Q2 2024 Ingredion Inc Earnings Call
Operator: Good day, and thank you for standing by. Welcome to the second quarter 2024 Ingredient Incorporated Earnings Conference Call.
Speaker Change: Good day and thank you for standing by. Welcome to the second quarter 2024 Ingredient Incorporated Earnings Conference Call.
Operator: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Noah Weiss, Vice President, Investor Relations. Please go ahead.
At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.
To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.
Noah Weiss: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Noah Weiss, Vice President, Investor Relations. Please go ahead.
Noah Weiss: Good morning, and welcome to Ingredion's second quarter 2024 earnings call. I'm Noah Weiss, Vice President of Investor Relations. Joining me on today's call are Jim Zallie, our President and CEO, and Jim Gray, our Executive Vice President and CFO.
Noah Weiss: Good morning and welcome to Ingredion's second quarter 2024 earnings call. I'm Noah Weiss, Vice President of Investor Relations.
Speaker Change: Joining me on today's call are Jim Zallie, our President and CEO , and Jim Gray, our Executive Vice President and CFO .
Noah Weiss: The press release we issue today, as well as the presentation we will reference for our second quarter results, can be found on our website, Ingredion.com, in the Investors, As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those estimated in the forward-looking statements, and Ingredion assumes no obligation to update them in the future as or if circumstances change.
Speaker Change: The press release we issued today, as well as the presentation we will reference for our second quarter results, can be found on our website, Ingredion.com, in the Investors section.
Noah Weiss: Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-Q.
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.
Speaker Change: Actual results could differ materially from those estimated in the forward-looking statements, and Ingredion 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
Speaker Change: or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K.
Speaker Change: During this call, we also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income, and adjusted effective tax rates, which are reconciled to U.S. GAAP measures in Note 2 non-GAAP information included in our press release and in today's presentation appendix.
Speaker Change: With that, I will turn the call over to James Zallie.
James Zallie: Thank you, Noah, and good morning, everyone.
James Zallie: Ingredion's results for the second quarter exceeded our expectations with a strong recovery in volumes across the portfolio and strong growth in profitability with adjusted operating income up 8% and gross margins up 240 basis points.
James Zallie: Profit growth was supported by improving volume and Greater Fixed Cost Absorption, with net sales volumes increasing 8%.
James Zallie: Profit growth was supported by improving volume.
James Zallie: Lower Input Costs and Greater Fixed Cost Absorption
James Zallie: Sales were down 9% due to the pass-through of lower raw material costs as well as the lap of South Korea's 2023 net sales.
James Zallie: This record second quarter for operating income is noteworthy as it is against the backdrop of value-seeking consumers facing historically high prices in many markets.
James Zallie: We believe our success is due to the breadth and affordability of our ingredient portfolio and the diversity of our customer and geographic mix.
James Zallie: Our strong results were also supported by our cost control measures and productivity initiatives.
James Zallie: Going forward, we will continue to derive strength from our newly segmented business model by optimizing pricing strategies and leveraging our scale in raw material procurement to deliver customer value and improve our financial performance.
James Zallie: Turning to a summary of our volume growth across segments.
James Zallie: This quarter, I would like to take a few moments to walk you through the segment-specific volume drivers behind the Q2 results.
James Zallie: We delivered strong, across-the-board volume growth.
James Zallie: for the first time since de-stocking began early last year.
Speaker Change: Volumes were up 1% in the quarter, however, if we adjust for the volumes that went with the sale of the South Korea business, volumes were actually up 5%.
James Zallie: Our most significant year-over-year increase came from Texture and Healthful Solutions segment, with net sales volumes increasing 8%.
James Zallie: As packaged food shipments gradually improved, our distributors have begun replenishing inventories in anticipation of continued demand, particularly in the U.S. and Canada, where grocery retailers are witnessing growth in center store sales.
James Zallie: From a food category perspective, we have seen positive trends in some of our savory categories, like dressings and sauces, where volumes have started to turn positive year over year.
James Zallie: Although quick service restaurants and food away from home has slowed in the second quarter, we are seeing stronger demand for batters and breadings for frozen chicken and french fries prepared at home.
James Zallie: Additionally, for texture and healthful solutions, demand in the Middle East and Africa has been particularly strong, recovering to pre-pandemic levels driven by distributor restocking and sales of our innovative solutions for dairy and dairy alternatives.
James Zallie: We have also seen nice growth in new customer acquisition throughout Asia, supported by our investment two years ago in China, coupled with continued strong performance from our tapioca franchise.
James Zallie: Turning to food and industrial ingredients, LATAM.
James Zallie: Dry weather and correspondingly high prices for sugar in Mexico led to increased demand for sweeteners from beverage customers.
James Zallie: In Brazil, brewery continued to recover and I'm pleased to report that in line with full-year volume commitments, our sales into nutritional supplements in Colombia commenced, representing a solid in-year restart for this business.
James Zallie: Lastly, for Food and Industrial Ingredients, U.S. Canada, we have seen seasonal summer demand pick up.
James Zallie: Additionally, our industrial business and volumes to paper and packaging customers continue to recover.
James Zallie: Let me now update you on progress against our three strategic pillars.
James Zallie: Starting with our business growth pillar.
James Zallie: We set a record for second quarter profitability thanks to strong volume in all segments.
James Zallie: Texture and Healthful Solutions saw 8% volume growth. Additionally, project related customer engagement continued to see strong momentum with a 26% increase in the first half versus the same period last year.
James Zallie: Which we view as a positive leading indicator of future growth for this segment.
James Zallie: Furthermore, customer feedback regarding our service and solutions has reflected the highest levels of trust and collaboration since we began tracking these metrics.
James Zallie: Our sugar reduction business had a strong quarter with net sales up 10% reflecting strong volume growth.
James Zallie: During the quarter, aligned with our strategy, we increased our investment and ownership of PureCircle by $40 million, taking our equity stake to 98%.
James Zallie: In 2024, we renewed several multi-year agreements with a few significant customers, which allowed us to recoup inflation on our input costs over the last two years. These adjustments have contributed to higher profits.
James Zallie: Lastly, we have seen continued strong demand for industrial starches in papermaking and packaging in North America.
James Zallie: Turning to our second pillar, cost competitiveness through operational excellence.
James Zallie: Last quarter we launched a multi-year cost savings program called Cost to Compete with a target to deliver $50 million of run rate savings by the end of 2025.
James Zallie: During the first half, as part of our global reorganization, we have identified and initiated $18 million in annual run rate savings, mostly in SG&A.
James Zallie: As we are seeing lower corn costs, not just in the United States in the first half of 2024, our global ag procurement teams have responded to lower market prices, which has resulted in a greater than expected reduction in raw material costs.
James Zallie: This benefit was evident primarily in our food and industrial ingredients segments.
James Zallie: From an operational excellence standpoint, our global supply chain team has been building new forecast accuracy tools.
James Zallie: These capabilities, which are a combination of machine learning and people expertise, are improving our production scheduling effectiveness, which will result in lower production costs and inventory levels over time.
James Zallie: Regarding our purpose-driven and people-centric growth culture pillar, despite a period of significant change, our employee engagement remained in the top quartile of Glenn's global benchmarks.
James Zallie: As recognition of our progress, I'm proud to say that our Global Technical Headquarters in Bridgewater, NJ won a Regional Top Workplaces Award.
James Zallie: Our commitment to sustaining high employee engagement further was advanced throughout the through the refreshment of our employee value proposition with the aspiration for everyone to have the opportunity
James Zallie: To create the future with people who care.
James Zallie: Turning now to Gross Profit Margins.
James Zallie: On a year-over-year basis, we improved gross margin by 240 basis points.
James Zallie: to 23.7% driven by strong volume recovery, better absorption of fixed costs, the adjustment of multi-year contracts, and supply chain optimization and resiliency in managing volatility.
James Zallie: We recently published our 2023 Sustainability Report, and I would like to call out some highlights.
James Zallie: Most notably, we've achieved a 22% absolute reduction in global scope one and two emissions, marking a substantial milestone toward our 2030 environmental goals.
James Zallie: We've also increased our global purchase of renewable electricity to 25%, reinforcing our commitment to increasing sources of green energy.
James Zallie: We've reached another significant milestone, achieving 67% sustainable sourcing for our Tier 1 priority crops. I'm proud to say
James Zallie: that we now sustainably source 100% of our global waxy corn and stevia supply.
James Zallie: Furthermore, we reached 74,000 acres grown under regenerative agricultural practices.
James Zallie: Lastly, Ingredion has expanded its relationship with Halgood, a leading sustainability research platform for food ingredients. This partnership enables our customers to access the carbon footprint data for our entire ingredient portfolio as they innovate with sustainability considerations in mind.
James Zallie: Now, I will hand over to Jim Gray for the financial review.
Jim Gray: Thank you, Jim, and good morning, everyone. Moving to our income statement, net sales for the second quarter were approximately $1.9 billion, down 9% versus prior year.
Jim Gray: Gross profit dollars increased 1% with corresponding margins up 240 basis points to 23.7%, up sequentially and year-over-year.
Speaker Change: Reported and Adjusted Operating Income were $240 and $270 million dollars respectively.
James Zallie: With adjusted operating income up 8% versus the prior year, driven by lower raw material and input costs and higher volume, partially offset by price mix.
Jim Gray: Turning to our Q2 Net Sales Bridge, the 9% decrease in net sales was driven by $204 million in lower price mix and $11 million of foreign exchange impact.
James Zallie: Partially offset by positive volume of 104 million.
James Zallie: Additionally, the exit from our South Korea business had an $80 million impact on sales volume.
James Zallie: For modeling purposes, last year's Korea net sales for Q3 and Q4 were similar to Q2's run rate.
Speaker Change: Turning to the next slide, we show net sales drivers for the second quarter. As Jim has already highlighted sales volume growth, I'll stick to color comments regarding overall net sales and price mix.
Speaker Change: For the total company, net sales were down 9%.
James Zallie: And when excluding the net impact of South Korea's sales from the results, down 6%.
James Zallie: Texture and Healthful Solutions net sales were down 5%.
Speaker Change: Price mix was down 11% for the quarter, partly reflecting the pass-through of lower corn costs, as well as higher pricing from last year, when these businesses priced through double-digit inflation for both specialty corn and natural gas, primarily in Europe and in the U.S.
James Zallie: Food and Industrial Ingredients, LATAM, Net Sales were down 9%.
James Zallie: and Food and Industrial Ingredients U.S. canned net sales were down 8%.
James Zallie: Both of these segments' net sales results are impacted by declining year-over-year price mix.
James Zallie: Driven by the pass-through of lower corn costs.
James Zallie: Let me turn to a recap of our Q2 segment performance.
James Zallie: Texture and Healthful Solutions net sales were down 5% compared to the prior year and down 3% on a constant currency basis.
James Zallie: Texture and Healthful Solutions operating income was $86 million, with a corresponding OI margin of 14.6%.
James Gray: It was driven by an unfavorable price mix, partially offset by higher volume demand, greater fixed cost absorption, and lower input costs, with an OI margin of approximately 19%. While gross profit dollars decreased 7%, gross margin was up to 23%, net capital expenditures were $120 million, slightly below our expected pace of investment for the first half. We remain committed to repurchasing at least 100 million of Common Shares outstanding this year.
James Zallie: Driven by unfavorable price mix, partially offset by higher volume demand, greater fixed cost absorption, and lower input costs.
James Zallie: On a sequential basis, T&H Solutions increased operating income margins by over 200 basis points.
James Zallie: And we anticipate op income margins to be between 13% and 15% for the full year.
James Zallie: In Food and Industrial Ingredients, LATAM.
James Zallie: Net sales were down 5% versus last year and down 6% on a constant currency basis.
James Zallie: F&I LATAM operating income was $130 million, with an OI margin of 20.6%, driven primarily by lower input costs as we were lapping the prior year's energy transition to biomass in Brazil.
James Zallie: Further contributing to op income growth, volumes were improved year over year, and the Argentina JV had surprisingly strong results, as we are seeing better than expected economic conditions.
James Zallie: We expect OI margins for the full year to be between 17% and 19%.
James Zallie: Moving to food and industrial ingredients, U.S. canned, net sales were down 8% for the quarter.
James Zallie: FNI-US-CAN operating income was $105 million.
James Zallie: with an OI margin of approximately 19%.
James Zallie: The significant improvement was driven by tight management of lower raw material costs.
James Zallie: and the renewal of multi-year customer contracts that have caught up with input inflation endured in prior years.
James Zallie: We expect for the full year, OI margins for this segment to be between 16% and 18%.
James Zallie: For all other, net sales decreased 42% for the quarter, driven by the overlap of South Korea's net sales in the prior year's quarter.
James Zallie: When adjusting for the exit from South Korea and foreign currency impacts, net sales were up 6%.
James Zallie: All other, operating loss was $10 million.
James Zallie: Primarily driven by our protein fortification business and some one-time costs incurred in the quarter.
James Zallie: For the full year, we expect all other operating losses in the range of $20 million to $30 million.
James Zallie: A significant reduction from 2023.
James Zallie: Turning to our earnings bridge, on the left side you can see the reconciliation from reported to adjusted earnings per share.
James Zallie: On the right side, operationally, we saw an increase of 20 cents per share for the quarter.
James Zallie: The increase was driven primarily by an operating margin increase of 6 cents.
James Zallie: and other income of $0.11 per share.
James Zallie: which reflects the positive results primarily from our Argentina joint venture.
James Zallie: Moving to our non-operational items, we had an increase of 35 cents per share.
James Zallie: Primarily driven by lower financing costs and favorable foreign currency gains of $0.22 per share and a favorable tax rate contribution of $0.10 per share.
James Zallie: Shifting to our year-to-date income statement highlights.
James Zallie: Net sales for the first six months were approximately $3.8 billion, down 11% versus the prior year.
James Zallie: While gross profit dollars decreased 7%, gross margin was up to 23%.
James Zallie: Reported and adjusted operating income were $453 million and $486 million, a decrease of 16% and 11% respectively.
James Zallie: Both reflecting the lap of a strong first quarter in 2023.
James Zallie: Turning to our year-to-date earnings bridge, operationally, the result is a decrease of $0.60 per share, which reflects Q1's large decrease with a positive contribution from Q2.
James Zallie: For our non-operational items, we had an increase of 50 cents per share.
James Zallie: Primarily driven by lower financing costs of $0.37 per share, and a favorable tax rate contribution of $0.07.
James Zallie: Moving to cash flow. First half cash from operations was $521 million.
James Zallie: Cash Firm Operations benefited from consistent net income and lower than expected investment in working capital.
James Zallie: Lower inventory value benefited working capital investment, as demand was strong and we experienced production downtime in the U.S., as well as lower raw material costs passing through working capital balances.
James Zallie: For the balance of 2024, we expect sales volume growth.
James Zallie: Further reductions in cost of goods sold per ton.
James Zallie: We are still planning to invest $340 million into capital expenditures.
James Zallie: and Operating Income to be up high double digits versus prior years Q3
James Zallie: That concludes my comments and I'll turn it back to Jim.
James Zallie: Thank you, Jim. After experiencing a record second quarter with strong volume growth and lower input costs, we expect those trends to continue in the second half, providing the impetus for strong profit growth.
Speaker Change: with both the identification and initiation of SGNA and COGS savings.
Speaker Change: We are confident that we are on track to meet our $50 million target of run rate savings by the end of next year.
James Zallie: Our strong cash flow generation and balance sheet provides strategic optionality for M&A, investment in organic growth, and future returns to shareholders.
Speaker Change: Before we go to the Q&A, I would like to turn your attention to an exciting event that we are planning for November 14th, which will highlight our Texture Innovation leadership capabilities.
Speaker Change: With the formation of our global texture and healthful solution segment we want to showcase how texture solutions can make healthy taste better. More information will be forthcoming over the next month.
James Zallie: Now, let's open the call for questions.
Speaker Change: Our first question comes from Kristen Owen with Oppenheimer. Please go ahead.
Kristen Owen: Hi, good morning. Thank you for taking the question and congratulations on a nice quarter.
Kristen Owen: I just wanted to unpack your end-user demand versus restock that you called out in the prepared remarks.
Speaker Change: I'm just wondering if you can help us with any insight that you have on maybe your distributor inventory levels, and as it's related, just what's assumed in the high and low end of the guide for the full year from a volume perspective. Thank you.
Speaker Change: Yeah, Kristen, this is James Zallie. So, our...
Speaker Change: The second half is lapping prior year customer destocking that we believe is no longer evident in the supply chain.
Speaker Change: Our second quarter's strong volume growth.
Speaker Change: builds off of the prior three-quarters trend line that we've been reporting on.
Speaker Change: Our belief is that consumers have not just started this past quarter to economize, but have been economizing over the past year. And plus, despite this, we're seeing an upward trend in volume growth.
James Zallie: And plus, despite this, we're seeing an upward trend in volume growth.
Speaker Change: of our ingredients and our geographic diversification.
Speaker Change: and I'm going to be talking about the the the the the the the the the the the the the the
Speaker Change: We're seeing companies offer more promotions to move volume, and we have also, which we've highlighted, active innovation programs to also drive volume growth, of which we are part of many co-creation briefs right now.
Speaker Change: And we do track data from a standpoint of...
Speaker Change: Food and Beverage Categories at Retail and Latest 13-Week Data shows Volume Growth in Multiple Categories in which our Ingredients
Speaker Change: are sold into, such as frozen prepared meals, frozen battered protein substrates.
Speaker Change: soups, dressings, and condiments all have done well.
Speaker Change: to say starting in late 2022, but certainly for the first three quarters of 2023 was pretty stark. And we have seen distributors, you know, replenishing inventories now. And so and typically
Speaker Change: They're very good at managing their cash flow and also have an early indication of what they need to supply for seasonal production for holiday periods as well. So, we take...
Speaker Change: that volume restocking that we're seeing and order pattern for distributors as a good sign going forward, so that's a little bit...
Jim: As far as part of our calculus, Jim, you may want to make some additional complimentary comments. Just to remind, you know, Kristen as well as those folks on the call, right,
Jim: At home meals, and so to the extent that you see the consumer grocery basket economizing, maybe a little bit more meal occasions at home.
Jim: you know, more kind of ready to prepare entrees, etc. That really bodes well for our volume poll, I would say about 20% of our business in the US, as an example, is really exposed to food service.
Jim: And there we are seeing, you know, more mixed results, right, because of traffic. You know, traffic in some of your QSRs and your fast cash has shown kind of month-over-month declines.
Jim: you know, low single digits. So we, you know, we raise an eyebrow to that, but also see that, you know, he's, as Jim's mentioned, more value meals.
Speaker Change: have come back within QSRs to, you know, stimulate demand. So, you know, it's a bit of a mix, but I would say that we lean a little bit more towards those in-home eating occasions, and that's usually really good for our volume. And we do supply the co-packers that go into private label as well. Yeah.
Unknown Executive: And we do supply the co-packers that go into private label as well.
Unknown Attendee: That's very helpful, Collar. Thank you for that.
Collar: That's very helpful, Collar. Thank you for that.
Unknown Attendee: I wanted to follow up on gross margin expansion. You know, three big levers that I see there, and I'm hoping you can maybe help me quantify or contextualize those levers. I mean, you've got the improving demand backdrop, you've got the declining commodity backdrop, and then you've got these efforts that you're making internally to improve your operations. So maybe parse out those levers for us and help us understand, as we see that the commodity environment continues to trend lower, how much you can hold on to that, you know, as we think about the 2025 bridge. Thank you.
Speaker Change: I wanted to follow up then on the gross margin expansion, you know, three big levers that I see there, and I'm hoping you can maybe help me quantify or contextualize those levers. I mean, you've got the improving demand backdrop, you've got the declining commodities backdrop, and then you've got these efforts that you're making internally to improve your operations. So maybe parse out those levers for us and help us understand as we see the commodities environment continue to trend lower. Excuse me.
Speaker Change: How much you can hold on to that, you know, as we think about the 2025 bridge. Thank you.
Speaker Change: Yeah, I think, so I'll, maybe I'll take the lead on this and that.
Speaker Change: You're always going to benefit a little bit from, you know, an expectation of your raw material cost and if your raw material costs come in lower.
Speaker Change: Remember, we hedge about 80 to 85% of our raw material costs. So to the extent that there's just a little bit of lower,
Jim: Spot prices in the marketplace that's going to benefit, but really it's the volume That where your second driver that you highlighted the volume growth is really providing some fixed cost absorption
Jim: You know, we highlighted that last year, you know, as a tremendous headwind.
Jim: And so as that comes back, particularly in our texture and healthful businesses.
Speaker Change: Where you have more assets in the downstream production, you just get some tremendous fixed cost absorption.
Speaker Change: as we see that that volume coming through. And then I'd say on top of that
Speaker Change: We're in, I would say, maybe our third year as a global operations team under our new model, really running at harmonizing things like our internal savings metrics, our procurement team.
Speaker Change: So there are some internal initiatives that we're taking just on a day-to-day basis to drive operating excellence.
Jim: I would say that that's that's a bit of a wind in our sails as well that will continue as we go into 25 and 26. Yeah I think what Jim's highlighting is that it's noteworthy to point out that beyond the cost to compete program
Jim: Ingredion's strategic pillar focused on cost competitiveness through operational excellence.
Speaker Change: is driving a comprehensive set of productivity initiatives to reduce costs, expand capacity, and avoid or delay capital investment. And that program, which has been underway for multiple years now as part of a global
Jim: Operations, Operating Model
Speaker Change: is paying dividends on top of that.
Speaker Change: We've initiated the cost to compete program with its 50 million dollar run rate savings target by end of 25
Speaker Change: And again, we've reported an update on our progress there. So that's another lever that's helping, we believe, and will help with the margins. The volume growth, I think Jim hit it right on the head as the number one issue from a leverage standpoint, and certainly
James Zallie: Not just in the United States, but we're seeing raw material costs, corn costs come down. And we're benefiting as that happens, related to our pricing and some of the sticky down that we we tend to
Speaker Change: Not just in the United States, we're seeing raw material costs, corn costs come down.
Speaker Change: and we're benefiting as that happens related to our pricing.
Jim: and some of the sticky down that we tend to benefit from. Kristen, I would add that the third lever, maybe there is a fourth lever, there is a difference in our product mix.
Kristen Owen: And to some extent that we have some products that sell for higher average prices per ton.
Speaker Change: and they offer a much more unique value to the customer in the recipe and in the consumer labeling. And those sell at higher gross margins. And those, Jim, are in the texture and healthful solution segment, which experienced the highest volume growth this past quarter.
Jim: So that's also that plays underneath a lot of gross margin expansion over time.
Jim: Great. Thank you so much. I'll leave it there.
Speaker Change: Thanks.
Jim: Thank you.
Speaker Change: Our next question comes from Josh Spector with UBS. Please go ahead.
Josh Spector: Yeah, hi, good morning. So I just wanted to ask at a high level, with your guidance at the EBIT level, you didn't change that for the year, the second quarter came in better, understanding that some of the parts on price costs and otherwise, but it seems like margin expectations moved up.
Speaker Change: So, I guess, was there more of a pull forward or was something temporary from a price-cost perspective in 2Q that you don't too expect to recur, or has anything changed on your view in the second half?
Noah Weiss: Well, Josh, you know, this was a maybe a source of internal debate. I just say that, you know, mid-single-digit op income growth implies a range. And as Noah advised me, we're probably more towards the upper end of that range. So we're just feeling that Q2 really confirmed
Speaker Change: Some of the dynamics in the business that we wanted to see impacting gross margin And we have good momentum behind cost to compete So I think that gives us confidence when you look at Q3 and Q4 for this year some pretty high op income growth expected
Josh Spector: Okay, thanks. That's helpful. And just kind of a follow-up to the prior question around volumes, it kind of...
Speaker Change: It seems like if we look at the two-year stack of things...
Speaker Change: You're expecting things to improve in the second half. I mean, you talked about a number of reasons about why.
Speaker Change: Our math would be that your volumes need to be up about high single digits to kind of get into the range that you're guiding to. I guess first, is that right? And then two, are you seeing the signs now that there's some acceleration in your multi-year stack on volumes into the second half?
Speaker Change: I don't know if there's acceleration, but I would, you know, definitely in terms of the second half volumes, we're solidly seeing mid-single digits to high-single digits on 3P volume growth.
Josh Spector: And the new segment of Texture and Healthful Solutions in 2024.
Unknown Executive: lapped a very strong first half, and that segment experienced more of the destocking phenomenon primarily because those ingredients are transported in a dry state in comparison to the food industrial ingredients which are sold.
Speaker Change: Lapped a very strong first half in the first half and that segment experienced more of the destocking phenomenon primarily because those ingredients transport in dry state in comparison to the food industrial ingredients which are sold
Josh Spector: for the majority in bulk liquid, for example, and so they experienced more of the destocking phenomenon in comparison to food and industrial ingredients. And so from a standpoint of the second half comparator,
Josh Spector: Yes, we do feel that
Josh Spector: There will be strong volume growth in the second half.
Speaker Change: Okay, thank you.
Operator: Our next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Adam Samuelson: Yes, thank you. Good morning, everyone.
Josh Spector: Good morning, Adam. Good morning, Adam. Good morning. So maybe just the first question on capital allocation and deployment. We're going to see a restart of repurchase activity in the second quarter, and you alluded to more to come in the second half. Can you help us think about
Speaker Change: The Continuation of that versus the M&A pipeline Maybe as it sits today, and are you seeing more interesting things? and if you are
Adam Samuelson: kind of any framing on the sizing of those and just remind us how you'd approach the return and accretion targets for
Speaker Change: Any framing on sizing of those and just remind us how you'd approach the return and accretion targets for any M&A.
Josh Spector: Yeah, maybe I'll take the first part on share repurchase, Jim. Maybe you should comment on M&A. Sure. But just real briefly, so with $66 million worth of shares repurchased in the first half,
Josh Spector: We're definitely striving towards $100 million for the full year.
Speaker Change: What is the ingredient in stock price trading? What is the ingredient in stock price trading relative to the market? Relative to intrinsic value, we calculate a return.
Speaker Change: For remaining shareholders and we're always looking at that versus the returns that we're getting on organic investment
Speaker Change: and potential M&A.
Speaker Change: And so, you know, I think that we look at that and it may come across as infrequent, but we're very purposeful.
Josh Spector: and Deploying Cache.
Josh Spector: To the extent that we have actually an anticipation of more strategic cash available as we end 2024.
Josh Spector: That will be part of our consideration as we are looking at share repurchase So right now committed to getting to the hundred million But open beyond that
Josh Spector: We keep dry powder on our balance sheet as well when we look at M&A.
Josh Spector: and Jim, you want to talk a little bit about what you're doing? Well, you know, so first, just to put an underscoring point on the share repurchase, I would say that further share repurchase is in the second half.
James Gray: Beyond the 100 Million is clearly an option. That being said, we're always weighing in the balance what we have in an active M&A pipeline that we're always nurturing. And we have prospects that we're advancing through that pipeline. So we have a number of projects for organic growth investment, as well as some cost savings, but also
Jim: Nurturing, and we have prospects that we're advancing through that pipeline and
Speaker Change: Anything that can enhance the value propositions to support primarily the texture and healthful solutions. However, we also want to use some of that capital wisely.
Speaker Change: for Reliability Investments for these very strong cash-generative businesses that you're seeing perform and seeing, I think,
Josh Spector: Hopefully some pleasantly surprising financials for the new segments of Food and Industrial Ingredients, LATAM.
Speaker Change: We have an eye towards the pipeline, the M&A pipeline that we're nurturing. And all that being said,
Unknown Executive: We have a
Speaker Change: We have a...
Speaker Change: a good challenge on our hands, which is
Speaker Change: How do we deploy the cash that we have? And certainly, we're going to be looking at share repurchases as well. And Adam, let me just ask your last question or answer your last question, which was with regard to M&A.
Adam Samuelson: That's all helpful. I guess just to follow up on the business and the outlook, in the quarter itself, the LATAM business has had very strong results and I'm maybe looking for a little bit more color on
Adam Samuelson: Pulling that apart a little bit between Mexico, which seems like it's had some tailwinds because of sugar prices, versus the traditional South American business and how we should think about those two parts of the geography is kind of moving forward through the second half. Thanks.
Speaker Change: So I'll take that and then Jim you can add any additional comments, but you're spot-on, Adam, that our Mexico business continued to generate record results in quarter two, driven by increased sweetener demand and higher sugar prices.
Speaker Change: In addition, our Brazil results improved on volume growth and against the LAP.
James Gray: in higher energy costs due to the biomass boiler startup in Q2 of 2023. And lastly, because this was a topic on quarter one's earnings call, I'm pleased to report that a large customer, which is served by our Columbia business, that did not pull any volume in quarter one, has commenced their full year purchase obligations in quarter two. And we expect them to meet their full year purchase commitments by the end of the year. So those were some of the factors that drove some of the very strong performance in food industrial ingredients.
Speaker Change: in higher energy costs due to the biomass boiler startup in Q2 of 2023. And lastly, because this was a topic in quarter one's earnings call, I'm pleased to report that.
Speaker Change: A large customer, which is served by our Columbia business, that did not pull any volume in quarter one.
Speaker Change: and we expect them to meet their full year purchase commitments by the end of the year. So, those were some of the factors that drove some of the very strong performance in food and industrial ingredients. La tem.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Andrew Strelzik with BMO Capital Markets. Please go ahead.
Unknown Attendee: Hey, good morning. Thanks for taking the questions. Maybe dovetailing off the last question.
Andrew Strelzik: Hey, good morning. Thanks for taking the questions. Maybe dovetailing off the last question.
Andrew Strelzik: are tracking towards the higher end of the guidance range and you've talked about a lot of positive factors that should impact your margins over the balance of the year.
Speaker Change: Hi, Andrew. Thanks for dialing in. I would probably just say that when you take the first half for both food industrial ingredients, US Can, as well as food industrial ingredients, LATAM,
Speaker Change: You know, you'll just, you gotta put Q1 into the math for the first half and so therefore then...
Speaker Change: And generally, I think that we're seeing co-product value relative to corn. You know, it's moving a little bit, but it wasn't moving nearly as much as necessarily last year. And so I think that that's going to basically support gross margins for these two businesses.
Andrew Strelzik: Other than that, I think that we probably do see some volume, but not a tremendous amount of volume growth, but some volume growth and upside in both of these businesses. Clearly, there's some room in LATAM in the second half of the year.
Speaker Change: Okay, great. That's helpful. And then...
Speaker Change: Just a little more clarity on the cost base and how you're thinking about that for the balance of the year off to a very good start here, especially relative to the $50 million over the course of two years.
Speaker Change: You know, so I think that when we look at the Cost to Compete program, and we put out that target for $50 million of run rate savings at the end of year two,
Speaker Change: It's really, we completed a refresher of our strategy in 2023 and our board decided to endorse our decision to re-segment our business.
Andrew Strelzik: And this has afforded the opportunity to redesign and reorganize each of the segment's needs. And most of those savings that were identified thus far come from redesigning and streamlining the org structure, really to align with each segment's must-have capabilities.
Andrew Strelzik: And so our teams are committed to delivering that $50 million of run rate savings by the end of 2025.
Andrew Strelzik: We're going to progress those savings initiatives. We'll provide relevant updates as we go. I think right now we've been a bit bolstered by the start of having the opportunity to have a reorganization.
Andrew Strelzik: really, you know, at the end of last year and getting completed in the first half of this year. And so still feel like that $50 million run rate target is appropriate.
Andrew Strelzik: As we've highlighted before as well, what Cost and Compete allows is kind of a restructuring window for events.
Andrew Strelzik: But that doesn't stop us from thinking about being cost competitive. And we do that on a day-to-day basis. And Jim has highlighted previously some of what the efforts are underway on our operations team as well as our global shared service centers.
Jim: To always think about productivity and efficiency on a day-to-day basis.
Speaker Change: Great. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Ben Theurer with Barclays. Please go ahead.
Ben Thurr: Yeah, good morning, Jim and Jim. Thanks for taking my question.
Ben Thurr: So just one quick one and a follow-up. So if we look at the texture and helpful solutions, obviously with,
Ben Thurr: Unknown Speaker You've explained a little bit like the volume dynamics and some of the destocking issues. But one of the things I was wondering, if you could explain as a little bit, what's the difference between
Speaker Change: If you could shed some color on that, that would be my first question. Thank you.
James Zallie: Those inventory downgrades are behind us, and on the back of the strong volumes we experienced, a strong customer pipeline, and better fixed cost absorption. We obviously see a brighter outlook going forward, but it was really some of those dynamics on the necessary actions to adjust pricing and then. A lot of the capital investments that we've highlighted in previous earnings calls that we would say are still early-stage capacity expansion investments that we made. For example, we more than doubled our specialty starch capacity in China and expanded capacity for specialty starches in Thailand, as we've highlighted in previous earnings calls.
Speaker Change: Those inventory downgrades are behind us and on the back of the strong volumes we experienced and a strong customer pipeline and better fixed cost absorption.
Speaker Change: The margins were
Speaker Change: that not the full percentage of that available capacity or those capital investments are actually generating returns, certainly at anywhere close to peak levels. So that's another factor in relationship to some of the things that
Speaker Change: And, you know, over time, as we look at that, when you adjust for the DNA, you'll see, you know, a very, I think, what we believe is a very healthy EBITDA margin for this segment, which is going to deliver top-line growth.
Speaker Change: Fantastic, very clear. Thanks for that. And then just if we if we look into some of the more recent volatility, but no more of that.
Speaker Change: You've mentioned Colombia, you've highlighted Brazil and Mexico.
Speaker Change: Just help us understand how you think about the consumer down there and what you're seeing from your customers in terms of...
Speaker Change: Willingness to maybe keep pricing into next year, or are you seeing some of your customers trying to push, given the lower corn cost, for more pass-through than maybe it was the case for 2024, just given signs of a little bit of a slowdown on the consumer side in both Mexico and Brazil?
Speaker Change: Hey Ben, I would probably respond just initially in that because we don't contract out as far and not really for a full year, really across South America, the contracting is really more maybe 12 weeks out or possibly as much as three months to six months.
Speaker Change: Changes in the cost of the raw material are going to be reflected pretty quick.
Speaker Change: through the inventory and then evident in the pricing to our customers.
Speaker Change: And so to the extent that there's sensitivity to our customer's consumer.
Speaker Change: That would probably be reflecting a relatively contemporaneous value.
Speaker Change: of the products that we're selling. We do have a little fewer contracts in Mexico that tend to go for a full year, but we're really more locked into U.S. corn costs on that and then apply hedges there.
Speaker Change: Yeah, and I would just say you know
Speaker Change: I mean, Argentina's economy in 24 shows some promising results due to the new president's reforms.
Speaker Change: Inflation is easing and macroeconomic indicators are better than expected, and as I highlighted, foreign exchange hasn't devalued to the degree expected. And also, in Brazil,
Speaker Change: Brewing Brewery had some significant recovery and in fact some of our customers reported very strong volume growth in Brazil this past quarter.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Heather Jones with Heather Jones Research. Please go ahead.
Speaker Change: Yeah, so thank you for the question Heather. The group of
Speaker Change: All other, that segment, is in fact on a positive trajectory year on year if you adjust for the sale of our South Korea business, which was in this portfolio last year.
James Zallie: and our 71% stake in our Pakistan business. And we are actively working a turnaround plan to steadily improve the health of our protein fortification operating unit over the next one to three years. We're very pleased to report
Speaker Change: and our 71% stake in our Pakistan business.
Speaker Change: So over the near future, they will continue to contribute toward all other profit growth.
Speaker Change: As stated previously, protein fortification is loss making, and we are actively working a turnaround plan to steadily improve the health of protein fortification operating unit over the next one to three years. What we're very pleased to report
Speaker Change: And for those of you that haven't been tracking this.
Speaker Change: on Chinese Imports.
Speaker Change: I think Mission Distributors Replenishing Inventories.
Speaker Change: It's sort of...
Speaker Change: quantify or give some guidance as to how much of that volume growth was
Speaker Change: Stronger end-customer demand versus restocking from last year's destocking.
Speaker Change: Maybe I'll just jump in, because, yeah, Heather, we have covered this a bit previously, but generally it's more of an end-consumer poll. You know, we've highlighted, particularly in grocery, you know, club, you know, mass,
Speaker Change: Those are categories that we track that unit volume growth and some of those categories, you know, so prepared meals, you know, maybe soups, sauces, and dressings.
Speaker Change: uh, you know, battered, you know, so french fries and chicken that we've seen unit volume growth in the end.
Speaker Change: Q2 when we look at the scan data. And so we're seeing pull there. I would say that the offset is maybe a little bit of some noise around QSRs.
Speaker Change: But within the U.S. canned business, you know, food services may be about 20% of our volume pull.
Speaker Change: So while we see some pretty interesting headlines with regard to some of the bigger fast food service chains and we're watching those, definitely I think we're seeing just more in consumer pull in the grocery basket.
Speaker Change: Okay, thank you so much. I appreciate it. Okay, thanks Heather.
Speaker Change: Thank you. I'm showing no further questions at this time. I'd now like to turn it back to James Zallie for closing remarks.
James Zallie: That really concludes today's call and we want to thank everybody for their interest in Ingredion and we hope to see many of you on November 14th at the Texture Innovation Day in Bridgewater, New Jersey.
Speaker Change: Thank you for your participation in today's conference. This concludes the program. You may now disconnect.