Ingredion Incorporated (INGR) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Andrew Strelzik. I'm BMO's agribusiness, beverages and restaurant's analyst, and I'm delighted to welcome everyone to Day 2 of the 19th Annual Farm to Market Conference. It's truly amazing to see the growth of the conference over time, as we expect around 400 investors and 1,000 total attendees at the conference between yesterday and today. Throughout the day, the conference will feature panels, presentations and fireside chats from senior executives across a range of public and private companies, spanning the agricultural and food value chain, including the crop protection, fertilizer, chemicals, agribusiness, protein, food and beverage sectors. And we're excited to explore in our keynote lunch panel how private equity firms are managing existing portfolio companies and deploying new capital amidst current market uncertainties with representatives from Apollo, Ospraie Ag Science and BMO Sponsor Finance Group. Before I go any further, I want to take a moment to thank the many people who truly make the conference a success you see today. The management teams have been unbelievably gracious with their time and insights upon which the conference has been built, our tremendous sales force, devoted editorial staff and tireless conference coordinators are remarkable in their commitment to making the event a success for investors and companies in attendance. And finally, thank you to the investors that have joined us from all parts of the world to really make this event special. As is the case each year, our goal is to provide a venue to explore key issues and investment opportunities across the food value chain. We hope you come away from the conference with incremental insights and a better understanding of company strategies and outlooks, opportunities and challenges and new ideas. If you have any questions, please don't hesitate to ask. And thank you. Enjoy the conference. We're excited to have Ingredion with us to kick off the second day of the conference. Ingredion continues to execute on its evolution to a more value-added specialty ingredient company, leveraging strategic investments and operational improvements to drive strong and more consistent performance. The strategy has enabled Ingredion to navigate a range of operating environments in recent years, and contributed to a 50% appreciation in shares over the last 15 months, amongst the strongest performances within our agribusiness coverage over that time frame. We're joined today by Ingredion CFO, Jim Gray. Thanks so much for spending some time with us.

Glad to be here.

I guess where I wanted to start is on some of the investments that the company has made over the last several years. It's been about $1 billion in terms of acquisitions and growth projects over that last maybe 6 years or so? I know we're going back a little bit. Can you talk about the strategy behind those investments and how you're seeking to shape the portfolio?

Sure. I think when Jim Zallie ascended to CEO in 2018, we really had a business that was one, pretty country-based. It generally followed where corn or tapioca grew around the world. We had amazing teams that could execute locally. But then when you looked at the overall portfolio, everybody -- each team kind of prioritized around their own business and what were the opportunities within that country across different industry sectors. And so it didn't have any ability to kind of gain momentum. And so when we came in and we started looking at where we could put portfolio investments into particular segments, product segments, serving different customers, we did so with a lens of growth. We did so with a lens of risk. And eventually, I think what we're doing is we're building in more consistency and profit flow to the portfolio. We're also kind of upgrading in terms of margins. We're upgrading in terms of the products and their value to customers. And so that's really -- that's probably a good way to see it. Obviously, we've had some specific investments. We've gone into sugar reduction. We've ventured into plant-based protein. But what we've really done is really driven texture, and really elevated, I think, our overall texture portfolio, and texture for us is a very broad definition. So much like you might own a flavor or a fragrance company, where they're focused on making the scent or the essential oils that kind of provide that flavor. Texture is a larger ingredient component in food and beverage, and it has a different supply chain to it. And it plays a different role in the foods and the beverages that we eat. And so we think it's a bit of an untapped and a little -- there's lots of different organized opportunities within that market globally. But underlying it, there's a lot of competencies to actually deliver texture effectively and efficiently for customers. And so that's been our theme for the last 5 or 6 years.

When you think about allocating capital towards these types of projects, what type of returns do you get on those investments? And are there areas where you've allocated capital that are either ahead or behind, maybe have some additional catch-up or growth opportunities to contribute to the profit growth expectations this year or next?

Well, so in our business, when we're putting organic capital to work, it might take us 1 to 2 years to put equipment into dirt. And then it might take us anywhere to 1 to 3 years, 1 to 5 years to ramp the capacity on that plant. It's a pretty long investment cycle. So right now, I would say that out of all the -- if I look at it at your $1 billion, I'd probably say like maybe half of that is fully productive. And so I would probably say that out of another half of it still has a lot of room to run in terms of profit growth.

When you think about now on a go-forward basis, continuing to layer on growth opportunities, what are the focus areas, I guess, is maybe the best way to say it? And as you think about continuing to shape the portfolio and the right level of spend for us to think about and returns.

Yes. So right now, when we -- if I can take it, we have a winning aspiration, right, to be a leader in texture and healthful solutions. And so we're investing in further texture and our healthful solutions business would be our stevia or sugar reduction solutions as well as our plant-based protein. So we still think that those are driven by some megatrends, very, very large markets. We'll continue to invest against those. Right now, we take capital and we're about $80 million to $100 million of growth capital a year. But we also look at tuck-in M&A and where there's M&A opportunities that we think can accelerate that. The tuck-in M&A is not part of our 4-year outlook. Our 4-year outlook is driven by organic growth, and then is also stimulated by that growth capital. As the company gets bigger, you really have 3 big levers to think about what's going to drive the shape of the revenue and the shape of the profit as well as your competitive moat. So one, you just have your overall portfolio, right? So where some businesses in markets that are really doing well and growing and where some businesses more mature. And so you always have to think of portfolio lens. You have a cost lens, which is, for us, I think, still pretty exciting because as I began, when you start your business and you're growing by country-by-country team, we've been at building an operations team that's global. We're now in our call it, my fourth year. We have global shared service support, and that really allows us to be -- you get to upgrade the whole thinking of your team in terms of opportunities that go against an $8 billion revenue company. So I think the cost productivity for us, we have a -- we have a cost program now, but I think the long-term cost levers that we can pull are still pretty exciting. And then straight up the middle, what we talk about all the time. So what are the growth opportunities around texture and healthful solutions. We'll still invest there. It's a very, very broad category, and we're going to be investing in the R&D and the competencies to continue to, I think, bring solutions to customers that are higher value add, right? So really 3 -- I look at it as 3 big levers that are going to shape the next 3 to 5 years.

And so the company recently started reporting under new segments.

Yes.

How does...

It's very exciting.

Very exciting. Absolutely. It was exciting, you told me...

I have to say that else my finance team won't support me.

How does that, I guess, restructuring or realignment change the way that maybe internally you guys approach the business and support your ability to achieve kind of the growth objectives you have over the next several years?

Yes. I mean, I think for those of you not familiar, so we took what we used to call our specialty ingredients business or mostly our food starches or starches that are modified in some ways to create value for customers. And we had really strong footholds. In Europe, we had a great business. In the U.S. We had kind of a leading business in Asia Pacific. And we're selling similar types of solutions. Now we were really successful with some regional customers. But when we looked at the large multinationals, they would come to us with a customer brief, and it would be like, "Hey, I want this -- I want the starch solution that you developed for me or this texture solution, but I want it in 19 countries". And you're like -- so you go through the internal machinations to get that done. And now what you have is you have a team that can just make all the trade-offs across the customer portfolio. It's all within their power, it's all within their consolidated P&L results. And so it's pretty exciting to see that team really collaborating across borders. And so that I think that's been quite enabling. And I think it will be an accelerant on how we think about texture and healthful solutions. The other piece then is that with our business in the U.S. and Canada as well as really kind of a natural fit between our Mexico team and our South America team, that even though we had organized by segments, you always have organizational silos, and it's funny how they don't talk to each other, sometimes because why would I help you out, doesn't help my P&L. They've come together, and it's amazing to see some of the opportunities that spring up. And particularly remind yourselves that we run at really high utilizations for our U.S. can business and for our LatAm business. And so being able to figure out where you can get that extra 1% or 2% as you're balancing through the years, I mean that's real money. And so I do think that's been kind of a cool focus, near end focus that I've seen already evident. Yes.

The specialty mix was 34% of sales in '23. Can you remind us how you think about the margin delta between specialty and nonspecialty? And how you think about where that mix will go over time and the driver of that improvement? I know you break it out kind of by verticals. So how do you think about the biggest drivers of that mix shift?

Yes. I mean, so right now, I mean, we don't really provide enough information to be able to look at gross margins by the different segments as we get through 2023's kind of restatement of the new segments, and we shared that in Q2, we shared that in Q3. You'll see more of that reveal. And just for everybody, under GAAP requirements by 2025, we will have to report growth segments -- gross margins for segments. And -- but to characterize what we've said, so our modified starch, a specialty ingredient, is typically going to be anywhere between a high 20% to low 40% gross margin business. It's also going to sell at a higher value per ton, okay? And so now why is that? Well, you have people resources that you have R&D, you have innovation, you have technical salespeople that are actually working with the customer and the customer's make process, right? So this is important, right, in that customers may be baking something. They're looking at the sheer and the mix. They're thinking about, hey, are they pouring this into a mold, is it going on a conveyor belt? Is it being baked? And to the extent that you can actually have something that comes off the conveyor belt cleanly, right? It doesn't provide any stick, so you don't get any yield loss in the final product for the customer. It goes through the oven faster or goes through the oven and it needs less heat. You're saving dollars for your customer. You are saving a lot of dollars that relative to the cost of the ingredient is pretty small. So to the extent that we can design ingredients that help our customers actually produce at a lower cost or with greater capacity, we're impacting their total cost of ownership, right? And so our theme has always been like let's look at where those functional ingredients can truly, truly be functional and game changing, not just in taste, not just in terms of the label of the ingredient on the back of the pack, but also just in the total use for the customer. So our specialty focus is really around that. And so I do think that, that's a much, much higher margin potential business as we go forward, and that's where we're making investments. The other verticals, right, where you're producing just a whole bunch of liquid and the cost of the raw material, the corn might be a higher portion of the COGS, pretty high variable COGS. What you've then doing is as you're working with customers really on the variability and the change of the commodity. So if corn futures are going up or down, tapioca is moving, sugar is moving. Generally, all of us in the industry work with our customers, our procurement folks to be able to say, well, how are we thinking about managing that price change and that risk. So that becomes a lot of the discussion around pricing. But at the end of the day, I get paid for my value-add on making the ton of glucose, the ton of high fructose. And so what we've really tried to do is move more towards, well, pay us for the value add and then let's have a conversation on how that raw material -- underlying raw material is moving. And let's try and make sure that we're sharing at least in that risk.

That makes sense. And I guess, as we think about growth levers, you mentioned that M&A is not included in the way you think about the outlook.

In our organic, yes.

And so at the same time, you sold the South Korea business, You have plenty of cash on the balance sheet. You've been open about wanting to or that you are pursuing M&A. I guess, where are the areas of focus? And what is the environment like now for M&A? I mean, probably have multiples come in? Is it an attractive environment? How close or not close are we to maybe executing on something there?

Yes. Well, so one, I think within our business, if you -- some of our materials would say if you looked at texture as an overall market, we think that, that market is close to $20 billion, somewhat related to the role that starches play in texture. You have hydrocolloids. You have natural fibers. You even have some emulsifiers. And I think all of these are somewhat key in delivering the texture and the taste that each of us experience, whether or not you're dipping into an ice cream, you're having a salad or you're biting into a breaded chicken sandwich. And so that's a pretty big market, and it's not terribly organized. That sounds kind of single dominant player out there that says, wow, look at them. They're an amazing leader in texture. And it's because the underlying make process and the technology is a little different as you go through each one of those. But I think that's a pretty fruitful area for us to be looking at. And our lens has been there for quite a while. So that's probably -- the environment -- look, when risk-free rates went up, multiples came in, which is -- you know that, right? And so I do think the environment has been a bit probably more to the favor of a strategic. I hope there's no private equity guys in the room. Cheering for you, good luck. Maybe the Fed will help you. Yes.

Okay. I guess kind of tagging on to that, though, is there a point at which you say, look, we've got all this cash. It doesn't make sense to have it sit on our balance sheet. Where does share repurchase and the pace of share repurchase, how does that kind of net against kind of your M&A aspirations, I guess.

Yes. Well, so I think where I've been sort of public is both. It's not -- I'm not going to look at it as the tyranny of the or. We have been very prudent, I think, in managing our balance sheet. We have a higher target for debt to EBITDA than what we're currently at. I think optimally, we -- 2.2 or so debt-to-EBITDA is a nice place for us. I think if you optimize the WACC, it would be a little bit higher than that. In our business, as much as we experienced like in 2021, if corn runs up and you have to invest in accounts receivable, you have to invest in the value of inventory, then you're going to put cash into the business. And in our cycle, that putting that cash in that business could be $600 million, $700 million, $800 million, and then we get it all back, right, when corn comes down to the levels we're sort of seeing today. So we think about long term the balance sheet and where that should be. And then we look at -- so all of the -- everything that's in the M&A pipeline and the timing of that, you can never really predict because each deal sort of has its own agreement in its own life. But beyond that, then we look at share repurchase. And right now, we're out there with -- we're going to try and get share repurchase done this year that's going to exceed what we did last year. So equal or exceed last year, which is about $100 million. So I think we're along the way. Yes.

Shifting gears a little bit, you laid out several years ago kind of your growth algorithm through 2025. You have been, over the course of that period pacing ahead. This year, the guidance, especially after a number of very good years that started maybe a little bit lower than that. But as we get closer to 2025, as we get closer to that finish line, is that still the right way to think about the growth potential of the business? Is there anything that has changed in your thinking the way whether it's restructuring cost savings, et cetera, that make you think differently about the growth potential beyond '25?

Well, I'll go back to the point is that if you ask about the 4-year outlook, it has a revenue and an operating profit component, and it has an EPS and a fiscal policy and a TSR component, right? So we're very clear on our TSR that we really aim to be 12% to 14% on our TSR. And I know that some of you all don't manage that, but for the folks who actually own shares like me, TSR is pretty good. So we like TSR. So that's a combination then of driving the growth opportunities in texture and healthful solutions, being very focused on our food and industrial ingredients. You'll see us investing capital. You'll see us investing in cost savings there. It's taking our ops team and our global supply chain team and as well as all of our support services and making sure we're getting every ounce of efficiency and effectiveness that a global company can, which is honestly, I think we're early stages in that journey. So that's going to drive revenue and operating profit as part of our outlook, but then also being supportive of how we look at the portfolio, I think, and being very mindful of fiscal policy will help drive the adjusted EPS growth and in overall the TSR. So I'm -- because you can't -- we're very mindful of our dividend, right? So we're going to adjust, we're going to drive that op growth. We're going to pay that dividend, grow that dividend and then we'll use share repurchase as well.