received an award for ethics and values in the industry for the Mexican Confederation of industrial Chambers and in South America. We were pleased to be awarded great place to work certification for the second year in a row in Brazil, Colombia and Peru.

Turning to volume trends in the quarter.

We show here a volume index based upon our 2019 quarterly shipment averages excluding high fructose corn syrup, and adjusting for changes in our portfolio since 2019.

During our Q2 conference call. We introduced this graph to illustrate how exaggerated demand in 2021, and 2022 produced a buildup of inventory throughout the supply chain that required rebalancing.

It appears customer Destocking has decelerated as we experienced sequential improvement month on month throughout the third quarter.

We believe this quarter's performance also demonstrates the diversity of our product portfolio.

Market's exposure and the strength of our business model.

Both our core and specialty ingredients continue to be well positioned to address large and growing end markets in the geographies, where we operate.

From a specialty ingredients perspective, we experienced growth in our largest specialty category texture solutions.

Our food systems platform has outperformed expectations as we worked closely with customers to reformulate recipes to drive affordability, primarily in the European private label market.

In sugar reduction, we also continued to experience strong volume growth and expanded pure circle margins.

Our core ingredients also showed resilience with one of our largest markets Mexico delivering record third quarter operating profit driven by volume growth across a range of food and beverage categories, where a robust economy is driving growing middle class demand.

In the U S. We were also pleased to see solid demand for glucose as our production facilities ran at full capacity in the quarter, partially in response to higher sugar prices.

Lastly, our industrial ingredients, which served the paper, making and corrugated industry saw a steady pickup in demand as shipment volumes recovered broadly across the U S.

As you can see the diversity inherent in our business allows us to continue to deliver shareholder value even in challenging environments.

As we have continued to invest in growth and improved risk management, our business has shown consistency as we deliver record setting results.

Now, let me turn it over to Jim Greg for the financial review.

Thank you, Jim and good morning to everyone.

Moving to our income statement net sales of approximately $2 million were up 1% for the quarter versus prior year.

Gross profit dollars grew 13% versus prior year.

With gross margins, reaching greater than 20% again this quarter.

Reported and adjusted operating income were $213 million and $219 million respectively.

The increases were driven by favorable price mix, partially offset by higher input costs and lower volumes.

Our third quarter reported and adjusted earnings per share were $2 36.

And $2 33 for the period.

Up, 48% and 35% respectively from the prior year.

The main driver for lower adjusted EPS as a 13th adjustment due to a tax provision in Mexico, driven by the higher value of the Mexican peso against the us dollar.

Turning to our Q3 net sales bridge.

We achieved strong price mix of 155, sorry, $159 million, along with favorable foreign exchange impact of $10 million.

This was partially offset by decreased sales volumes of $159 million.

Turning to the next slide we highlight net sales drivers for the third quarter.

Foreign exchange was a 1% tailwind this quarter as South America saw a strengthening of the Brazilian and Colombian peso.

Partially offsetting the FX related impact in EMEA, primarily in Pakistan.

Sales volume was down 8%.

But up sequentially from the second quarter.

As customers continue to work through Destocking of inventory.

Contributing to net sales growth price mix was up 8% due to customer and product mix optimization compared to the third quarter of 2022.

Turning now to gross profit margins.

On a year over year basis, we improved gross margins by 220 basis points to 27% driven by price mix optimization.

Inflationary input cost increases continued through the third quarter, but the rate of increase has started to moderate.

Weaker industry volumes have led to higher fixed cost absorption throughout 2023.

Our operations team has done a great job to address higher costs and manage production more evenly to demand.

It is noteworthy to highlight the commercial and operational excellence efforts have enabled us to expand gross margins for five consecutive quarters.

Let me turn to a recap of our Q3 regional performance.

North American net sales were up 3% when compared to prior year the.

The increase was driven by strong price mix as well as solid sales volumes across sweeteners and industrial ingredients.

North America operating income was seven was $171 million up 36% versus last year.

Driven by favorable price mix, partially offset by higher input costs and lower volumes.

In South America comparable net sales were down 8% versus last year and down 15% on a constant currency basis.

South America's operating income was down 33% to $32 million, driven primarily by lower volumes and higher energy costs associated with our transition to renewable biomass in Brazil.

While we incurred upfront cost associated with this change over the long term strategic supply of predictable energy and cost savings will be beneficial.

Okay.

Moving to Asia Pacific net sales were down 2% for the quarter and were flat on a constant currency basis.

Asia Pacific operating income was $33 million up 22% versus prior year.

Favorable price mix, partially offset by lower volumes.

In EMEA net sales increased 1% for the quarter and absent foreign exchange impacts net sales were up 5%.

EMEA operating income was $32 million in the quarter.

Up 7% compared to the prior year.

Driven by favorable price mix, partially offset by lower volumes higher raw material costs and foreign exchange impacts.

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

On the right side operationally.

We saw an increase of 29 per share for the quarter.

The increase was driven primarily by an operating margin increase of 66.

Partially offset by unfavorable volume of minus <unk> 36 per share.

It is noteworthy that operating performance alone drove a 17% increase in adjusted EPS.

Moving to our non operational items.

An increase of 31 per share in the quarter.

Which was primarily driven by a lower tax rate of 36 per share from our recently issued IRS notice, which increased our ability to claim certain foreign tax credits against U S taxes.

Year to date net sales of $6 2 billion were up 5% versus prior year.

Gross profit margin was 21, 6% up 240 basis points.

Year to date reported operating income was $755 million.

And adjusted operating income was $766 million.

Reported operating income was lower than adjusted operating income primarily due to equity method investment impairments and costs related to a work stoppage at our Cedar Rapids facility in the first quarter.

Our year to date reported earnings per share was $7 63.

And adjusted earnings per share was $7 45.

Reported EPS was higher than adjusted EPS, primarily due to the tax benefits from the evaluation of the Mexican peso against the US dollar in the period.

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

On the right side operationally, we saw an increase of $1 56 per share.

The increase was driven by margin improvement of $2 84.

Offset primarily by lower volumes of 94.

And foreign exchange impacts of minus <unk> 19 per share.

Moving to our non operational items, we saw an increase of <unk> <unk> per share year to date due to a $38 38 per share tax benefit partially offset by higher financing costs of <unk> 25 per share.

Moving to cash flow.

Year to date cash from operations was $647 million up significantly from $80 million in the same period last year.

Through the end of Q3, our networking capital investment was $118 million and we expect this to remain relatively flat for the balance of the year.

Net capital expenditures were $231 million in line with our full year expectations.

During the first three quarters of the year, we paid $143 million in dividends to shareholders and repurchased $101 million of outstanding common shares.

As cash from operations remained strong we will continue to be flexible and strategic with respect to our capital allocation priorities.

Next I'd like to address our updated 2023 outlook.

We now expect net sales to be up mid single digits, reflecting softer, but recovering sales volumes.

We lowered our adjusted effective tax rate to 25% to 26% reflecting.

Recent tax provision guidance.

We have also raised our full year 2023, adjusted EPS guidance and now expect it to be in the range of $9 <unk>.

To $9 45.

We have decreased slightly to the diluted weighted average shares outstanding to be between 66, 5% and 67 5 million shares.

Lastly, cash from operations for the full year 2023 is now expected to be in the range of $650 million to $750 million.

In terms of our full year regional outlook North America 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 cost increases.

For South America, we expect net sales to be flat to down 5% due to lower volumes.

South America operating income is expected to be down mid to high teens, driven by lower volume and higher energy and input costs.

In Asia Pacific, We 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 and pure circle growth, partially offset by higher input costs.

For EMEA, we now expect net sales to be up 5% to 10%.

And operating income to be up 40% to 45% due to favorable price mix.

Corporate costs are expected to be up high single digits.

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

Thanks, Jim.

I would like to share just a few final thoughts on how we see the business outlook for the remainder of the year.

As we finished the third quarter, we anticipate that volume weakness related to inventory corrections is largely behind us and we anticipate that the sequential improvements in shipments should continue.

While the operating environment continues to be uncertain, our business remains resilient and our teams are operating with agility as evidenced by our strong profit growth and year over year gross margin expansion.

We are well positioned to deliver a record year in 2023, which we believe is a testament to the strength of our diverse portfolio and our customer relationships.

We are delivering results that will exceed our four year growth outlook, while continuing to return value to shareholders through increased dividends and opportunistic share repurchases.

We remain focused on finishing the year strong and carrying momentum into 2024.

Before opening the call for Q&A I would also like to mention our announcement today of our intention in the first quarter of 2024.

To reorganize our business operations to better serve customers with a global focus on texture and helpful solutions.

We expect the reorganization of our business will result in a change to our financial reporting segments in the first quarter, which will provide the company's financial stakeholders with greater insight.

Into our product capabilities and market opportunities and better reflect the strategic value drivers for the company.

Now, let's open the call for questions.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press Star 111 moment for your first question.

Our first question comes from the line of Kristen Owens of Oppenheimer. Your line is your line is open.

Great. Thank you good morning, and thank you for taking my question Jim.

Jim I actually wanted to follow up on the last comment that you made here about the realignment of the segments and if you can just help us understand internally the effect of that realignment and maybe if there are any synergies in terms of <unk>.

Innovation cycle times or just.

What that implies internally for the organization and I'll start there. Thank you.

Thank you Kristen.

We are very excited about the opportunity that lies before us with our intention to reorganize our business operation.

Operations too.

Aligned to the value propositions inherent in texture and helpful solutions.

We see.

Starch and our position being so broad and deep with specialty starches and the opportunity to build upon that to offer unique textural solutions.

For a variety of applications.

A lot of headroom for growth and equally.

It's already been evidenced with our position with pure circle and sugar reduction and we believe long term the opportunities with protein fortification and fiber fortification that helpful solutions there were.

We're we're problem solving more holistically offers an excellent opportunity and to be able to pursue.

With global customers.

And operate on a global basis.

We think is going to offer a lot of operational synergies.

Go to market synergies and be able to do more for our customers in two very large and growing categories. So we're very excited I think the organization is very excited there was an internal announcement that went out today.

Timed with the external announcement.

<unk>.

We're very excited but equally we're excited about the opportunity to talk.

In detail about that.

The different segments that will be part of this.

Reorganization because.

Because we think it is going to better reflect the strategic value drivers.

For the company and give all of you a greater insight into our product capabilities and market opportunities.

That's really helpful.

And then.

I realize it's a little bit early for 2024.

But just given some of the trends that you discussed on the Destocking.

And price mix I'm, just help us understand puts and takes for next year, how we should think about sort of the momentum on the margin side moving into 2024. Thank you so much.

So what I'll say and I'm going to let Jim also supplement whatever I say here, but <unk>.

As in prior years. It is relatively early in the contracting cycle and therefore, it's typically our practice to update contracting on our Q4 call. However.

It is noteworthy I think to highlight a few points.

As we mentioned in our prepared remarks, we have renewed several multi year contracts with large customers that represent a significant base load of volume, which should be margin expansion expansive in 2024.

In addition.

Let me remind everyone that approximately 50% of our revenue dollars in North America.

<unk> from fee contracts that reprice monthly with corn cost inputs from our customers and we anticipate some pass through of lower corn costs in 2024, if the markets remain weak.

A similar outlook as they have today, but under current market conditions. When these contracts renew they should be also supportive of margin expansion.

In 2024 and look this year as we go into contracting or pricing centers of excellence, which we've talked about for the last couple of years and have served us so well.

Dealing with inflation.

Our teams are prepared for a different contracting environment. This year in comparison to the last two years and we have a very experienced commercial team that will continue to manage pricing and volume trade offs.

Carefully.

In response to competitive market conditions also I think.

As it relates to volumes, we are encouraged to see that sequentially. Our volumes month on month throughout quarter, three have improved and what I would also say is that.

Based on Q3 results and early indications for quarter four we anticipate sequential improvements in volume shipments should continue but thats as much visibility or as much as I really can say about contracting as we head into 2024.

Thank you.

Great. Thank you one moment please.

Our next question comes on a line of Ben Theurer of Barclays. Your line is open.

Yeah, Good morning, Jim Jim Congrats on the on the good results.

Two quick ones. So one you highlight that.

Some of the market dynamics.

And particularly called out.

Volume across the board.

But you had some bright spots, particularly Mexico, but also in South America in general a little a little better on what you saw in some of the volumes can you help us understand.

Within your customers, what's been driving those volumes, what's the categories specialties is in sugar reduction just to understand a little bit better the quality of that volume that would be my first question.

Yes so.

I'll take it and then Jim can supplement I would say we have done extensive voice of customer work.

To supplement what we've been monitoring is a dynamic volume track of really all year.

To understand where customers are with their inventory rebalancing in the Destocking and we do believe we're sensing that that should be largely behind us.

And our texture solutions business continues to do well.

The sweetener bulk volumes.

Have held up reasonably well throughout this entire year.

And.

In.

Brazil for example, we I know volumes are down or had been down certainly in the first half, but we saw a nice volume pick up in Q3.

And in Brazil, and September volumes for example demand levels reached 2022 levels.

And just a reminder, we were up against a little bit of prepping for the World Cup, which is typical down in Brazil in quarter four of 2022.

So overall.

I think we've we're past the trough and we are on an upswing.

And we're seeing it pretty broad based across all of the geographies of our operating segments that we monitor by monthly yes.

Ben I think we've mentioned before to shareholders that when we look at syrups.

Or are we look at some industrial starches the customer.

Cycle time on their inventory has always been much shorter.

And so generally we haven't seen that kind of build up north.

<unk> Hasnt really experienced the decline in sales volumes that maybe we've seen in the first half of the year or Q3.

Where we did see more of a buildup at our customers was around our food ingredients that support texture.

And Thats, we highlighted in the chart.

In the presentation that.

Because of longer supply chain times.

The criticality of some of these food <unk> starches.

In recipes that there definitely was a buildup in 'twenty, one and 2022 and we've seen that when we refer to destocking, we've seen some of that.

Excess inventory has really worked itself out through the food supply chain and so we are encouraged as we I think go into the year here on Q3 and Q4.

That some of the higher value food Textra riser starches, we do believe our working down.

I would say that.

The only thing that we're a little bit watch out is as we just don't know with higher inventory values. How that plays out in December from for some of our multinational brand companies.

And then just to note I think in your part of the World Ben is that what Youre. Obviously seeing is just worldwide sugar sugar is much more expensive.

Some constraints in terms of the larger sugar producers around the globe and just when it ever against that much of a gap between the value of our syrup versus the premium for using sugar theres always going to be some extra demand poll.

For our syrups and different routes that we're definitely seeing that where higher sugar prices globally and in the U S are supportive of higher corn based sweetener demand.

Okay, perfect that makes sense and then.

My second question is really just around capital allocation. So you've upgraded your cash from operations guidance for the year, just marginally higher on Capex I think just about $10 million versus the prior guidance. So there is clearly more excess cash created and you've alluded to it opportunistic share buybacks increase dividend, but just.

How you feel about.

The asset base that currently have how much do you think go forward you still need to invest into antitrust.

Capex operations to have plants up and running maintenance and how much is left for buybacks because it seems like you've guided down for shares outstanding. So theres something in those numbers just wanted to understand like how you think about the buyback opportunity here.

We look at.

Obviously, the strategic cash that we have for deployment. So that's cash from operations less our capex unless our dividends.

And this in Q3, we did deploy 101 hundred $1 million towards share repurchases.

So again thought that the stock was trading at a nice value and wanted to make sure that we're putting dollars back towards towards shareholders.

And we'll continue to look at that as an opportunity.

Think of as we look forward on our organic growth capital. We have obviously, we've had some some volume slowdown so that gives us a little bit more headroom capacity that allows us to push out some of our growth capex.

Into later years, but we're really seeing some investments and some of our helpful solutions platforms.

That are still where we're anticipating for example, we're completing an expansion at our peer circle facility in Kuala Lumpur.

Just coming online and so that really helps us with our our bioconversion is.

Stevia solutions, which are absolutely in demand as we look around the world and concerns from from governments around.

Obesity diabetes, and really pushing trends towards towards sugar reduction. So we will be opportunistic towards organic capital, but theres, just an excess of demand in terms of opportunities right now that we see globally.

Versus really the dollars that we allocate.

Out of our capital allocation.

Okay perfect. Thanks, Jim.

Got it. Thank you. Thank you.

Thank you one moment please.

Yes.

Our next question comes from the line of.

Then view of Stephens Your line is open.

Hey, Thanks, good morning, guys.

Good morning, Matt.

So I wanted to ask about the <unk> guidance and in particular kind of the implied operating profit for North America, which I recognize there is inherent.

Seasonality in the business from <unk> to <unk>.

I would think with core basis coming down still strong pricing volume getting better sequentially.

We might see opt.

Operating profit better than flat to slightly up in the fourth quarter. So help me think about the range of outcomes that are possible. There what the variables are affecting it and NYU centered in on that guidance that you did.

Yes, Thanks, Ben I'll take this one.

I think this has been a year, where we've seen.

Some some sales volumes impacts and.

Kind of just slower play through and.

The demand signals that have really kind of led to.

What I would call kind of a nice normalization of our texture sales, particularly in North America.

And we're seeing as we go into Q4, it's always a softer quarter in terms of volume demand for for for.

For sweeteners.

And so I think what we're just doing is as we're being I would say mid mid center cut and maybe conservative on volume expectations.

Which really kind of probably guides, our Q4 and as I mentioned before when you have corn values decreasing from one contracting year to the next so higher corn values in 2023 and expectation that corn is going to be less expensive in 2024, and generally we have a conversation.

With customers about.

The value of that corn and as it impacts their pricing and so you might have an expectation from customers that pricing might be flat to down in 2024, and my caused them to pause.

On those last couple of weeks of ordering in December you'll get that ordering back in January or February but.

It's something that I have to be thoughtful about as we close out the year and then I'd just remind everybody listening that.

Your CFO and Youre looking at your working capital change year over year, and Youre trying to manage operating cash flow.

Decrease in inventories is probably your most significant lever that you can use nowadays with short term rates so high.

And so if I'm being center cut to cautious on that I, just I'm trying to.

We anticipate what December surprise might be.

Okay very good understood. My second question is around.

Currency and in South America in particular is it your expectation that you can continue to price for any currency headwinds that you incur as we move forward.

And would that be true across the other regions that you are operating as well how do you expect to be able to navigate that.

Yes, generally we do because.

The the underlying conversation as well.

What's the value of the corn and in some markets. If the value of the corn is really valued on an equivalent to U S. Dollars, then thats absolutely part of the day to day conversation with customers on pricing.

I think what it will be interesting is that you would say well women. If the <unk> is strengthening then wouldn't.

The value of the corn be less it just rises more in Brazil.

And due to exports. So it does it is a very efficient market in Brazil in particular.

But yes, we believe very much that we have the muscles to pass through changes in FX.

Over time, yes, and we've demonstrated that over the last number of years and specifically.

Our pricing centers of excellence.

Originated in South America, and develop those muscles and thats been carried out around the world. So I think we feel pretty comfortable and confident that the team is very experienced in knowing how to do that.

Great Congratulations best of luck.

Thanks Pam.

Thank you one moment please for our next question.

Our next question comes from the line of Joshua Spector of UBS. Your line is open.

Hi, Good morning. This is Lucas I would answer Josh.

So just sort of wanted to get back to the volumes I mean, you've given quite a bit of context, there on sort of how it's improving sequentially through the third quarter into the fourth quarter. So I was just wondering if you could give us your updated view on where do you sort of see the gap currently between customer purchases in the sales volume trends.

What is the difference sort of now between kind of the seller and the sell out and do you expect that to reconnecting the fourth quarter or is that maybe maybe in the first quarter.

Thanks.

Lucas maybe I can actually just expand on your question a little bit in terms of.

I think there is some implied timing of.

What you are looking out for like customers customer feels like branded company customer volumes versus our ingredient sales does that your question.

Exactly I said way way your where your sales are going downstream. So I mean, obviously with the de stocking there has been a gap there.

Over the last nine months of Si and presumably that's that's narrowing as we sort of get towards the end.

Do you have any visibility into sort of where that gap is.

How you see it closing other than just that your volumes are improving.

Okay.

Yeah, maybe I'll comment and I think maybe Jim Jim can add here as well.

We look at our business and now we have a large part of our ingredients goes into food and beverage usually into packaged.

Packaged food.

Companies and within that you have both branded as well as private label. So private label is really kind of co Packers and co man. So we've seen some volume kind of uptick there I'd say really where we're catching up is in more of the branded branded CPG companies. We also have about.

In the United States and Canada for example, about 20% to 25% of our volume goes towards foodservice, so restaurants et cetera.

And in there we've seen generally.

Probably much more kind of ups and downs.

<unk> thousand 20 and recovery in 2021, I would say that foodservice traffic has been pretty steady.

And it's been a nice kind of Stabiliser from a channel perspective for some of our ingredients and then I'd only say that kind of somewhere in between as distributors and so the distributors, obviously serve more medium and small customers. They can be either innovative package food companies they might be in foodservice supply and it's really I think within distribution.

<unk> that I think that we're seeing that's probably the gap or I would say that as they have worked through there.

Their access inventory going out to that medium and small customer base in some of those medium and small customers are fighting to get back on shelves were fighting to get their innovation.

Aiken up that demand is where we're probably seeing the recovery and what I would say is that as I indicated that we're seeing early indications for quarter four that the sequential improvement in volumes are continuing and that's also with distributors.

The only thing that we're trying to read the tea leaves on.

With a little bit of that momentum pick up.

We're also trying to be realistic in relationship to how we may see customer.

Customer buying behavior tied to what Jim was saying about the year end in December related to.

Corn costs coming down et cetera, and so we're trying to interpret laid all of that as we put together our forecast say for quarter, four but I do think it bodes well for.

Volume momentum to continue in quarter and into 2024.

Alright, Thanks, and then.

Just on the higher sugar prices, sorry, I Should've mentioned, you're starting to see some demand substitution coming through there.

Just thinking about the pricing side. So how should we think about your ability to kind of cross within Ericsson stay here relative to the move up in sugar. There does that is that going to assist with set of value capture heading into next year.

Yes.

Hi, Jim.

Lucas I know this is a little bit newer to the business but.

I'll just give you one example, so.

When we look at Mexico, and you look at average.

Beverage bottling business.

They use a blend of sugar and high fructose corn syrup, most of that Hfcs is imported from the United States.

And there is a value gap that actually liquefy in sugar and using it at the current domestic price of sugar in Mexico is much more expensive than using hfcs imported from the U S and so to the extent that youll see beverage bottlers will still move that mix.

I will move that mix to 55%, 60% Hfcs.

That's a small percentage move in the recipe, it's actually quite a bit of demand.

And so there is not many customers that have that ability.

But that is a pretty clear example, where you can see that benefits the demand pull for hfcs for the for the industry.

Out of the U S.

And Thats, an example, where you can see that happening.

Thank you.

Okay.

Thank you.

Again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your color.

Again to ask a question. Please press star 111.

One moment for our next question.

Our next question comes from the line of Adam Samuelson of Goldman Sachs. Your line is open.

Yes. Thank you I was wondering everyone.

Good morning, good morning, Adam.

Alright.

Sorry, the first question, maybe just continuing on on Mexico just quickly.

Is there.

Any way to quantify this.

North America, where profit.

And margins expanded strongly is that.

With Mexico, an outsized contributor to that both in terms of your local production as well as maybe shipments from the U S.

To Mexico or would you say that the profit growth was really across.

The whole North American platform, yes.

Yes, I would say it was proportional to across all of North America, but in Mexico for us.

Has <unk>.

Been a consistent deliver and again, we highlighted the fact that it was a record operating income quarter for the Mexican business with really pretty much robust demand across the.

The product categories in which we supply and remember.

Mexico production.

Goes for Mexican consumption, but also some for export as well for the products they are producing.

Especially in brewing that would be export it from Mexico to the U S. But from a standpoint of its contribution to overall North America results, Jim I would say it was proportional in the quarter proportional and I would say within U S Canada U.

We still saw a pretty decent sweetener demand and.

And we saw an uptick in industrial starches.

Jim can speak to a more of a better pull for packaging for some of our industrial starch solutions and then the only I would say the soft spot that has been all year has been more of our <unk>.

As those volumes have.

We've really seen the impact of Destocking on really some of our texture, which go into the center of the store, which has been talked about being a little bit softer and impacted by the destocking.

Okay. That's helpful and then just on specialty.

You give the slide talking about your 6% growth year to date.

And you gave some of the year to date performance and some of the key buckets and that starts with <unk> pharma personal care food systems. Those three items are growing well above the total specialties and so.

What is below the 6% underneath your specialty umbrella just the protein side or help me clarify kind of where.

What is not performing at the ABA.

Bump that specialty average.

Yes, I would say that.

Plant based proteins is definitely compared to what our expectations were for the year.

It has.

Been soft and the market continues to be soft.

The two categories that we talked about last quarter in Q2 with now for Q3 the.

Data for plant based milk in alternative meat sales volumes were down, 10% and 18% again, respectively, which is the same as Q2 so that.

Segment.

Compared to our expectations remained soft and then I would say the only other category is in the area of say clean and simple ingredients, which have higher price points.

I would say that would be one other category, but it's proportionately compare to say starch based texture risers overall.

Not.

As large but.

That has been a little soft, but but we've got a great franchise. There. So we anticipate that that's a long term trend towards clean.

<unk> and <unk>.

Natural labeling will continue to bode well long term.

Okay.

And just to clarify is tied to the reorganization that's going to go into effect early next year what.

Maybe it's not completely finalized yet what is their reporting going to be externally isn't going to be kind of a specialties versus core dynamic or are you going to be giving starts with some of the key specialty kind of buckets. As you list them here or just how are we going to be seeing us going forward.

Yes.

Not really finalized yet.

And we have some clear ideas.

<unk> of where we're headed but we're not ready yet to communicate the specific segments. The narrative from a standpoint of core and specialties will likely change.

As we move to again a global.

Operating segment or segments or deferring segments.

But I think Cagny in February in the earnings call in February is when we'll be in a better position to sharply clarify.

How will be defining all of those reporting segments.

Okay Alright.

That's helpful. I appreciate it thanks.

Thank you Adam.

Thank you one moment please.

Sure.

Our next question comes from the line of Andrew <unk> of.

BMO capital markets. Your line is open.

Great. Thanks for taking the questions good morning.

Good morning, Andrew Good morning, so.

For my first one I just wanted to revisit.

<unk> guidance or the implied guidance and you already talked about some of the assumptions around volume in North America.

Just curious any other swing factors relative to the high and low end is a bit of a wide range that we should keep in mind.

About the fourth quarter and your assumptions.

Yeah.

Yes, Andrew this is Jim Gray I'll take this.

Yes.

Obviously, there's a couple of kind of more outliers, which would be what happens to energy prices here as we have some conflicts around the world.

And we're also looking at is there anything on kind of macroeconomic factors that impact demand in the last couple of months of the year.

Largely October has done what we saw in November and December.

And then maybe just FX, there's a couple of countries.

We have either elections or they have some kind of economic decisions in front of us that can always have an FX spike.

I think on the opportunity side.

Really is customer demand I would say is as we built our forecast.

Really more of a trend I think month by month that Jim spoke to.

That trend has been a little bit stronger than necessarily as we're looking at.

Kind of how we lined up Q4, so we'll see but.

It's October.

Winter is upon us in the northern hemisphere.

And usually that's.

Something that can impact kind of demand pull for us. So we're just we're cautious on looking at Q4.

Okay, Okay, great and then.

I guess as it relates to 2000.

A clarification and then a question the clarification just on the comments you made about the multiyear contract renewals that are going to support margin expansion are you talking about margins on a percent basis or a dollar per ton basis or both and then.

In terms of the question about 'twenty four.

You have that dynamic you have volume recovering.

At the same time, you talked about this being an outsized growth year in 'twenty three and I think you have some one time stuff in the early part of the year.

That occurred as well so I guess when you bring it altogether and I know youre, not obviously contributed 24 guidance but.

Do you think that the operating income growth algorithm kind of that level of growth is in play for next year. What do you think are maybe the risks to achieving that I'm just trying to at a high level put it together coming up with is a very very strong year relative to the AGA.

So just on the multi year contract question. The answer to your question about is it margins or is it gross profit dollars or both the answer is it's both.

So that's one thing.

<unk>.

And we.

Also are looking at.

Honestly the progress that we've made against our global operating model now and just a reminder, we're in our third year.

Of.

Globally.

Moving to global operations.

And.

Having that team worked through the significant challenges the supply chain crisis brought about.

One to two years ago has made.

We believe stronger and has enabled us to make investments in digital capabilities to better service our customers on.

Our inventory positions, our warehousing and again Thats one of the other things that we feel very good about is.

Sure.

Okay.

When volumes are saw have been soft like they were for the majority of this year across the industry. Many companies are sitting on higher quantities of inventory. Then we think we are as we exit the year and so we think that.

We will be helpful. As we go into next year. The other thing and it's just noteworthy because south America's performance this year.

<unk> has been down in comparison to really.

Two to three very strong.

Years.

And.

The energy transition there. It's just noteworthy to point out we estimate that there is a $5 million to $8 million one off.

Cost of that transition to <unk>.

Biomass.

Which again, it's going to we're doing that for a number of reasons, but.

Moving to biomass, which is lower cost of natural gas and will also.

Provide less earnings volatility, we believe going forward.

In comparison to natural gas and again, it's enabled us to reduce in Brazil, 84% of our greenhouse gas emissions all of those things we think ARPA.

Operationally our.

Helpful. As we head into 2024, so that's that's kind of how we're why we're feeling.

At this point in time and again, we're not through contracting.

So we have to see how that's going but based on all the data points that we have thus far.

We're cautiously optimistic about 2020 for I would say Jim yes.

Andrew I'd answer the question.

Maybe on a long term basis, we're consistently building capabilities so across our go to market team as we seek really customer excellence. We've built in pricing centers of excellence why does that matter. The last two years. So 2022 versus 21 23 versus 22, we've seen a pretty dramatic run up in corn costs.

Worldwide normally we're chasing that so now we're looking at 2024 will corn costs might be down.

And so now we're using new capabilities around our pricing centers of excellence and with our commercial teams to navigate what that means in terms of pass through in terms of some of our raw material advantage our expected cost advantage next year.

While being paid and being rewarded for the gross profit dollars that we need to run our business.

Jim just talked to we're also building that global operations team and they are building momentum and I think that that works towards controlling inflation.

And so we're not I don't think we're necessarily out of the woods yet on what the inflation of our manufacturing expense looks like for next year and so we need the time to pull that together and my team to do the math and see how that works out, but we're clearly aware of that as we're setting prices and talking to customers next year.

And so I just think that we have some capabilities that we've continually being build building and as we're going through different impacts of our corn cycle. I think we're going to really strive to be managing that gross profit dollar on that operating income dollar growth.

Yeah.

Great.

I guess I'll go ahead and leave it there. Thank you very much.

Thanks, Andrew. Thank you. Thank you. Thank you.

<unk> no further questions at this time I will turn the call back over to Jim Zolli for any closing remarks.

Okay. Thank you operator, and I wanted to thank all of 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.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.

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Thank you for standing by and welcome to ingredients third quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

To ask a question at that time, Please press star one on your telephone.

Please be advised today's call is being recorded.

I'll now turn the conference over to your host Mr. Noah Wise, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to <unk> third quarter 2023 earnings call.

No wise Vice President of Investor Relations joining me on today's call are Jim Sally, our president and CEO and Jim Gray, our executive Vice President and CFO.

The press release issued today as well as the presentation, we will be referencing for our third quarter results can both be found on our website ingredient dot com in the investors section.

Results could differ materially from those estimated in our forward looking statements and ingredient assumes no obligation to update them in the future as or if circumstances change additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found.

And in the company's most recently filed annual report on Form 10-K, and subsequent reports on Form 10-Q and 8-K.

With that I will turn the call over to Jim Sally.

Thank you Noah and good morning, everyone as we enter the last part of the year I am pleased to report positive sales growth and strong profitability in the third quarter driven by solid price mix, partially offset by volumes, which are recovering sequentially across all regions.

Adjusted operating income was up 15% as we were able to mitigate the impact of cost increases through multiple levers, including pricing and mix improvements.

Operational excellence.

Productivity initiatives.

Our business is stronger and more profitable today as a result of the continued execution against our strategic roadmap for growth.

Let me update you now on the progress against each of our strategic pillars.

Beginning with specialty ingredients year to date net sales have grown 6% along with continued gross margin expansion.

Additionally, starch based texture, risers pharma and personal care and food systems, all experienced double digit growth year to date against strong performance in the prior year.

Turning to commercial excellence, our sales teams secured multiyear contracts.

With some of our larger global customers.

These contracts, which provide a sizable base load of volume.

Should support margin expansion.

In 2024.

Additionally, the work, we completed to enhance our logistics systems and overall supply chain fulfillment capabilities.

Has been rewarded with higher net promoter scores.

And positive customer feedback.

So looking to quarter four we are excited by the opportunity to further improve our warehouse operations and reduce customer pickup times.

And freight costs.

An increasingly important part of the commercial excellence agenda, we have with our customers.

He is dedicated to shared value creation from sustainability initiatives.

The regenerative agriculture projects, we continue to collaborate with our customers is generating incremental value across the supply chain for farmers ourselves and our customers.

We are also engaging to develop a regenerative agricultural framework for the food and beverage industry as a proud founding member of S. AI platforms program.

In the area of cost competitiveness.

We have done a very good job of balancing production against changing customer demand.

Our operations team continues to do a fantastic job managing production inputs to help offset inflation and absorb fixed costs.

Additionally, I'd like to recognize the tremendous job our operations team.

Finally, acknowledging our purpose driven and people centric growth culture.

Turning to volume trends in the quarter.

We show here a volume index based upon our 2019 quarterly shipment averages excluding high fructose corn syrup, and adjusting for changes in our portfolio since 2019.

During our Q2 conference call. We introduced this graph to illustrate how exaggerated demand in 2021, and 2022 produced a buildup of inventory throughout the supply chain that required rebalancing.

It appears customer Destocking has decelerated as we experienced sequential improvement month on month throughout the third quarter.

We believe this quarter's performance also demonstrated the diversity of our product portfolio.

Market's exposure and the strength of our business model.

Both our core and specialty ingredients continue to be well positioned to address large and growing end markets in the geographies, where we operate.

From a specialty ingredients perspective.

<unk> growth in our largest specialty category texture solutions.

Our food systems platform has outperformed expectations as we worked closely with customers to reformulate recipes to drive affordability, primarily in the European private label market.

In sugar reduction, we also continued to experience strong volume growth and expanded pure circle margins.

Our core ingredients also showed resilience with one of our largest markets Mexico deliver.

Delivering record third quarter operating profit driven by volume growth across a range of food and beverage categories, where a robust economy is driving growing middle class demand.

In the U S. We were also pleased to see solid demand for glucose as our production facilities ran at full capacity in the quarter, partially in response to higher sugar prices.

Lastly, our industrial ingredients, which served the paper, making and corrugated industry.

A steady pickup in demand as shipment volumes recovered broadly across the U S.

As you can see the diversity inherent in our business allows us to continue to deliver shareholder value even in challenging environments.

As we have continued to invest in growth and improved risk management, our business has shown consistency as we deliver record setting results.

Now, let me turn it over to Jim Greg for the financial review.

Thank you, Jim and good morning to everyone.

Moving to our income statement net sales of approximately $2 billion were up 1% for the quarter versus prior year.

Gross profit dollars grew 13% versus prior year with.

With gross margins, reaching greater than 20% again this quarter.

Reported and adjusted operating income for $213 million and $219 million respectively.

The increases were driven by favorable price mix, partially offset by higher input costs and lower volumes.

Our third quarter reported and adjusted earnings per share were $2 36.

And $2 33 for the period.

Up, 48% and 35% respectively from the prior year.

The main driver for lower adjusted EPS as a 13 adjustment due to a tax provision in Mexico, driven by the higher value of the Mexican peso against the us dollar.

Turning to our Q3 net sales bridge.

We achieved strong price mix of 155.

Alright, $159 million, along with favorable foreign exchange impact of $10 million.

This was partially offset by decreased sales volumes of $159 million.

Turning to the next slide we highlight net sales drivers for the third quarter.

Foreign exchange was a 1% tailwind this quarter as South America saw a strengthening of the Brazilian and Colombian peso.

Partially offsetting the FX related impact in EMEA, primarily in Pakistan.

Yeah.

Sales volume was down 8%.

But up sequentially from the second quarter.

As customers continue to work through Destocking of inventory.

Contributing to net sales growth price mix was up 8% due to customer and product mix optimization compared to the third quarter of 2022.

Turning now to gross profit margins.

On a year over year basis, we improved gross margins by 220 basis points to 27% driven by price mix optimization.

Inflationary input cost increases continued through the third quarter, but the rate of increase has started to moderate.

Weaker industry volumes have led to higher fixed cost absorption throughout 2023.

Our operations team has done a great job to address higher costs and manage production more evenly to demand.

It is noteworthy to highlight that commercial and operational excellence efforts have enabled us to expand gross margins for five consecutive quarters.

Let me turn to a recap of our Q3 regional performance.

North American net sales were up 3% when compared to prior year.

The increase was driven by strong price mix as well as solid sales volumes across sweeteners and industrial ingredients.

North America operating income was seven was $171 million up 36% versus last year.

Driven by favorable price mix, partially offset by higher input costs and lower volumes.

In South America comparable net sales were down 8% versus last year and down 15% on a constant currency basis.

South America's operating income was down 33% to $32 million, driven primarily by lower volumes and higher energy costs associated with our transition to renewable.

<unk> in Brazil.

While we incurred upfront cost associated with this changeover for the long term strategic supply of predictable energy and cost savings will be beneficial.

Okay.

Moving to Asia Pacific net sales were down 2% for the quarter and were flat on a constant currency basis.

Asia Pacific operating income was $33 million up 22% versus prior year with favorable price mix, partially offset by lower volumes.

In EMEA net sales increased 1% for the quarter and absent foreign exchange impacts net sales were up 5%.

EMEA operating income was $32 million in the quarter.

Up 7% compared to the prior year, driven by favorable price mix, partially offset by lower volumes higher raw material costs and foreign exchange impacts.

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

On the right side operationally.

We saw an increase of 29 per share for the quarter.

The increase was driven primarily by an operating margin increase of 66.

Partially offset by unfavorable volume of minus <unk> 36 per share.

It is noteworthy that operating performance alone drove a 17% increase in adjusted EPS.

Moving to our non operational items, we had an increase of 31 per share in the quarter.

Which was primarily driven by a lower tax rate of 36 per share from our recently issued IRS notice, which increased our ability to claim certain foreign tax credits against U S taxes.

Yeah.

Year to date net sales of $6 2 billion were up 5% versus prior year.

Gross profit margin was 21, 6% up 240 basis points.

Year to date reported operating income was $755 million.

And adjusted operating income was $766 million.

Our year to date reported earnings per share was $7 63.

And adjusted earnings per share was $7 45.

Reported EPS was higher than adjusted EPS, primarily due to the tax benefits from the evaluation of the Mexican peso against the US dollar in the period.

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

On the right side operationally, we saw an increase of $1 56 per share.

The increase was driven by margin improvement of $2 84.

Offset primarily by lower volumes of 94.

And foreign exchange impacts of minus <unk> 19 per share.

Moving to our non operational items, we saw an increase of <unk> <unk> per share year to date due to a $38 38 per share tax benefit partially offset by higher financing costs of 25 per share.

Moving to cash flow.

Year to date cash from operations was $647 million up.

Up significantly from $80 million in the same period last year.

Through the end of Q3, our networking capital investment was $118 million and we expect this to remain relatively flat for the balance of the year.

Net capital expenditures were $231 million in line with our full year expectations.

During the first three quarters of the year, we paid $143 million in dividends to shareholders and repurchased $101 million of outstanding common shares.

As cash from operations remained strong we will continue to be flexible and strategic with respect to our capital allocation priorities.

Next I'd like to address our updated 2023 outlook.

We now expect net sales to be up mid single digits, reflecting softer, but recovering sales volumes.

We lowered our adjusted effective tax rate to 25% to 26%.

Reflecting recent tax provision guidance.

We have also raised our full year 2023, adjusted EPS guidance and now expect it to be in the range of $9 <unk>.

To $9 45.

We have decreased slightly to the diluted weighted average shares outstanding to be between 66, 5% and 67 5 million shares.

Lastly, cash from operations for the full year 2023 is now expected to be in the range of $650 million to $750 million.

In terms of our full year regional outlook North America 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 cost increases.

For South America, we expect net sales to be flat to down 5% due to lower volumes.

South America operating income is expected to be down mid to high teens, driven by lower volume and higher energy and input costs.

In Asia Pacific, We anticipate net sales to be flat versus the prior year and.

And we expect operating income to be up high double digits.

Driven by favorable price mix and pure circle growth, partially offset by higher input costs.

For EMEA, we now expect net sales to be up 5% to 10%.

And operating income to be up 40% to 45% due to favorable price mix.

Corporate costs are expected to be up high single digits.

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

Thanks, Jim.

I would like to share just a few final thoughts on how we see the business outlook for the remainder of the year.

We are well positioned to deliver a record year in 2023, which we believe is a testament to the strength of our diverse portfolio and our customer relationships.

We are delivering results that will exceed our four year growth outlook, while continuing to return value to shareholders through increased dividends and opportunistic share repurchases.

We remain focused on finishing the year strong and carrying momentum into 2024.

Before opening the call for Q&A I would also like to mention our announcement today of our intention in the first quarter of 2024.

To reorganize our business operations to better serve customers with a global focus on texture and helpful solutions.

Into our product capabilities and market opportunities and better reflect the strategic value drivers for the company.

Now, let's open the call for questions.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press Star 111 moment for your first question.

Our first question comes from the line of Christian <unk> of Oppenheimer. Your line is your line is open.

Great. Thank you good morning, and thank you for taking my question Jim.

Jim I actually wanted to follow up on the last comment that you made here about the realignment of the segments and if you could just help us understand internally the effect of that or realignment and maybe if there are any synergies in terms of.

<unk> cycle times, or just what that implies internally for the organization and I'll start there. Thank you.

Thank you Kristen.

We are very excited about the opportunity that lies before us with our intention to reorganize our business operation.

Operations too.

Aligned to the value propositions inherent in texture and helpful solutions.

We see.

Starch and our position being so broad and deep with specialty starches and the opportunity to build upon that to offer unique textural solutions.

For a variety of applications.

Having a lot of headroom for growth and equally.

There were problem solving more holistically offers an excellent opportunity and to be able to pursue.

That with global customers.

And operate on a global basis, we think is going to offer a lot of operational synergies.

Go to market synergies and.

Be able to do more for our customers into very large and growing.

Categories. So we're very excited I think the organization is very excited there was an internal announcement that went out today.

<unk> with the external announcement and.

We're very excited but equally we're excited about the opportunity to talk.

Q3 2023 Ingredion Incorporated Earnings Call

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