Ingredion Incorporated (NYSE:INGR) Q3 2023 Earnings Call Transcript

Ingredion Incorporated (NYSE:INGR) Q3 2023 Earnings Call Transcript November 7, 2023

Ingredion Incorporated beats earnings expectations. Reported EPS is $2.33, expectations were $1.88.

Operator: Thank you for standing by. And welcome to the Ingredion’s Third Quarter 2023 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 call is being recorded. I would now turn the conference over to your host Mr. Noah Weiss, Vice President of Investor Relations. Please go ahead.

Noah Weiss: Good morning, and welcome to Ingredion’s third quarter 2023 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. The press release issued today and the presentation we’ll reference for the third quarter results can both be found on our website, ingredion.com, in the Investors section. As a reminder, our comments within the presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the Company’s future operations and financial performance. Actual results could differ materially from those estimated in the forward-looking statements, and 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 or in this morning’s press release can be found in the Company’s most recently filed annual report on Form 10-K and subsequent reports on Form 10-Q and 8-K. During the 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 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.

James Zallie: Thank you, Noah, and good morning, everyone. As we enter the last part of the year, I am pleased to report positive sales growth and strong profitability in the third quarter, driven by solid price mix, partially offset by volumes, which are recovering sequentially across all regions. Adjusted operating income was up 15% as we were able to mitigate the impact of cost increases through multiple levers, including pricing and mix improvements, operational excellence and productivity initiatives. Our business is stronger and more profitable today as a result of the continued execution against our strategic roadmap for growth. Let me update you now on the progress against each of our strategic pillars. Beginning with specialty ingredients, year-to-date net sales have grown 6%, along with continued gross margin expansion.

Additionally, starch-based texturizers, pharma and personal care, and food systems all experienced double-digit growth year-to-date against strong performance in the prior year. Turning to commercial excellence, our sales teams secured multi-year contracts with some of our larger global customers. These contracts, which provide a sizable baseload of volume, should support margin expansion in 2024. Additionally, the work we completed to enhance our logistics systems and overall supply chain fulfillment capabilities has been rewarded with higher net promoter scores and positive customer feedback. Looking to quarter four, we are excited by the opportunity to further improve our warehouse operations and reduce customer pickup times and freight costs.

An increasingly important part of the commercial excellence agenda we have with our customers is dedicated to shared value creation from sustainability initiatives. The regenerative agricultural projects we continue to collaborate on with our customers is generating incremental value across the supply chain for farmers, ourselves, and our customers. We are also engaging to develop a regenerative agricultural framework for the food and beverage industry as a proud founding member of SAI Platform’s program. In the area of cost competitiveness, we have done a very good job of balancing production against changing customer demand. Our supply chain team has worked closely all year with both the commercial organization and operations to ensure our customer demand is met while maintaining sufficient, yet not excessive, finished goods inventory.

Our operations team continues to do a fantastic job managing production inputs to help offset inflation and absorb fixed costs. It is worth noting that year-to-date, our teams have faced more than $50 million of higher allocated fixed costs due to lower volumes and have largely offset these cost challenges through their productivity efforts. Additionally, I’d like to recognize the tremendous job of our operations team that they have done driving employee and contractor safety performance this year. Ingredion has historically operated at world-class levels of safety performance, but this year is particularly notable given a step change reduction in recordable and lost time case rates. Finally, acknowledging our purpose-driven and people-centric growth culture.

For the ninth consecutive year, Ingredion Mexico received an awards for ethics and values in the industry from the Mexican Confederation of Industrial Chambers. And in South America, we were pleased to be awarded great place to work certifications for the second year in a row in Brazil, Colombia, and Peru. Turning to volume trends in the quarter, we show here a volume index based upon our 2019 quarterly shipment averages excluding high fructose corn syrup and adjusting for changes in our portfolio since 2019. During our Q2 conference call, we introduced this graph to illustrate how exaggerated demand in 2021 and 2022 produced a build-up of inventory throughout the supply chain that required rebalancing. It appears customer destocking has decelerated as we experienced sequential improvement month on month throughout the third quarter.

We believe this quarter’s performance also demonstrated the diversity of our product portfolio. Markets exposure and the strength of our business model. Both our core and specialties ingredients continue to be well-positioned to address large and growing end markets in the geographies where we operate. From a specialty ingredients perspective, we experienced growth in our largest specialty category, Texture Solutions. Our food systems platform has outperformed expectations as we worked closely with customers to reformulate recipes to drive affordability primarily in the European private label market. In sugar reduction, we also continue to experience strong volume growth and expanded pure circle margins. Our core ingredients also showed resilience with one of our largest markets, Mexico, delivering record third quarter operating profit driven by volume growth across a range of food and beverage categories where a robust economy is driving growing middle class demand.

In the U.S., we were also pleased to see solid demand for glucose as our production facilities ran at full capacity in the quarter, partially in response to higher sugar prices. Lastly, our industrial ingredients which serve the paper making and corrugating industries saw a steady pickup in demand as shipment volumes recovered broadly across the U.S. As you can see, the diversity inherent in our business allows us to continue to deliver shareholder value even in challenging environments. As we have continued to invest in growth and improved risk management, our business has shown consistency as we deliver record setting results. Now, let me turn it over to Jim Gray for the financial review.

Jim Gray: Thank you, Jim, and good morning to everyone. Moving to our income statement, net sales of approximately $2 billion were up 1% for the quarter versus prior year. Gross profit dollars grew 13% versus prior year with gross margins reaching greater than 20% again this quarter. Reported and adjusted operating income were $213 million and $219 million respectively. The increases were driven by favorable price mix, partially offset by higher input costs and lower volume. Our third quarter reported and adjusted earnings per share were $2.36 and $2.33 for the period, up 48% and 35% respectively from the prior year. The main driver for lower adjusted EPS is a $0.13 adjustment due to a tax provision in Mexico driven by the higher value of the Mexican peso against the U.S. dollar.

Turning to our Q3 net sales bridge, we achieved strong price mix of $159 million, along with favorable foreign exchange impact of $10 million. This was partially offset by decreased sales volume of $159 million. Turning to the next slide, we highlight net sales drivers for the third quarter. Foreign exchange was a 1% tailwind this quarter as South America saw strengthening of the Brazilian reai and Colombian peso, partially offsetting the FX-related impact in EMEA, primarily in Pakistan. Sales volume was down 8%, but up sequentially from the second quarter as customers continued to work through destocking of inventory. Contributing to net sales growth, price mix was up 8% due to customer and product mix optimization compared to the third quarter of 2022.

Turning now to gross profit margins. On a year-over-year basis, we improved gross margins by 220 basis points to 20.7%, driven by price mix optimization. Inflationary input cost increases continued through the third quarter, but the rate of increase has started to moderate. Weaker industry volumes have led to higher fixed cost absorptions throughout 2023. Our operations team has done a great job to address higher costs and to manage production more evenly to demand. It is noteworthy to highlight that commercial and operational excellence efforts have enabled us to expand gross margins for five consecutive quarters. Let me turn to a recap of our Q3 regional performance. North American net sales were up 3% when compared to prior year. The increase was driven by strong price mix, as well as solid sales volumes across sweeteners and industrial ingredients.

North America operating income was $171 million, up 36% versus last year, driven by favorable price mix, partially offset by higher input costs and lower volumes. In South America, comparable net sales were down 8% versus last year, and down 15% on a constant currency basis. South America’s operating income was down 33% to $32 million, driven primarily by lower volumes and higher energy costs associated with our transition to renewable biomass in Brazil. While we incurred upfront costs associated with this changeover, the long-term strategic supply of predictable energy and cost savings will be beneficial Moving to Asia Pacific. Net sales were down 2% for the quarter, and were flat on a constant currency basis. Asia Pacific operating income was $33 million, up 22% versus prior year, with favorable price mix partially offset by lower volumes.

In EMEA, net sales increased 1% for the quarter. And absent foreign exchange impacts, net sales were up 5%. EMEA operating income was $32 million in the quarter, up 7% compared to the prior year, driven by favorable price mix, partially offset by lower volumes, higher raw material costs and foreign exchange impacts. Turning to our earnings bridge. On the left side of the page, you can see the reconciliation from reported to adjusted earnings per share. On the right side, operationally, we saw an increase of $0.29 per share for the quarter. The increase was driven primarily by an operating margin increase of $0.66, partially offset by unfavorable volume of minus $0.36 per share. It is noteworthy that operating performance alone drove a 17% increase in adjusted EPS.

Moving to our non-operational items. We had an increase of $0.31 per share in the quarter, which was primarily driven by a lower tax rate of $0.36 per share from a recently issued IRS notice, which increased our ability to claim certain foreign tax credits against U.S. taxes. Year-to-date, net sales of $6.2 billion were up 5% versus prior year. Gross profit margin was 21.6%, up 240 basis points. Year-to-date, reported operating income was $755 million, and adjusted operating income was $766 million. Reported operating income was lower than adjusted operating income, primarily due to equity method investment impairments and costs related to a work stoppage at our Cedar Rapids facility in the first quarter. Our year-to-date reported earnings per share was $7.63, and adjusted earnings per share was $7.45.

Reported EPS was higher than adjusted EPS, primarily due to the tax benefits from the valuation of the Mexican peso against the U.S. dollar in the period. Turning to our year-to-date earnings bridge. On the left side of the page, you can see the reconciliation from reported to adjusted. On the right side, operationally, we saw an increase of $1.56 per share. The increase was driven by margin improvement of $2.84, offset primarily by lower volumes of $0.94 and foreign exchange impacts of minus $0.19 per share. Moving to our non-operational items. We saw an increase of $0.09 per share year-to-date due to a $0.38 per share tax benefit, partially offset by higher financing costs of $0.25 per share. Moving to cash flow. Year-to-date, cash from operations was $647 million, up significantly from $80 million in the same period last year.

Through the end of Q3, our net working capital investment was $118 million, and we expect this to remain relatively flat for the balance of the year. Net capital expenditures were $231 million, in line with our full year expectations. During the first three quarters of the year, we paid $143 million in dividends to shareholders and repurchased $101 million of outstanding common shares. As cash from operations remains strong, we’ll continue to be flexible and strategic with respect to our capital allocation priorities. Next, I’d like to address our updated 2023 outlook. We now expect net sales to be up mid-single-digits, reflecting softer but recovering sales volumes. We lowered our adjusted effective tax rate to 25% to 26%, reflecting recent tax provision guidance.

We have also raised our full year 2023 adjusted EPS guidance and now expect it to be in the range of $9.05 to $9.45. We have decreased slightly the diluted weighted average shares outstanding to be between 66.5 million shares and 67.5 million shares. Lastly, cash from operations for the full year 2023 is now expected to be in the range of $650 million to $750 million. In terms of our full year regional outlook, North America net sales are expected to be up 5% to 10%, driven by favorable price mix. Operating income is expected to be up 20% to 25%, with price mix continuing to outpace lower volumes and cost increases. For South America, we expect net sales to be flat to down 5% due to lower volumes. South America operating income is expected to be down mid to high-teens, driven by lower volume and higher energy and input costs.

In Asia Pacific, we anticipate net sales to be flat versus the prior year, and we expect operating income to be up high double digits, driven by favorable price/mix and PureCircle growth, partially offset by higher input costs. For EMEA, we now expect net sales to be up 5% to 10% and operating income to be up 40% to 45% due to favorable price/mix. Corporate costs are expected to be up high single digits. That concludes my comments, and I’ll hand it back to Jim.

James Zallie: Thanks, Jim. I would like to share just a few final thoughts on how we see the business outlook for the remainder of the year. As we finished the third quarter, we anticipate that volume weakness related to inventory corrections is largely behind us, and we anticipate that the sequential improvements in shipments should continue. While the operating environment continues to be uncertain, our business remains resilient, and our teams are operating with agility, as evidenced by our strong profit growth and year-over-year gross margin expansion. We are well positioned to deliver a record year in 2023, which we believe is a testament to the strength of our diverse portfolio and our customer relationships. We are delivering results that will exceed our 4-year growth outlook while continuing to return value to shareholders through increased dividends and opportunistic share repurchases.

We remain focused on finishing the year strong and carrying momentum into 2024. Before opening the call for Q&A, I would also like to mention our announcement today of our intention in the first quarter of 2024 to reorganize our business operations to better serve customers with a global focus on texture and healthful solutions. We expect the reorganization of our business will result in a change to our financial reporting segments in the first quarter, which will provide the company’s financial stakeholders with greater insight into our product capabilities and market opportunities and better reflect the strategic value drivers for the company. Now let’s open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Kristen Owen of Oppenheimer. Your line is open.

Kristen Owen: Hey thank you. Good morning and thank you for taking my question. Jim, I actually wanted to follow up on the last comment that you made here about the realignment of the segments. And if you could just help us understand internally the effect of that realignment? And maybe if there are any synergies in terms of innovation cycle times or just what that implies internally for the organization. And I’ll start there. Thank you.

James Zallie: Thank you, Kristen. We are very excited about the opportunity that lies before us with our intention to reorganize our business operation — operations to align to the value propositions inherent in texture and healthful solutions. We see starch and our position being so broad and deep with specialty starches and the opportunity to build upon that to offer unique textural solutions for a variety of applications as having a lot of headroom for growth. And equally, it’s already been evidenced with our position with PureCircle and Sugar Reduction. And we believe long-term, the opportunities with protein fortification and fiber fortification, that helpful solutions there where we’re problem-solving more holistically offers an excellent opportunity.

And to be able to pursue that with global customers and operate on a global basis, we think is going to offer a lot of operational synergies, go-to-market synergies and be able to do more for our customers in two very large and growing categories. So we’re very excited. I think the organization is very excited. There was an internal announcement that went out today, timed with the external announcement. And we’re very excited. But equally, we’re excited about the opportunity to talk more in detail about the different segments that will be part of this reorganization because we think it is going to better reflect the strategic value drivers for the company and give all of you greater insight into our product capabilities and market opportunities.

Kristen Owen: That’s really helpful. And then I realize it’s a little bit early for 2024. But just given some of the trends that you discussed on the destocking, strength in price mix, just help us understand puts and takes for next year, how we should think about sort of the momentum on the margin side moving into 2024? Thank you so much.

James Zallie: So what I’ll say — and I’m going to let Jim also supplement whatever I say here. But as in prior years, it is relatively early in the contracting cycle. And therefore, it’s typically our practice to update contracting on our Q4 call. However, it is noteworthy, I think, to highlight a few points. As we mentioned in our prepared remarks, we have renewed several multiyear contracts with large customers that represent a significant baseload of volume which should be margin expansion expansive in 2024. In addition — let me remind everyone that approximately 50% of our revenue dollars in North America comes from fee contracts that reprice monthly with corn cost inputs from our customers. And we anticipate some pass-through of lower corn costs in 2024 if the markets remain with a similar outlook as they have today.

But under current market conditions, when these contracts renew, they should be also supportive of margin expansion in 2024. And look, this year, as we go into contracting, our Pricing Centers of Excellence, which we’ve talked about for the last couple of years and have served us so well dealing with inflation, our teams are prepared for a different contracting environment this year in comparison to the last two years, and we have a very experienced commercial team that will continue to manage pricing and volume trade-offs very carefully in response to competitive market conditions. Also, I think as it relates to volumes, we are encouraged to see that sequentially, volumes month on month throughout quarter 3 have improved. And what I would also say is that based on Q3 results and early indications for quarter 4, we anticipate sequential improvements in volume shipments should continue.

But that’s as much visibility or as much as I really can say about contracting as we head into 2024.

Kristen Owen: Thank you.

Operator: Thank you. One moment, please. Our next question comes from the line of Ben Theurer of Barclays. Your line is open.

Benjamin Theurer: Hi yes, good morning Jim, congrats on the good results. Just two quick ones. So one, you’ve highlighted some of the market dynamics and particularly called out — volume across the board was weak, but you had some bright spots, particularly Mexico. But also South America, in general, a little better on what you saw in some of the volumes. Can you help us understand just within your customers, what’s been driving those volumes? What’s the category, is it specialties? Is it sugar reduction? Just to understand a little bit better the quality of that volume. That would be my first question.

James Zallie: Yes. So I’ll take it, and then Jim can supplement. I would say we have done extensive voice of customer work to supplement what we’ve been monitoring as a dynamic volume tracker really all year to understand where customers are with their inventory rebalancing and the destocking. And we do believe we’re sensing that that should be largely behind us. And our Texture Solutions business continues to do well. The sweetener bulk volumes have held up reasonably well throughout this entire year. And in Brazil, for example, we — I know volumes are down or have been down certainly in the first half, but we saw a nice volume pickup in Q3 in Brazil. And September volumes, for example, demand levels reached 2022 levels.

And just a reminder, we were up against a little bit of prepping for the World Cup, which is typical down in Brazil in quarter 4 of 2022. So overall, I think we’ve — we’re past the trough and we’re on an upswing. And we’re seeing it pretty broad-based, Jim, across all of the geographies or operating segments that we monitor by monthly.

Jim Gray: Yes. Ben, I think we’ve mentioned before to shareholders that when we look at syrups or we look at some industrial starches, the customer cycle time on their inventory has always been much shorter. And so generally, we haven’t seen that kind of build-up, nor has it really experienced the decline in sales volumes that maybe we’ve seen in the first half of the year or Q3. And where we did see more of a build up at our customers was around our food ingredients to support texture. And that’s — we highlighted in the chart in the presentation that because of longer supply chain times, the criticality of some of these food texturizing starches in recipes, that there definitely was a build-up in 2021 and 2022. And we’ve seen that.

When we refer to destocking, we’ve seen some of that excess inventory has really worked itself out through the food supply chain. And so we are encouraged as we, I think, go into the year here in Q3 and in Q4, that some of the higher-value food texturizer starches, we do believe, are working down. I’d say that — the only thing that we’re a little bit watch out is we just don’t know with higher inventory values, how that plays out in December for some of our multinational brand companies. And then just to note, I think in your part of the world, Ben, is that what you’re obviously seeing is just worldwide sugar is much more expensive. Some constraints in terms of the larger sugar producers around the globe. And just when it ever gets to that much of a gap between the value of our syrup versus the premium for using sugar, there’s always going to be some extra demand pull for our syrups in different recipes.

James Zallie: We’re definitely seeing that where higher sugar prices globally and in the U.S. are supportive of higher corn-based sweetener demand.