Ingredion Incorporated (INGR) Earnings Call Transcript & Summary

Good day. Thank you very much for joining us. Next on stage, we have Ingredion, a leading global ingredient solutions provider. We're pleased to welcome Jim Zallie to the stage, who was appointed President and CEO of Ingredion in January of 2018, elected to the Board of Directors in September '17 and now serves also as Chairman of the Board. Given the announced acquisition plan for Tate & Lyle, Jim will address the deal in his opening remarks and then our focus during the fireside questions will be on current business developments. With that, Jim, please go ahead.

Thank you, Ben, and it's a pleasure to be back at the Barclays Conference. It's been a busy year for Ingredion as we continue to transform our portfolio, our business. And as you'll see with the announced acquisition of Tate & Lyle to continue to create the future of food on behalf of our customers and with our customers. So let me get right into it. Obviously, anything I say today will be protected by the safe harbor provisions in the forward-looking statements. For those of you that are not familiar with Ingredion, I just wanted to give you a quick snapshot. We're a global ingredient solutions provider. We've been around for a long time, more than 100 years. Revenue is $7.2 billion. We're traded on the New York Stock Exchange. Market cap $6.6 billion, as you can see. But most importantly is the global reach and the extensive customer intimacy, 15,000 customers around the world and ship and sell products in 120 countries around the world. And our business, we resegmented it a few years ago, and it's a combination of global and/or multiregional multi-country segments. One is Global Texture and Healthful Solutions, about 1/3 of our revenue. Food and Industrial Ingredients, LatAm, you could see also about 1/3 of our revenue, Food and Industrial Ingredients, U.S., Canada, about 30%; and then other businesses, which is made up of the Pakistan business, which we recently sold a majority stake in as well as our sugar reduction and protein fortification businesses. 75% sold to food and beverage, 20% approximately sold to nonfood applications, which would be industrial, but also into pharma and personal care businesses, which are increasingly becoming larger and important and higher margins and growing fast. And then we grind a lot of corn and we sell that for animal nutrition. And the cash flow, the strong cash flow that the business has generated over the last 3 years, we've generated more than $1 billion of cash each and every year. This year, projected $700 million to $800 million. A lot of that comes from the Food and Industrial Ingredients segments that we then are investing into the faster-growing Texture and Healthful Solutions business. And so these are the 3 segments, and they're scalable. They are profitable businesses in their own right. And they are all about working with customers to enable customers to generate consumer-preferred innovation through the ingredients we supply to give them a front-of-pack labeling differentiation. For example, texture, a certain texture, a certain crispness or crunchiness or velvety texture or protein fortified claim or the ability to reduce sugar. So we're all about influencing front-of-pack claims and consumer-preferred innovation. The Global Texture and Healthful Solutions business, I wanted to highlight because it's at the center of the strategy for the acquisition to acquire Tate & Lyle. Tate & Lyle is going to bring $2.7 billion of revenue. This business $2.4 billion. So together, more than $5 billion with the combined company, it will be more than 50% of our revenue. But this business has been doing very well, 9 consecutive quarters for net sales volume growth this past quarter, quarter 2 and the second highest operating income in the business' history. And the operating margin, which you can see going back from '24, '25, and you can see in this most recent quarter at 18.7%, continuing to increase its margins, a lot of focus on solution selling, which inherently have higher margins and also just higher growth rates as well. And we have been reshaping our portfolio, transforming our portfolio over a number of years, if you've been tracking us over, say, the last decade. But most recently, in the last couple of years, we divested our South Korea business. That was a business that had exposure to high fructose corn syrup and industrial starch pretty much. We divested that. We sold it at a multiple above our current multiple or the multiple at the time, and we generated $250 million of proceeds. This most recently, in June, we divested the majority stake, 51% of our position, which we held for many, many years, many decades in Pakistan. It was a great business at the time, but not strategic to where we want to take the portfolio into the future more towards higher-value specialties. It was a business that was exposed to textiles and also into glucose syrups. Predominantly, we generated $165 million of net proceeds from that. And also, we announced most recently last year, the closure and execution of the Alcantara facility in Brazil outside of Rio and then invested in our Mogi Guacu facility, and that went off seamlessly. And then most recently this year, announced the closure and divestment of our Cabo facility. But the big news was on June 8, where we announced the acquisition -- intended acquisition of Tate & Lyle, significant enterprise value of $5 billion. It adds to our Texture portfolio, mouthfeel, fiber fortification and sugar reduction capabilities. We also announced a stronger entry into India. For the last couple of years, we've made acquisitions in pharma for India. And I think of it this way, taking the investments in Pakistan and basically putting them into the most populous country in the world that's growing at a nice clip, but also very strong pharma presence and a lot of upside in food ingredients as well. And we partnered with a very strong company called Sanstar, one of the leading corn wet millers, a good family-owned business, but also publicly listed in India and had cultivated that relationship for a number of years and then consolidated an acquisition of a company called Mannitab for pharmaceutical excipients also in India as well. And so the net effect is we're transforming the portfolio to a higher growth, higher-margin mix. And again, with Tate & Lyle, more than 50% of the portfolio in Texture and Healthful solutions. And this, as you can see, the revenue will get to approximately $10 billion and the EBITDA at $1.8 billion. And you can see the fact that there's really 2 complementary portfolios. And really, what it does is it creates more scale for us to service our customers. And that portfolio will give us an ability to provide more differentiated value, specifically through solution selling. Both companies focus more and more on solution selling, but think of it as adding more tools to the toolbox to provide more textural innovation, more sugar reduction solutions and more fiber fortification, which are highly on trend as the reformulation boom takes place, appealing towards increased regulation around products to be healthier, more clean label, and also enables us to also provide more affordable solutions as well. The other thing that it does is it provides a complementary network of supply with more inherent just naturally built-in redundancies of supply. And that is something that we're hearing from customers, they're very pleased about because of what they went through during the pandemic, during the supply chain crisis, but also what's happening right now geopolitically with increasing tensions related to tariffs or related to energy prices. And having reliable supply is one of the things also that we think is going to position us as a preferred supplier with this combination and makes it very compelling. And it makes us better positioned to serve consumer needs and address industry trends such as clean label, again, affordability, sugar reduction. We call multisensory experiences, which is textural innovation. For those of you that have been tracking the food space and have been reading a number of the food articles in the last 1 to 2 years, you're hearing more about texture being positioned as the new flavor, multi-textured foods. You're familiar with Boba Tea, Boba Tea now making its way into pudding-like products. Consumers looking for different eating experiences and companies looking to drive innovation and drive overall liking for products that will taste interesting and great influenced by texture. Ingredion with this acquisition, intends to be the go-to provider for Texture and Healthful Solutions that make healthy taste better. And then you can see also pharma, home and personal care. The other thing that this acquisition will do, both companies have not so well-known areas of focus in the area of skin and hair care as well. These are businesses that are now not so small. They're $200 million, $300 million businesses. Combined, it's going to be even larger, growing at high single digits and higher profit margins as well. So the acquisition is very compelling on that front. And really, the way we go to market with solutions is it starts with bringing consumer insights, talking the same language as our customers and then developing a co-creation brief where they're skin in the game on both sides and then really customized formulations and then helping them scale the products up. And an interesting statistic, we don't work with just large CPG companies. We're working with private label manufacturers. We're working with insurgent brands as well. And most of the volume growth, the very elusive volume growth that's happening in the food industry, where it's happening is coming from insurgent brands. And we are partnering with a lot of these insurgent brand companies, especially in the areas of protein fortification, sugar reduction. And all of that, this acquisition, we believe, brings complementary capabilities to drive a higher margin mix. The acquisition will deliver $130 million of cost synergies. That's not taking into account any cross-selling or revenue synergies. That's 4.8% only on the stated revenue of Tate & Lyle, which is something we think is very achievable. We have to execute that, but it's very achievable. It's not something that we think is overly stretchy. And you can see what that will do to the adjusted EBITDA once we complete the acquisition. And when the acquisition completes, which is scheduled to complete in the second half of next year, we'll be at 3x leverage with a commitment based on their own inherent cash flow and based on our own strong balance sheet to take our targeted leverage down to less than 2.5, 18 months post the close. And our capital allocation priorities remain focused on investing for growth where we have projects for growth, obviously, reliability cost savings, but then preserving the dividend where we have had 11 straight years of dividend increases and opportunistic buybacks. Even this year, despite this acquisition, we're going to generate $700 million to $800 million of cash, and we reaffirmed our intent to buy back more than $100 million of shares this year. And in the last 3 years, we bought back $550 million of shares approximately. So we are right now in the regulatory and antitrust review stage and again, expect completion towards the second half of next year. And then obviously, for 12 to 24 months, we'll be feverishly working to deliver on the synergies and the promise of the acquisition. And again, 15% EPS accretion or greater than 15% EPS accretion of adjusted EPS in the first full calendar year post acquisition. And so what this reinforces in regards to the investment thesis for Ingredion is multiple pathways to value creation, specifically the ability with scale and again, the focus to expand the Texture and Healthful solutions portfolio to be that go-to provider for Texture and Healthful solutions that make healthy taste better for our customers, just a broader solution set overall with the ability to drive 1% to 2% volume growth, 2% to 4% will come from mix upgrades, primarily solution selling. And then that will help drive the 4% to 6% Texture and Healthful Solutions compounded annual growth rate. Many of the product lines, specifically in the areas of clean label are higher average selling price, higher gross margins. Those are growing fast right now based on all the reformulation that's taking place. And these are durable positions. There will be a combined enhancement of our IP estate as well that will make us a more intimate partner for customers to help drive innovation. And we think that provides really defensible positions, especially in the areas that we're targeting. And we get more scale from the acquisition, and we've talked about those numbers. And then the disciplined capital allocation as well. Again, very strong balance sheet today with a commitment to get the leverage down to 2.5x in approximately 18 months post close. So with that, I'm going to go over and talk to Ben. So Ben?

Perfect. Take a seat. Time for the fire.

All right.

Well, thanks for that. And as I said, we're not going to go any deeper on any questions Tate & Lyle related. But maybe to start off, Jim, obviously, a big topic, and we've heard this in the morning as well, is just the health of the North American consumer. So maybe just help us from your side, what are you seeing in terms of any change in customer behavior, maybe potential trade down? And how is your portfolio kind of like balanced, call it, private label, value goods? How to think about your exposure as to the consumer dynamics in the U.S.?

Yes. I think, first of all, it's important to highlight that we're a global company, not just a U.S.-centric company, even though so much of our focus is also obviously on the health of the U.S. consumer, but we're a global company and diversified in that regard. We're a company that helps our customers formulate affordably, affordable solutions. And so that's been part of our DNA for quite a long period of time. Going forward for the second half, we haven't dialed back any of our, say, outlooks on volume, but we are watching the consumer very, very closely because of all the news that we're all watching in relationship to some food companies' outlooks for the forward outlook. And I think that the other thing that's compelling about our business is that we sell across multiple customer channels. So we're selling to the fast-moving consumer goods companies, yes, but we also are selling to private label. Maybe 15%, 20% of our business in the U.S. goes to private label through direct partnerships or the co-manufacturing networks that they use. In Europe, it's a higher percentage. It could be 40%, 45%. In the U.K., it can be even a little bit higher than that. So private label is not an insignificant portion. We sell to food service and quick service restaurant customers and are there with continuous new product launches and those insurgent brand customers that we're talking about as well. So we're diversified across the customer base. And what we've been focused on through solution selling, and we believe that the 9 consecutive quarters of net sales volume growth in texture and healthful solutions, which I don't think is any small feat that we've been able to achieve and a large portion of that's been coming from steady growth in the U.S. market is because we're trying to be smart about segmenting our customers, trying to identify which of those customers are -- have the right strategies, are listening to their consumers and are partnering. And the whole solution selling model, which starts with that consumer insights and the customer briefs is allowing us to -- it's an overused expression, but skate to where the puck is going, to try to find those pockets of growth because invariably, there are always pockets of growth. Even though volume has been elusive, there's pockets of growth. Example, this most recent quarter, our protein fortification business was up 40%. And that's driven by, of course, the demand -- the tightness in the whey market for dairy proteins, but protein fortified products. And even for affordable solutions, our ingredients get formulated into those products for value launches for food service. So it's about really being customer intelligent, segmenting customers and segmenting the opportunities and being diversified. But we're watching it very closely because I think we're at a point where if energy prices and diesel prices continue to go up, the transportation, the delivery cost to get food to customers, it's -- I still believe it's a K-shaped economy. I know that Scott Bessent is talking about a C-shaped economy. I'm still thinking it's a K-shaped economy. And we have offerings for both products for more of the premiumization and nutritionally fortified, but also for the more affordable products. So that's how we're looking at it right now. We're watching it closely.

Okay. So staying maybe within Texture and Healthful Solutions is obviously, you've highlighted has been posting very solid volume growth and just to understand a little bit better what are the consumer trends that are driving that and where you see continued momentum for further growth? And particularly, if you could touch on things such as reformulations, et cetera, how that is going to play a key role within Texture and Healthful Solutions and your customer road map.

So we're seeing -- and we've been talking about it on the last number of earnings calls. We're seeing a lot of reformulations come our way, partly because of how we've reorganized our go-to-market model to engage with customers with co-creation and solutions briefs and solution selling, but also because volume growth is incredibly elusive for the entire industry, and everybody is trying to figure out exactly why. Is it the extreme economizing that's going on with consumers? Is it GLP-1s? Is it regulations where if they're having to remove synthetic dyes, they might as well make the product overall more clean label. So we're seeing growth coming from our clean label franchise. We're seeing products that are requiring to be protein fortified or having less sugar in them. And thus, we have our high-intensity natural sweetener products. But at the end of the day, the products always at the end of the day, have to taste great. And we're seeing incremental briefs for textural innovation because -- and there are so many stories, so many quotes, so many headlines if you read them. A lot in the confectionery space right now talking about multi-textured foods and texture being the new flavor. And we are being seen as the go-to provider for textural innovation. And that's why we're so excited about the Tate & Lyle acquisition because it's going to give us more texture tools in the toolbox to do that. So we think that's driving a lot of the growth right now just based on the strategy we have and the value propositions that we're offering for the industry that's looking to drive volume growth through innovation. The branded goods manufacturers because of the affordability challenge and because they took price up too high, lost share to private label. Private label then saw that as an opportunity and private label went very hard maybe 6, 9, 12 months ago to target a lot of that share. The CPG companies said, time out, what are we doing? We got to readjust here. They've lowered prices. They've gained back some of that volume. It's a battle. And we're there helping, enabling both drive innovation because at the end of the day, they both need innovation to drive sustainable volume growth. And we're there at that intersection to help them. That's what's happening, and that's what we're seeing, and that's what we're trying to do on the customers' behalf.

How much does your global footprint actually play a role here with maybe expertise and knowledge of having ingredient -- alternative ingredients to offset some of those changes?

It helps a lot because of the supply network that we have. So we can obviously ship products around the world, especially for the Global Texture and Healthful Solutions business. But really where it's helping is the transportation of ideas, the transfer of ideas and winning products in one geography that we then through our network can transfer to another geography. And a lot of our customers are multinational customers. And if something is working in one country, they'll want to roll it out into another country. And having a global presence being globally positioned helps with that as well.