Ladies and gentlemen, thank you for standing by and welcome to the Ingredion Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Heather Kos. Please go ahead.

Good morning, good afternoon, and good evening, and welcome to Ingredion's second quarter 2018 earnings call. Joining me on the call today are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and Chief Financial Officer. Our results were issued this morning and a press release that can be found on our website, ingredion.com. The slides accompanying this presentation can also be found on the website and were posted a few hours ago for your convenience. As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties. Actual results could differ materially from those predicted in the forward-looking statements, and Ingredion is under no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. During this call, we also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income, and adjusted effective tax rate, which are reconciled to U.S. GAAP measures and note to non-GAAP information included in our press release and in today's presentation appendix. Now, I'm pleased to turn the call over to Jim Zallie.

Thanks, Heather, and welcome to everyone joining us today. Before I discuss our second quarter results, I wanted to provide a brief perspective on our performance relative to our expectations. We are disappointed with our quarter two and year-to-date results and we are taking aggressive actions in response. In particular, our performance in North America has not contributed as we had anticipated where we were negatively impacted by operational headwinds. First, higher production costs, coupled with operational inefficiencies, resulted from our ongoing efforts to rebalance our starch inventories across our network. Second, freight inflation continued to impact our business. And third, we experienced softer than expected sweetener volumes leading to a weaker outlook for the second half of the year. We must be and we will be more agile in addressing and navigating these changes impacting our industry and our business. We are currently taking swift actions to improve our cost structure in response to inflationary headwinds, and we are optimizing our network capacity in North America in response to lower U.S./Canada production volumes. We established a $125 million Cost Smart savings target and formalized the program to deliver saving through cost of sales, including freight and SG&A reductions by the end of 2021. Savings will commence in the second half of 2018 and savings delivery momentum will increase each year of the program. Part of this program includes the cessation of wet-milling and production of high fructose corn syrup and industrial starches at our Stockton, California facility by the end of 2018. The conversion of Stockton to a shipping distribution station enables us to remain well positioned to service customers in the western United States. In addition to our actions to reduce costs, we will also be pursuing necessary pricing actions to mitigate inflationary impacts. Now, moving to the…

Thank you, Jim. Let me start by covering the highlights of the income statement. Net sales were up for the quarter. Higher volumes and price mix more than offset unfavorable foreign exchange. Gross profit margin was lower by 160 basis points. Weaker performance in North America, as well as higher tapioca costs in Asia-Pacific more than offset better performance in South America. Reported and adjusted operating incomes were $193 million and $201 million respectively. Reported operating income was lower than adjusted operating income by $8 million. The difference was due to $6 million of severance and other expenses associated with our Cost Smart program, while the balance was due to finance transformation. Our reported and adjusted earnings per share were $1.57 and $1.66 respectively. Moving to the net sales bridge, sales were up 3% versus last year. Volume contributed $46 million, while price mix contributed $14 million. This was partially offset by unfavorable FX of $21 million, primarily attributable to Argentina, Brazil, and Pakistan currency revaluations. As we look more closely by region, you can see unfavorable foreign exchange affected South America and EMEA, but was partially offset by favorable foreign exchange in Asia-Pacific and North America. In North America, volume was up 1%. Specialty volumes were up, but this was offset by U.S./Canada sweetener and industrial starch volumes. Price mix in North America was down given higher freight costs. In South America, volume was up 8% led by sweetener sales in Argentina given the prior year weak lap, as well as growth in the Andean region. Price mix was up driven by the pass-through of unfavorable foreign exchange in Argentina and Brazil, as well as higher raw material costs. EMEA had strong volume growth driven by Specialties in Europe and stronger demand in Pakistan. For the quarter, reported and…

Before we go to the Q&A session, I would like to conclude with the following comments after having been in my role for a little more than six months. We are operating with a strong sense of urgency to recover from the first half earnings setback and the impact it will have this year. Our actions at all levels of our company consist of a necessary focus on cost reduction, operational excellence, and pricing actions. Importantly, we are also driving commercial excellence and innovation with an intense focus on our customers. We will continue to use our strong balance sheet to invest in specialties growth opportunities, including specialties M&A. We remain committed to returning cash to shareholders. All of this is consistent with our commitment to deliver our long-term earnings growth algorithm. And now, we're glad to take your questions.

The first question is going to come from the line of Brett Hundley. Please go ahead.

Hey. Good morning, guys.

Hey, Brett.

Good morning, Brett.

My question is really centered on North America, and I wanted to ask a question on the U.S. So, historically or I guess since 2010, domestic HFCS disappearance has been declining by almost 2% a year. And then inside of that statistic, USDA data shows that domestic HF-55 has been roughly flat. However, over the past couple of years, it looks like 55 here in the States has been sliding more, maybe by about 60 bps a year. And I'm really wondering if that's going to accelerate going forward. It seems like large beverage companies here, if you read the transcripts of KO or Pepsi, it looks like they're really starting to gain momentum behind a push for zero-calorie options and things like that, while really focusing on healthier parts of their portfolio. So, I guess I have two questions surrounding this. Do you think that 55 demand is sliding even more now as a result? Number one. And then number two, what does that mean for the specialty sweetener market? And when I ask that question, not only am I asking about what it means for the specialty sweetener market, but also your participation in that potential growth of specialty sweeteners?

Yeah. So, let me take that. So, first of all, the data that you cited in relationship to HFCS-55, our data would show that over the last 10 years that HFCS-55 has declined probably in the same range of 2% as you had for the overall consolidated. But nonetheless, putting that aside, let me start by putting the sweetener market fundamentals into context. The total sweeteners volume for both industrial or non-food and food usages over the last number of years is relatively flat. There definitely has been growth in industrial usage or non-food, such as for renewable chemicals and/or as a fermentation substrate. However, HFCS has continued to decline. We produce sweeteners for primarily food grade applications. Thus, each player in the industry is impacted differently by their mix of sales to non-food versus food and uses across different customer bases and geographies. So, we believe that the fundamentals with us taking action to close production at Stockton does support solid fundamentals for HFCS – for us post our actions and for the marketplace. Hopefully, that answers your question.

Yeah, I appreciate that. I'm going to follow up offline, actually. And, I just have two other relatively quick ones. So, first of all, Jim Gray, do you guys have a 10b5 trading plan in place?

Well, currently we're in a quiet period up and through this call.

Okay.

All right.

And lastly, just on the evaluation of M&A, Jim Zallie, I think you were talking recently at a conference or with a media outlet, I can't remember, but, you were talking about evaluating small and large M&A for your company. And I wanted to ask you about the larger transactions right now and how you might evaluate those transactions or even pay for them in this marketplace? When the cost to consolidate larger companies, it is so elevated right now combined with a retreat in your share price more recently. I'm just curious, how you think about M&A going forward and if that maybe skews you down towards – towards smaller acquisitions over the near-term?

Yeah, you're referring to an interview that I did just last week with The World of Food Ingredients and Food Ingredients First where I received that question. And what I said is that we remain very focused on acquisitions that were going to be primarily, almost exclusively based on enhancing our Specialties portfolio and that are aligned with value propositions that are – such as wholesome clean label, health and nutrition, textural innovation. Those value propositions would be consistent with our M&A and Specialties M&A growth strategy. We're looking at, obviously, smaller tuck-in, bolt-ons which would be $300 million to $500 million range, as well as always keeping our options open to do something that could be transformational, should it arise. The beauty of our business is that we generate solid cash and have a very strong balance sheet that would afford us those options. So, we're always looking for Specialties M&A that is going to create shareholder value for the long term. So, we're very committed to the target of $2 billion in Specialties growth by 2022, 32% to 35% of our portfolio and M&A is an enabler to not only hit that target, but to exceed it.

Thanks so much.

The next question is going to come from the line of Akshay Jagdale. Please go ahead.

Akshay?

Akshay, your line is open.

Hi. Can you hear me?

Yes, we can.

Hey, Akshay.

Hi. Sorry, I just jumped from another call. I don't know if you addressed this already on your opening remarks, but can you – can you just talk about what you think the impact of your capacity rationalization plans will have or is having on pricing discussions? And on the commentary in your press release, you mentioned you're going to also take some pricing actions. So – but you have contracting season, right, that's probably not yet started, but how do you think the capacity rationalization will impact those conversation?

Yeah. The comments that I made earlier relating pricing actions are really in response to inflationary headwinds that we're experiencing this year. We talked about freight in quarter one continuing into quarter two, as well as just other inflationary pressures related to, say, chemicals and packaging, et cetera. So, those are necessary pricing actions that we are taking. And I really can't forward-look as to what the outlook is yet for 2019. It still is very early as you referenced, and it would be premature on my part to make any comments in that regard.

Just as a follow-up. My question is more about, do you think that your rationalization brings into balance the supply and demand for the industry given the challenges we've seen this summer as it relates to corn syrup or HFCS-55 demand at least?

Yeah. Let me let Jim Gray take a shot at that. Jim?

Yeah, Akshay. I mean, it's hard for us to comment on what the industry is doing. We know for ourselves that the cessation of wet-milling at Stockton and halting our production of high fructose and industrial starches there allows us to rebalance into our plants in the United States, Canada, and Mexico and that – that'll improve our utilization. And we think that gives us several years of headroom.

Perfect. I'll pass it along. Thank you.

Okay.

Our next question to come from the line of Farha Aslam. Please go ahead.

Good morning. This is Tim on for Farha.

Hi, Tim.

Hey, Tim.

Hi, Tim.

I just had a couple of questions surrounding North America. How are the starch inventories tracking against company expectations? And how is the freight inflation progressing versus company expectations? And have service levels improved since Q1?

Yeah. So, what I would say is that our starch network rebalancing efforts are well underway and good progress is being made. And I just want to take a moment to put this issue into context. We entered the year with an active plan to optimize starch production across different starch manufacturing facilities to support our global starch network. And this is – it's something we do routinely, because starch transports more easily, it's in a dry powder form, and we have three or four facilities that we flex across our network, and we're continuously looking to optimize based on how our customers change through contracting each year and where it's most optimal to get arbitrage. But when you do that, it's a complex undertaking and that's under normal circumstances. As we indicated in quarter one, we experienced uneven demand early in the year, which complicated an already complex project. And then, it was really further exacerbated by the trucking shortage coming out of the blocks in January. We also didn't execute, to be quite frank, as we typically do and we're actively working to remedy this. And we anticipate steady improvement in rebalancing our starch network with year-on-year improvement. And then, as it relates to freight, as we've indicated previously, we've already begun taking steps to mitigate the impacts we are experiencing. And we believe, for example, 2019 dry van impact should be less than in 2018, and we continue to monitor just the overall general inflationary market for freight. But both are progressing, I would say, well as we move into the second half of the year based on all the actions that we are taking.

Okay, great. Thank you. And just one follow-up question. What's driving the higher raw material costs in Pakistan, and how long does the company expect this issue will persist?

Yeah, Jim?

Okay. I mean, the higher raw material is corn and that's due to the size of their winter crop, which was smaller than expected. And we just lean more towards the second crop in the year.

Okay. Thank you. I'll pass it along.

Sure.

The next question is going to come from the line of David Driscoll. Please go ahead.

Good morning. This is Cornell Burnette, analyst filling for David.

Hi, Cornell.

Hey, Cornell.

Hi, Cornell.

Okay. Great. Just wanted to start off with and ask you, pardon me if I missed this on the beginning of the call, because I got on a little late, but what was the percentage decline in the core North American sweeteners in 2Q and then year-to-date?

Yeah. Hey, Cornell, we don't really talk about any volume declines within a country. And we talk about our sales variance at a region level, and that's the mix that I went through on the slides in the presentation.

Well, can you at least give us maybe just some sense of kind of how to scale kind of what's the exposure in North America of the core sweeteners that go into beverages and food, kind of given some of the headwinds that we've seen from those industries?

Yeah. I think maybe our comments on the change in our outlook, particularly driven within U.S./Canada, is really more – some of what we experienced in Q2 were really more what we expect to experience in the second half. Just as we read and you read, what we think the actions are taking place, particularly in the beverage market, we just are incorporating that into some of our outlook for the second half.

Got you. And then to go on a little bit further – maybe a little bit further out, can you just talk about, again in light of some of the recent actions, you've taken Stockton down and so forth, kind of what's the ability of kind of the North American business to grow perhaps once we lap some of these issues in freight, and get into a new year of new contracting, given some of the things that you've been doing on the production side?

Yeah. Cornell, this is Jim Zallie. So, with the actions we're taking with the Stockton repurposing, we believe the fundamentals in the sweetener market in North America remain solid. The actions we're taking to rebalance our starch network will provide headroom for growth into next year. What's unknown for everyone in the industry right now is the impacts of inflation, the unintended consequences of trade disputes in international tariffs and the pricing outlook. We've historically demonstrated that we can navigate these kind of market conditions given the strength of our business model. And additionally, prior to assuming our roles, both Jim and I led the North America business to its record level of profitability last year. We both deeply understand the market dynamics and the customer fundamentals and, thus, we feel, in answer to your question, that we have levers at our disposal to maintain and grow our profit pool.

Okay. Very good. And then, I guess, the last one for me is just kind of on the Cost Smart savings program. Should we think about all of those savings in theory kind of dropping to the bottom line? Or there's kind of reinvestments that you have targeted for a portion of those gross savings numbers that you cited?

Thanks, Cornell. Let me talk about how we're going to address Cost Smart going forward. We purposely describe our Cost Smart savings as it relates to cost of sales and freight, which will drive our gross margin and separately SG&A, which drives, what we call, our OpEx. We expect Cost Smart to provide a positive impact on gross margins and on our operating and expense ratio, which will be defined as SG&A as a percent of our net sales. And when we talk about the rate of the – run rate savings, so $2 million to $4 million starting in late 2018, this grows to $22 million to $34 million cumulatively in 2019, and then building to $125 million by year-end 2021 before inflationary effects. So when you think about inflation, we would expect that our net inflation for cost of sales, freight, and SG&A will really be less than our rate of revenue growth, okay? So the net, just going to have inflation, offset it with Cost Smart savings, but that rate of change from year-to-year will be less than our rate of revenue growth. Thus, we expect an improvement in gross margin and a reduction in our OpEx ratio over the program's life. And then furthermore, we'll come back and we'll update against Cost Smart at least twice a year.

Okay. Very good. Very helpful. Thanks a lot, and I'll pass it along.

Sure.

Next, we got to the line of Ken Zaslow. Please go ahead.

Good morning, guys. This is actually Omar filling in for Ken.

Hey, Omar.

Just quick question on sort of your growth algorithm. Do you guys still expect to hit the long-term growth targets that you guys initially laid out at your Analyst Day or is 2018 a refit on that base?

No. We are still committed to hitting the long-term earnings growth algorithm that was cited in our opening comments and that was, I think, further supported by my answer to Cornell's question, primarily related to North America which is obviously a big driver in our view on our ability to pull some levers in North America.

Got it. That's helpful. And with regards to the inflationary cost environment, what percentage of your portfolio is impacted by this just recent inflationary cost environment basically? Said differently, are you guys – what part of the portfolio is insulated from the recent headwinds just from a high level? If you could talk to just the way the contracts, just from – no specifics, but just high level from contract base or from a pricing power standpoint?

Jim, you want to take a shot?

Yeah. I'm trying to maybe clarify your question. In some countries, the method of contracting allows for some direct pass-through of costs. And for example, in the United States/Canada, there is some pass-through of changes in corn where our customers are sophisticated enough and willing to accept that risk and believe they can manage it better on their own, as well as we have some freight costs pass-throughs, okay? In other countries, the model is such that, if there's changes in either our underlying raw material or our manufacturing inputs, we price on a fairly close frequency. We may reprice four weeks, we may reprice in six- to eight-week increments. So generally, we're trying to make sure that we capture any changes in the underlying corn or tapioca raw material. We're also trying to capture changes in FX. If other manufacturing inputs tend to inflate our business model, it really allows us to absorb that and try and actually mitigate that as we look at pricing pass-throughs.

Got it. That's very helpful. I'll pass it on.

Okay.

And next, we have the line of Adam Samuelson. Please go ahead. Adam Samuelson - Goldman Sachs & Co. LLC: Yes. Good morning, everyone. Can you hear me?

Yes, we can.

Yes.

Hi, Adam. Good morning. Adam Samuelson - Goldman Sachs & Co. LLC: I apologize jumping between earnings calls. I'm just hoping for a little bit more color on the North American margins this quarter. And just thinking about the earnings bridge year-over-year and thinking about freight inflation, some of the headwinds on the starch utilization side, some of the sweetener volume pressures that you cited, is there any way to quantify kind of what each of those impacts were? And then I have a follow-up question on the back half of the year.

Yeah. Let me take a shot at that and then Jim can add some color commentary. So, this would be kind of a reset quarter two update from what we said in quarter one. But at the end of last year, we ended with North America operating income at $654 million. If one anticipated low- to mid-single-digit growth on top of that, you might've expected around $680 million of operating income in 2018. In quarter one, we said, we had $17 million of higher freight costs. $20 million of incremental production costs related to rebalancing our starch inventories and $10 million of commodity pricing pressures. In quarter two, these full year impacts remain as expected. However, in quarter two, our sweetener volumes were unexpectedly lower and production costs higher, given weaker customer demand and outlook. The full year sweetener impact against the most recent earnings forecast is expected to be an additional $20 million. Also, in our latest guidance, we've included an additional $5 million to $10 million of expense for operational inefficiencies across both starch and sweetener, which is a source of focus and opportunity as we see it as we move into the second half and into 2019. So hopefully, that's clear from a standpoint of what's new and what's changed quarter two versus quarter one. Adam Samuelson - Goldman Sachs & Co. LLC: That's – that's very helpful. And then just following up, as I think about the back half of the year, there is an expectation that the earnings growth improves from where we are, and I guess that the fourth quarter comp gets considerably easier given some of the issues that did happen in the fourth quarter of last year. But just from a year-on-year perspective at the corporate level, I mean, how do I think about the back half performance versus the first half? Is it just a better balance of utilization in North America that you don't have some of those kind of unabsorbed overhead or – just help me think about some of the mix there?

Adam, this is Jim Gray. Well, part of it is the lap of what we're facing both in North America, as well as in Asia-Pacific. So, to remind you, the tapioca shortfall really started surfacing in September-October of last year and that did impact us in Q4. Within North America, we believe that Mexico continues to perform well. And then, if you look at U.S./Canada, the efforts that we have begun here in the beginning of the year, as Jim has talked previously to what actions were taken with regard to freight, as well as how we've worked through our starch inventory rebalance, we think some of those effects mitigate the inflationary pressures and the additional production costs that we've seen and allow us to move into Q3, Q4, I think, with a – kind of a more stable view of margins within North America. Adam Samuelson - Goldman Sachs & Co. LLC: Okay. I appreciate the color. I'll pass it on. Thanks.

Okay. Thanks, Adam.

And at this time, there are no further questions in the queue.

Okay.

All right. Very good. All right. Well, I'd like to thank everyone for your time today. And that will conclude the call.