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spk00: was trimmed on working capital intensity. And Jim Gray, maybe just help us think about the implications of that into 2023. And is there reason to believe that there's some working capital release that would be likely next year, absent another step up in corn prices and inflation? Or how does that actually flow through the balance sheet and cash flow statement over the next 12 months?
spk02: Yep, sure, Adam. I think what we're seeing is that when we look at the cash from ops read that's in our supporting tables, it's taking the end point at 2021. And I think at that time, both corn was lower, as well as as we move through, we've seen corn costs rise globally since the beginning of the Ukraine conflict. What we're now seeing, I think, in our AR is kind of a steady run rate. So if I look at the, I'm looking at the end of Q1 to Q2, the end of Q2 to end of Q3. And accounts receivable is relatively in line with our quarterly sales. And so I'm encouraged there. I think we are still seeing some of the corn costs pass through our inventory. And also just recognize that this is the seasonal type of the year. So most of the harvests are done. In the northern hemisphere and so this is when we have in some markets where we have to buy our corn And and so for example like Pakistan, you know, we bought a lot of spring corn Much of that's on our balance sheet. And so I think as we just roll forward and you know, we'll finish out q4 And then we'll look at the beginning of 2023 You know likely there'll be price increases that will still be rolling through some of our invoicing and But I generally see the net demand for working capital to be much, much less than what we've experienced in the first nine months. And that's kind of assuming that the overall global corn market stays elevated, kind of reflecting the U.S. strip price, mid sixes per bushel. And then just for everybody on the call, post the 23 crop size in the U.S., you know, as we get into a feeling for the carryout and next year or even 24, if we see, you know, corn coming down, then that usually is a beneficial to our working capital.
spk00: That's a helpful color. I'll pass it on. Thanks.
spk01: Thanks, Adam. Thank you.
spk06: Your next question comes from the line of Rob Mosco with Credit Suisse. Your line is now open.
spk04: Hi. Hi, guys. I have a few questions. One is on the plant-based business, can you give us an update on how you're doing versus your internal targets? I know you said 145% sales growth, but that was off of a very small base last year. So what I'm interested to know is, you know, I think you said it would be a drag on operating profit this year and then maybe better next year. So maybe an update there. My second question is about your FX outlook for the year. Maybe I missed it, but do you have higher headwinds from FX to your EPS than you thought? But you know, how does that impact your EPS guidance, if at all? And then maybe I'll wait for a follow-up.
spk03: All right. I'll take the PBP question, or plant-based proteins, which is the acronym we use here, and Jim will take the 4X question. So, as it relates to plant-based proteins, specifically, as it relates to your direct question, for 2022, our revenues are trending within the range we provided at the beginning of the year, albeit on the lower end, but they are trending within the range that we had provided. With regards to the anticipated operating income improvement, we continue to improve our production each month. In fact, at two facilities in October, we had record production months from a standpoint of quality of inventory and saleable product. And we'll have a much more complete look at the go forward in relationship to the operating income improvement at the end of the year and probably be providing an update on that in quarter one. As it relates just to the entire plant-based protein category, I would say that I would remind everybody that the approach that we've taken is to build a broad portfolio across protein flours, concentrates, and isolates across four types of pulse-based proteins. So we're not dependent, for example, just on pea protein isolate that goes into alternative meats. So it's a systems approach. It's a formulation approach. And while there has been weakness in demand for certain portions of the market, we're not dependent on sales into one product category exclusively, for example, alternative meats. And we were not from the beginning a large supplier to any one of the large alternative meat producers. So we still have a very robust project pipeline with many customers, and we're monitoring the category just like everybody else is, and clearly price points and perhaps other questions around clean label formulating, et cetera, for alternative meats have dampened the demand there, but we still believe that that this is a trend, not a fad, that's supported by significant sustainability drivers, and that at the end of the day, it's going to be about formulating great tasting, great texture, and highly nutritious products. And we think our formulation approach across flowers, concentrates, isolates, along with our fifth growth platform, which is food systems, That whole approach is what ultimately will serve us well in this category. So we're in it for the long haul, and we're still optimistic. And it does make us a more complete supplier when you think about us being a leader in texturizing, a leader in sugar reduction, and a leader in plant-based proteins. They all support one another from a standpoint of innovative new product development opportunities for customers. And some of our wins right now that we're seeing are in alternative snacks, for example, or protein-fortified snacks in bakery and alternative dairy, as opposed to, say, dependent upon alternative meats. So, again, more fulsome update in quarter one on the exact financials. Rob, that's how I would answer that. And I'll turn it over to Jim on the 4X question.
spk02: Yeah. Rob, you had a follow-up on plant-based proteins? Yes. No, go ahead, please. Okay, just so on FX, you know, I think as we have seen the dollar really strengthen, you know, is obviously we're absorbing that foreign exchange impact and, you know, we're pretty clear on our tables. I would say that, you know, our full year updated outlook does kind of include where the dollar is at today relative to kind of other foreign currencies that are key in our markets. You know, it's part of our business model, and we've consistently been able to try and offset foreign exchange headwinds because, you know, it impacts the cost of corn, which is traded globally in dollars. And so, you know, that's going to show up in our local pricing models, you know, as we're looking at changes in the value of corn. I think it's somewhat well understood by our customer base. And maybe just to highlight, you know, it's pretty noteworthy that both South America and EMEA, which had a fair amount of foreign exchange weakness, had expanding gross margins. So what we're trying to do, Rob, is really become tight and resilient on seeing that FX change, seeing that impact on our raw materials, you know, which is either energy or corn. and then being able to be pretty agile in passing that through. We're still going to have lags, but I think we have built some more muscles on our execution around that.
spk04: Okay. Actually, my follow-up. You said that you're now at the lower end of your range for your plant protein revenue target. Is that because the alternative meat category has softened?
spk03: Not specifically, because, again, our – projections were across the entire platform of applications that I described and customer base. So we were never entering the space to supply a magic bullet for one product for one category. That, again, has not been our approach or strategy. I just think that if you remember, we had at the beginning of the year little bit of challenges just ramping up into entirely new product category for us. But we've demonstrated each and every month improvements in our production and our ability to make food grade products at the highest quality. And so I think it's a timing issue related to that. But look, the category is evolving and going through changes and we'll continue to monitor it. So for the long term, we're still optimistic about the plant based protein category. Got it. Thank you. Thank you, Rob. Thanks, Rob.
spk06: Your next question comes from the line of Benjamin Thurow with Barclays. Your line is now open.
spk05: Thank you very much. Good morning, Jim and Jim. Congrats.
spk03: Good morning.
spk05: So two questions. So one, and this was just a couple of weeks ago that when you talked about some of the potential risks in EMEA and more specific within Europe, given the developments that we've seen in some of the countries, be it Germany, be it France and so on, and efforts to try to bring electricity prices down, supply to support of industries, consumers, etc., Are you feeling more comfortable within your outlook as to not running into shortages and actually getting some government support? And how do you think this is going to play out, particularly into 1Q maybe and a little bit into 2Q, if you could give us a little bit of a sneak preview, just on your expectations on Europe energy side and the risks associated with that? That would be my first question.
spk03: Okay, let me take that and – What I would say is that we're obviously very pleased with our performance in quarter three for EMEA in total. As it relates specifically to Europe, we are cautiously optimistic in relationship to the energy situation. As you highlighted, compared to the peak of energy costs in Europe, they have declined sharply since the summer peak. It is though noteworthy that they still are two to three times higher than they were at the beginning of 2021 prior to the Ukraine conflict, and they still sit six times the level of the US from a standpoint of gas prices. What we are seeing, and I think that everybody's encouraged by the fact that the EU in solidarity has built gas storage to levels approaching 90 to 100%, and that is including Germany. At this point, we do not foresee any government curtailment of natural gas in Germany for the winter, and we're anticipating that we will be able to manage through the situation as it continues to develop. Europe also has been impacted, as you know, by a tough summer drought, and that has impacted the corn crop as well as the wheat crop, for example. And we, though, one of the comments that we made in the presentation is that we've looked at our contingency plans and business continuity plans to support our customers leveraging and flexing our global network. And we genuinely believe that given some of the decisions we took to say, go long on our corn positions and our specialty corn crop positions, not just in Europe, but also in the U.S., as well as now the new network capacity from China, all of that allows us to flex and leverage that global network on behalf of our European customers that are concerned about potential shortages of say, grain that can be turned into starch for their needs going forward. We believe we're actually going to be able to support them, leveraging our network. All that being said, what we are, I think, concerned about is how much of the inflationary increases that we're all reading about that are impacting the EU at 10% just this past month. Today, I believe it was announced that the UK just is at 11% inflation in the month. What that's going to do to the consumer ultimately and how that affects consumer buying behavior, and that's kind of hard to predict at this point in time, except to say that we're in the food industry and at the end of the day, again, we've weathered recessions based again on the diversity of how diversified our products are that go into all the different elements of food consumption.
spk05: Perfect. And that actually nicely brings me to my second question. It was kind of interesting to see, if we take a look into the volume, so if we think about APAC, but also South America, volume growth was definitely on the positive side, while within EMEA and in the U.S., we've seen it on the negative side. And I've heard a lot from some of the other companies out of LATAM, et cetera, just talking about how they've lived with inflation for much longer, right? I mean, if you're an operation in Argentina, they know what inflation is about. So the question really is, have you seen significant differences in how your customers accept price increases and actually can pass this on, and even consumers just look through it by being a little less sensitive to price increases, lower elasticities maybe in some of the emerging markets, and that in the end has been a benefit to you just given your global footprint between emerging markets, developed markets, and how do you think how resilient that consumer down in South America in APAC actually is given all the price increases you've been pushed through.
spk03: I'll let Jim take a shot at it, and I'll add any color commentary. Jim?
spk02: Yeah. Ben, as you note, and I think we've noted, when we think about, you know, various economies, particularly some of the South American countries, you know, I'd also add Pakistan to that, where we have, you know, let's call it emerging and or kind of more developing economies, and you've seen inflation, and inflation is an ongoing presence in daily life. You get price changes. Clearly both our customers are more open to and agile in looking at, wow, the cost of the ingredient from Ingredion has changed. How do I work that into my costing, and therefore how do I think about my pricing going forward? So to the extent, you know, unless you have, you know, you know, real true, you know, economic disparity in one of those more developing economies, generally you're going to see consumer acceptance and kind of absorption of that higher pricing. And we definitely have kind of more resilience in the populace as well as some of our customer base. When you move to more of a slower growth economy that may be more, you know, developing, like, you know, you get to the U.S., maybe northern Asia, and you get these changes in the cost of the underlying raw material, and it's a big part of our COGS, we then have to work through those pricing centers of excellence with those customers to introduce and explain why is our cost changing, why does our price to them for our ingredients need to change. And that's what we work on in our commercial teams as well as our pricing centers of excellence and advertising that. And to the extent that I think that our customer base and what I'll call lower growth, historically lower inflation economies is now becoming much more agile and accepting that, wow, yeah, we're seeing the change in the energy. We're seeing the change in the raw materials. And I think that's kind of contributed to our success in putting pricing through this year.
spk05: Perfect. Thank you very much, Jim.
spk06: Your last question comes from the line of Ben Bienvenu with Stevens. Your line is now open.
spk01: Hey, thanks. Good morning, guys. Hey, Ben. Hi, Ben.
spk02: Good morning.
spk01: So I want to ask about the guidance. And in particular, recognizing that you guys did narrow the range a little bit for the year, it's still, you know, the implied range for the fourth quarter is still quite wide. And so I want to unpack a little bit of kind of the elements of variability that you see ahead and what ultimately prompted you all to obviously narrow the range but still leave it as wide as it is.
spk02: Sure. You know, Ben, I'll take that, and I deserve to be beat up for that one. I think when we look at our business, which largely is manifest in the northern hemisphere, and we come through the year, we can look at the layout of the corn, we can look at the spring crops and kind of anticipate what the harvest is going to be. So we get better, I think, consistency and view into the business for Q2 and Q3 in terms of the pull. Traditionally, or at least historically, what we've seen in our customer base is as we finish the year, particularly with multinationals, CPG firms, has been, what's their focus on their inventory levels as they're closing out their fiscal year, if that happens to coincide with the calendar year? And so, particularly in some of our specialty ingredients, what's their stocking behavior? I think one of you asked previously, I do see that, you know, I think inventory levels are going to be carried a little bit higher into the end of the year just because there has been some, you know, various supply chain disruptions either in moving ingredients either around a country or continent, yeah, and or, you know, across oceans. And so, you know, what we're a little bit of, well, so we see somewhat elevated inventory levels. I think some of our procurement officers that are customers are saying, yeah, you know, That makes sense. It's prudent. It's smart. It's a little bit against what we've probably seen in maybe the last five or six years where we've usually seen a little bit of a kind of more of a drawdown on inventory to try and post a lower number. So we're anticipating that inventories will carry through, but that could be a downside. I think probably more importantly, Ben, is that there still is, and particularly in the U.S., some supply chain We're going to get through the midterm elections, but there's still rail union labor issues to be resolved. And that is, you know, November 19th is the deadline for, you know, a number of the rails in the U.S. to say either they agree or they don't agree. And that causes all sorts of potential truck and intermodal disruption. And then, you know, you still have a port issue on the west coast. And so, you know, those things, I think, are just, you know, like they're not in our center cut guidance. We think we're going to be able to get through those. But if you look at the range, I think it's also helpful for you all to understand that some of us are looking at that and saying, yeah, that could have an impact. Low probability, but it could have an impact.
spk03: Yeah, and that's exactly what I would say. I would say that we just are – taking a cautious view towards the still uncertainty in relationship to that rail situation. Again, November 19th is a big date. We'll see if there is either a slowdown or potentially a strike. Hopefully, the government, again, can intervene and avoid something like that. Let's say 4x timing, Jim. We say three to six months. The dollar continues to remain very strong, so that's kind of factored in, I think, just a timing issue related to that. And as Jim said, you know, it's just, I think, commonsensical to assume that companies will be making some year-end adjustments to their inventory positions, probably for working capital reasons as well. And so we've kind of reflected on all of that and factored that into the go-forward guidance here for the full year.
spk01: Okay, great. Makes perfect sense. My second question is, It's just related to margins. Taking into account roughly the midpoint of the guidance implied in the fourth quarter, there is still material sequential compression in operating margin. But year over year, you seem to be making progress on margin expansion. And I would think that would continue to be a trend as we move into next year, margin expansion year over year. So can you talk about the things that when you look out on the horizon and the visibility that you have, can you talk about the path back to 2021 or 2020 margins and how you get there?
spk03: So, Jim and I can tag team on that. Jim, do you want to go first?
spk02: Yeah, I think, hey, Ben, you touched on a great question, and I've had a conversation with a number of you on how we think about the corn layout and how it impacts each quarter. Previously, we talked about a hedging strategy, which may have left us a little bit more exposed in Q3 or particularly Q4, which I think is what we felt in the end of 2021 when corn started to rise up. Here you get into 2022, we're expanding our hedging strategies and we have not exactly all of the evenness of the coverage over all of the quarters. And so as the Ukraine conflict impacted, you know, as Jim mentioned, corn is probably up between a buck to a buck 20 a bushel year over year. There's still a little bit of that compression that is in Q4, but largely, largely we've mitigated a lot of that impact. As we even further kind of mature and dial in what we're hedging relative to our contracting, particularly for U.S.-Canada business, into 2023, I really think the layout of that kind of net corn impact is even going to be smoother, right? So Ben, what we're trying to do with respect to some of the ag movement is really get to a consistent base level of either gross profit or OI that you all can see. And then for us moving forward and getting to higher levels of gross margin, It's really focused on where's the value in either specialty ingredients. It can be focused on the value of upgrading some of our core ingredients into new uses, as well as really focused on operating and operating efficiencies. But I'm going to turn it to Jim, too.
spk03: Yeah, I would say we have margins as a key performance indicator that is very strongly in focus for our leadership team. And that's about mix enhancement on the specialty side. And we have an intense focus to grow our food systems business, which we believe has a lot of things going in its favor from a standpoint of more integrated systems and solutions to offer to customers that typically come with a higher margin threshold. So upgrades in our specialties, but also also upgrades in our core from a standpoint of trading up on the margins there for that grind utilization, which is, again, operating at the higher levels of historical norms in our industry. And we do see opportunities, and we are already capitalizing and pursuing on opportunities for that two-thirds of our business to move up the margins in that core as well. And that's, I think, a very significant point to emphasize here. in addition to specialties and not just think about it in a specialties way. And the other thing I would say is that, you know, you can't count on Forex, and certainly we don't, because we've lived for the last X number of years since I've been in my role with significant dollar strength. But at some point, the dollar will moderate, and all of the hard work we've put in when that does moderate will also help our margins. So I think that for all those reasons, we think that we will see certainly modest improvements in our margins going forward. We're working on it, we're very, very focused on it.
spk02: Yeah, and Ben, as we've said in the past, we're at the height of a corn price cycle, right? So we're witnessing some of the highest corn costs that we've seen in years, right? And then as we get hopefully, you know, that higher corn price instance, you know, farmers to grow relative to other ag inputs. And as we get better carry outs and maybe crop sizes, right. Um, you know, that's gonna, that's gonna help us. Um, yeah, I think as, as we've seen, it makes one, it makes our products more attractive because we do pass through some of that corn cost decrease when that occurs. Uh, but generally it's also then we're holding on to our gross profit dollars per ton. And then that is gross margin expansive.
spk01: Very good. Thank you so much, and good luck with the fourth quarter.
spk03: Thanks, Ben. Thank you, Ben.
spk06: There are no further questions at the queue. I will now turn the call back over to James Alley for closing remarks.
spk03: All right. Thank you. And I want to thank everyone for joining us this morning. We look forward to seeing many of you at our upcoming investor events. This concludes today's conference call.
spk06: Thank you for your participation. You may now disconnect. The conference will begin shortly.
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