Ingredion Incorporated (INGR) Earnings Call Transcript & Summary

Hello, and welcome to Ingredion's 2021 CAGNY presentation. For those of you not familiar with Ingredion and who might be hearing about our company for the first time, or for those of you who know us and are looking for the latest update on our progress and plans, we hope you leave today with a clear impression of a company that is purpose- and values-driven, customer- and growth-focused, and with products and technologies that support sustainable trends that are shaping the global food and beverage industry. Before starting, I need to mention that our comments today may contain forward-looking statements that will be covered by safe harbor provisions. I'm Jim Zallie, President and Chief Executive Officer of Ingredion. And today, I will be joined by Jim Gray, our Executive Vice President and Chief Financial Officer. Ingredion is a global leader in the food ingredient space that takes nature-based raw materials and turns them into highly relevant, specialized and, in some cases, customized ingredient solutions for food manufacturers around the world. We have a wide and diverse customer base, with operations in 26 countries, and we serve more than 18,000 customers in more than 120 countries. Now speaking of relevant, 68% of 2020 global new product launches in the food industry contain the kind of ingredients that we produce. We co-create with our customers, servicing them out of 32 Idea Labs with more than 500 food technologists and scientists that are actively developing new ingredients, many of which are protected by intellectual property. We are a company that is guided, united and inspired by our purpose of bringing the potential of people, nature and technology together to make life better. That purpose and our 5 values directed our actions throughout what was the most challenging year in my 35-year career in the food industry. Our value of Care First, ensuring we safeguarded our people, our product quality and our reputation. Our value of Everyone Belongs was leaned on heavily as we not only embraced, but celebrated diversity, equity and inclusion. Innovation is part of our heritage, but we're committed to making bolder innovation bets. Being preferred by our customers is at the heart of our growth culture. And operating with an owner's mindset is evident in all we do, making decisions that create value for all stakeholders. There are 4 pillars to our strategy. The first is to drive growth of specialty food ingredients and systems that align with consumer trends and an ever-changing customer landscape. To do that, we're intensely focused on delivering commercial excellence, co-creating with our customers and leveraging differentiated go-to-market capabilities. Supporting our growth ambition is a relentless focus to simplify and operate with agility to smartly lower our costs to support our growth investments. All of these elements are underpinned by a purpose-led people-centric culture. Over the last 8 years, we've steadily increased the percentage that higher value specialties represent, up from 20% in 2012 to 32% in 2020, with an operating goal to have specialties reach $2.7 billion and comprise 38% of net sales by 2024. These products have unique value propositions. They're typically growing above GDP as they're aligned with market trends and consumer preferences, and they meet a higher internal gross profit threshold. These ingredients provide different functionalities across hundreds of food categories. We organized them into 5 platforms: starch-based texturizers, clean and simple ingredients; plant-based proteins, sugar reduction and specialty sweeteners, and food systems. The ability to pursue specialties growth is supported by a stable, cash-generating sweetener and starch product portfolio. Our relevance as a supplier is enhanced by the reach provided by these ingredients from liquid syrups, some of which are non-GMO or organic, to powder dextrose for pharmaceutical applications, and starch-based strength additives for a growing corrugated box market. This $4 billion product portfolio is also diversified globally, with the U.S. making up only 36% of the total. These products are forecasted to grow in line with population growth over the next 4 years and at an accelerated rate in EMEA, where we have a very successful and growing business in Pakistan. As Jim Gray will cover, Ingredion generates strong cash flow, 35% of which is available for strategic value creation. We've deployed our cash in recent years to expand into specialty potato and rice starches and hydrocolloids to enhance our texturizing capabilities; plant-based proteins with the acquisition last year of Verdient Foods; and sugar reduction also this past year with the acquisition of the leader in natural stevia-based, high-intensity sweeteners, PureCircle. You can expect us to continue to pursue and make organic and inorganic growth investments that expand the breadth and depth of our specialties portfolio. That portfolio proved particularly resilient this past year despite the dislocations brought about by the pandemic. Specialty ingredients grew in every region this past year in constant currency from being up 2% in North America to up 11% in South America. We were extremely pleased by this performance, which validated the attractiveness of the growth prospects and the strength of the value propositions for our 5 growth platforms during not only good times but in challenging economic times as well. The abrupt changes brought about by the pandemic forced every company to display agility and reinvent the way they engage with customers, and I believe we did that very well. We conducted more than 1,300 virtual customer meetings over the last 9 months compared to probably less than 10% of that amount in the prior year. We turned our culinary kitchens into digital studios to live stream product formulating and even conducted simultaneous taste testing with customers. We worked quickly to develop relevant content and reimagine together the innovation process with our customers. [Presentation]

While our core product portfolio in the U.S. faced challenges the last few years and we worked hard to offset significant foreign exchange headwinds, we invested undeterred in specialty growth, investing more than $600 million over the last 3 years with the intent to establish a significant position in plant-based proteins; to acquire the leading position in stevia for sugar reduction; and diversify and expand beyond corn into potato, rice and tapioca starches as well as expand our operations in the largest specialty food starch market in the world, China. We're looking forward to the future commercial opportunities represented by these investments. The 2 most significant global megatrends where we are investing are plant-based proteins and sugar reduction. In the case of plant-based proteins, it is a rapidly growing category supported by consumers that are mindful of the environment, animal welfare, sustainability and digestive health. Sugar reduction is a global goal on the part not only of consumers, but governments and health professionals to curb the rise in obesity and diabetes. Ingredion has made a significant commitment to having plant-based and animal alternative proteins be a new growth path in our specialties portfolio. The $250 million we have invested is against the market size estimated at $13.4 billion by 2024. Our approach is to have a comprehensive and complementary portfolio of protein flours, concentrates and isolates to formulate great-tasting nutritious, meat alternatives, dairy alternatives, snacks and cereals and baked goods. Both of our operations in Nebraska and Canada will be operating and will be food-grade certified in the first half of this year, and we're excited to be holding customer celebration events of the opening of both plants during that time. The total addressable sugar reduction ingredient market is estimated to be $5 billion by 2026, and it's growing high single digits. The global stevia market is estimated to be $1.6 billion by 2028. Our acquisition of PureCircle and our investment to produce the rare sugar, allulose, along with our other specialty ingredients, provides us with a powerful combination to deliver plant-based, sustainable low- to no-calorie alternatives to sugar across a range of foods and beverages. Across our 5 specialty growth platforms, we see net sales dollar growth opportunities over the next 4 years of greater than $700 million, with growth rates ranging from mid-single digits to double digits and step change incremental growth from plant-based proteins. Now I'd like to turn the presentation to Jim Gray, who will discuss our financial goals and shareholder value creation.

Thank you, Jim. I will start with a brief recap of 2020's performance and then turn to our 4-year goal and financial health. 2020 presented changes to how we work, how we commute, how we dine and how we shop around the world. This volatility presented ups and downs for our customers' demand and correspondingly created ups and downs in demand for our ingredients. We finished 2020 with just under $6 billion in net sales, down 3.6% year-over-year, and yet down only 1% in constant currency. We experienced $164 million of foreign currency weakness to our net sales. Our operating margin is a healthy 11%, down just slightly year-over-year as we managed our plant and our SG&A costs to mitigate top line variability. Across our region operating segments, we experienced full year net sales declines in 3 of 4. North America, our largest segment, experienced the broadest volume turn down, impacted by reduced demand in the U.S. foodservice industry, primarily in beverages and the shutdown of the Mexico brewing industry in the spring. South America was similarly affected as stay-at-home restrictions led to a constriction of supply at bars, restaurants and corner markets. Asia Pacific, home to 57% of the world's population, witnessed swift and rigorous quarantines, which led to quicker recoveries, especially in China and South Korea, 2 of our larger operations within Asia Pacific. In our EMEA region, Europe specialty volume recovery led in the second half, and with some favorable FX, led to a full year net sales gain. Given the regional strength of our businesses, we believe that as the world population grows, both our specialty and our core products will benefit. To illustrate the momentum of our demand recovery, here, we show that our net sales in constant currency was most impacted in the second quarter, down 9%. By the fourth quarter, both volume and price gains are contributing to a positive 4% year-over-year growth as we exit with strong momentum. As Jim showed earlier, our specialties ingredients continued to grow throughout the year. As we look forward into 2021, we are seeing greater stabilization in demand for our basic sweeteners and starches and an eventual full recovery as away-from-home dining returns. As we addressed running the business in the face of pandemic challenges, we also understood the criticality of cost discipline and leaned on our Cost Smart program more than ever. We have made great progress transforming our company. Entering 2020, we had a full slate of changes underway. And we're never deterred from implementing and executing, although we had to become very creative using virtual process mapping, recruiting, training and project management to develop new ways of working. Our Cost Smart program has achieved $103 million in cumulative run rate savings, exceeding our $100 million target. And we are reaching for $170 million in savings by the end of this year. As evidenced, our comparable 2020 operating expenses before the addition of PureCircle were down 3% versus 2019; real results to transform, save and reinvest to fuel our growth strategy. Turning to our 4-year goal. We anticipate 1% to 4% net sales growth. Our adjusted operating income average annual growth is expected to be between 6% and 9%. This takes into consideration that we are starting from last year's results, which are depressed due to COVID impacts on demand. And we anticipate a volume recovery in our core sweeteners and starches. I should note that our 2021 outlook also assumes that we face start-up costs for our plant-based protein facilities as well as continue to drive improved profitability at PureCircle. Our 4-year goal assumes real operating margin dollar growth, and actual margin results may vary due to the pass-through of changes in raw material costs and FX. We have faced significant foreign currency weaknesses over the last 3 years. As global economies emerge from the growth disruption created by COVID, we highlight that FX may become a tailwind for our business. I would like to highlight that our cash flow from operations grows directionally in line with the increases in adjusted operating income, and our businesses generate significant cash. In 2020, cash flow from operations was $829 million. Our capital allocation prioritizes organic specialty growth and dividends to shareholders. As we note here, we have been and anticipate investing greater than $100 million into growth opportunities with expected returns well above our weighted average cost of capital. After our first 2 priorities, our free cash flow available for strategic value creation is approximately 35%. In the past 3 years, we have deployed free cash flow towards acquisitions, which Jim has highlighted, as well as share repurchase when we believe the intrinsic value of the company is much greater than the current trading value. We will continue to deploy this ample basket of free cash flow towards the highest value-creating opportunities for shareholders. As Jim highlighted in his remarks regarding specialties, we believe that specialty net sales growth, alongside stable net sales delivery from our core, will contribute to our 4-year profit growth goal. We expect 1% to 4% net sales growth for the company on average over the next 4 years. We continue to expect that our specialty net sales can grow mid-single to high single-digit on average annually through this horizon. We have already made capital decisions and have begun to execute the plans supporting the growth of our specialty net sales towards $2.7 billion by 2024. I would also call out at the bottom of the bars on this slide that the percentage of the company's operating income from specialties exceeds 50% by 2024. We believe the differentiation of our ingredient solutions and technical capabilities further builds our competitive advantage in texture and taste. Many of our investors have asked about the progress of our plant-based protein facilities. Here, I highlight our plant-based proteins platform, which we expect to realize sales in excess of $130 million by 2024. In 2021, we will incur approximately $20 million of operating costs to the bottom line as we fully staff and run these facilities. As revenue builds, we expect to cover these costs and grow the bottom line into double-digit operating margins or higher. We are excited about these specialty growth opportunities beyond our leading texture and sweetener businesses. That concludes my comments on our financial goals and creating shareholder value. Now let me turn back to Jim.

Thanks, Jim. After discussing how we successfully navigated the challenges of 2020, and I believe, are emerging stronger as a result, I'm pleased to share with you our Vision 2025 big goals that will enable us to continue to transform Ingredion. We're targeting specialty sales at greater than 50% of the company's total revenue, with diversification beyond starch and beyond corn. We're aspiring to have greater than $200 million in sales from plant-based and animal alternative proteins and greater than 20% of our specialty sales to come from products developed in the last 5 years, up from 12% today. We're looking to diversify more of our sales beyond the U.S. and North America, and sustainably source 100% of our 6 primary nature-based raw materials. We've set a stretching target to create $100 million of value from digital transformation across all aspects of our business, and we're targeting gender parity for manager and above positions. Also, as part of our forward-looking goals, ESG is sharply in focus with last year's launch of our All Life plan and 2030 sustainability goals. Aligned again with our purpose, our organization is committed to making progress to improve the lives in communities in which we operate, reduce environmental impact by enacting science-based targets to reduce our carbon footprint and water usage as well as ensure we operate in a manner that respects human rights through 100% transparency of the practices of our suppliers. At Ingredion, we remain directed by our road map for value creation for customers, shareholders and all stakeholders. And now, Jim and I are pleased to take your questions.