Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ingredion Inc (INGR, Financial) reported a record second quarter for operating income, with adjusted operating income up 8% and gross margins up 240 basis points.
- The company experienced strong volume growth across all segments, particularly in texture and healthful solutions, which saw an 8% increase in net sales volumes.
- Ingredion Inc (INGR) benefited from lower input costs and greater fixed cost absorption, contributing to profit growth.
- The company has initiated a multiyear cost savings program called 'cost to compete,' targeting $50 million in run-rate savings by the end of 2025, with $18 million already identified.
- Ingredion Inc (INGR) increased its investment and ownership of PureCircle by $40 million, taking its equity stake to 98%, reflecting strong growth in its sugar reduction business.
Negative Points
- Net sales were down 9% year-over-year, impacted by the pass-through of lower raw material costs and the exit from the South Korea business.
- The texture and healthful solutions segment experienced pricing adjustments and inventory downgrades, which negatively impacted profitability.
- The protein fortification business remains loss-making, although efforts are underway to improve its financial health.
- The company faces mixed results in the foodservice sector, with some quick-service restaurants experiencing month-over-month declines in traffic.
- Ingredion Inc (INGR) has seen a decline in net sales for its Food & Industrial Ingredients segments in LATAM and US/Canada, driven by lower price mix due to the pass-through of lower corn costs.
Q & A Highlights
Q: To unpack your end user demand versus restock that you called out in the prepared remarks. I'm just wondering if you can help us with any insight that you have on maybe your distributor inventory levels and as it's related, just what's assumed in the high and low end of the guide for the full year from a volume perspective? Thank you.
A: Our second half is lapping prior year customer destocking that we believe is no longer evident in the supply chain. Our second quarter's strong volume growth builds off of the prior three quarters' trend line that we've been reporting on. Our belief is that consumers have not just started this past quarter to economize, but have been economizing over the past year. Despite this, we're seeing an upward trend in volume growth. Given the breadth of our ingredient portfolio and the diversity of our customer base across branded CPG, private label, foodservice, along with the affordability of our ingredients and our geographic diversification, we believe our growth assumptions are reasonable. Distributors are replenishing inventories now, and we take that as a good sign going forward.
Q: I wanted to follow up then on the gross margin expansion. Three big levers that I see there and I'm hoping you can maybe help me quantify or contextualize those levers. And you've got the improving demand backdrop. You've got the declining commodities backdrop. And then you've got these efforts that you're making internally to improve your operations. So maybe parse out those levers for us and help us understand as we see the commodities environment continued to trend lower, how much you can hold on to that as we think about the 2025 bridge? Thank you.
A: You're always going to benefit a little bit from an expectation of your raw material cost and if your raw material costs come in lower. But really it's the volume growth providing some fixed cost absorption. We highlighted that last year as it was a tremendous headwind and so as that comes back, particularly in our texture and healthful businesses, you just get some tremendous fixed cost absorption. Additionally, we're in our third year as a global operations team under our new model, really running at harmonizing things like our internal savings metrics or procurement team. So there are some internal initiatives that we're taking just on a day-to-day basis to drive operating excellence. This will continue as we go into '25 and '26.
Q: I just wanted to ask at a high level with your guidance at the EBIT level, you didn't change that for the year, the second quarter came in better understanding of some moving parts on price costs. And otherwise that seems like margin expectations moved up. So I guess was there more of a pull-forward or was something temporary from a price cost perspective in 2Q that you don't expect to recur or has anything changed on your view in the second half? Thanks.
A: Mid-single digit OP income growth implies a range. We're probably more towards the upper end of that range. Q2 really confirmed some of the dynamics in the business that we wanted to see impacting gross margin, and we have good momentum behind cost to compete. So I think that gives us confidence when you look at Q3 and Q4 for this year, some pretty high OP income growth expected.
Q: Can you help us think about the continuation of share repurchase activity versus the M&A pipeline maybe as it sits today and are you seeing more interesting things, and if you are kind of any framing on sizing of those and just remind us how you'd approach the return and accretion targets for any M&A?
A: With $66 million worth of shares repurchased in the first half and we definitely striving towards $100 million for the full year, could be more. We're always considering where the Ingredion stock price is trading relative to the market and our intrinsic value. We look at that versus the returns that we're getting on organic investment and potential M&A. We have an active M&A pipeline that we're always nurturing and we have prospects that we're advancing through that pipeline. Those will be anything that can enhance the value propositions to support primarily the texture and healthful solutions. We also want to use some of that capital wisely for reliability, investments for these very strong cash generative businesses. We have a number of projects for organic growth investment as well as some cost savings. We are confident in our ability to deploy cash effectively.
Q: The LATAM business has had very strong results. Can you provide more color on pulling that apart a little bit between Mexico, which seems like it's had some tailwinds because of sugar prices versus the traditional South American business and how we should think about those two parts of the geography moving forward through the second half? Thanks.
A: Our Mexico business continued to generate record results in quarter two, driven by increased sweetener demand and higher sugar prices. In Argentina, the peso did not devalue at the level that we had expected, which drove strong results from our Argentina JV in the period. In addition, our Brazil results improved on volume growth and against the lap in higher energy costs due to the biomass boiler startup in Q2 of 2023. Lastly, a large customer served by our Colombia business that did not pull any volume in quarter one has commenced their full year purchase obligations in quarter two, and we expect them to meet their full year purchase commitments by the end of the year.
Q: Both your food and industrial segment margins are tracking towards the higher end of the guidance range. You talked about a lot of positive factors that should impact your margins over the balance of the year. What are the factors that would cause that to moderate and it includes the industrial segments?
A: When you take the first half for both food industrial ingredients US/CAN as well as food industrial ingredients LATAM, you got to put Q1 into the math for the first half. When you look at the second half in terms of the OI margin range, it's really one factor because several things. We sort of have an angle on where the price levels are because we've generally concluded contracting and we know what that flow rate is. We know where the raw material cost is going to be, and we've largely hedged those positions. In general, we're seeing co-product value relative to corn, it's moving a little bit, but wasn't moving nearly as much as last year. So I think that's going to basically support gross margins for these two businesses. Other than that, we probably do see some volume, but not a tremendous amount of volume growth, but some volume growth and upside in both of these businesses.
Q: Can you provide more clarity on the cost process and how you're thinking about that for the balance of the year, especially relative to the $50 million over the course of two years?
A: When we look at the cost to complete program and we put out that target for $50 million of run rate savings at the end of year two, it's really we completed a refresh of our strategy
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
