Ingredion Incorporated (NYSE:INGR) Q1 2024 Earnings Call Transcript

Ingredion Incorporated (NYSE:INGR) Q1 2024 Earnings Call Transcript May 8, 2024

Ingredion Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 Ingredion Incorporated Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to, Noah Weiss, Vice President of Investor Relations. Please go ahead.

Noah Weiss: Good morning, and welcome to Ingredion’s first quarter 2024 earnings call. I’m Noah Weiss, Vice President of Investor Relations. Joining me today, on today’s call are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and CFO. The press release we issued today, as well as the presentation we will reference for our first quarter results can be found on our website, ingredion.com, in the Investors section. As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company’s future operations and financial performance. Actual results could differ materially from those estimated in 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 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-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 US GAAP measures in Note 2 non-GAAP information included in our press release and in today’s presentation’s appendix. With that, I will turn the call over to Jim Zallie.

Jim Zallie: Thank you, Noah, and good morning everyone. Ingredion’s first quarter results exceeded our expectations against a strong comparison with last year’s record first quarter performance. As anticipated, our net sales volumes in the quarter improved sequentially despite the impacts of extreme cold weather on shipments in the US and taking into account the sale of our South Korea business. As you can see on slide 5, while the consolidated net sales and operating income were lower year-over-year, the operating income for quarter one 2024 was still the second highest in the company’s history and continue the upward trend from prior years. Inclusive of the current period, we have delivered 5% net sales growth over the last five years compounded annual growth rate at an adjusted operating income compounded annual growth rate of 7% over the same period.

Furthermore, while we delivered adjusted operating profit for the first quarter of 2024 at the top end of our guided range, the current market environment would have been conducive to delivering even better profitability had it not been for the impact of extreme cold weather on our US shipments, which we estimate was at least $10 million. Now let me update you on progress against our three strategic pillars. Starting with our business growth pillar. During the quarter, we completed the reorganization of our business. which resulted in new reportable segments, which we are sharing for the first time today for Texture and Healthful Solutions, we feel increasingly confident regarding volume momentum as we saw strong demand from distributors in the quarter and volumes overall in April were up nicely year-over-year.

Also noteworthy, project related customer engagements in the US are up 60% in quarter one, which we view as a positive leading indicator of future growth for our Texture and Healthful Solutions segment. We have completed the commissioning of the capacity expansion for our higher-value, stevia product lines at our PureCircle facility in Kuala Lumpur to support our sugar reduction franchise growth. Lastly in terms of a positive indicator of overall economic growth, we have seen a strong demand recovery for industrial starch from paper making and packaging customers in North America. Turning to our second pillar, cost competitiveness through operational excellence. In February, we closed on the sale of our South Korea business. The proceeds from this divestiture will be used to support our capital allocation priorities.

During the quarter, we also launched a multiyear cost savings program, which we are calling cost to compete. We are already advancing toward our target to deliver $50 million of savings by the end of 2025, and I’ll highlight this program more in a few minutes. Some of the notable cost to compete initiatives include a project we have undertaken to unlock capacity across our manufacturing footprint by applying machine learning and AI. In addition, we are continuing to optimize our supply chain, distribution and warehouse network in pursuit of service excellence, efficiencies and savings. Lastly, we continue to be encouraged by the results achieved by our centralized procurement team, which has recorded some big wins on freight cost savings through globally led procurement strategies combined with strong local execution.

Regarding our purpose-driven and people-centric growth culture, I’m proud to report that we were recognized for the tenth time by Ethisphere as one of its 2024 world’s most ethical companies. This award reflects the deep commitment of our teams around the world, who lead with integrity and prioritize ethics across our organization. Regarding sustainability-related achievements, I would like to commend our team for lowering greenhouse gas emissions by 22% compared to 2019 levels and for increasing the share of purchased electricity from renewable sources to 25%, which is a big jump from only 5% two years ago. This has been done through a combination of investments in solar and biomass energy. In fact, for Brazil specifically following the completion of our recent conversion to biomass boilers at our two largest facilities, 96% of all of our energy needs in Brazil, now come from renewable sources.

I would now like to comment a bit more on volume trends in the quarter. As we have shown in previous quarters, this is a volume index based upon our 2019 quarterly shipment averages excluding, high fructose corn syrup and adjusting for material changes in our portfolio. This graph illustrates the heightened volume demand during 2021 and 2022, in reaction to globally constrained supply chains. In the middle of 2023, we experienced a notable drop in orders as customers destocked inventories primarily impacting our texture product line. This year, we anticipate a gradual improvement in volumes and have already seen a significant pickup in distributor demand and solid volume growth in April. It is worth noting that for the quarter, on the slide being shown, we are also projecting where volume was expected to land, if not for the impact of extreme cold weather on our US shipments.

Ingredion has a legacy of transforming and evolving its business in response to changing market dynamics. Our ability to strategically adapt has ensured long-term prosperity for the company and is one of the many reasons, we are approaching a rare milestone to be listed now for 122 years, on the New York Stock Exchange. Ingredion’s previous region structure was instrumental in maintaining local accountability to deliver results. That culture of accountability will continue as we shift to a more customer and market-focused segments in pursuit of growth, which will be further enabled by our maturing global operating model. Our reorganization and financial resegmentation would not have been possible five years ago, without the global operating model currently in place.

As we look forward, we believe the more compelling natural geographic alignment of the new segments, will create operational and market synergies. As we execute, our strategy to drive growth and deliver on our winning aspiration to be recognized as the go-to provider for texture and helpful solutions that make healthy taste better, I’m pleased to announce that Dr. Michael Leonard will join Ingredion as Senior Vice President, Chief Innovation Officer and Head of Protein Fortification, effective May 13 2024. Mike brings broad industry leadership experience in both developed and emerging markets, with both CPG and ingredient multinationals as well as high-growth start-up companies, which will be a tremendous asset to Ingredion and our customers.

As we mentioned recently at CAGNY, we are committed to driving continuous cost efficiencies as a means to maintain consistent profitable growth. Cost to compete will deliver $50 million of run rate savings by 2025. We are pursuing savings in two areas. $25 million will come from SG&A, which will show up in our reported operating expenses. And another $25 million will come from cost of goods sold savings, which will positively impact our gross margin. We see a significant opportunity to continue to leverage our shared services infrastructure that we have built over the past five years. To lead that effort, we are also pleased to announce that Vanessa Bordeaux joined Ingredion as Vice President Global Shared Services. In her role, she will continue to drive continuous improvement and change with a strong focus on global process standardization, risk reduction and internal controls management.

Now, I will hand it over to Jim Gray for the financial review. Jim?

Jim Gray: Thank you, Jim and good morning, everyone. Moving to our income statement. Net sales for the first quarter were approximately $1.9 billion, down 12% versus the prior year. Gross profit dollars decreased 14%, but gross margins were resilient remaining greater than 22% again this quarter and down slightly when compared to the strong lap of Q1 of last year. Reported and adjusted operating income were $213 million and $216 million, respectively. The decrease in operating income was driven by the impacts of extreme cold weather in the US, hyperinflation in Argentina and the carryforward of higher cost inventory into the quarter. Turning to our Q1 net sales bridge. The 12% decrease in net sales was driven by $176 million in lower price/mix and $40 million in lower volume, partially offset by a positive foreign exchange impact of $12 million.

Additionally, the exit from South Korea had a $51 million impact on sales volume. Turning to the next slide. We highlight net sales drivers for the first quarter. For the total company net sales were down 12% and 10% when excluding the net impact of South Korea’s sales from the results. Texture & Healthful Solutions net sales were down 10%. Sales volume was flat to prior year, which is indicative of returning volume demand for Texture Ingredients. Price/mix was down 9% for the quarter, partly reflecting the higher pricing from last year as these businesses price through double-digit inflation for specialty corn and natural gas, primarily in Europe and the U.S. Food and Industrial Ingredients LatAm net sales were down 8% which, was primarily driven by lower corn costs year-over-year being reflected in price/mix.

Of note, sales volume was impacted primarily by the timing of customer demand pull in Colombia, which we anticipate to come back during the balance of the year. Lastly, Food and Industrial Ingredients U.S. can net sales were down 11%. Price/mix was down 7% reflecting pass-through of lower corn costs on variable rate customer contracts. Sales volume was impacted by slowed production and reduced U.S. shipments due to cold weather. Let me turn to a recap of our Q1 segment performance. Texture and Healthful Solutions net sales were down 10% compared to the prior year and down 9% on a constant currency basis. Texture and Healthful operating income was $74 million, demonstrating an OI margin of 12.4%, driven by less favorable price/mix as I mentioned previously and the carryforward of higher cost inventory.

We expect OI margins to improve for the full year to be between 13% and 16%. In Food and Industrial ingredients LatAm, net sales were down 8% versus last year and down 12% on a constant currency basis. Food and Industrial LatAm operating income was $101 million with an OI margin of 16%, down slightly from last year, primarily driven by the impact of the devaluation of the Argentine peso on our joint venture as well as higher utility costs. We expect OI margins for the full year to be between 16% and 19%. Moving to Food and Industrial Ingredients U.S. can, net sales were down 11% for the quarter. Food and Industrial U.S. can operating income was $87 million with an OI margin of 16%, up slightly versus last year’s quarter. The improvement was driven by renewal of multiyear customer contracts and tight management of raw material costs, largely offset by higher fixed costs associated with downtime due to extreme cold weather in the U.S. We expect full year OI margins for this segment to be between 15% and 18%.

For all other, net sales decreased 35% for the quarter, largely driven by the overlap of the exit of our South Korea business. All other operating loss was minus $4 million, better by $4 million from the year ago period. The improvement was driven by a lower operating loss for protein fortification and other factors. Our full year outlook for all other is to reduce the operating loss by one-third. Turning to our earnings bridge. On the left side, you can see the reconciliation from reported to adjusted earnings per share. On the right side, operationally, we saw a decrease of minus $0.86 per share for the quarter. The decrease was driven primarily by an operating margin decrease of minus $0.47 and unfavorable volume of minus $0.34 per share.

Moving to our non-operational items. We had an increase of $0.14 per share, primarily driven by lower financing costs of $0.13 per share. Moving to cash flow. First quarter cash from operations was $209 million. Cash from operations benefited from consistent net income and lower-than-expected investment in working capital as we pulled from inventories in the U.S. greater than expected. Net capital expenditures were $65 million, slightly below our expected pace of investment for the year. During the first quarter, we paid out $51 million in dividends and began to repurchase outstanding common shares. As we look forward, our capital allocation priorities continue to be; first, organic investment; second, a return to shareholders through our dividend; and third, strategic deployment of cash into M&A and share repurchases.

Let me turn to our outlook for 2024. Before we go through the updates to the full year 2024 guidance, it is worth noting a few items that will impact the quarterly cadence for our businesses. Last year we witnessed a shift in the corn cost layout, which means that we will see lower price/mix through 2024, as we pass along lower raw material costs to fee-based customers. This is a normal expectation for our business model and should be a supporting factor to gross margins as we go through the remainder of the year. For the balance of 2024, we anticipate sales volume growth, a reduction in COGS per ton and continuous improvement in gross margins. Excluding the impact of the divestiture of South Korea from our outlook, we expect full year net sales to be flat to up low-single digits, reflecting improved volume demand offset by a decline in price/mix as we pass through lower raw material costs where applicable.

We anticipate that adjusted operating income will be up mid-single digits with year-over-year growth in Q2 through Q4. We are decreasing our financing cost outlook to align with the reduction of overall debt levels and now see it in the range of $85 million to $105 million. For the full year 2024, we now expect reported effective tax rate of 24.5% to 25.5%. And an adjusted effective tax rate of 26.5% to 27.5%. The company now expects its full year reported EPS to be in the range of $10.35 to $11, which includes an $82 million gain from the sale of our South Korea business. For the full year, we now anticipate adjusted EPS to be in the range of $9.20 to $9.85. We expect diluted weighted average shares outstanding to be between 66 million and 67 million shares, which does not reflect balance of year share repurchases.

We have been able to buy shares in the second quarter and are seeking to buy back shares comparable to 2023’s repurchases for the balance of the year. 2024 cash from operations is anticipated to be in the range of $750 million to $900 million and capital expenditures are expected to be approximately $340 million. Corporate costs are expected to be up mid-single digits, in line with previous guidance. For the second quarter of 2024, we anticipate net sales to be flat to down low-single digits and operating income to be up low-to-mid-single digits on a year-over-year basis. In the appendix, we have included a 2024 full year segment outlook and our estimated comparable to 2023. That concludes my comments. And I’ll hand back to, Jim.

Jim Zallie: Thank you, Jim. Based on our first quarter performance along with our revised outlook, we believe, we remain well positioned for another year of growth with momentum continuing throughout 2024. Volumes continue to show improvement with distributors replenishing their inventories and the headwind of destocking now fully behind us. These trends along with increased customer engagements to drive innovation are evidence of more favorable market conditions than we have seen in the last 12 months. During the quarter improvements in working capital led to another strong quarter of cash flow from operations. We see this continuing as demand gradually improves, and we start to see the benefit of lower corn costs starting in quarter two.

Also cost to compete provides us with another meaningful lever to meet our long-term financial commitments with the delivery of at least cost savings over the next two years. This will positively impact margins and overall profitability. Looking ahead, we will use our strong cash position to continue to invest in areas of growth that offer the highest returns as well as return capital to shareholders. Our strategic initiatives are aligned with our winning aspiration. And we are excited about the opportunities that lie ahead. Now, let’s open the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Adam Samuelson with Goldman Sachs.

Adam Samuelson: Yes. Thank you. Good morning, everyone.

Jim Zallie: Hi, Adam.

Jim Gray: Hi, Adam.

Adam Samuelson: Hi. So I guess the first question maybe on the capital allocation point. Jim Gray, I think I heard in your prepared remarks share repurchases for this year, consistent with last year which were $100 million or so. I’m just trying to get a better clarity on, kind of why not higher given the strength of the company’s free cash flow the divestiture proceeds from Korea which are in the door, net leverage which looks like it’d be tracking closer to the one-times level by the end of the year. Just help us frame kind of where — why the kind of step down in leverage implied by that outlook? Or help us to phrase that.

Jim Gray: Yeah, sure. I think it’s always a balance, right? Right now when we look at the end of Q1, obviously, with some of the proceeds from Korea in the cash position of the company looks strong. So, therefore, being confident to say that we’re going to seek up to $100 million of share repurchases through the year, it does make sense. But as we’ve always stated that organic capital investment and at least some M&A that accelerates either our Texture Solutions or Healthful Solutions or solidifies our competitive position in the markets where we play has always been a priority. And if those returns look attractive for the medium to long-term for shareholders and they’re returning rates that are going to be higher than necessarily just buying back shares today then I think we’re going to prioritize those.

So it’s a balance I think Adam but right now we’re pretty confident to come back and say we really like to pick up close to $100 million of share repurchases as we finish 2024.

Jim Zallie: Yeah. I think Adam that it is the view at this current point in time based on what we see across the balance between organic capital growth investment opportunities, M&A and the opportunity for share repurchase with obviously our dividend being solidified. So I think it’s how we’re viewing it at this moment in time. And if there are any changes, we will certainly be updating those as we go forward throughout the year. But currently that’s the view that we have. And it’s not an insignificant amount of evidence that we believe in the intrinsic value of the company to be opportunistic with share repurchases in the same amount as last year.

Adam Samuelson: Okay. And maybe I could just ask a follow-up on the volume trend side. You commented to April trends continuing to return to growth. I just want to be clear is that across the three now reporting units or any framing on areas of particular customer strength by region or category that you could call out? Thank you.

Jim Zallie: I think we see the modified starch, food starch category, specialty starch category; the volume is gradually improving throughout 2024. That was certainly solid in April. We commented on industrial starts for papermaking and corrugating. That’s been exceptionally strong, which we again view as a hopeful sign of increased economic activity. Sweetener volumes were down a bit but generally in line with the historic trends. And so for Ingredion at large we’re anticipating mid-single-digit uptick in sales volumes demand for 2024 pretty much. And it’s also noteworthy to say that we were pleased with double-digit volume growth in China for the quarter, recognizing that it does compare to prior year’s quarter in China when China went with herd immunity in December of 2022 into January of 2023 but also Chinese New Year was early this year.

So but we were very encouraged to see that. And then also the price of corn has come down significantly in China, which should be supportive of volume growth going forward as well. So that’s how we’re looking I guess at volume across the world right now.

Adam Samuelson: All right. That’s all helpful. Thanks.

Operator: Our next question comes from the line of Andrew Strelzik with BMO Capital Markets.

Andrew Strelzik: Hey, good morning. Thanks for taking the questions. The first one, I guess, I just wanted to ask about the guidance. And if I put a couple of your comments together you said, the first quarter exceeded your expectations. You’re more confident in the Texture volumes and then also now you have the cost saves. So I guess I’m curious why you’re only taking up the loan to the guidance a little bit. Are there any other offsets to think about and recognize it’s a bit early in the year? But just curious how you approach the guidance given those dynamics?

Jim Gray: Yeah Well, I appreciate that you appreciate that it’s early in the year. I think what we look at is as we announced earlier both at CAGNY and the beginning of the year, we are seeing that the businesses have some pretty easy volume lapse from last year particularly the depth of that was in Q2. So we’re pretty confident around volume coming back as Jim just mentioned, I think that does help our fixed cost absorption. And so that’s really I think the key underpinning between the positive side of op income growth. I think the caution that we would have would be just really watching particularly US customers, maybe less so European customers in terms of how they’re managing price, how they’re managing through innovation and what that has in terms of an impact on unit volume demand.

And so they’re kind of out of the gate, I would say that what I’m seeing in pricing change in the US is probably still in the mid-single digits maybe the high end of low single digits. And so I’m going to be just a little bit cautious on whether or not that doesn’t really just accelerate consumer demand in the grocery basket. So we just — we want to see that come through. I think we are seeing it in some of the pockets. I’ll give you an example, like for example you wouldn’t think that condiments would necessarily be kind of a good fast-moving unit volume. But the improvement in condiments from some of the scan data that we see for the first quarter was really healthy year-over-year. So I think there are definitely signs of green shoots here.

I think the other two cautions that we would always have in our business is, hey any political turmoil warfare, what impact does it have on oil prices? And can you have some energy that changes in terms of availability. Even though we do hedge natural gas, you still have that — can have an impact there. And then I think third is just global supply chains and any kind of freight ocean freight disruptions can always cause some disruption in over a 3 to 6-month period. Those are — Andrew those are kind of our — what’s on our radar.

Andrew Strelzik: Okay. That’s really helpful color. And then my second question is just digging in a little bit on the cost savings plan. And I guess I’m just curious how to think about the cadence of that coming through over the course of the next two years? Maybe a little more color on where exactly that comes from? And does any of it get reinvested? Or should we assume most of that fall into the bottom line?

Jim Zallie: Let me take a shot at just framing it. And then Jim you can pick up on the comments. Obviously, when you initiate a program like this and just a reminder, we have a pretty good track record of delivering on cost takeout. Going back to the inception of what we call Cost Smart in 2019 which was a 3-year program which sun set it in 2021. We originally set that target at $125 million, raised it to $150 million and ended up delivering a little north of $170 million. So hiatus for a couple of years and now cost to compete at $50 million. And with those programs typically, they ramp up with savings. So, there will be more of the $50 million of savings that will accrue in 2025 as opposed to ’24. But ’24 will have a meaningful amount of savings delivered more so in the SG&A area.

And the COGS will come more so into 2025 as we also look at opportunities across our footprint as well. And there’ll be more information that we’ll be able to share over time related to that, but real substantive cost savings. Now, clearly what we want to do is fulfill our winning aspiration to be the go-to provider for Texture solutions and Healthful solutions. And so we are going to be investing strategically in capabilities that are going to enable us to deliver on that promise for customers when it comes to things like Texture data measurement science, the sophisticated sensory capabilities that you need and formulation management for example. So those are some of the things that we will invest in. However, some of that is already factored into some of our budgeting process starting this year as well.

Jim, do you want to add some color on that?

Jim Gray: Yes, Andrew, I think what we’re always trying to do is just dampen the rate of wage inflation increase on the company, right? So that we always — every company has to pay market rates of year-over-year wage change, right? So what you have to do is look at your organization to be able to say, where are some things that we need — that we can now stop doing, because we’re now three — global three segments versus having kind of four regions. And then also from that just efficiencies and tightening and greater effectiveness, where do you want to make various select choices to reinvest. But I think the overall that you’ll see is this kind of a dampening of our of year-over-year change in SG&A rate. And then obviously, as we get after COGS which we already have an annual program called Net Structural Savings where we’re chasing inflation and trying to dampen the manufacturing expense inflation that we incur every year.

But this will be — the cost to compute will allow us to get after some event-driven actions within our manufacturing network. So that’s our goal.

Andrew Strelzik: Okay. Great. Thank you, very much. I’ll pass it on.

Operator: Our next question comes from the line of Ben Bienvenu with Stephens.

Ben Bienvenu: Hey thanks, good morning everyone.

Jim Gray: Good morning, Ben.

Jim Zallie: Good morning, Ben.