Ingredion Incorporated (INGR) Earnings Call Transcript & Summary

Hello, and welcome to Ingredion's 2022 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 strategy 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 that is transforming itself with an expanded solutions capability and opportunity set that aligns with 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'll 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 plant-based raw materials and turns them into highly functional, specialized and increasingly customized ingredient solutions for food manufacturers around the world. We have a diversified customer base with more than 19,000 customers in more than 120 countries and approximately 70% of new product launches in the food industry in 2021 contain the types of ingredients we produce. We co-create with our customers, both in person, in our 32 Idea Labs around the world, and virtually, at our creative culinary studios, leveraging the talents of more than 500 food technologists and scientists that are actively formulating and developing new ingredients every day. Every day, we strive to live our purpose, to bring the potential of people, nature and technology together to make life better for all stakeholders. This is true through our sustainability commitment to have 100% of our 6 priority crops be sustainably sourced by 2025 as well as by our commitment to diversity, equity and inclusion, and our concern for employee well-being. Additionally, we're mindful of the products we produce and sell, and the impact they can have on the environment and the enjoyment of consumers and the overall impact to health. Think of Ingredion as a leader in texturizing with the broadest and deepest portfolio of specialty starches from corn, to potato, to tapioca, to rice and a growing portfolio of hydrocolloids and texturizing fibers. We have unmatched understanding of how texture impacts taste. And we believe texture will increasingly be as important as flavor to drive consumer preferences. We are also a rapidly emerging supplier of pulse-based proteins, with a range of protein flowers, concentrates and isolates that are used to formulate nutritious, alternative dairy and alternative meat products and fortify healthy snacks, baked goods and sports nutrition supplements. Third, we are also the leader in high-intensity natural sweeteners for sugar replacement, a very large and rapidly growing opportunity. Over the last 6 years, we've steadily increased the percentage of higher-value, higher-margin specialties in our portfolio and specialties now represent 33% of our total net sales, up from 24% in 2015. We have market-leading positions in specialties with high barriers to entry. We've enabled specialty growth through organic capital investments and accelerated it through strategic M&A. Our total sales have increased by almost $1 billion, and specialties represents over 80% of the increase. In line with our long-term profit outlook, we expect our overall net sales to grow, on average, 3% annually through 2025, with specialties growing mid- to high single digits, reaching 40% of the portfolio, while our stable core ingredients exhibit modest to low growth and are managed for margins and strong cash flow. The ability to pursue specialties growth is supported by a stable, cash-generating, globally diversified, core sweetener and starch product portfolio. These ingredients which include liquid sweeteners, dextrose for pharmaceutical applications, polyols for personal and home care, and starch-based strength additives for corrugating and papermaking applications have important relevance in the local markets where they're sold. Outside of the U.S. comprising 65% of the core. These ingredients are projected to grow with population growth over the next 4 years and at an accelerated rate of that in EMEA where we have a very successful and growing business in Pakistan. In the U.S. and our other large core ingredients markets we have deep experience in managing volatility through our global hedging practices, our pricing, our contracting, co-product and working capital management. As an example of our core ingredients business model at work, it shows that we are able to pass through corn cost inflation through pricing. Now while the timing of this pass-through varies by country and contract type, it is generally 3 to 6 months where we do not contract annually. For example, in Brazil, you can see that our average selling price moves with corn costs on an approximate quarter lag. In the United States and Canada, where the majority of customers contract annually, approximately 55% of our core customers' agreements pass through which is essentially a tolling agreement where the customer is responsible for managing corn cost exposure. The remaining 45% of customers are based on a firm price where Ingredion manages the cost exposure through well-established hedging practices, which mitigate volatility, while also taking advantage of the natural hedge between gross corn and coproduct pricing movements. Ingredion's product portfolio has been significantly broadened through more than $700 million of organic growth investments and M&A over the last 4 to 5 years. Over this time, we've added hydrocolloids and rice starch to our texturizing portfolio, while increasing tapioca starch capacity in Thailand and more than doubling our modified food starch capacity in China. We've built a very respectable position in plant-based proteins in the U.S. and Canada with significant headroom for growth. And we acquired, partnered and invested our way to being the market leader in high-intensity natural sweeteners with a rapidly growing position in Stevia and Reb M. In addition, we've enhanced our capabilities in the U.S. and Europe to formulate more customized ingredient systems for a range of customers. Essentially, we're not the same starch and sweetener company we were 4 to 5 years ago with the same growth prospects. Our solutions and opportunity set has been expanded and transformed. And this is opening up new possibilities for us to innovate with and for our customers. As an example, I was recently asked by a customer about our new customer value proposition, "Be What's Next," and whether I could give an example of a food innovation that we could enable now that we couldn't 4 to 5 years ago. And I thought about a very large global market segment, where we have never had an ability to play and win. And I answered the question by saying, "Today, Ingredion could enable a low-calorie, sugar-free, dairy and animal-free, plant-based, clean label and indulgent ice cream." We now have the plant-based protein to replace dairy protein. We have the natural high-intensity sweetener to provide taste while replacing sugar and calories, along with the hydrocolloids to control ice crystal formation and in part a rich creamy, indulgent mouth feel. This is just an example of how our opportunity set has been widened. It's also worth noting that in this industry, 4 to 5 years to commercialize new ingredient development is not long and that we believe the investments we have made position us for solid growth over the next 4 years. So we play in large and growing markets, and we're combining our growth platform offerings in texturizers, clean and simple ingredients, plant-based proteins and sugar reduction and specialty sweeteners, to build our fifth growth platform, a customized capability, called Food Systems. This capability, which was established with foundational acquisitions of TIC Gums in 2017 and last year with KaTech allow us to appeal to a growing customer need that for simplified batching and reduced labor handling. We're seeing this demand not only from small customers but increasingly larger customers. We believe formulated systems can grow double digits and offer higher gross margins and are less capital-intensive, and thus, deliver attractive returns on invested capital. Now from an individual ingredient category standpoint, the 2 most significant global megatrends that we have invested in are plant-based proteins and sugar reduction. Plant-based solutions are supported by consumers that are mindful of the environment, animal welfare, sustainability and digestive health. Sugar reduction is a global goal on the part of not only consumers but governments and health professionals to improve metabolic health and curb the rise in obesity and diabetes. The sugar reduction products we sell allow consumers to replace over 1 billion pounds of sugar last year or the equivalent of over 1.8 quadrillion calories. We are excited about the opportunities and are bullish on the prospects for plant-based proteins. The market today is $10 billion and is projected to grow high single digits with 1/3 of consumers seeking to increase their consumption of plant-based foods and our opportunities are not limited to one application, like alternative meats, but are more diversified across very large segments like alternative dairy, healthy snacks, fortified bakery and sports nutrition. Our project pipeline with customers remains strong and new product launches planned in 2022 driven by consumer demand. Sugar reduction is also a significant opportunity for us. The total addressable sugar reduction ingredient market is currently estimated at $5 billion, growing to nearly $7 billion by 2026 and is growing high single digits. We are the global leader in natural high-intensity sweeteners following our acquisition of PureCircle in 2020. PureCircle has been a great turnaround story for us, with net sales up over 60% in 2021, off an annualized 2020 base. Our partnership in 2021 with Amyris, a leading biotechnology company to manufacture and market a great tasting Reb M sweetener, produced sustainably by fermentation rounds out our Stevia portfolio, forming, what we like to call, a perfectly sweet trifecta of offerings in extracted, bioconverted and fermented Reb M, validating our belief in the differentiated value propositions for specialties and demonstrating their resilient growth potential, these products have grown through the twists and turns of the last 2 pandemic years. Last year, specialties grew 17%, driven by both strong volume and price mix. And during the most challenging period of the pandemic, in 2020, our specialties still grew low single digits. Growth was evident across the 5 growth platforms and across all 4 regions. Now speaking of the pandemic, one of the achievements that we are particularly proud of is the way our go-to-market and technical teams have pivoted and adapted to engage and co-create with our customers. This gives us confidence in our ability to be part of our customers' new product launches, and in many ways, increases our availability, our speed and efficiency to connect. 2021 saw approximately 2,500 more virtual engagements versus the prior year. In-person engagements also increased over 30%, as vaccine availability increased and we were able to once again safely meet with customers. This resulted in over 14,000 customer engagements during the year. Around the world, we have 160 technical service employees engaging with customers daily. They conduct live digital sessions from our 32 Idea Labs helping customers and providing Ingredion solutions in real time. We are particularly encouraged by 14 new product protein launches that originated from those Ingredion labs in 2021. Now I've already discussed 3 of our 4 strategic pillars to forge growth, including our purpose-led, people-centric culture, our specialties growth strategy and our commitment to drive commercial excellence. Our last pillar focuses on cost and has served us extremely well over the last 3 years, delivering $170 million of run rate savings, a 36% increase over our original Cost Smart savings target. Our focus on cost and efficiency will continue, and Cost Smart will now evolve into cost competitiveness, driven by operational excellence. Jim Gray will describe how Cost Smart helped us develop the muscles to pursue continuous cost reduction going forward. The program enabled us to invest nearly $10 million of savings into R&D and digital enablement. As demonstrated over the last 6 years, value-creating M&A has been and will continue to be an important part of our sustainable growth strategy. Our focus will be on opportunities that enhance the value propositions of our growth platforms, enable us to buy growth and acquire talent. We have a track record of investing strategically in opportunities that deliver a return well above our weighted average cost of capital by integrating quickly, delivering synergies and investing capital with attractive returns. So M&A will continue to play an important role in our transformation. With that, I'll turn it over to Jim Gray, who will update you on our 4-year outlook and our focus on total shareholder return.

Thank you, Jim. Let me begin with a brief recap of 2021's performance. We completed 2021 with net sales growing 15% year-over-year, up $900 million, largely driven by over $600 million of price/mix increases, bringing our total net sales to $6.9 billion. As Jim highlighted earlier, our business model passes through the change in raw material costs. When the cost of corn rises rapidly as we experienced in 2021, our operating margin percentage may decrease. We view the growth in operating margin dollars as a more meaningful metric of our business performance. And our adjusted operating margin dollars grew 4% year-over-year as we absorbed and overcame almost $900 million in cost of sales increases. Adjusted earnings per share grew 7% year-over-year to $6.67 in 2021. Cost Smart, our 3-year cost reduction program has beat our $170 million savings objective. Our global team stayed focused throughout the pandemic to drive large-scale optimizations of our production assets, restructure our warehouse network and reorganize our workforce and approach standing up and expanding 3 shared service centers globally. Our organization has developed the capabilities and mindset to continuously drive cost reduction. As we look forward, Operational Excellence will be central to managing costs, especially in our current environment. Our operations team continues to progress a better balance of our manufacturing network, debottleneck and improve efficiency in order to drive greater capacity at a lower cost, recognizing that greater volatility is here to stay. We are assessing pricing more frequently, updating contract terms and embarking upon expanded hedging practices to reduce value at risk. Cost Competitiveness, our updated cost reduction initiative embraces thousands of individual activities undertaken by our team members to recognize that costs are a deliberate resource choice and being mindful of these choices can reduce costs. Turning to our 4-year outlook. We anticipate 2% to 4% net sales growth on average annually over the horizon. Our annual average adjusted operating income growth is expected to be between 7% and 9%. Our outlook assumes real operating margin dollar growth. We expect to manage pricing year-to-year to recover changes in raw material costs. Our actual margin results may vary quarter-to-quarter due to raw material cost moves and foreign exchange fluctuation. As the pandemic has impacted volumes, costs and pricing, we have approached cash flow from operations as an average for 2020 and 2021, which is just over $600 million per year. This run rate is in line with our historical cash generation and our expectations for cash flow generated over the next 4 years. Cash flow from operations is expected to grow as adjusted operating income grows. Our capital allocation prioritizes organic specialty growth. As we note here, we have been and anticipate investing nearly $100 million each year into organic specialty growth opportunities with expected returns above our weighted average cost of capital. As Jim highlighted in his comments regarding our specialty ingredients, we anticipate that specialty net sales growth, supported by a stable core will contribute to average annual net sales growth of 2% to 4%. We expect that our current specialty portfolio will grow net sales organically in the mid-single digit to high single digits on average annually. To call out, we have already made the investments to support specialty net sales growing to 40% by 2025. Many of our investors and analysts have asked if we could provide more clarity regarding how our specialty investments will show up in our expected results. Here, we are sharing for each of our region operating segments, the net sales growth expectation, the proportion of net sales attributable to specialty and core ingredients and our expected change in the region's operating income margin. Let me note that for each region, we are at an elevated position of what we would consider a rising corn cost market. As corn costs rise, our price increases are chasing that inflation. When corn costs fall, our price declines tend to lag and our margins expand. For North America, we anticipate average annual net sales growth of 2% to 4%, and operating income margin to expand 30 to 50 basis points annually, driven by an increase in specialty texturizing ingredients as well as continued growth of plant-based proteins. We anticipate that plant-based proteins net sales will grow from $16 million in 2021 to over $150 million in 2025. As we continue to ramp up production, we expect to hit breakeven in late 2023. We expect that plant-based protein operating losses will improve and that this business can generate mid-teens operating income margin by 2025, which represents a $50 million to $60 million swing in operating income over the next 4 years. We expect South American net sales to reflect continued growth in Brazil and India. And over the next 4 years, recover the net sales reduction created from the contribution of Argentina to the Arcor JV. In Asia Pacific, we expect average annual net sales growth of 6% to 8%, driven by the growth in PureCircle as well as expansion of specialty texturizers in China. Asia Pacific operating margin expands at a greater pace as PureCircle reaches higher margin levels expected in our acquisition case. In EMEA, we anticipate net sales growth in the mid-single digits as our Europe team drives clean label texturizers and expands upon KaTech's Food Systems growth. Already high operating income margins are anticipated to remain relatively flat. As we go forward with specialty growth as well as changes to our core ingredients in our region operating segments, we will provide updates via this outlook format. From our remarks, we hope that you take away that we are focused on executing our business strategy and believe strongly that investment in the business at attractive rates of return will lead to greater net sales, operating income and cash flow growth. We are also committed to driving greater total shareholder return. We are committed to a dividend payout in line with growth in adjusted earnings per share. Our current dividend payout ratio is approximately 40%. We consider share repurchases after funding our growth investments and dividends, and we will access our strong balance sheet when appropriate to capture opportunities to deliver higher shareholder returns. We have demonstrated our commitment to creating attractive shareholder return by increasing our dividend every year since 2012. Even through the COVID pandemic, our products have proven to be resilient and our business continued to generate cash, which we have returned to shareholders through increases in the dividend. We continue to invest in growth through both organic capital investment and strategically through value-enhancing M&A to accelerate specialties growth, all with a disciplined approach to ROIC greater than our current WACC. And during the last 4 years, we have repurchased over $600 million of common stock outstanding. That concludes my comments on our financial outlook and shareholder value creation. Let me hand off to Jim.

Jim just discussed how we think about our capital allocation to create value for shareholders. Before closing, I want to remind everyone of our driving growth road map for value creation for our customers. It's organized around our 5 growth platforms, and it's underpinned by our culture and a strong belief in the importance of controlling and certifying the supply chain, while co-creating with customers to enable consumer-preferred innovation. As we do that, we will grow and we will create value for our customers, for our shareholders and for all stakeholders. And we want to grow responsibly, operating within clear ESG framework that we developed as part of our 2030 All Life plan. This includes a focus on the communities in which we operate and giving back, reducing water stress in our agricultural supply chain and protecting human rights to name a few. We are very proud of our progress against the All Life plan in 2021, and we're committed to deliver against our 2030 goals. Thank you for joining us, and thank you for your interest in Ingredion.