Ingredion Incorporated (NYSE:INGR) Q4 2023 Earnings Call Transcript

Ingredion Incorporated (NYSE:INGR) Q4 2023 Earnings Call Transcript February 6, 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 Ingredion Incorporated Fourth 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 conference is being recorded. I would now like to hand the conference over to your host today, Noah Weiss, Vice President of Investor Relations. Please go ahead.

Noah Weiss: Good morning, and welcome to Ingredion’s Fourth Quarter and Full Year 2023 Earnings Call. I’m Noah Weiss, Vice President, Investor Relations. Joining me today, on today’s call are Jim Zallie, Vice 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 fourth quarter and full year results can 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 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 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 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 P. Zallie: Thank you, Noah, and good morning, everyone. Our business performed exceptionally well in 2023, surpassing several key financial records with solid net sales, very strong profitability and robust cash flow, as well as outstanding Company performance across safety, environmental and importantly, service delivery. For the full year, we increased our net sales 3% and our adjusted operating income by 23% as we managed raw material volatility and took pricing actions and proactive cost saving measures. As we look ahead to 2024, we are well-positioned to deliver further financial growth on top of 2023’s remarkably strong results, and are confident that our new segmentation will better align our resources and capabilities with customers’ needs to realize further growth opportunities.

Let me update you now on progress against our four strategic pillars. Beginning with specialty ingredients, full year net sales grew by 4% and specialty growth contributed to gross margin expansion. At the end of 2023, specialty ingredients represented 34% of consolidated net sales. Performance highlights included food systems, driven by strong private label demand and pharma and personal care, driven by continued wellness trends, each demonstrating strong topline growth for 2023. Turning to commercial excellence. Throughout the year, our technical service teams engaged regularly with customers to co-create and provide the best ingredient solutions for their application. We were pleased to see a 26% increase in customer engagements, both in person at our Idea Labs and virtually through our digital connect studios.

We believe this demonstrates a recognition by our customers, not only of our capabilities, but also their need to innovate to drive volume growth. We also advanced our go-to-market capabilities through global training and consultative selling, with a focus on consumer trends that continually drive our business, including protein and fiber fortification, clean labeling and sugar reduction. By giving our teams the tools and information they need to help customers innovate around these trends in real time, we have been able to improve our net promoter scores, something that we regularly track. Adding to this, our investment in supply chain systems have improved on-time delivery each quarter as we progressed through 2023, giving our customers confidence that our supply chain can support just-in-time demand.

In the area of cost competitiveness, we invested in our procurement capabilities, completed a redesign of the team, and have provided training globally in category management. The team has done an outstanding job of leveraging Ingredion scale and implementing best practices. We are beginning to see significant value creation through real year-over-year savings, risk reduction and improved supplier collaborations. I also want to emphasize the outstanding work that our operations team has done to ensure the safety of our employees and contractors this year. Ingredion has always been a leader in safety performance, but this year, we have achieved a notable improvement in reducing the number of recordable and lost time incidents. As 2023 developed, we experienced softer customer demand.

Our supply chain and operations teams responded quickly by adjusting production schedules, which enabled us to end the year with a well-balanced inventory level. As we absorb greater fixed costs in 2023, we feel that we are well-positioned in 2024 as volumes recover to obtain leverage from our operations and lower manufacturing costs. Finally, acknowledging our purpose driven and people centric growth culture. I’m proud to report that we earned a perfect score in the Human Rights Campaign Foundation’s Corporate Equality Index for 2023. We are also happy to announce that we were once again recognized on Fortune’s Most Admired Companies list, ranking in the top five of the food production category. Regarding progress against our sustainability agenda, in 2023, we reached a new milestone with 66% of our five priority crops being sustainably sourced.

We are on-track to meet our 2025 commitment of 100% sustainable sourcing. Also, we continue to expand our regenerative agriculture program with customers, resulting in an 85% year-over-year increase in acreage. Regenerative agriculture is currently seen as one of the most promising mechanisms for on-farm carbon reductions to help all companies in the food supply chain to reduce their Scope 3 footprint. Turning now to gross margins. During 2023, we improved gross profit margins by 260 basis points to 21.4%, which demonstrates that our pricing actions and proactive cost savings initiatives have absorbed the inflation of the last three years. The gross profit margin improvement was achieved despite declining customer demand and necessary actions by our operations teams to slow production resulting in higher fixed costs.

It’s worth noting that this is the 6th consecutive quarter of gross margin growth. And I’d like to highlight that 2023 has been a record year for the Company across a number of important financial metrics. We have increased our sales to $8.2 billion which is an all-time high. We delivered $969 million of operating income, up 23%, which is also a record high, and adjusted EPS grew to $9.42 which is the most ever and 26% higher than last year. As changes in working capital investments turned favorable, we delivered cash from operations of over $1 billion. These combined results delivered a positive return for shareholders with 15% total shareholder return. Now, I will hand it over to Jim Gray, for the financial review and 2024 outlook. Jim?

James D. Gray: Thank you, Jim, and good morning to everyone. Moving to our income statement. While net sales of approximately $2 billion were down 3% for the quarter versus prior year. Gross profit dollars grew 14%, with gross margins greater than 20% again this quarter. Reported and adjusted operating income were $202 million and $203 million respectively. The increases were driven by lower input costs and favorable price mix, partially offset by lower volumes. For the fourth quarter, it is worth noting that South America growth was driven primarily by favorable foreign exchange impacts and strong performance in our Argentina JV. That said, our Q4 JV results lag one month in financial reporting, so the devaluation of the peso will impact our quarter one, 2024 outlook, which I will comment on later.

Our fourth quarter reported and adjusted earnings per share were $1.97 for the period, each up more than 15% from the prior year. Turning to our Q4 net sales bridge. The 3% decrease in net sales was driven by $148 million in lower volumes, partially offset by price mix of $63 million along with a positive foreign exchange impact of [$19 million] (ph). I would like to comment on volume trends in the quarter. Here we show a volume index based upon our 2019 quarterly shipment averages, which excludes high fructose corn syrup and adjust for changes in the portfolio since 2019. This graph illustrates the extraordinary volume demand in 2021 and 2022 and reaction to constrained supply chains globally. In the middle quarters of 2023, we experienced a drop in orders as customers drew down inventories, primarily in our texture products.

We have seen a gradual increase in order volumes through November. In December, order volumes slowed, representing two-thirds of the fourth quarter’s sales volume decline as customers anticipated lower prices in their contracts beginning in January. We anticipate a gradual improvement in volumes this year and have already seen strong demand in January deliveries. Turning to the next slide, we highlight net sales drivers for the fourth quarter. Foreign exchange was a 1% tailwind again this quarter, as South America saw strengthening of the Brazilian reai and Colombian peso, partially offsetting the FX related impact in EMEA, mainly in Pakistan. Sales volume was down 7%, but again sequentially better than the third quarter as customers finished working through the destocking of inventory.

As I highlighted previously, the fourth quarter sales volume headwinds were most evident in EMEA and North America, both regions experiencing a December pause in orders as new contracts and lower pricing levels became effective in January. Price mix was up 3% due to price and customer mix optimization compared to the fourth quarter of 2022. The decrease of 18% for South America was driven by lower corn prices resulting from Brazil’s larger harvest. Turning to our earnings bridge slide, on the left side you can see the reconciliation from reported to adjusted earnings per share. On the right side, operationally, we saw an increase of $0.41 per share for the quarter. The increase was driven primarily by an operating margin increase of $0.94 partially offset by unfavorable volume of minus $0.76 per share.

Moving to our non-operational items, we had a decrease of $0.09 per share in the quarter, which was primarily driven by a lap of lower tax rates from Q4 2022. Full year net sales of $8.2 billion were up 3% versus prior year. Gross profit margin was 21.4%, up 260 basis points. Full year reported operating income was $957 million and adjusted operating income was $969 million. Reported operating income was lower than adjusted operating income, primarily due to impairments on minority equity or venture investments. Our full year reported earnings per share was $9.60 and adjusted earnings per share was $9.42 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.

Turning to our full year net sales bridge, the 3% increase in net sales was driven by $943 million of price mix, partially offset by lower sales volumes of $648 million along with a negative foreign exchange impact of $81 million. Turning to the next slide, we highlight net sales drivers for the full year. Foreign exchange was a minus 1% headwind for the full year as the impact in EMEA, mainly in Pakistan, and various currencies in Asia Pacific were only partially offset by South America. Sales volume was down 8% as order volume was slower as customers destocked inventories built up over the last several years. Price mix was up 12% due to price and customer mix optimization compared to the full year of 2022. Turning to our full year 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 $1.99 per share for the full year. The increase was driven by margin improvement of $3.78 offset primarily by lower volumes of $1.65 and foreign exchange of $0.16 per share. Moving to our non-operational items, we saw a decrease of $0.02 per share for the full year due to higher financing costs of $0.21 per share and other non-operating income of minus $0.10 per share, partially offset by a $0.28 per share tax benefit. As a follow on note, on February 1, we completed the sale of our South Korea business for $294 million. Korea business results contributed $0.47 and $0.45 to reported and adjusted EPS respectively. We have adjusted our 2024 outlook considering this impact. Moving to cash flow.

Year-to-date cash from operations was just over $1 billion. As we progressed through 2023, raw material costs peaked and started to decline with a clear understanding of the size of the U.S. crop. Declining input costs eventually rolled through to our pricing, which will drive lower inventory values and lower accounts receivable balances. This net change impacted our ending balance sheet favorably, resulting in a recovery of working capital, which contributed positively to our cash from operations. Net capital expenditures were $314 million and in-line with our full year expectations. We continue to prioritize return of capital to shareholders in our capital allocation choices. During 2023, we increased the per share dividend rate for the 9th consecutive year, and we repurchased $101 million of outstanding common shares.

As we look forward, our capital allocation priorities continue to be: First, organic growth and reliability investments into our global manufacturing network. Second, a return to shareholders through our dividend. And third, strategic deployment of cash into M&A to accelerate our ingredient solution strategy or opportunistically repurchase shares. Let me turn to our outlook for 2024. It might be helpful to note three drivers of our financial performance before I speak specifically to our 2024 outlook. First, our pricing is anticipatory of raw material cost layout in the coming year. In 2023, we anticipated rising costs and we’re catching up with the prior year’s inflation in energy and other areas, so we carried strong price mix into 2023. During 2023, we witnessed a shift in the corn cost layout, which implies that we will see some lower price mix through 2024 as we pass along lower raw material costs to our more fee-based customers.

This is a normal expectation for our business model. Second, the change in the cost of corn and co-product values impacts how we begin each year with hedge values. Going into 2023, the hedge value that we carried into quarter one was approximately $11 million of realized hedge value gains. This year, we are seeing a swing with approximately $20 million of realized hedge value losses carrying into the first quarter of 2024. This expectation follows from declining corn costs and our hedge practices. Third, our volume expectation impacts our plant utilization and ultimately our manufacturing costs. For 2024, we expect greater volume demand and improvement in manufactured cost per ton. In total for the year, our goal is to continue to grow our gross profit dollars by way of managing higher gross profit dollars per ton.

The layout for margin change across 2024 will be highlighted by lower margin in the first quarter, as we have set prices in anticipation of full year corn cost layout, and are carrying into quarter one higher corn value as realized hedges work through COGS. We anticipate as lower corn costs work through Q2 through Q4 that net margins will continue to improve. Excluding the impact of the Korea divestiture from our outlook, we expect net sales to be flat to up low-single-digits, reflecting improved volume demand, partially offset by a decline in price mix driven by lower raw material prices. We anticipate that adjusted operating income will be up mid-single-digits with year-over-year growth in Q2 through Q4. For the full year 2024, we expect a reported and adjusted effective tax rates of 24% to 26% and 25.5% to 26.5% respectively.

The Company expects its full year reported EPS to be in the range of $10.20 to $11.15 including the anticipated net gain from the sale of the Korea business. For the full year, we expect adjusted EPS to be in the range of $9.15 to $9.85 excluding the effects of the Korea divestiture. We expect the diluted weighted average shares outstanding to be between 66 million and 67 million shares. 2024 cash from operations is expected to be in the range of $750 million to $900 million, and capital expenditures for the same period are expected to be approximately $340 million. Corporate costs are expected to be up low-single-digits. For the first quarter of 2024, we expect net sales to be down modestly with a mid-single-digit decline versus the first quarter of 2023, which reflects lower pricing as corn costs are passed through, as well as a relatively challenging lap from the prior year in EMEA due to extraordinary pricing to catch up with energy and input cost inflation.

For adjusted operating income, we anticipate a double-digit decline of minus 25% to minus 35%, driven by three factors: First, we are running with less volume in production than first quarter last year. We expect volume demand to improve in Q2 and beyond. Second, the carry-in of corn costs and hedge values presents a $30 million swing in profit margin quarter-over-quarter. The layout of corn will present lower corn costs through the year and support margin expansion for the balance of the year. And third, the devaluation of the official Argentina peso exchange rate will have a $15 million hyperinflation impact in January. As you can see from this page, our expectation for quarter one profit will be relatively in-line with the historic trend, excluding the very unique set of circumstances in Q1 2023.

That concludes my comments, and I’ll hand back to Jim.

James P. Zallie: Thanks, Jim. We delivered a record year in 2023 with strong profit growth and year-over-year gross margin expansion, and we generated record cash from operations of over $1 billion and we invested prudently in our strategic priorities. We believe that the customer inventory correction that started back in the first quarter of 2023 has largely run its course, and we are well-positioned to capture incremental volume opportunities as they arise in 2024. It is with this backdrop that we enter 2024 with a view to continued profit growth reflecting greater volume demand along with a focus on cost savings and operational excellence. We remain confident in our long-term growth targets and our ability to create value for shareholders.

Before closing, let me take a moment to highlight the transformational journey that Ingredion has been on. As you may know, Ingredion has been providing customers with ingredients and solutions for more than a century, and we have successfully adapted to changing market conditions throughout our history, and we continually position ourselves for long-term success as market conditions and consumer trends change. This time is no different. As a natural outgrowth to our transformation, we announced last November plans to reorganize our business operations, which will result in a change to our reportable business segments. Texture and Healthful Solutions will have a global mandate, while our Food and Industrial Ingredients businesses will have a regional and local focus.

The new structure creates greater transparency into our product capabilities, aligns our commercial teams to serve customers better, and provides greater insight to shareholders. We believe this move is the next logical step in a long history of adapting to changing market conditions in the pursuit of long-term growth. Now, let’s open the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Ben Bienvenu with Stephens.

Ben Bienvenu: Hi, good morning everybody.

James P. Zallie: Good morning, Ben.

Ben Bienvenu: As it relates to the South Korea business divestiture, I’m curious, any thoughts you can provide on potential use of proceeds that doesn’t seem to be considered in the guidance for this year? So obviously, we’re capturing the dilution, but not the potential returns associated with putting that sale proceeds to work in the business. So, maybe any framing around that that you can offer would be helpful?

James D. Gray: Sure. Hi, Ben, this is Jim Gray. First, obviously, we always look at where our shares are valued and we always have in at least the middle of our mind, if not the back of our mind share repurchase. And with a forward view of what we believe our intrinsic value is for the Company. I’d also say though and just highlight that the M&A landscape has been one where it’s been, I think, a little bit challenging in the last 2023, maybe part of 2022, at least for private equity, as risk free rates rose. There’s also been kind of globally, when you look at some ingredients companies, flavor and fragrance companies, multiples have come down. And as a strategic buyer, following our refresh strategy, we are continuing to look at where are there opportunities where we can look at M&A and deploy monies prudently, but and do so in a way that accelerates our strategy in ingredient solutions.

And so, you can never kind of guarantee that a deal is going to get done, but we have a pipeline that we continue to pursue.

James P. Zallie: Yes. I mean, our first priority always is with capital to invest in organic capital for growth and obviously, maintain our plant assets, so they run with liability and efficiently. As Jim talked about, second to that would be our dividend, the focus on our dividend. And third, would be the use for M&A to grow our Textured and Healthful Solutions businesses. And we have a very, as we always do, active M&A pipeline. But Ingredion, over time, has always remained disciplined. And for those acquisitions we have made, we’ve integrated them very well and delivered on the business case. And also, it’s noteworthy that the price that we got for the Korea business, which is primarily a core business, where, Jim, I think about a third of that volume was dedicated to high fructose corn syrup, was above our trading multiple from a PE standpoint.

So, we feel very good about it, and we think it’s the right thing to do for our portfolio, and we’ll use the proceeds wisely.

Ben Bienvenu: Okay, very good. My second question is on the cost outlay for this year, and in particular raw material costs, corn, I’m wondering, are you hedged this year on your gross corn similar to how you were in 2023? Should we expect a uniform outlay of hedge exposure throughout the year? And then, on the co-products, are you hedged similar this year as you were last year? Help us understand the framework around your cost hedging for 2024.

James D. Gray: Sure, sure. Yes, we are following the same discipline with regard to our U.S. Canada Business in that hedging upwards of kind of 80% or more of our gross corn purchase expectation and hedging almost towards 50% of our co-product values that we expect from the sale of our co-products. I would just say that when you look at the layout of corn, you had a declining corn futures market in 2023. So, any hedges that we’re placing towards the end of the year, we’re obviously going to be reflecting a little bit less in terms of the cost of corn. As you now look forward into 2024, you still have somewhat of a decline in the quarter-over-quarter comparison. So, that lower corn cost, even though it’s hedged, as long with the co-product values, it’s going to show up more so in Q1 versus Q4 of 2023, Q2 of 2024 will be slightly better than Q1 of 2024, etcetera.

So, that kind of goes to my comment on the layout of the corn. You should see corn cost, corn deflation helping us with margins, helping us with COGS as we get into Q2, Q3, Q4.

Ben Bienvenu: Okay. Thanks so much.

Operator: Thank you. Our next question comes from Andrew Strelzik with BMO Capital Markets.

Andrew Strelzik: Hi, good morning. Thanks for taking the question.

James D. Gray: Hi, Andrew.

Andrew Strelzik: Hi. I was hoping you could elaborate a little bit on some of the volume dynamics that you talked about, the shift out of December, is there a way to kind of frame that or quantify that? And are you seeing that Jan is then stronger than you would have anticipated? Or are you just kind of back to where you thought you would be? And I guess more broadly, if you could kind of walk through what you’re seeing across your end markets from a volume perspective?

James D. Gray: Yes. Andrew, I do appreciate the question, and it’s a little bit of a nuance for everyone listening. I would say that in Q3, when I was asked about what did I see as some of the potential risk to the end of the year? I always said, well, our brand Company CFOs are smart folks. They’re probably going to be managing inventories at the end of the year, because it contributes to their operating cash flow. And if you’re in procurement, you’re looking at a lower corn cost in 2024, you’re negotiating for your price of your starch, your sweetener. And you probably came out with a slightly better price in January for 2024 than what you’re carrying in 2023 for us. And so, what we just saw was some of the volume pause, I’m going to call it pause on orders, because I think that’s smart to do if you’re in procurement, that impacted really Europe, and so that shows up in the EMEA sales volume number for Q4 had impacted North America, and that shows up in the sales volume number.

So, pretty natural play of things as the year ends. So, we are seeing January volumes strong. So, I would say that it’s, I don’t know if it’s necessarily changing our guidance, but we are very confident that December pause, there’s still an underlying customer order volume demand, and that’s coming through in January.

James P. Zallie: Yes. I think it played out exactly as we had indicated in the last earnings call, and we thought it was very rational behavior on the part of customers to certainly adjust working capital down, but also wait for some of the price decreases that they were anticipating that would be affected with contracts starting in January. But, we do want to emphasize that the customer inventory correction that started a year ago has largely run its course, and we don’t see that as a factor as we head into this New Year.

James D. Gray: Hi, Andrew, if I can, just to carry forward, because we had a net sales guidance of kind of up low-single-digit, but it has two parts to it. And so, I think one part is, what’s the underlying volume demand, and then that’s partially offset by some anticipated price mix due to lower corn as we pass through. But, maybe ask Jim to comment on what we see for volume demand in 2024.

James P. Zallie: Yes. I think with respect to packaged food volume demand, we expect an increase in unit volumes as brand and private label lap the very high unit prices that occurred, I guess over the last two years. So, we anticipate that grocery retailers will want to support consumers to bring them back to the stores, and I think we’re going to see more promotions to support traffic. We also highlighted the increasing customer interactions. We’re seeing many more engagements for innovation related projects that we think is a leading indicator for the need for brand innovation to drive also volume growth within the CPG space. So, we’re anticipating a mid-single-digit uptick in sales volume demand for 2024, and that growth should become evident in all geographies through 2024, except perhaps, as Jim said, in Europe for the first quarter.

And overall, as we guided, net sales will be flat to up low-single-digits as we expect some price mix headwinds with lower corn costs being passed through on our variable pricing contracts.

Andrew Strelzik: Great. That’s super helpful color. I appreciate that. And then, if I could just ask about M&A and buybacks and kind of how you think about the capital deployment to the two, whether it’s the South Korea proceeds or otherwise. Is there a point at which if a deal does not materialize on the M&A side that you would pivot to buybacks, is there a timeline element to this? Or I know these the timing of these things can be very unpredictable. So, I guess I’m just curious how you think about, pivoting between the two at some point if needed?

James P. Zallie: Yes. I’ll let Jim, make a comment and I’ll make a comment. Go ahead, Jim.

James D. Gray: I think for Andrew and for everybody, I don’t think it is an either or, right? So, right now given our balance sheet, given our cash position, if we believe that the shares are absolutely of value, then we can be executing on share repurchase. And that’s not going to give us pause on what we’re doing on M&A.