Ingredion Incorporated (INGR) Earnings Call Transcript & Summary

Good morning, Jim. It gives me great pleasure to have you at our conference, particularly in these unprecedented times. With Jim as CEO of Ingredion, Ingredion has been a steady -- has been on a steady path to transition itself from a commodity coming into a more consistent value-added ingredient company, while at the same time, reducing costs, optimizing its network and navigating the ever-evolving landscape. They've also been laser-focused on return on capital, improving processes and cash generation. Again, I can't be -- I can't express my gratitude for you being with us today. With that, Jim, I'll turn it over to you for some opening comments. And again, I can't be more appreciative of you spending the time with us.

Well, Ken, that's very kind of you, but a big thank you to BMO for hosting such a conference and, from what I've seen so far, pulling it off very effectively despite the fact that we can't be together in person. Just let me start by recognizing obviously what we're going through right now collectively, as a society, as a global community. This is really truly an unprecedented period and -- that we're all trying to do our best to navigate the unknown. And I think that we're seeing some really great elements of leadership evolve out of this. We're certainly seeing that here at Ingredion. And I think any company right now really needs to draw strength from its purpose and its values, and that's what we have been doing as a company. And then our strategy as well, we think, is enduring through this period. It's a strategy that's really built around a purpose- and performance-driven culture with a very strong emphasis on people, commercial excellence with a real strong commitment to customers right now. And thirdly, it's about being cost vigilant. So our Cost Smart program with a focus on cash has been very critical. And then our fourth pillar of our strategy is about driving specialties growth, which is really to be very aligned with the markets and the trends, and those are evolving very quickly. And what you can see up on the screen right now is the DRIVINGROWTH road map, and we're executing against those elements of the DRIVINGROWTH road map, and a centerpiece of that is our 5 specialty growth platforms that you see there, and we're very well positioned in each one of those to drive net sales growth Despite, I believe, some of the challenges. Because some of the trends that I believe we're going to see through this pandemic is going to shine a brighter light on things like affordability where our starch-based texturizers portfolio plays very well, health and wellness where, certainly, clean and simple and simple labels as well as sugar reduction will play a big role. And then lastly, it's around plant-based proteins, and we're all seeing what's happening in relationship to the meat processing industry and some of the challenges it's facing. And going into that unfortunate situation for that industry, the plant-based trend was already poised for significant growth, and we're investing $185 million into that segment. So we feel that our strategy as well as our DRIVINGROWTH road map, relying on that will enable us to endure. But clearly, there's going to be a lot of ups and downs as we collectively navigate this period. But again, thank you to BMO, and it's a pleasure to be with you today.

I'm going to kick it off with, can you talk about how demand, and you touched about it a little bit, demand around the globe is affecting your products? Particularly, let's start with specialty ingredients. How have they fared? They're about 25%, 30% of your portfolio. So definitely an important place to start.

Yes. So let me just go back to quarter 1 just for a moment. I mean everyone wants to look forward, and that's the appropriate thing to do, but quarter 1, we actually delivered really solid operational and financial results. Despite the fact that the pandemic was starting to rear its head in Asia Pacific, we had -- our net sales were flat, but absent foreign exchange. And just a little bit of a word on foreign exchange from a standpoint of how we have navigated. Over the last 2 years, '18 and '19, we've navigated nearly $500 million of foreign exchange headwinds having to pass-through price increases to offset that. We experienced another $40 million of foreign exchange headwinds in quarter 1. And despite that, absent foreign exchange, our net sales were up 3%, and they were up, absent foreign exchange, in 3 of the 4 regions. And we really had strong performance in most of the regions. We experienced a little bit of an impact in Asia Pacific, primarily related to China, where -- which experienced the pandemic in the early parts. But clearly, since quarter 1, in April, we've experienced more of a challenge in regards to the foodservice sector and the fall off in the foodservice sector. So that's something that we're monitoring very closely. Food at retail continued very strong into April month, and then we're seeing a little bit of leveling off, still probably a couple of percentage points above historical norm for food at retail just related to the fact that people still are staying at home more so and not going out. But foodservice is starting to -- started to really see an impact in our business in April month, and we're going to monitor that very closely as we go into quarter 2 and then certainly the second half.

But your specialty ingredients, I thought they fared fairly well.

In quarter 1, specialty ingredients were up strongly. They were -- they experienced another quarter of year-on-year growth. So yes, our specialty business did perform well, and it's 30% of our revenue, as you indicate, and it had a very strong performance in quarter 1.

I guess what percentage -- maybe I missed this, what percentage of this is -- of the specialty is foodservice versus food at retail?

We estimate about 25% of our specialty business is going into foodservice.

Okay. Just -- and the -- but have you started to see some of the foodservice markets start to reopen? And have you seen -- we've heard through the day a little bit that there has been a bottoming, and we've seen a little bit of a rebound. Not back to normal by any stretch, but definitely, we've seen a bottom in the foodservice. Have you seen that trend? And if that's...

In order to give a very fulsome answer, we're a very global company, as you know. And let me answer the question and quickly take you around the world from what we've seen. So let's start with where the pandemic started, which was in China and then in Korea. The foodservice sector experienced the downturn in January and February months. In early March, we started to see a pickup. So it was about 6 weeks in duration, and it has remained strong ever since. So our China business, we had indicated on the earnings call, in April, started to bounce back, and it has remained very robust. So we're seeing a strong comeback there and foodservice is getting back to some semblance of normalcy in China. Then let's go to Europe. For us in Europe, the European business is a very highly specialty business, probably 80% of our business is specialties, and very limited amount exposed to the core. And that business is less exposed, probably below 20% exposed, to foodservice, and that has endured throughout this period. Even through April month and going into May, so far so good in regards to that business. Then if we go to North America or U.S., Canada and Mexico, that business is being impacted, starting probably in the second week of April, then going forward to present in relationship to the decline in foodservice. And let's talk about one specific impact that was beyond our control, and that is the brewing industry, which we've all read about in Mexico where the Mexican government has imposed a government mandate declaring that industry oddly nonessential. Unofficial estimates are -- that started, by the way, on April 1, that nonessential classification in that industry began to be impacted starting on April 1. So the whole month of April, the brewing industry has been virtually down and into the present. We're hearing unofficially that starting around May 17 through the end of the month, that industry will start to come back online. There's a lot of noise from consumers in Mexico that beer stocks have dwindled, but that has impacted our business starting in the month of April. And then in foodservice in U.S., Canada, just overall consumption of foods that go into hospitality, food that goes into quick-service restaurants as well as casual dining, that's all being impacted. So beverage sales, for example, that would go into fountain beverages, that will be down. And we sell into coatings for French fries, that will be down. However, what we are seeing now as we approach the early signs of mid-May is, certainly, things are opening up slowly, and we believe that foodservice will see an uptick, probably not getting back anywhere near to normal, but an uptick, as consumers go out. And quick-service restaurants are going to come back faster than, certainly, casual dining and certainly faster than fine dining. So it's going to be a slow and steady process. It's going to be choppy. There's no doubt, but that's what we're seeing there. Now quickly in South America, I don't want to forget South America as that's where the pandemic is hitting now. It's flu season, it's the southern hemisphere. And so that industry, when it comes to brewing and when it comes to soft drink consumption, has gotten hit very hard, and also impulse buying for confectionery that sold a lot through the informal economy through mom-and-pop stores as well as sidewalk sales as well has been impacted quite significantly. Brewing consumptions went down just because people weren't going to the restaurants in the month of April by about 70%, confectionery sales down about 50%. Now interestingly, we were very concerned that, that was going to continue to extend into May. And what we said on the earnings call was that we saw early signs that, that was picking up, and that continues. So the brewing industry in Brazil is bouncing back very well. But again, I think that's stock building that probably is going to be choppy over time. But the good news is that, again, following what I said originally in China, that 6-week period for foodservice, you then start to see an uptick in foodservice, and it will start, hopefully, a slow and steady ascendancy over time. But for sure, it's going to be choppy.

Let me think about this because I think it's an interesting point. So if I think about your Asian business, I'm assuming by the end of the year, you'll either be flat or potentially growing again.

That is correct. That's what we're -- that's, right now, what we are anticipating for the Asia Pacific business.

So would I be able to transpose that timing on your other businesses? And let's say, obviously, it won't be by that quarter, but by first half of 2021 or middle of 2021. Is that a way -- is that a good proxy to think about? And what are the good reasons to think if it's a good proxy or what are the maybe the caveats to it?

Unfortunately, not every region for us is exactly the same from a standpoint of the product portfolio composition and the markets to which we are exposed. So in Asia, the majority of our business is a very highly specialty business, similar to EMEA. In North America, clearly, we have a larger exposure to core sweeteners as well as, in South America, a heavier exposure to brewing. So I don't think we'll be able to, say, superimpose what we're seeing and what we anticipate happening in Asia Pacific and what we're seeing and what we anticipate in EMEA to necessarily be exactly mirrored in North America and South America just due to the different portfolios, the weighting to those sectors and also to foodservice and just the difference in consumer behavior and, equally, how the virus is likely to impact societies in those different regions and countries. We're all seeing right now, again, great concern out of Brazil in relationship to the virus and the infection rates. And again, it's logical that, that's going to be the case, putting aside how governments are responding just due to a being flu season. So I think that's why I would be hesitant to just want to say what's going to -- what's happened in Asia or what's happened -- what we've seen is going to be directly superimposable to the other -- to all the other regions.

Yes. Let's just talk about your CapEx projects. Again, I understand with the COVID-19, has the return composition or the timing to which you'll get your returns on your CapEx project, your growth projects, will that have any material change? And what do you think the growth characteristics of your CapEx will be? What do you think the returns will be? And then what is the timing to which you'll be able to generate the EBITDA associated with that?

Yes. So first of all, we're feeling very good about the capital investments that we have made, the investments that we have made because we think they are very consistent with the trends that we'll endure throughout the pandemic. So if I take the largest investment that we've made that will create kind of a third leg for our business, which is in plant-based proteins, we are investing $185 million in pea protein isolate facility in South Sioux City, Nebraska. That is slated to commission and to be selling product by the end of this year after a 3-month FDA qualification, which is typical for a new start-up. And then equally, we have a facility in Canada to produce a range of pulse protein concentrates and flowers. And today, by the way, we've released a press release equally in Canada where we have entered into an exclusive commercial agreement with a company called NorQuin, which has a tremendous genetic profile in quinoa, and quinoa has all 9 essential amino acids. So our strategy in plant-based proteins is to leverage the competency we have around texturizing foods with the knowledge of formulating with plant-based proteins for both nutritional and texturizing benefits across pea, chickpea, lentil, fava bean as well as quinoa now to round out a whole essential amino acid profile. Those investments are continuing. The one in Canada is delayed a few months because one of the pieces of equipment was coming from Italy, so -- Northern Italy, so that's been delayed by about 3 months. But other than that, everything remains on track, and we feel very good about the return on investments that we're going to get because we believe the demand for plant-based proteins is outstripping supply right now. So we're very -- we feel very good about that investment. If I could just transition quickly to the next investment, which is an investment in allulose. Allulose is a rare sugar. We made that investment in Mexico where obviously there's a big focus by the government on controlling obesity, labeling guidelines have been imposed. And that particular ingredient, which is 70% as sweet as sugar, provides the bulk that's lost when you formulate with a high-intensity natural sweetener like Stevia. And just this past quarter, in the month of March, I think we were 1 of only 2 acquisitions that were actually announced in industry to make the acquisition of PureCircle, and that's the leader in stevia-based all-natural leaf extract stevia. And so we feel, in sugar reduction, the return on investment with allulose, along with the investments that we've made in stevia, is going to serve us extremely well for the trend towards sugar reduction. And then other than that, we've made investments to bolster our starch-based texturizer portfolio with investments in noncorn-based starch-based exteriors, which is a focus area for us to diversify beyond corn into potato, rice, and tapioca. So we're making those investments there. So we feel very good about that investment. And we're feeling very good still about the returns that we anticipate for that investment in growth capital, which we have increased over the last 3 years to about 60% of our total capital has been going to growth capital in the last 3 years.

And is that fair to say the returns are north of 15%, 20%? Is that a reasonable expectation?

Those are typically our standard internal rates of return that we target for hurdle rates for approval of those projects. So yes, we're in that mid-teens range.

Perfect. If I take -- go back to a little bit of your cost structure, I would argue that, potentially, COVID-19 may provide some tailwinds, right? You have lower nat gas costs, lower corn prices, lower travel and entertainment. Can you frame the magnitude of the additional -- the net impact of the cost savings from this? And are there parts of this that are actually permanent? How do you think about that?

Well, so there are different buckets. And one of the things -- let me just highlight 1 big cost component to our business is corn today. And for the last couple of years, you have heard us talk about our net corn recoveries and our net corn costs, which took a structural cost increase related to China trade tariffs and the impact that had on soybeans and then the associated impact that had on the corn complex. This particular year, fortunately, that has changed where gross corn costs, obviously, have come down significantly and coproduct prices have remained relatively high, and so that equation has changed favorably for us. That will continue to play out for the remainder of this year, and we'll see benefits to that effect more so even in the second half of the year on the corn cost side of the equation, and that's a good thing. Certainly, natural gas, energy costs have come down. Our freight costs have come down, which is a good thing. T&E is obviously nonexistent right now. So we're benefiting quite significantly from that as well. And then equally on chemicals, where oil-based feedstocks that are used for some of our chemicals, will go down. So we have, though, on top of that, a very focused program, which we initiated in -- I think we launched it in May of 2018 formally called Cost Smart. And this year, we're targeting to be in a range of $90 million to $100 million of run rate Cost Smart savings by the end of this year, and we feel very good about that target and being able to hit that target. And so those cost savings will certainly offset any of the impacts -- or not any of the impacts, but some of the impacts that we're going to see from the volume declines that we're certainly going to experience in foodservice. How exactly that's going to net out? It's too early to say, Ken, to be quite frank, but clearly, there's going to be positives. And some of those positives are going to be quite significant as it relates to the net corn side of the equation. And some of the mark-to-market benefits that we called out, it was a little bit of a headwind in North America in quarter 1, will be benefiting us as we go through the rest of the year.

Can you talk about what -- and I was going to get to this, and you hit it perfectly. The coproducts, what do you attribute the strength of the coproducts to? And is that sustainable?

Well, one of the things that is helping the coproduct equation right now is obviously the devastation that's impacted the ethanol industry and with oil prices, obviously, being so low and DDGs, distiller grains, not really being available. And then the alternative is, obviously, traditional corn coproducts. And then equally, as I understand it, there's been some challenges on the palm oil side of the equation as well, and corn oil prices continue to remain pretty healthy. So -- and then with -- coupled with gross corn costs obviously coming down on the -- just from a macroeconomic standpoint as well as, obviously, the plantings are off to a very good start, well above even 5-year averages and certainly well above last year, we think gross corn costs are going to stay low, certainly into the second half of this year.

You talked about pricing. Which regions do you think you have the best capability to price and which are the places that maybe will take a little bit more time? And does the economic issues play a role in how you expect the recovery? I know usually -- historically, you've been able to do it 2 to 3 quarters out, but how does that change? And maybe it doesn't?

Well, to your point around pricing, I mean, I think if you go back and you look at what we have done each and every quarter and during now, in my time as CEO for 2.25 years, $540 million of foreign exchange headwinds. We have consistently developed the muscles to pass-through price increases related to raw material cost increases or related to foreign exchange headwinds. And typically, we've been pricing-through, in any 6-month period, about 75% of that price increase, and then it catches up over the remaining, say, 3, 4 months. And that's typically been the case except in an extreme circumstance, say, Argentina, which experienced, obviously, hyperinflation, or where it goes into a very significant recessionary period where just consumer demand is suppressed. But we feel that our business model and the strength of that business model enables us to pass-through price increases, especially related to anything raw material wise. That being said, it's hard to predict where prices are going to go as we go forward from here related to the fact that demand is likely to be down going forward just due to macroeconomic conditions, consumer spending power being down and, equally, costs being down. And so that's all going to need to be considered, taken into account, and we always are taking a longer-term view to the industries and to the customers, and obviously, making sure that we can pass-through our price increases, cover our costs, but equally, taking a long-term view. And I don't think we want to be in any way short-term opportunistic when people are facing unprecedented challenges. Right now, our focus is on our customers, how we support our customers, how we can help them. We need them to be successful. We need them to survive for us to navigate this period. So we're very, very customer-focused right now and are looking to do what we can to support our customers through this period while obviously covering our own costs and making sure that our own company remains healthy and strong, and we keep a strong balance sheet, of course.

Is there any worries on the pricing side? You kind of alluded to it, and I thought about it as you were saying, is if there's product that gets backed up, does that take longer to -- if the demand comes down and the production is the same, then you have to work through the inventories. Are there any issues across your portfolio that, that would become an issue? Or that's just not something...

No. Let me just -- let me tell you, what we did very, very quickly, and I think it served us extremely well, is we reacted quickly because we had our market position in China, and we saw what was happening and we said, "Let's activate a Global Crisis Management Committee January 11." By early March, we had morphed that into a global pandemic project management office, which reported directly to me, and we had work streams, one of those was supply chain. And supply chain immediately started working with our marketing groups around the world and from an S&OP standpoint to look at what SKUs at the SKU level we're growing and which were declining based on how consumer purchasing behavior was changing. We quickly started to share information and adjust our production schedules to make sure that we, ourselves, weren't going to be caught with too much inventory of one product or another. And we've actually done a very, very good job on that. I think what you're going to see, unfortunately, is that in the foodservice sector, and we're seeing that as it relates to fountain beverages or whether it be beer going stale, you're going to see those products being depleted or written down or sold very inexpensively to deplete those inventories. And that's kind of what we think is happening right now in Brazil. We think that after that 6-week period of brewing being down, inventories got so far depleted that we're seeing a real spike back to near-normal levels of production. But again, we don't anticipate that is the way it's going to be between now and the end of the year. We think it's going to be quite choppy, but we're pleased to at least see that.

Just you touched on the cost savings. Obviously, you've been tracking ahead, and you've done a great job with that. Can you talk 2 points? One is, what's the sustainability of this Cost Smart program beyond 2020 going into -- and how much do you think you'll be able to enjoy to the bottom line or reinvest somewhere?

Well, we, as a company, have embraced Cost Smart, not necessarily looking at it as an episodic event or something that would be short-lived. We're looking at how do we use it to become more agile and literally more strategic in relationship to where we invest and how can we take tasks that are going to go the way of robotic process automation and areas like that and automate them or streamline them. So I think for all companies right now, us included, we're looking at this pandemic as a great reset, I'll call it. It's an opportunity for all companies to really carefully reflect on what they've observed about their employees, their employees' productivity, and how they can come out on the other side of this, using it as an opportunity to become more efficient, leverage technology more. We're certainly doing that. We're certainly looking at that and looking at it for every single function on how we can become more efficient. I'll just raise an example. Going into this, we had some real concerns about making sure customer service could function efficiently. Customer service is actually more efficient and more effective, based on actual metrics that we use to track their efficiency and effectiveness, working remotely. And so those kind of things we're going to have to take a careful look at. So actually, we're going into this with a real -- a glass half full approach in regards to our cost structure coming out on the other side of that. And we want to use the time between now and the end of 2021 wisely to blueprint that and to come out on the other side of that. I think one of the areas -- I would be remiss if I gave the impression that everything is a positive. I think one of the challenges that all food companies, all industries and we're monitoring very closely that will also be reinvented, I think, through this period, is innovation. And what I mean by that is, clearly, one of the things that any ingredient supplier, like ourselves, thrives on is the customer intimacy and the project pipeline. Clearly, you have researchers, scientists at major food companies that are not in their labs, are not next to one another in pilot plants formulating products, and that hampers the ability for us to move along those projects and those pipelines. We're going to have to figure out together with customers, and we're doing that now, on how we can cocreate with them, doing some things more virtually or more through content development that is created digitally to make sure they know what ingredients we have, how they can solve some of their problems. And while they focus now on their major core brands where we pivot, of course, to support private label and the core brands, the big brands, I think you're going to see some changes coming out of this that weren't probably as indicated as going in. An example of that is, will as many of the small and emerging companies that were driving a lot of the innovation be able to survive this period in comparison to the bigger brands? And so all of that is something that I think we're also going to have to figure out collectively with our customers, and that's why our customer focus right now is extremely important across all channels.

Let me kind of finalize this. As you put all this together, do you envision Ingredion's earnings power stronger or weaker or indifferent? And do you think the growth algorithm changes given the episodic issues associated with COVID-19?

Yes. Here's how I'm looking at it. Clearly, I think we're looking at 2020 as a very challenging year. That's why we took the -- really the prudent decision, I think, to withdraw guidance for the full year and really only look a quarter ahead as to what we could have moderate visibility towards. But clearly, 2020 is going to be challenging. And I think we'll see a slow but steady recovery as the -- assuming that the virus is not something that if you've had it, you, hopefully, build immunity to and you can't get it again. So there's so many unknowns and questions with that. But if you assume that's the case and you assume people have reengineered the way of working to keep people safe, it'll be a slow, steady recovery into 2021. And so what we think is where we're positioned from a standpoint of starch-based texturizers, the broadest and deepest company in the world into corn, Tapioca rice, potato, that whole portfolio lends itself to affordable formulating. We think that's going to be a big trend. Starch is a very effective, affordable ingredient to lower the cost structure to make products more affordable for all socioeconomic classes for packaged foods, which will continue to do well through this period. Clean and simple ingredients, our second platform. Very well positioned, a world's leading position in clean and simple functional native starches, and we just introduced the clean label emulsifier. For example, plant-based proteins. We think it's going to be big because meat alternatives, dairy alternatives is going to be big. Those products showed explosive growth really at retail despite the pandemic and despite the shelter-in-place rulings. And then lastly, sugar reduction. Sugar reduction to -- for obesity and diabetes is absolutely going to be center focus for consumers given that it's a comorbidity tied to this unfortunate virus that we think that is going to lend itself very well. And we just made an acquisition of the largest stevia player, so we're -- and the investment in allulose. So we're feeling very good about our investments, very good about where we're positioned to come out on the other side of this strong. But in the near term, we're just going to need to be very nimble, very agile and work with our customers to navigate a downturn, there's going to be a downturn, and come out on the other side of this well positioned and stronger. The other thing, lastly, is on our core business, the industry has proven over the years, certainly since 1995, if you go back to that period, which was probably a low period for the industry, and it shows you how long I've been in the industry, that it's a rational industry. And the industry has been very rational through this period. And I think as it relates to supply/demand imbalances, they will be approached rationally by the industry. And so we think that, again, we'll navigate the downturn and come out on the other side of this stronger.

Great. Honestly, I could not be more appreciative of you spending time with us today. Thank you so much. And with that, we end it. Perfectly on time.

Thank you, Ken. Thanks very much. Bye-bye.