Ingredion Incorporated

Ladies and gentlemen, thank you for standing by and welcome to Ingredients, Inc. Second Quarter 2020 Earnings Conference Call. At this time, I'll put the spin lines on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference to your speaker today, Tiffany Willis, the Vice President of Investor Relations and Corporate Communications Officer. Please go ahead, ma'am.

Thank you, Victor. And good morning, everyone, and welcome to Ingredion's second quarter 2020 earnings call. I'm Tiffany Willis, Vice President of Investor Relations and Corporate Communications Officer. On today's call are Jim Zally, our President and CEO, and Jim Gray, our Executive Vice President and Chief Financial Officer. We issued our results this morning in a press release that can be found on our website, ingredient.com, in the investor section. The slides accompanying this presentation can also be found on the website and were posted a few hours ago for your convenience. As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the company's future operations and financial performance. including the impact of the COVID-19 pandemic. Actual results could differ materially from those predicted in the forward-looking statement. An ingredient 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, Forms 10-Q and 8-K. During this call, we 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. And with that, I'm now pleased to turn the call over to Jim Vallee.

Thank you, Tiffany, and good morning, everyone. Back in early May, when we last updated you, our world and our industry were all still coming to grips with the impact of the global pandemic. While the uncertainty has persisted, Ingredion has remained an essential business in the food supply chain, continuing to provide a secure supply of ingredients to customers and meet their changing needs. I'm proud that over the last six months, our employees have risen to the challenges, demonstrating preparedness, persistence, and resilience, which has enabled us to continue to progress our strategy through these unprecedented times. The three priorities that we established from the beginning have continued to guide our actions. Our first priority for employees' safety, health, and wellness has allowed us to operate our facilities and continued to seamlessly meet the needs of our customers while quickly, creatively, and productively adapting to new ways of working. Second, our role during these times as a responsible corporate citizen has brought us even closer to the communities in which we operate, reinforcing the already strong local bonds and connections we have always had. Third, we have delivered on our commitment to maintain business continuity and I'm pleased that our employees have embraced the necessary changes and disruptions from the pandemic as opportunities to reimagine and reinvent our approach to customers and deliver value in new and different ways, all while ensuring supply chain reliability and uninterrupted service. I could not be more proud and appreciative of the dedication, caring, and spirit of our global employees, and I want to thank them. for embodying the essence of our purpose at Ingredion, to make life better. Now, turning our attention to the second quarter, we operated in an extremely challenging global environment. As COVID-19 cases increased, government responses and consumer behavior shifts significantly reduced food consumption away from home, which in turn impacted our results. For the quarter, our global net sales were down 13% compared to the year-ago period. Absent foreign exchange impacts of $59 million, net sales were down 9% versus prior year. Net sales were impacted across all four regions by volume decline and foreign exchange impacts. Adjusted operating income for the quarter was down 29% year-over-year, and down 25% absent foreign exchange translation impacts. The economic pressure from the current environment resulted in adjusted operating income being down year over year in all four regions. However, South America operating income was up 6% absent foreign exchange impacts. Before moving to region performance, I want to emphasize that we continue to execute against our strategic priorities in the quarter. We have expanded our shared services in Mexico, progressed the structuring of global business services, consolidated our potato starch network in North America, and closed on our acquisition of Pure Circle. In addition, we continue to make solid progress on the startup of our South Sioux City pea protein isolate facility as it has begun commissioning and certification. We continue to execute against our cost smart savings program and are increasing our savings run rate target to $170 million by 2021. This $20 million increase is a direct result of our teams identifying even more effective and efficient ways to operate our business without compromising quality or service to customers. Moving to our second quarter regional results, let me begin with North America. Sales were down 13% for the quarter versus prior year. The volume decline was impacted by significantly lower consumption of food away from home in both the US and Canada. Sales weakness from out of home channels were then further impacted by government mandated brewery shutdowns in Mexico. which occurred early in the quarter and remained throughout. I'll speak to both of these issues in greater detail in a moment. Operating income was $101 million, down 27% versus the prior year. Sales declines from the lower consumption of food away from home and the brewing shutdown pressured our bottom line. Looking closer at North America's net sales, we experienced a decline in US and Canada sweetener sales versus prior year, which was primarily driven by declines in high fructose sales, mainly into food service beverages. While we saw a rebound as we exited the quarter, our total North American net sales reflects the sweetener decline in US and Canada. It also reflects a decline in sales of brewing ingredients throughout the second quarter in Mexico. Brewing's steep decline pressured net sales for Mexico in the quarter, and while June and July sales to brewing in Mexico have picked up substantially, recovery of our overall volumes to prior year levels has not yet developed. South America exited the quarter with sales down 19% versus prior year. However, absent foreign exchange, sales were down only 1% as favorable price mix offset the majority of the volume decline. Operating income was $13 million, down 19% versus prior year due to foreign exchange impact and volume weakness. Excluding foreign exchange impacts, adjusted operating income was up 6% as strong price mix more than offset volume decline. To provide more insight into our South America performance, I want to highlight our net sales trend throughout the second quarter. Our sweetener sales were consistently pressured compared to prior year and our brewing ingredient sales were volatile with a very weak April followed by a strong bounce back in May and June. Carrying through to July, we are seeing healthy brewing ingredient sales. Sweetener sales still lag well below prior year as impulse buying of confectionery through informal channels is constrained by workers not commuting into businesses and children not attending school. Moving to Asia Pacific, sales were down 8% compared to the prior year due to volume decline and foreign currency. Operating income was $22 million, down 4% versus prior year, as weaker volumes from stay-at-home orders were offset by improved tapioca margins and effective management of operating expenses. Shifting to EMEA, our sales were down 8% for the quarter. Excluding foreign exchange, our sales were down 2%, driven by reduced volume from weakness in Pakistan, primarily in the export-driven textile sector. This impact was mitigated by favorable price mix and strong specialty sales in Europe. Operating income at $21 million was down 9% for the quarter. Absent foreign currency, operating income was flat compared to the prior year. Now, let me turn it over to Jim Gray, who will round out the financial review. Thanks, Jim. Net sales of $1,349,000,000 were down 13% for the quarter versus prior year. Gross profit margin was 20.1%, down 110 basis points. Reported and adjusted operating incomes were $113,000,000 and $127,000,000 respectively. Reported operating income was lower than adjusted operating income due to asset closures and restructuring costs related to cost margins. Our reported and adjusted earnings per share were $0.98 and $1.12 respectively. Second quarter net sales of $1,349,000,000 were down 13% versus prior year. We experienced negative foreign exchange impacts of $59 million. Sales volume decline of $183 million, primarily driven by COVID-19 impacts around the world, was partially offset by $41 million of favorable price mix. In North America, net sales were down 13% versus prior year due to sales volume decline of negative 15%. South American net sales were down 19%, primarily driven by a negative impact of 18% from foreign exchange. Sales volume decline of 11% was nearly offset by 10 percentage points of favorable price mix. In Asia Pacific, net sales were down 8%, as pressure was felt from foreign currency weakness and sales volume decline. Unfavorable price mix reflects lower tapioca raw material costs in Oceania and related pricing to customers. EMEA net sales were down 8%, primarily driven by foreign currency weakness in Pakistan. Sales volume declines in Pakistan outweighed the rest of the region. However, the region did deliver strong price mix. For the quarter, reported operating income decreased by $55 million, while adjusted operating income decreased by $51 million. The decrease in reported operating income versus adjusted operating income is primarily due to asset closures in our North America potato network and restructuring costs related to Cosmark. Operating income declined in each region, as Jim referenced earlier. The increase in corporate costs for the quarter was driven by higher legal costs, continued investments to drive innovation and centralization of global business services into corporate. In addition, our company incurred incremental COVID-19 expense for personal protective equipment, sanitization, and health screening, as well as an interim appreciation pay program at our U.S. manufacturing facilities, which has ended. This direct expense amounted to $7 million during the quarter, with the majority incurred in North America. Turning to our earnings bridge, on the left side of the page, you can see the reconciliation firm reported to adjusted. On the right side, operationally, we saw a decrease of $0.55 per share for the quarter, primarily driven by a volume decline of $0.35 and a margin decrease of $0.09. Unfavorable foreign exchange was an $0.08 impact to the quarter. Moving to our non-operational items, we saw an increase of one penny per share for the quarter driven by a favorable tax rate. Financing costs are higher due to realized losses on FX hedges as well as impacts of hyperinflation accounting. Underlying net interest expense was lower versus prior year. Year-to-date net sales of $2,892,000,000 were down 6% for the first half versus the year-ago period. Gross profit margin was 20.5%, down 40 basis points. Reported and adjusted operating incomes were $266,000,000 and $294,000,000, respectively. Reported operating income was lower than adjusted operating income due to asset closures and restructuring costs related to cost margins. Our reported and adjusted earnings per share were $2.08 and $2.72, respectively. Year-to-date net sales of $2,892,000,000 were down $194,000,000 from the same period a year ago. Foreign exchange impacts represented a $100,000,000 headwind. Sales volumes declined of $178,000,000 was partially offset by $84,000,000 of favorable price mix. The growth product platforms that comprise specialties represent 32% of net sales year to date. Excluding foreign exchange impacts, net sales of specialty ingredients within the product portfolio were slightly positive year over year. And we will provide another update regarding specialty ingredients at year end. Through the first half of 2020, we advanced many initiatives under our cost smart savings program. to optimize our network and reshape our organization. During the quarter, we completed the consolidation of our potato manufacturing network in the US. Furthermore, we continue to advance the expansion of global business services into the functions of finance and HR. We are also pursuing opportunities in this new dynamic work environment to re-engineer how we work with one another and with our customers. We're confident in our ability to deliver on our 2020 run rate savings target of 90 to 100 million, which is part of our now increased savings target of 170 million by 2021. I'd also highlight that our total company expenses year-to-date are down 1% despite the additional COVID-19 costs I referenced earlier. Turning to our year-to-date earnings bridge, Operationally, we saw a decrease of 53 cents per share, driven by a volume decline of 38 cents, which was slightly offset by margin improvement of 2 cents per share. Unfavorable foreign exchange and other income items represented a negative 13 cents and a negative 4 cents decline per share, respectively. Moving to our non-operational items, we saw an increase of 6 cents per share year-to-date, driven by a favorable tax rate, lower financing costs, and other non-operating income items. Moving to cash flow, cash provided by operations was $294 million in the first half. Capital expenditures were $175 million, up $19 million from the prior year period due to the timing of payments for our growth projects. During the second quarter, we issued two senior notes aggregating $1 billion in principal and subsequently paid down our revolving credit facility and substantially lowered our future financing costs. At quarter end, we had cash and cash equivalents of $1,047,000,000. Following the quarter's end, we have used cash towards the acquisition of Pure Circle and the redemption of our November 2020 senior notes. Moving from cash flow to our balance sheet, we are well positioned with greater financial flexibility due to our strong balance sheet. With solid investment grade ratings and a debt leverage ratio of 1.8 times net debt to adjusted EBITDA for the trailing 12 months, we have sufficient debt capacity and solid credit worthiness to manage through future business cycles. Turning to the third quarter. Due to the uncertainty of COVID-19, we cannot reasonably estimate full year results at this time. During the third quarter, we expect continued adverse impacts from COVID-19 on net sales across our operating segments, with recovery in sales generally correlated with easing of restrictions and increased consumer mobility. For the third quarter, we expect adjusted operating income for the company to be down in the mid-teens versus prior year, with the greatest range of potential outcomes in South America. We expect sequential improvement in North America as the U.S. and Mexico demonstrate greater consumer mobility in comparison to the severe shutdowns experienced in Quarter 2. In Q3, we anticipate South America's operating income change to be similar to Quarter 2 due to the impact of the prevalence of COVID-19 cases and extended country lockdowns, combined with the fact that South America will be at the height of their winter season. Barring a significant second wave of heightened COVID cases, we believe Asia-Pacific performance could be down low single digits or better in the third quarter. We anticipate that EMEA demonstrates sequential improvement, assuming that Pakistan does not experience continued or severe stay-at-home restrictions. Regarding Pure Circle, given the distressed conditions under which it has recently operated, We will be laser-focused on its turnaround for the next 12 months and anticipate mid-single-digit operating losses in the near term as the team works to drive the integration. For Ingredient overall, we anticipate cash flow in line with changes to operating income. For the year, committee capital investments are anticipated to be between $290 million to $310 million. Our reported effective annual tax rate is anticipated to be between 29% and 33%, and our adjusted effective annual tax rate is expected to be between 26% and 27%. With that, let me turn the call back to Jim. Thanks, Jim. As we navigate this challenging environment, we remain steadfast and focused on advancing our driving growth roadmap and positioning our company for long-term success. We have made substantial progress across our specialty growth platforms and I'm very pleased with the increasing breadth and depth of capabilities we are building for each of them. Our sugar reduction platform has evolved immensely with the addition of Pure Circle. The acquisition of the leading global player in the Stevia space will benefit us significantly over time. Pure Circle allows us to further build out our sugar reduction capabilities with an expanded global presence. Pure Circle had revenues ending its fiscal year of June 30, 2020, of $101 million. We expect to achieve both cost synergies of greater than 10% and additional revenue synergies starting in the second half of this year. Longer term, we expect to achieve high single-digit revenue growth. After a very challenging last 12 months for the Pure Circle organization, Now having stability and a bright future to look forward to as part of the Ingredion family opens up a new energizing chapter for the team. We held an excellent virtual day one integration kickoff and are very impressed with the Pure Circle talent and expertise. Turning to plant-based proteins, our South Sioux City manufacturing facility to produce pea protein isolate is scheduled to commission in the second half of this year. I recently had a chance to visit the facility and was very impressed with the overall site progress and caliber of the team that we have assembled at this new location. The project remains on schedule with primary construction complete and the facility is entering the phases of commissioning and certification. And I'm looking forward to hosting members of our board at the facility next month. Our other investment in pulse-based flours and concentrates with Verdient in Van Swoy, Saskatchewan continues to advance, and during the quarter, we further complemented our plant-based protein portfolio by forming an exclusive relationship with Norquin, a leader in high-value quinoa-based ingredients. Turning to country growth opportunities, I wanted to highlight that we will be making a significant investment to capitalize on the continued growth in the largest specialty starch market in the world in China. We have been operating in China for over 30 years and manufacturing there for nearly 20 years and have developed a very strong reputation for delivering specialty starch solutions. Given our strong local presence and customer preference to source locally, we have committed $85 million over the next two years to more than double our local supply capacity and at the same time optimize our global supply chain. Before I close, I would like to reinforce that we remain guided by our four strategic pillars and have been making solid progress executing against each of them despite the circumstances presented by the pandemic. Specialties growth, underpinned by a reputation and heritage for innovation, is central to our strategy, and we are focused on making specialties an increasing percentage of our overall portfolio, broadening beyond starch and beyond corn-based ingredients. Commercial excellence, being easy to do business with, and reinventing the way we connect and co-create with customers has progressed well despite the pandemic. As an example, the number of digital customer engagement has increased more than 300% in the quarter, and customer training sessions have more than doubled. CostSmart continues to develop momentum, not as an initiative, but as a mindset throughout the organization to drive business process simplification and efficiency, with the pandemic being a further catalyst to find new ways to achieve both. Lastly, our commitment to embody our purpose, live our values, and invest in and develop our talent has served us extremely well during the pandemic, and I am confident it will continue to do so. We reinforced our value of everyone belongs, emphasizing our stance against racial injustice and the importance of an inclusive culture, and we launched a new employee value proposition this past quarter. We also further strengthened our executive talent, and I'm pleased to share that we recently announced that Jeremy Zhu will soon join Ingredion as Senior Vice President and Chief Innovation Officer. Jeremy will succeed Tony DiLeo in this capacity while Tony transitions to lead the integration of Pure Circle. Jeremy brings more than 20 years of scientific industry experience, serving most recently for four years as President of Human Nutrition and Health at Royal DSM and for 16 years prior to that at DuPont. We look forward to Jeremy joining the Ingredient family. I look forward to providing additional updates on the progress against our strategic pillars in future calls. Now, let's open the call for questions.