Q3 2024 Ingredion Inc Earnings Call
The End
Speaker Change: To ask a question during this session you need to press Star one one on your telephone you would be in here in the automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, nor wise Vice President.
Of Investor Relations. Please go ahead.
Good morning, and welcome to <unk> third quarter 2024 earnings call I'm, 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.
Release, we issued today as well as the presentation, we will reference for our third quarter results can 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.
Speaker Change: Payments are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance.
Results could differ materially from those estimated in the forward looking statements and ingredient and 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.
We found in the company's most recently filed annual report on Form 10-K, and subsequent reports on forms 10-Q and 8-K.
During this call. We 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.
Speaker Change: With that I will turn the call over to Jim's Alley.
Jim Alley: Thank you Noah and good morning, everyone.
Jim Alley: Ingredient achieved a significant milestone in the third quarter with a 29% increase in adjusted operating income.
Jim Alley: <unk> not only our best third quarter performance ever but also the second highest quarter in the history of our company in fact, all three of our segments delivered double digit operating income growth in the quarter, which is a testament to the dedication and hard work of our teams across the world.
Jim Alley: Operating excellence and contract management across each of our segments were key drivers of the exceptional profit growth.
Despite facing input and wage cost inflation, our sales teams successfully adjusted multi year contract pricing with customers, which supported margin recovery.
Jim Alley: Furthermore, volume recovery improved fixed cost absorption and our operations and procurement teams drove structural savings, which complemented the savings coming from our cost to compete program.
Jim Alley: Turning to a summary of our sales volume growth all three segments reported year over year increases, resulting in 4% net sales volume growth compared to last year when adjusted for the sale of our South Korea business.
Jim Alley: Starting with texture and helpful solutions the.
Jim Alley: The double digit sales volume increase that we experienced was the result of notable food and beverage category growth in the U S.
Jim Alley: In areas, such as savory packaged meals and frozen prepared meals.
Jim Alley: Additionally, our sales volumes in Europe also experienced double digit growth driven by an uptick in consumer buying behavior as more and more people are commuting to work and seeking convenient meal and snacking options.
Jim Alley: We are experiencing the greatest volume growth with our most differentiated products and solutions, which generally offer higher profitability.
Jim Alley: We anticipated strong second half organic volume growth for texture and helpful solutions and our new global segment is better, enabling our commercial and operations teams to identify opportunities and capture.
Jim Alley: Growing global demand.
Jim Alley: In the food and industrial ingredients Latam segment volume growth from Brazil's brewing category showed continued recovery. Despite some unevenness in the quarter.
Jim Alley: I'm also pleased to report that our sales for nutritional meal supplements in Colombia have significantly improved and we anticipate continued growth through year end.
Jim Alley: Lastly for food and industrial U S Canada.
Jim Alley: We had continued strong demand from paper, making a packaging customers, which was partially offset by softer sweetener shipments primarily to foodservice.
Jim Alley: Now, let me update you on progress against our three strategic pillars.
Jim Alley: Beginning with business growth.
Jim Alley: Customer engagement on current inactive future innovation pipeline projects rose by 27% this quarter.
Jim Alley: These opportunities set the stage for deeper collaborations and greater long term partnerships, leveraging our expanding solutions capabilities.
Jim Alley: Texture and helpful solutions saw strong sequential net sales and profit growth driven by lower raw material costs better volumes and improved mix.
Jim Alley: For each of our food and industrial ingredients segments in 2024, we.
Jim Alley: We had renewed several long term contracts with key customers, enabling us to offset inflationary input cost increases, which we absorbed over the past two years the.
Jim Alley: The benefits of these renegotiated contracts led to increased profitability.
Jim Alley: We also observed consistent demand for industrial starches in the U S and Canada to the paper, making and packaging sectors.
Jim Alley: Lastly, this quarter, we ramped up higher throughput production at our colleague, Colombia, and Mexico, Mexico City facilities. After successfully Debottleneck necking, both operations with minimal capital expenditures, yielding very attractive returns.
Jim Alley: We are constantly seeking out these type of modest organic investment opportunities to optimize our network and provide headroom capacity for future growth.
Jim Alley: Turning to our second strategic pillar cost competitiveness through operational excellence.
Jim Alley: Earlier in the year, we launched a two year cost savings program called cost to compete with a target to deliver $50 million of run rate savings by the end of 2025.
Jim Alley: I am pleased to report that through the first nine months of the year. We are slightly ahead of our savings target expectations driven by captured SG&A from our global business re segmentation.
Jim Alley: We also as we also execute.
Jim Alley: On network optimization projects as part of our cost of goods sold savings initiatives tied to cost to compete over the next 15 months.
Jim Alley: In parallel we are also investing in opportunities to expand capacity and capabilities elsewhere for example.
Jim Alley: We are investing to expand our texture solutions formulating and innovation capabilities.
Jim Alley: With production ramping up as a result of increasing volumes, our commercial operations and procurement teams have improved sales and operations planning efficiency, leading to improved forecasting higher schedule adherence and improve service levels, which have been reflected in higher net promoter scores.
Jim Alley: This has also resulted in lower levels of inventory, which has driven improvements in working capital and strong cash flow.
Jim Alley: As we manage through 2025 contracting we're focused on leveraging our pricing centers of excellence to balance volume growth with pricing and a focus on margins to deliver year on year growth.
Jim Alley: Now, let's move to our last pillar supporting our purpose driven and people centric growth culture.
Jim Alley: Building on our exemplary safety record with a notable reduction in incidents in 2023.
Jim Alley: We were named a finalist for the National Safety Council Green Cross for Safety Awards. This prestigious recognition celebrates companies that exhibit exceptional dedication to safety and health, which reinforced our foundational value of care first.
Jim Alley: Our internship program has been named one of the top 100 in the U S by way up for the third time, we're especially proud of this ranking as it recognizes that ingredient is a great place to develop a career and positions us well in the minds of highly sought after college and turns and graduates and a tight.
Jim Alley: Labour market.
Jim Alley: Furthermore, this quarter, we were recognized as one of the most innovative companies in the food beverage and ingredient sectors in Brazil by Valor <unk>. This award was in recognition of our digital transformations that leverage artificial intelligence to predict equipment failures also the developing.
Jim Alley: Products in local markets from our idea labs, using proprietary consumer and customer insights and investing in cotwo emission reductions through the use of biomass energy.
Jim Alley: Lastly, it is worth highlighting that after a year of significant organizational change impacted by the reorganization of the company into new segments, our employee engagement scores remain at their highest levels and above industry benchmarks.
Jim Alley: Yeah.
Jim Alley: As discussed in the previous slide our significant gross margin improvement. This quarter is largely attributable to a well executed approach toward contract pricing raw material procurement improvements and hedging and increased volumes benefiting fixed cost absorption.
Jim Alley: Now I'd like to make some comments regarding the strength of the volume strength and our texture and helpful. Solutions segment ahead of our texture innovation day coming up next week on November 14th.
Jim Alley: We are pleased that a large proportion of our volume growth is coming from a more highly differentiated solutions.
Jim Alley: These opportunities are created when our customers come to us with complex problems that require a multi faceted solutions approach to meet a particular label challenge or cost target.
Jim Alley: Driven by front of pack label changes across many geographies and customers are looking to suppliers like ingredient to partner and deliver on their recipe and labeling needs, while meeting cost and use and sustainability targets.
Jim Alley: We are investing in our solutions capabilities, specifically in texture solutions sugar reduction solutions and protein and fiber fortification.
Jim Alley: We expect these investments to drive volume growth going forward offering faster customer innovation affordable recipe development, along with the opportunity for simplified and sustainable sourcing.
Speaker Change: Now I'm pleased to hand, it over to Jim Gray for the financial review.
Jim Alley: Thank you Jim and good morning, everyone move.
Jim Gray: Moving to our income statement net sales for the third quarter or approximately $1 9 billion down 8% versus prior year.
Jim Gray: Gross profit dollars grew 14% with corresponding margins up 490 basis points to 25, 6%.
Jim Gray: Reported and adjusted operating income were 268, and $282 million, respectively, with adjusted operating income up 29% versus the prior year, driven by lower raw material costs higher sales volume and better fixed cost absorption, partially offset by price mix.
Jim Gray: Turning to our Q3 net sales bridge, the 8% decrease was driven by $150 million and lower price mix and $20 million of foreign exchange impact.
Jim Gray: Partially offset by positive sales volume growth of $86 million.
Jim Gray: Furthermore, the exit from South Korea had a $79 million impact on sales volume.
Jim Gray: For modeling purposes last year's Korea net sales for the fourth quarter were similar to this quarterly run rate.
Jim Gray: Turning to the next slide we highlight net sales drivers for the third quarter.
Jim Gray: For the total company net sales were down 8% in.
Jim Gray: And excluding the impact of South Korea, net sales were down 4%.
Jim Gray: Texture and healthful solutions net sales were flat.
Jim Gray: Price mix was down 12%.
Jim Gray: For the quarter, primarily reflecting the pass through of lower corn costs.
Jim Gray: As well as last year's higher pricing due to double digit inflation experienced in our specialty corn and energy costs.
Jim Gray: Food and industrial ingredients Latam net sales were down 6%.
Jim Gray: And food and industrial ingredients use can net sales were down 9%.
Jim Alley: Both resulting from the impact of the pass through of lower corn costs.
Jim Alley: Let me turn to a recap of our Q3 performance by segment.
Jim Alley: Texture and helpful solutions net sales were flat compared to the prior year and down 1% on a constant currency basis.
Jim Alley: Textron helpful Solutions operating income was $96 million up 12% from the prior year.
Jim Alley: Op income margin improved to 16% driven by lower input costs and higher sales volumes, partially offset by unfavorable price mix.
Jim Alley: We still anticipate oi margins to be between 13% and 15% for the full year.
Jim Alley: And food and industrial ingredients Latam net sales were down 6% versus last year and down 2% on a constant currency basis.
Jim Alley: Operating income improved to $131 million, resulting in 26% year over year growth.
Jim Alley: Op income margin of 21, 1% was driven by lower input costs and lapping last year's transition cost to a more sustainable biomass energy source in Brazil.
Jim Alley: In addition, the weakness in the Mexican peso led to favorable transactional FX impacts.
Jim Alley: As we are dollar denominated in Mexico.
Jim Alley: The movement of the Mexican peso weakening contributed approximately $3 million upside in the quarter to Latam op income.
Jim Alley: We now expect OE margins for the full year to be between 18% and 20%.
Jim Alley: With the increase in the range driven by stronger performance as well as transactional FX impacts in Mexico.
Jim Alley: Moving to food and industrial ingredients U S can net sales were down 9% for the quarter and operating income was $99 million.
Jim Alley: With an OE margin of approximately 18%.
Jim Alley: Improvement year over year was driven by reduced raw material costs and the renewal of a long term customer contracts, which have been price adjusted for previous years input inflation.
Jim Alley: We expect full year Oi margins for this segment to be between 16% and 18%.
Jim Alley: For all other net sales decreased driven by the overlap of South Korea as net sales in the prior year's quarter.
Jim Alley: All other operating loss was minus $4 million, primarily driven by our protein fortification business.
Jim Alley: Turning to our earnings bridge on the top App you can see the reconciliation from reported to adjusted earnings per share.
Jim Alley: Operationally, we saw an increase of <unk> 77 per share for the quarter.
Jim Alley: The increase was driven primarily by an operating margin increase of 93.
Jim Alley: Partially offset by volume of minus <unk> 12 per share which.
Jim Alley: Which includes Korea for 2023.
Jim Alley: Moving to the share moving to the change in our non operational items, we had a decrease of <unk> <unk> per share.
Jim Alley: Primarily driven by an unfavorable tax rate change of minus 37.
Jim Alley: Mostly offset by lower financing costs contributed a positive <unk> 30 per <unk>.
Jim Alley: Sure.
Jim Alley: Shifting to our year to date income statement highlights.
Jim Alley: Net sales for the first nine months were approximately $5 6 billion.
Jim Alley: Down 10% versus the prior year due mainly to lower corn costs in the current period.
Jim Alley: While gross profit dollars decreased 1%.
Jim Alley: Gross margin has increased 220 basis points to 23, 8%.
Jim Alley: Reported and adjusted operating income was $721 million at $768 million respectively.
Jim Alley: Flat to down slightly from last year, reflecting the lap of a strong first quarter in 2023.
Jim Alley: Turning to our year to date earnings Bridge operationally. The result is an increase of <unk> <unk> per share.
Jim Alley: To note last year's results include an approximate 35 per share contribution from the South Korea business.
Jim Alley: For our non operational items, we had an increase of <unk> 54 per share.
Jim Alley: Primarily driven by lower financing costs of <unk> 64 per share, partially offset by an unfavorable tax rate change of minus 19.
Jim Alley: Moving to cash flow.
Jim Alley: First nine months of cash generated from operations was $1 billion.
Jim Alley: Cash from operations benefited from consistent net income strength as.
Jim Alley: As well as short term working capital benefits.
Jim Alley: The year to date working capital benefits as a result of lower raw material costs, passing through working capital balances as well as improved inventory management.
Jim Alley: Year to date, we have repurchased $87 million of the outstanding common shares.
Jim Alley: And we expect that we will meet or exceed our $100 million goal.
Jim Alley: Our capital allocation priorities continue to be first organic investment.
Jim Alley: Second our return to shareholders through our dividend and.
Jim Alley: And third strategic deployment of cash into M&A <unk> share repurchases.
Jim Alley: Now, let me turn to our outlook for 2024.
Jim Alley: For the full year 2024, we anticipate continued sales volume growth and op income improvement.
Jim Alley: Excluding the impact of the sale of South Korea from our outlook. We now expect net sales to be down mid single digits.
Jim Alley: The reduction in price mix as we pass through lower raw material costs, partially offset by improving volume demand.
Jim Alley: Yeah.
Jim Alley: We anticipate that adjusted operating income will now be up high single digits due to lower input costs and better operational efficiencies.
Jim Alley: We are decreasing our financing cost estimate to align with the reduction of overall debt levels and some positive foreign exchange impacts.
Jim Alley: We now see total financing costs in the range of $40 million to $50 million.
Jim Alley: For the full year 2024.
Jim Alley: We expect reported effective tax rates of 28% to 29%.
Jim Alley: And an adjusted effective tax rate 26, 5% to 27, 5%.
Jim Alley: The company expects its full year reported EPS to be in the range of $10 60.
Jim Alley: The $10 90.
Jim Alley: Which includes the gain from the sale of our South Korea business as well as our restructuring and impairment charges.
Jim Alley: For the full year, we are increasing our estimate for adjusted EPS to be in the range of $10 35.
Jim Alley: To $10 65.
Jim Alley: We expect diluted weighted average shares outstanding to be between 66 and 67 million shares.
Jim Alley: We anticipate our 2020 for cash from operations estimate to be in the range of $1 one to $1 25 billion.
Jim Alley: We expect capital expenditure investment to be between 310 and $330 million.
Jim Alley: Corporate costs are now expected to be flat year over year.
Jim Alley: In the appendix we have included a 2020 for full year segment outlook and our estimated 2023 comparable range.
Jim Alley: That concludes my comments and I'll turn it back to Jeff.
Speaker Change: Thanks, Jim.
Speaker Change: Our strong sales volume growth from texture and helpful solutions, coupled with operational excellence has enabled us to increase margins despite inflationary pressures.
Jeff: Cost to compete savings are ahead of target in year, one of the program with line of sight to network optimization projects that have been scoped and will be the focus of cost of goods sold savings over the next 15 months.
Speaker Change: We continue to deliver profitable growth and strong cash flow with a commitment to return cash to shareholders as evidenced by our 10th consecutive annual dividend increase and our full year $100 million share buyback goal.
Speaker Change: We anticipate building on our highest ever third quarter operating income performance, enabling us to carry momentum through year end and into 2025.
Speaker Change: And finally, our driving growth roadmap continues to guide long term value creation for our shareholders as we leverage the benefits of our new segment structure and capture new market and customer opportunities.
Speaker Change: Before we go to the Q&A I would like to remind everyone about an exciting event that we are planning for November 14th we will highlight.
Jim Alley: Our texture.
Speaker Change: Innovation leadership capabilities.
Speaker Change: During the event are leading scientists and cooling allergist will lead participants through a delicious journey of texture and how it impacts taste.
Speaker Change: We will explain the strategic vision and the differentiated solutions that will drive incremental profitability and growth for this business segment. We are excited to demonstrate how we intend to use our vast ingredients library and expertise along with the capabilities. We are building to provide texture solutions that make healthy.
Speaker Change: It tastes better.
Speaker Change: Now, let's open the call to questions.
Speaker Change: Thank you.
Speaker Change: Tom We will conduct a question and answer session. As a reminder to ask a question you would need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: Please stand by while a compile the Q&A roster.
Speaker Change: Our first question comes from Ben Theurer from Barclays. Please go ahead.
Ben Theurer: Okay, Good morning, Jim and Jim Congrats.
Speaker Change: Good morning, guys good morning, Ben.
Speaker Change: So.
Speaker Change: Just two.
Ben: Two quick ones actually on my side. So first of all you obviously had very impressive <unk>.
Speaker Change: Grove again, and the texture and helpful Solutions segment, right, we got 8% last quarter.
Speaker Change: 11% now.
Speaker Change: But there seems to be a little bit.
Speaker Change: A higher discount on the price makes sense I wanted I was just trying to understand if you're doing something with your customers to push the volume on the.
Speaker Change: Price mix or is it is it more price or is it more mix, what's what's driving at.
Speaker Change: Did you get the very strong volume, but then at the same time, a little more negative on the price mix piece within texture and helpful solutions, just understanding what's been driving that that would be my first question and then I have a quick follow up.
Speaker Change: Yes, Ben Thank you.
Speaker Change: I think.
Speaker Change: What.
Speaker Change: We feel good about is that if we go back to the pricing centers of excellence that we put together.
Speaker Change: Three four years ago that served us so well through the ramp up of inflation that also led to us becoming very.
Speaker Change: Clear minded in relationship to the customer base.
Speaker Change: And the market in categories that we wanted to position ourselves in and we've invested a lot in consumer and customer insights.
Speaker Change: Two.
Speaker Change: We anticipate.
Speaker Change: Where the puck is going in relationship to consumer buying behavior and.
Speaker Change: With inflation, we've sought out pockets of growth so I would say that we feel.
Speaker Change: Fortunately that we are well positioned.
Speaker Change: To grow in those categories and those.
Speaker Change: Those end uses that are are generating are generating growth. So if for example in this past quarter, we've seen low.
Speaker Change: Single digit volume growth in the sarcoma data across the categories of savory prepared meals bakery and snacks.
Speaker Change: As well as dairy.
Speaker Change: And our volume growth in these same categories was reflected by our sales in the quarter.
Speaker Change: And also though it's worth noting that we are lapping last year's soft demand as customers were optimizing their inventory levels in Europe. There is evidence that consumer sentiment has turned more positive versus last year's economic challenges and we believe we are seeing more workable.
Speaker Change: Worker mobility as professionals return to the workplace and the demand for.
Speaker Change: The products that we're selling into for convenience and takeaway items pick up and right now we anticipate that this.
Speaker Change: Strength in demand will continue through the end of the year, Jim do you want to have any additional comments, yes, I would just highlight too and that Jim started to note upon and kind of more our more differentiated solutions I would say that the way that those show up in our P&L as we do sell some ingredients that might be very clean label that have high functionality.
Speaker Change: They show up at a higher value per ton.
Speaker Change: And we're selling that volume that's helping to drive the gross profit dollar growth to some of the products that were in texture helpful solutions that might be a bit more kind of functional in terms of their week to week month to month to use as corn price comes down it does get passed through and Thats, what I think youre seeing.
Speaker Change: In terms of the price mix and so very confident in the profit pool and the growth that we're generating and texture and helpful.
Speaker Change: Okay got it and then just a quick follow up on me.
Speaker Change: Capital allocation point of view.
Speaker Change: Significantly upped your free cash flow guidance call. It roughly 300 ish million give or take at the same time capex seems to come in a little bit lower.
Speaker Change: What are you going to do with the excess cash.
Speaker Change: Yes fair enough I think that those are both.
Speaker Change: I think.
Speaker Change: Beneficial to our overall balance sheet and our financial position I think most importantly understand that we've said this in the past that.
Speaker Change: Our.
Speaker Change: Our capital allocation, we really looked at first what are those organic investment opportunities, we're going to be very disciplined on the dividend. We have increased it for the 10th year in a row.
Speaker Change: It does generate excess cash on our balance sheet. We're looking at and are very committed to our share repurchase goal for the year. So we plan to meet or exceed that.
Speaker Change: And then yes, I think also there is there has to be a bit of a timing involved it can't necessarily just be every quarter there are opportunities in front of us.
Speaker Change: Both organic investments as well as we are always looking at M&A.
Speaker Change: And I think that we have to look at what we have done as a team to deliver results for shareholders and just note that when cash flow was against US like in say 2022 week corn was going up you had a significant investment in working capital.
Speaker Change: Since then if you look back over the last two and three quarters years, we've delivered 50% GSR.
Speaker Change: So I think that now that we just have a bit of a surplus of cash flow because working capital is a little bit favorable that's a temporary.
Speaker Change: Our business invest in working capital and so we will invest that cash very wisely and then I just think to address the capital investment phasing aspects of your question I think it's just a reminder, that we have spent the most historically.
Speaker Change: Our capital investment.
Speaker Change: For projects in the fourth quarter and our teams have many projects underway and we anticipate we will invest a significant amount of capital into our growth and the reliability of our manufacturing assets and it's it's natural from a phasing standpoint to incur some delays from equipment suppliers.
Speaker Change: And the availability of local skilled labor to complete projects on time and that can impact the timing of the spend one year to the next but.
Speaker Change: We do anticipate getting close I guess to our full year target despite being at $1 70 through the first three quarters.
Speaker Change: Capital spend.
Speaker Change: Alright, perfect, Jim and James Thanks, again and congrats.
Speaker Change: Thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from Kristen Owen from Oppenheimer. Please go ahead.
Kristen Owen: Hi, Good morning. Thank you for taking my question and congratulations on the nice results.
Speaker Change: Thank you Kristen good morning Kristen.
Kristen Owen: Good morning.
Kristen Owen: Can we just start with the demand question.
Kristen Owen: You noted the improved European consumer behavior.
Kristen Owen: Lackluster pro forma for the entire sector year to date. So I'm wondering if you can double click on that help us understand what's driving the volume growth is it lack of destock or are we seeing some real green shoots in that.
Kristen Owen: Okay.
Kristen Owen: Yes.
Speaker Change: Yes, I think that the first thing to highlight is that against the prior year quarter. We are lapping a softer quarter. So I think that that's important to put in perspective, just as I highlighted in relationship to the.
Speaker Change: U S situation as well that all being said it does appear that the.
Kristen Owen: The European consumer is.
Kristen Owen: More mobile and is.
Kristen Owen: Spending more in relationship to convenience type offerings, and that's one of the outlets that we've.
Kristen Owen: Deciphered back to the customer base, and where we think where.
Kristen Owen: We're doing well.
Kristen Owen: That's basically how I would summarize it.
Speaker Change: Okay. Thank you for that.
Speaker Change: Maybe just a quick follow up the level of inventory if you could comment on how youre seeing channel inventories. There are we really feel at this stage, we're a little bit of growth because the comps are easy or is there any restocking that youre seeing in the channel.
Speaker Change: Yes.
Speaker Change: I'm not necessarily seeing necessarily the restocking is driving the sales volume growth I think that there was a surplus of inventories in some of our packaged foods and some of our.
Speaker Change: Private label.
Speaker Change: Customers within both the U K as well as Europe. They just they had to get rid of those inventories that's what they used during 2023.
Speaker Change: I don't think that they ever really press their inventories down to a level where they were.
Speaker Change: Really trying to manage cash flows I think what we're seeing is just a nice steady demand pick up.
Speaker Change: As both as Jim alluded to Theres greater consumer mobility.
Speaker Change: Bit more takeaway.
Speaker Change: Kind of lunch and breakfast activity.
Speaker Change: Well, it's just that kind of that.
Speaker Change: Overall need for convenience I think is really driving some of the demand we've seen in our customers. Yes, I don't think there are any concerns.
Speaker Change: At a macro level.
Speaker Change: Globally to rebid.
Speaker Change: Rebuild inventories with safety stock that would be in excess of anything that would be.
Speaker Change: Typical if anything were.
Speaker Change: Taking a cautious approach in relationship to the outlook as it relates to.
Speaker Change:
Speaker Change: How customers will manage inventories between now even in the end of the year.
Speaker Change: Always the case as you go into a new year of contracting. So we don't see anything where it's any kind of a robust pipeline refilling of restocking demand demand is very steady utilizations are up yes.
Speaker Change: Thank you for that clarification, if I did have one follow up question just on the cost side.
Speaker Change: So nice improvement in the gross margin here just wondering if you can help us unpack how much of that is the improved volume backdrop versus.
Speaker Change: We're continuing to roll off that high cost.
Speaker Change: Yes, I think that obviously, we've renegotiated the multi year contracts, which we referred to and that enabled us to.
Speaker Change: Recover the margins and the cost that we had absorbed over the last couple of years and that has helped us in the food and industrial ingredients segments, clearly, there's a benefit from the reduction in raw material input costs.
Speaker Change: Which is which is shared with customers, but I would say look it's also I mean, we noted last year.
Speaker Change: That the volume the production volume was down and that was creating a fixed cost absorption headwind.
Speaker Change: As we have particularly seen volumes come back and texture and helpful solutions, and we benefit from better fixed cost absorption on those assets, that's really driving some of our better performance right and we're really managing that well, it's those three things it's the pricing.
Speaker Change: It's the cost and it's the mix and volume on texture and helpful solutions and the fixed cost absorption.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from Ben <unk> from BMO BMO capital markets. Please go ahead.
Ben Theurer: Hey, guys good morning, and thanks for taking the question.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Industry sources suggest that 2025 sweetener contracting is tracking better than buyers maybe initially expected.
Speaker Change: What is your visibility on contracting so far and do you foresee a chance that pricing could be up modestly and I have another question as well Hey, Ben can I just clarify your question you said tracking better than buyers expected.
Speaker Change: Yes.
Speaker Change: Hi, sorry, guys then.
Speaker Change: Then.
Speaker Change: Got it.
Speaker Change: Better than sellers expected, okay, well, what we would say is that.
Speaker Change: Contracting.
Speaker Change: Peers to be moving.
Speaker Change: Moving.
Speaker Change: Slower than last year.
Speaker Change: And I think that Thats, probably attributable to the change in the value of corn that is modest year over year.
Speaker Change: But just a reminder in relationship to contracting for 2025 and really for that matter for.
Speaker Change: Any year when we're at this point of the year.
Speaker Change: That approximately 50% of our revenue dollars in North America comes from fee.
Speaker Change: <unk> contracts or should I say U S, Canada, primarily from fee contracts they reprice monthly.
Speaker Change: With corn cost inputs from our customers.
Speaker Change: Anticipate some pass through of lower corn costs in 2025, if the markets remain with a similar outlook is today.
Speaker Change: But Jim mentioned earlier, the fact that industry capacity utilization has also lifted up a couple few percentage points as well, which is kind of tightened up overall supply demand.
Speaker Change: And we believe that our experienced commercial teams and our pricing centers of excellence.
Speaker Change: We are well prepared to manage pricing and volume trade offs thoughtfully in response to customer demand and the competitive market conditions.
Speaker Change: <unk>.
Speaker Change: Although raw material and input cost inflation has moderated.
Speaker Change: The wet milling industry is a high capital intensive industry and needs to earn a fair return.
Speaker Change: So that's all yet to play itself fully out.
Speaker Change: So that's kind of how I would summarize where we're at right now with contracting. It is still early it is early but I would say that we see that industry grind utilization is up year over year.
Speaker Change: And Thats.
Speaker Change: And so that's always a nice backdrop.
Speaker Change: Yes. Thank you that's very helpful.
Speaker Change: And my second question is around M&A.
Speaker Change: So you've previously talked to.
Speaker Change: Focusing more on.
Speaker Change: More like bolt on type acquisitions call it under $400 million.
Speaker Change: But given your.
Speaker Change: Youre a healthy cash balance.
Speaker Change: Would you consider or are you starting to consider more.
Speaker Change: Our transformative type acquisitions fully understanding that that would have to probably be.
Speaker Change: The U S. Thanks.
Speaker Change: Hey, Ben I think as we've always stated we consider M&A landscape broadly right. So.
Speaker Change: The Street May characterize tuck in we look at acquisitions that accelerate our capabilities and our market position, particularly in texture as well as helpful solutions.
Speaker Change: And we're always going to take a disciplined approach to that we're going to be front and center on whats the return to the ingredient shareholder.
Speaker Change: Really first and foremost and that I think guides us I think in terms of maybe market opportunities Jim.
Jim: Well I think I think that.
Jim: One of the things we feel.
Jim: Very clear minded about is.
Speaker Change: The strategic direction of the company because of the enterprise wide strategy refresh work. We did all of last year and then the activation of that strategy with our winning aspiration, which is to be the go to provider for texture and helpful solutions that make healthy taste better that is.
Speaker Change: Is uniting the company.
Speaker Change: Going forward and that will shape.
Speaker Change: The M&A approach that we take and anything that we can do to enhance the value proposition inherent in that.
Speaker Change: <unk>.
Speaker Change: Is what we're looking at and I would say that we're always <unk>.
Speaker Change: Actively managing.
Speaker Change: Our pipeline of M&A opportunities occur.
Speaker Change: Across the spectrum of size, but I would say that what we want to buy is we want to buy.
Speaker Change: Revenue, we want to buy profit and we want to buy talent and capabilities that are going to complement.
Speaker Change: That winning.
Speaker Change: Our winning aspiration culture, and obviously cultural fit fit as well so.
Speaker Change: But that's that's what we're looking to do to kind of work, we're encouraged to expand growth and honestly I think the landscape is.
Speaker Change: As hurdle with some opportunities out there so we're actively working those.
Ben Theurer: Thanks, a lot guys that makes total sense and congratulations on the strong results I'll hop back in thank you guys. Thank you. Thank you Ben.
Ben Theurer: Thank you one more before I maybe question.
Ben Theurer: Our next question comes from Josh Spector from UBS. Please go ahead.
Josh Spector: Yes, hi, good morning, I guess, the first thing I want to ask is you hit on this maybe different ways, but specifically.
Josh Spector: How much of the earnings improvement when you look at the last couple of quarters would you say is structural. So this is the earnings power of ingredients today, you've recovered corn youre running at better utilization rates let.
Josh Spector: Let me stop there and get your thoughts.
Speaker Change: I think.
Speaker Change: I'll take a shot at it and let Jim kind of complement I think that.
Speaker Change: What.
Speaker Change: We're seeing what we're feeling in relationship to our performance over the last number of quarters.
Speaker Change: Is the result.
Speaker Change: <unk>.
Speaker Change: Our operating model in support of the new segment structure. So.
Speaker Change: The.
Speaker Change: Decision to move to the new business segment structure, which followed.
Speaker Change: <unk> enterprise wide strategy refresh work that was done companywide in 2023.
Speaker Change: As you would expect has brought.
Speaker Change: Additional clarity and focus.
Speaker Change: Within those segments to their customer base.
Speaker Change: To their raw material base.
Speaker Change: To the need to reduce earnings volatility within each one of those segments.
Speaker Change: And we're absolutely getting benefit from the dedicated focus and leadership.
Speaker Change: From the clarify segment.
Speaker Change: Work that we did.
Speaker Change: But what I don't think.
Speaker Change: It has been fully appreciate it and what we're also recognizing.
Speaker Change: Is overlaying all of that.
Speaker Change: Is a global operating model that we.
Speaker Change: Began to put the foundation together.
Speaker Change: With.
Speaker Change: About three to four years ago.
Speaker Change: And.
Speaker Change: The benefits of that that's always a work in progress it leads to an awful lot of productive tension internally.
Speaker Change: From a standpoint of where roles and responsibilities accountabilities lie, but we're through the tough part of all of that.
Speaker Change: And example.
Speaker Change: Our operations and supply chain team, we have moved from internal metrics with customers that used to be.
Speaker Change: Delivered in full on time to now perfect order, which is a higher standard of <unk>.
Speaker Change: Delivery and we're at well over 90% perfect quarter, and our net promoter scores are showing that our procurement teams.
Speaker Change: Have been continuously finding opportunities to optimize.
Speaker Change: We're scheduled to hold our first.
Speaker Change: Procurement supplier day next year, something we would never would've thought ever conceived of.
Speaker Change: Back 234 years ago. So there is a maturity aspect and Jim certainly can comment on shared services.
Speaker Change: And the work that is going on there and how we've evolved that and so I think there is structural cost savings.
Speaker Change: That are coming about.
Speaker Change: The global operating model.
Speaker Change: Across all aspects of <unk>.
Speaker Change: Global what we call global business services, and Jim can comment on that.
Speaker Change: But.
Speaker Change: I think we are in the early innings of the benefits coming from the re segmentation, we kind of highlighted some of that and thats coming from that laser like focus I think that these now more global or multi regional segments are bringing and the accountabilities that the management is feeling.
Speaker Change: With the line of sight to their customer base, sorry to be a little bit long winded, but its a good question and we ourselves to be quite Frank are doing some soul searching and reflecting because we're pleasantly.
Speaker Change: Surprised pleasantly pleased but.
Speaker Change: But nonetheless trying to make sure we clearly understand it but we feel good about.
Speaker Change: Multiple levels of performance.
Speaker Change: Performance, Josh I would add that when we look at our food and industrial ingredients types of businesses.
Speaker Change: There's a there's a cadence in the business that we've tightened right. So it's around how is the raw material cost changing.
Speaker Change: How do we implement our pricing and our contracting how does that reflect against expanded hedging and then just running the assets.
Speaker Change: In a reasonably good utilization so that is helping support the higher op income margins that we're seeing both in our U S can F&I business as well as in our Latam F&I business I think on our texture and helpful solutions the structural.
Speaker Change: Improvements that I think as Jim alluded to are still a little bit in the early innings is its really is around kind of which products and which solutions. We can provide for customers recognizing that the better job, we do there theres even more.
Speaker Change: Utilization of our downstream assets, which really enhances our gross profit growth. So I think yet to come there.
Speaker Change: Really helpful. I appreciate all those comments.
Speaker Change: Yes, I did want to follow up that earlier in the call you talked about a balance of pricing with volume growth to deliver year on year growth next year I think your comments earlier on contracting seems somewhat optimistic there so.
Speaker Change: I don't know if that comment does gear gesture with concerns on what demand growth looks like or if there is increased competition elsewhere.
Speaker Change: How do you see that balance playing playing out for you.
Speaker Change: Yes, and not to be evasive I, just think it's early yet still in the process and.
Speaker Change: We feel good about the momentum that we have as we finish the year.
Speaker Change: Don't sense.
Speaker Change: Anything other than perhaps the normal working capital management that goes on our customers and December months.
Speaker Change: And corn is fluctuating a bit.
Speaker Change: <unk>.
Speaker Change: And reasonably affordable and generally Youre seeing I think GDP is across the globe in some of our key countries are kind of improving as somewhat the buy.
Speaker Change: I can generalize the global interest rate environment softens.
Speaker Change: That's generally good for demand and that's the type of industry utilization that we're seeing is increasing year over year, yes that interest rates are remaining elevated so I think that.
Speaker Change: But as they come down we might see yes, yes.
Speaker Change: Yes, some management towards GDP growth right.
Speaker Change: Yeah.
Speaker Change: Okay I'll leave it there thank you.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from Heather Jones from Heather Jones Research. Please go ahead.
Heather Jones: Good morning, congratulations on the quarter.
Speaker Change: Thank you Heather Heather.
Speaker Change: Hi.
Heather Jones: I wouldn't normally start with us.
Heather Jones: But.
Heather Jones: This year your financing cost have been <unk>.
Speaker Change: <unk>.
Speaker Change: Volatile given what's been going on with currency and down almost a 100 million I'm not 100, and I almost $50 million from original guidance. So just.
Speaker Change: This is a big if but if currencies were stable from here on out which is unlikely, but if they were how should I be thinking about net financing costs were 25.
Speaker Change: Yes, I think we've had some FX.
Speaker Change: Gain.
Speaker Change: Which has offset our lowered our financing costs I want to I want to say, we're about $9 million to $10 million year to date favorable I can follow up with you on that but that's generally if I think about what's happened in the quarters.
Speaker Change: I think the other really unanticipated piece Heather was that.
Speaker Change: The lower cost passing through our working capital. We just didn't have to invest in working capital. This year. In fact, it's been a bit of the reverse it's been a source of cash that's allowed us to pay off.
Speaker Change: Our pay down any kind of short term lines of credit were not carrying any CP.
Speaker Change: And obviously short term rates had been in the 4% to 5%. So instead now we have some cash balances and we're earning some interest income.
Speaker Change: So that's I think that's really been the two big drivers of the expectation for financing costs for the full year.
Speaker Change: Okay perfect. Thank you for that.
Speaker Change: And then on the protein fortification business for us.
Speaker Change: Think if I remember correctly, you guys were reducing your losses there by <unk>.
Speaker Change: A third this year.
Speaker Change: Is it fair to think that you could.
Speaker Change: Reduce it by a similar amount going into 'twenty five or how are you all thinking about that yes, that's exactly how we're thinking about it.
Speaker Change: We've had those internal discussions obviously as we're putting our budgets together for next year and.
Speaker Change: Again, just a reminder protein fortification is within the all other category.
Speaker Change: And that group.
Speaker Change: Does consist of.
Speaker Change: Our protein fortification of our sugar reduction and our Pakistan business of which we have a 71% stake.
Speaker Change: And Pakistan and sugar reduction are generating positive operating income and they are growing.
Speaker Change: And they will continue to contribute positively.
Speaker Change: Protein fortification is lossmaking.
Speaker Change: But we have been actively working a turnaround plan to steadily improve the health.
Speaker Change: Of that.
Speaker Change: On trend operating unit over the next one to three years and this year.
Speaker Change: There will be we have line of sight to a significant year over year improvement in operating income and proportionately. We estimate that we should see that same order of magnitude of improvement next year based on.
Speaker Change: Business that we have actually contracted heading into next year for that.
Speaker Change: Relatively small segment, but.
Speaker Change: Because it's loss, making it's worth highlighting and and I appreciate the question.
Speaker Change: So thank you.
Speaker Change: Yes.
Speaker Change: Thinking about that improvement in 'twenty five is it similar for the Canadian and U S assets towards one of those benefiting more because I know.
Speaker Change: I can't remember the magnitude, but there was antidumping duties put on Chinese imports. So are you seeing more of the improvement in the U S assets or how.
Speaker Change: Should I think about that yes.
Speaker Change: Yes, I would say that.
Speaker Change: My comments were based on the entire protein fortification business.
Speaker Change: Operating segment.
Speaker Change: The.
Speaker Change: Higher value ore.
Speaker Change: Pea protein isolate business is the business that.
Speaker Change: Is carrying the improvements right now and that was what my comments were predominantly based off of in relationship to this year's important improvement in operating income and then what we project for next year being proportional.
Speaker Change: Okay, alright, thank you so much.
Speaker Change: Thank you.
Speaker Change: Thank you I'm showing no further questions at this time I will now turn it back to Jim Valley.
Speaker Change: For closing remarks.
Jim Valley: Alright, well. Thank you all for joining us. This morning, we look forward to seeing many of you at the upcoming texture innovation day in Bridgewater, New Jersey next Thursday, and I want to thank you for your continued interest in ingredient.
Speaker Change: Yes.
Speaker Change: Thank you for participating.
Speaker Change: Participating in today's conference. This does conclude the program you may now disconnect.
Speaker Change: Yes.
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