Ingredion Incorporated

Thank you for standing by and welcome to the Ingredient Incorporated second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Jason Payne, Vice President of Corporate Finance and Interim Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Ingredion's second quarter 2022 earnings call. I'm Jason Payne, Vice President of Corporate Finance and Interim Vice President of Investor Relations. On today's call are Jim Zally, our President and CEO, and Jim Gray, our Executive Vice President and CFO. We issued our results today in a press release that can be found on our website, ingredient.com, in the Investors section. The slides accompanying this presentation can also be found on the website and were posted today 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 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. 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 on 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 U.S. GAAP measures in Note 2, Non-GAAP Information, included in our press release and in today's presentation's appendix. Now, I'm pleased to turn the call over to Jim Salley.

Thank you, Jason, and good morning, everyone. We are pleased to discuss Ingredion's second quarter performance and continued business momentum. We delivered outstanding top-line performance of 16 percent net sales growth for the second quarter. Our pricing centers of excellence continue to offset higher corn and other input costs, including foreign exchange impacts. Combined with a better product mix, our second quarter adjusted operating income grew 3% over last year's very strong second quarter. And just to note, this year's second quarter performance is now the strongest quarter we've delivered since 2017. Looking more closely at our top line performance, across all four regions, comparable net sales grew double digits in the second quarter. As I mentioned, our commercial teams continue to successfully manage the terms of our customer contracts to address higher corn and input costs and continue to take actions to offset foreign exchange impacts as the U.S. dollar continued to strengthen. Of note, we offset more than $40 million of foreign exchange sales headwinds in EMEA and Asia Pacific combined. Regarding customer demand, I would like to note that on a comparable basis, our shipped product volumes are now ahead of pre-pandemic levels for the same quarter in 2019. This is an important milestone for us given the impact the pandemic has had on the industry and our business over the last two years. At the same time, net sales have grown significantly and specialty ingredients have increased as a percentage of both volume and net sales, reflecting a higher value mix. Now, moving on to our strategic pillars. We continue to make great progress against each of the four pillars that are shaping our growth strategy. Global specialties once again exhibited strong top-line growth up mid-double digits in the quarter. Specialties performance was robust across all five growth platforms with texturizing ingredients and sugar reduction leading the net sales dollar increase. Additionally, plant-based protein sales were up strongly in the quarter and are now up more than 185% year-to-date. Moving to commercial excellence. While challenges remain across global supply chains, we've implemented several process improvements to best respond to customer demand. With regard to cost competitiveness through operational excellence, we have expanded our hedging programs and continue to build our capability to address commodity risks, primarily in North America. As a result, we anticipate significantly less commodity volatility in the second half of the year. We also maintain momentum against our fourth strategic pillar, accelerating a purpose-driven and people-centric growth culture. We published our 2021 sustainability report, Making Life Better, which details our progress against our 2030 global sustainability goals to address important societal and environmental sustainability challenges. During the quarter, we advanced several sustainability initiatives to drive positive, lasting impact in the communities where we live and work. One such example that I would like to highlight is a pilot program that Ingredion Brazil is leading. Working with Heineken and several other suppliers, we are teaching and training farmers to adopt regenerative farming practices. This pilot program resulted in a 25% reduction of emissions in scope and increased the amount of carbon captured in the soil by 40%. Separately, to further reduce our global carbon emissions, we have successfully exited coal usage at our Argo plant in Illinois, which resulted in an 8% reduction in our total Zone 1 and 2 carbon emissions. This change delivered nearly a third of the reductions needed to meet our 2030 greenhouse gas emissions goal. Also in the quarter, we published our 2021 Diversity, Equity, and Inclusion Report, which highlights our broad efforts to increase representation across our employee population. We are committed to creating a growth culture focused on diverse talent, inclusiveness, and community partnerships. As I mentioned, specialty delivered very strong growth this quarter across all four regions, and net sales grew double digits over and above the strong growth we experienced in the first half of 2021. While the growth was led by our texturizing portfolio, we also generated strong growth from our sugar reduction and specialty sweetener ingredients and plant-based proteins. Notably, our first half specialties net sales results are above our expected four-year net sales growth outlook, which we outlined at our recent investor day. Now, let me spend a moment to update you specifically on sugar reduction, which grew 20% in the second quarter, led by Pure Circle, where customer wins, drove 28% net sales growth and positive operating income. Pure Circle's continued momentum demonstrates its market leadership for high-intensity natural sweeteners in a rapidly growing market for reduced sugar foods and beverages. And we are pleased to share that we have increased our ownership of Pure Circle from 75% to 82% in the quarter. we anticipate further increases to our ownership of Pure Circle over the next three years. As we look ahead to the second half of the year, we are focused on navigating the challenges in the current business landscape. First, we continue to remain committed to offsetting inflationary increases through a combination of pricing and productivity improvements from our operations. We have demonstrated an ability to do this well in the first half, and we expect to be able to offset additional cost increases as they arise. Second, supply chain challenges continue to be impacted by labor availability, COVID restrictions, and the Ukraine conflict. Our teams are operating with agility to overcome these challenges to ensure continuity of supply and service to customers. Energy prices remain elevated, and there is increasing concern around the potential natural gas supply disruptions in Europe. We are currently developing contingency plans to mitigate possible impacts in the region. And lastly, while foreign exchange impacts have been relatively benign over the past two years, we are currently experiencing higher foreign currency weakness on the back of a strengthening U.S. dollar. Our pricing centers of excellence have served us well, and we will continue to price through raw material costs increases as well as foreign exchange. Now, let me hand it over to Jim Gray for the financial overview. Jim?

Thank you, Jim. Good morning to everyone. Starting first with our Q2 regional performance, North American net sales were up 20% when compared to the same period in 2021. The increase was driven by strong price mix, primarily as a result of last fall's contracting season, as well as dynamic in-year pricing. North America operating income was $161 million, up 8% versus the prior year. The increase in operating income was driven by strong price mix that more than offset inflationary input costs, including higher corn. In South America, reported net sales were up 8% versus prior year, which includes the impact of the Argentina JV presentation change. On a comparable basis, net sales would have been up 42% versus prior year, primarily driven by strong price mix and volume across the region. South America operating income was $39 million, up $6 million. Operating income favorability was driven by stronger performance in Andean and Brazil, as well as a positive contribution from the Argentina joint venture. Excluding foreign exchange impacts, adjusted operating income was up 15% in the quarter. Moving to Asia Pacific, net sales were up 11% in the quarter. Absent foreign exchange, sales were up 19%. Asia Pacific operating income was $21 million, down $3 million versus prior year. Strong performance in ASEAN was more than offset by weakness in Korea due to higher input costs and impacts in China related to COVID disruptions. Negative foreign exchange also impacted the region during the quarter. In EMEA, net sales increased 10% for the quarter, and absent foreign exchange impacts, net sales were up 24%. EMEA operating income was $29 million for the quarter, down $3 million compared to the prior year. EMEA operating income was down as higher corn and input costs in Pakistan, as well as foreign exchange headwinds, more than offset resilient performance in Europe. Excluding $5 million of foreign exchange impacts, EMEA's adjusted operating income was up 6% in the quarter. Moving to our income statement, net sales of $2,044,000,000 were up 16% for the quarter versus prior year. Gross profit dollars were higher year over year, while gross margin was 19.1% down 170 basis points, mostly attributable to price mix lagging higher corn and input costs, primarily in Pakistan and Korea. Reported operating income was $213,000,000 and adjusted operating income was $215,000,000. Reported operating income was lower than adjusted operating income due to restructuring expenses. Our second quarter reported and adjusted earnings per share were both $2.12 for the period. Turning to our Q2 net sales bridge, we achieved strong price mix of $328 million, largely attributable to strong contracting and dynamic in-year pricing in each of our four regions, with notable increases in North America and South America. The sales volume decrease of $5 million was driven by the impact of the presentation change related to the Argentina joint venture, partially offset by strong volume increases in each of the regions. On the next slide, we highlight net sales drivers. Of note, foreign exchange was a 2% headwind in the quarter, with significant headwinds in EMEA and Asia Pacific. Reported South America results include the impact of the presentation change of the Argentina joint venture within the volume column. South American net sales grew 42%, with volume up 15% on a comparable basis, excluding the impact of the Argentina JV. 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 $0.07 per share for the quarter. The increase was driven primarily by an operating margin increase of $0.24, partially offset by lower volumes of minus $0.11, an unfavorable foreign exchange of minus $0.07. Moving to our non-operational items, EPS was flat the prior year primarily driven by lower financing costs of $0.02 and favorable outstanding shares benefit of $0.02, mostly offset by a higher adjusted effective tax rate of minus $0.03. Year-to-date net sales of $3,936,000,000 were up 17% versus prior year. Gross profit margin was 19.5%, down 180 basis points. Year-to-date reported operating income was $423 million and adjusted operating income was $428 million. Reported operating income was lower than adjusted operating income primarily due to restructuring costs. Our year-to-date reported earnings per share was $4.04 and adjusted earnings per share was $4.06. Turning to our year-to-date net sales bridge, 17% net sales growth has been led by $612 million of price mix improvement, primarily from North America. The sales volume increase of $14 million was driven by volume increases in each of the regions, primarily in North and South America, largely offset by a sales volume decrease of a negative $128 million from the presentation change related to the Argentina joint venture.