Ladies and gentlemen, thank you for standing by. Welcome to the Ingredion Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given to you at that time. As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to your host, Vice President of the Investor Relations and Corporate Communications, Heather Kos. Please go ahead.

Good morning, good afternoon, and good evening and welcome to Ingredion's third quarter 2018 earnings call. Joining me on the call are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and Chief Financial Officer. Our results were issued this morning in 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. The Ingredion team is working effectively to navigate both the challenges of the macro environment and capitalize on the opportunities presented by the shifts in consumer preferences and changing customer landscape. We are becoming a more agile company. We are aligning our resources and cost base to drive long-term profitability and are making progress in better positioning the company for future growth. With that said, we are disappointed with the third quarter's results. Specifically, in the latter half of the quarter, our results were impacted by unexpected events. We experienced the effects of rapidly changing foreign currencies, primarily in Argentina, Brazil, and Pakistan, and we responded to unplanned power outages at our largest manufacturing facility in North America. We are addressing these challenges by aggressively driving operational improvements, structurally reducing costs, and taking necessary pricing actions, while ensuring we deliver on our customer experience commitments. To accelerate operational execution, we have restructured the North America supply chain leadership, bringing intense focus to freight cost optimization and reducing complexity. We continue to make progress on rebalancing starch production and inventories across our network. Further, to better align our manufacturing cost structure to future sweetener demand, we have progressed the transition of Stockton customer volume and service to other plants in our network. We anticipate the cessation of production in Stockton by the end of November. Now, moving to the third quarter results. Ingredion volumes were flat. Specialty sales growth was offset by core volume decline. North America and South America operating incomes were down. Asia-Pacific continued to be impacted in the quarter by extraordinary tapioca costs, although less than in the first half of the year due to recent pricing actions. EMEA continued to perform well in spite of forex headwinds with…

Thank you, Jim. I'll start by covering the highlights of the income statement. Net sales were down for the quarter. Unfavorable foreign exchange more than offset favorable price/mix. Gross profit margin was lower by 300 basis points driven by weaker performance in North America and Asia-Pacific and foreign exchange headwinds in South America. Reported and adjusted operating incomes were $155 million and $189 million respectively. Reported operating income was lower than adjusted operating income by $34 million. The difference was due to $31 million of restructuring charges associated with our Stockton, California facility while the balance was attributable to our Cost Smart SG&A initiatives. Our reported and adjusted earnings per share were $1.32 and $1.70 respectively. Moving to the net sales bridge, our sales were down 2% versus last year. Unfavorable FX of $76 million was primarily attributable to currency devaluations at Argentina, Brazil, and Pakistan. Volume declines were $6 million. This was partially offset by $47 million of favorable price/mix. By region, you can see unfavorable foreign exchange affected all four regions but was most pronounced in South America and EMEA. In North America, volume was flat year-over-year. Specialty volumes were up but this was offset by lower sweetener volumes. Price/mix in North America was down given higher freight costs. In South America, volume was down 4% due to weaker brewery sales. Price/mix was up driven by the pass-through of higher raw material costs and foreign exchange in Argentina and Brazil. APAC volume was down due to seasonal issues in Korea. EMEA had strong volume growth driven by specialties in Europe and Pakistan core demand. For the quarter, reported and adjusted operating income decreased $76 million and $50 million respectively. North America operating income decreased $39 million due to higher production costs driven primarily by several unexpected power outages…

Okay. I would like to announce today that in keeping with our strong commitment to sustainability, we have posted a Global Reporting Initiative, a GRI Index, to the sustainability page of our website. This further aligns us with voluntary reporting requirements and the expectations of our stakeholders. In closing, our leadership team remains focused and we are as committed as ever to drive operational excellence and win with customers. We are tackling our challenges, making the necessary changes to strengthen our business, and navigating the impacts to our industry and business. Our global organization is highly engaged in refining and evolving our path to profitable growth. This centers on continuing to deliver exceptional customer value by being easy to do business with and being a true innovation partner. And as we have demonstrated, we will continue to use our strong balance sheet to invest in specialties growth opportunities and pursue M&A. We remain committed to delivering shareholder value. And now, let's open the call to questions.

Beth, we're ready for questions.

And our first question comes from the line of BMO Capital Markets. Please state your name.

Hello?

Hi, there.

Just a couple of questions that I have. One is, can you talk about how the outage actually occurred? And then what are the ramifications to kind of cleaning it up and what's the timeframe to which that'll happen?

Sure, very much, yeah. So very unexpectedly, we experienced three successive power failures in our main substation at Argo over a three-week period. The outage is basically they shut down our boilers, and a plant of Argo's size takes 7 to 10 days to stabilize production per incident. We believe complete utility outages of this magnitude into three weeks are extraordinary and something we've not experienced in the last three decades at Argo. And so those issues are behind us. They hit us in the middle part of the quarter and the impact financially impacted us in the latter part of the quarter.

And what's the timeframe? So it's completely past us? Is it...?

It is past us and the plant is operating at normal production rates right now and has been for the last few weeks.

So then when I think about 2019 and beyond, how much of the issues in North America will reoccur and will you be able to recover and get to a more sustainable margin? How do you think of that given all the issues that have happened in North America? And then on top of that, just also thinking about the high fructose corn syrup demand that has come out, how do I frame the North American business for 2019-2020?

Sure. So let me start by trying to answer the question what happened in North America this quarter and year-to-date and then try to address all of your questions. I mean, we've clearly had a challenging year and are making the necessary changes to address the situation in North America. So off our North America 2017 operating income base of $654 million last year, let's walk through the full year outlook bridge. Starting with the most recent events, the unplanned power outages at Argo, we estimate the full year impact of that to be $10 million, the majority of which hit us in this quarter. Now, let's move to something we talked about in quarter one which was freight and then talk also about ME inflation, which we call manufacturing expense inflation, which has impacted us in the year and also commodity pricing pressures combined, so that bucket. We estimate the full year impact of these to be $40 million. Next, sweetener volumes and the associated impact on our fixed cost absorption in our network; we estimate that impact to be $20 million. Our starch rebalancing is estimated to be $20 million and some operational inefficiencies are estimated to be $10 million. So in regards to which of those headwinds for the full year are transitory versus structural, what I would say is at this point in the year there are many unknowns related to the uncertainties in the macro economy, the trade situation, incremental inflation beyond what we've experienced in 2018 to 2019 or 2018 and then going into 2019, and then obviously 2019 contracting which is an unknown. So we expect the impact of the Argo outage and operational inefficiencies to be short-term transitory effects. Our team is working very hard against the $40 million headwinds related to freight, ME inflation, and commodity margin pressures within the industry that are being felt within the industry. We believe the $20 million impact attributable to starch rebalancing should steadily improve throughout 2019 and the $20 million impact of sweetener volumes to be structural in nature. But in response, we've announced the cessation of wet-milling at Stockton which should yield $69 million of savings. So we are obviously taking very aggressive actions and moving with a sense of urgency in our North America business. As mentioned, we restructured our supply chain leadership, bringing intense focus to freight cost optimization, and working to reduce complexity in our production facilities. So hopefully that walk provides you a very clear explanation of what's happened in 2018 and our best view right now about what's transitory versus structural and the best view we have right now for 2019.

Great and I appreciate it. Thank you very much.

Thanks, Ken.

Our next question comes from the line of Credit Suisse Securities. Please state your name. Robert Moskow - Credit Suisse Securities (USA) LLC: ...kind of similar. What is the...?

Hey, Rob, you got cut off at the beginning of your question. Can you repeat it? I'm so sorry. Robert Moskow - Credit Suisse Securities (USA) LLC: Sure. My question is as you go into price negotiations, with volumes declining in sweeteners what's the industry logic for trying to get a price increase? Is it to offset commodity inflation because I would imagine corn is pretty flattish? And when are we going to know what the conclusion of that is? Will it be in January like we normally hear?

Yeah. Typically, we obviously don't comment at this time of year regarding contracting, but we will in quarter one. Certainly, we believe the entire industry is feeling inflationary impacts right now, and I'm going to let, Jim, make a comment related to corn because I think it is something that we didn't want to kind of highlight in relationship to what we call commodity price – commodity margin pressures. Jim?

Yeah. So, hey, Rob, one of the things that we've heard a couple of comments that corn might be flattish for the year, but also recognize that part of our corn cost is offset by our co-products – the sale of our co-products. And what we're seeing is that with the soybeans backing up in the U.S., those have really pressured some co-product pricing which in that increases our overall cost of corn. And I'd say that – it's a pretty unique dislocation related to the current trade disputes between the U.S. and China. The carryout expected on soybeans is pretty high for the end of this year so, we don't see that unwinding soon. I do think that the layout of our cost of corn or the net cost of our corn will be higher in the first half of 2019. Robert Moskow - Credit Suisse Securities (USA) LLC: Okay, so two follow-ups on that. Does that mean that you think all of your competitors will face a similar net corn cost situation, and therefore use that as part of the logic? And then secondly, I guess on the starch rebalancing, can you give a little more detail on what you're rebalancing? I mean, does that include just the structural shift away from sweeteners and your starch, cream and into more value-added starch products. And if so, I think you said that that was – is that a structural cost or is it something that – I can't remember if you said it was structural or not because it would seemed structural like that means just demand is shifting away from the sweetener side?

Hey, Rob. I'll finish up on corn and then – and hand the starch inventory rebalancing back to Jim. But with regard to corn, I can't say exactly what our competitors' face, but what – some of the publicly available quotes on things like cornmeal or corn oil, it's pretty easy to see the trend in those, and those are positively quoted from multiple sources. Maybe Jim... Robert Moskow - Credit Suisse Securities (USA) LLC: Okay.

...you can address...

Yeah. So just in relationship to the starch production imbalance that we refer to, we actually talked about this in earlier quarters because it started to impact us in quarter one, if you remember, primarily on our industrial starch volumes, which typically are much larger in quantity because they're shipped in bulk. And due to – it's a long time ago but due to some very cold weather in the harshest part of the winter, we suffered some production imbalances at the same time as we were trying to optimize our North America production across three different plants. And so those are challenging moves when things are going normal and then throw on top of it a weather-related issue that impacted industrial starch. And also there was some softer customer demand related to those same weather-related issues and supply chain issues that impacted the entire industry or with trucking availability, et cetera. So throughout this year, we've been working to rebalance our starch production networks and we see the situation improving and steadily improving throughout 2019. And that's why we said against that $20 million headwind, we see us mitigating to offsetting most of that as we go through 2019. Robert Moskow - Credit Suisse Securities (USA) LLC: Okay. So, it has nothing to do with shifting your stream of how the corn flows through the plant, whether it goes into starch or sweeteners. It's really just within – okay.

No. No. It's primarily within our starch network. It's primarily optimizing lines that we'd produce on either food or industrial; and to be quite frank, it's also related to trying to accommodate growth in other base starches that typically we wouldn't produce in North America because of growth in specialty, tapioca, potato and rice that typically would be produced outside of North America, but to accommodate customer needs, we've tried to put those in. And when you do that, you create challenges for a plant that's dedicated to corn. Robert Moskow - Credit Suisse Securities (USA) LLC: Thank you.

Thank you. And our next question comes from the line of Jefferies, LLC. Your line is open, please state your name.

Hi. It's Akshay Jagdale, Jefferies. Can you hear me?

Yes, we can. Hi, Akshay.

Hi.

Perfect. Hi. Thank you for that bridge, that's super helpful. I just want to make sure I caught all the buckets. So, if I can repeat them? Power outage is $10 million; freight, manufacturing inefficiencies, and commodity costs are $40 million; sweetener demand is $20 million; rebalancing is $20 million; and there was another $10 million...

Yeah.

...which was also operational inefficiencies, is that right?

Yeah. It's kind of a catch-all bucket, but, yes, that's been...

Okay. So...

Hey, Akshay. Sorry. What we were describing is this freight inflation. Some of the manufacturing inputs, we've had inflation in chemicals and packaging.

Packaging.

And then we've got some commodity margin pressures. That bucket. We've kind of combined this $40 million because it's largely inflationary or changes in trade regulations that have impacted various prices in our inputs.

Yeah.

Okay.

So...

The operational efficiencies are just more miscellaneous stuff around just various smaller one-timers around different plants.

Right.

And that would – okay.

Right. So, I mean none of that, I guess, is really price pressure related to overcapacity per se, right? I mean, the sweetener demand and the rebalancing gets the industry back in balance on that piece. Is that the right way to think about it? I mean, all of these things aren't easy to get back and it takes time, but this is not a structural competitive issue, right? None of these buckets seem to me like they are related to structural competition increasing and pricing coming down that way. Is that a fair statement?

Well, I mean I think the one thing that Jim did highlight though is that when we look at our sweetener volumes, and particularly sweetener that's probably sold into beverages, we've stated for a long time that we see that volume declining over time. So, we do expect about $20 million of the impact 2018 versus 2017 in North America due to sweetener volumes to be structural, okay? So now we're offsetting that as we transition. We ceased wet-milling at Stockton and we transitioned that volume to other plants. That'll be about a $6 million to $9 million type of annual savings. But right now, I mean in front of us, we would look at about $20 million of impact 2018 versus 2017.

Got it. And just one last one on the contracting. So, the point you're making is net corn costs, whatever people's views are, it's a bit higher than that. And what we have heard about contacting is that pricing is up and it depends on which product, obviously, to estimate how much. But would it be your view that – I mean, what is your view on capacity utilization because I'm guessing you don't want to comment on margins outlook for next year. But capacity utilization, what's the view this year versus last year as you're contracting? Thank you.

Yeah. I think that what I would like to say in relationship to capacity utilization is that we believe with the Stockton closure that that certainly helps from a standpoint of our network from an industry balance standpoint and we believe that the industry continues to operate at high capacity utilization rates.

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

Thanks, Akshay.

Our next question comes from the line of Citi Investment Research. Your line is open. Please state your name.

Great. Thank you. Hi. It's David Driscoll. Good morning, everybody.

Hey, David.

I wanted to follow on these North American questions. So, the biggest topic that I hear from some of the competitors is that Ingredion is just more exposed to the freight market, the truck market and that you guys just have a different cost structure than they do. So, to be honest with you, I'm not clear on how you will recover all those freight costs in light of the fact that that cost moves so much relative to rail, and does this put you in a difficult spot in recovering those freight costs?

Well, let me take a shot at it, and then let me ask Jim to add some additional commentary. So, because we have, I think, relative to the other players in the industry, a large specialty starch business that is shipped by dry van, dry van was the first freight category out of the gate in 2018 to get hit with pretty steep increases in price. And we see though continued freight inflation that's going to have impact and is impacting rail and will impact ocean freight as well. But because of our specialty starch dry van shipments being relatively larger probably in comparison to other industry players, that's been a headwind for us. We have made significant progress in working with customers and our contract terms have been updated with new freight rates where possible. We're also enforcing longer lead times, which should mitigate the risk of having to enter the spot market for example for last-minute shipping. And we're working very hard to mitigate the impacts that we experienced this year, but also certainly there's going to be additional freight inflation that the industry is going to experience and we're seeing that in some of the earnings releases, I think, in the CPG world right now. But this has been an intense area of focus for us starting immediately in quarter one. And I would say we've actually made very good progress working with our customers to mitigate some of the impacts and are continuing to do that. And then we would also move as it relates to pricing for 2019 as well. And Jim, do you want...

Could I follow up...?

Hey, David, may I just follow up? This is Jim Gray, that when you're thinking about the value of food starch coming into a customer and the kind of where that sells for on a price per ton basis, the cost of the freight is a smaller proportion of that total cost to the customer. So, obviously, if there is changes there, you can also – I think there is – and we have more confidence that those can be mitigated some way. There's either ways you can change between us and our customer where the inventories are held to help make the transportation cost more efficient and lower and/or the value of – or the cost of the freight change relative to the cost of the final product is lower. I think if you move to more of a syrup business where you have tanker trucks or railcar tankers; there the freight cost is more expensive given the uniqueness of the asset. And so, there, I would expect to see, if you have freight inflation that it's going to impact, it will be more of an issue in terms of managing through with customers.

Two quick follow-ups On the sweetener volumes in North America, I mean, the one place that I find a lot of investors keep asking me questions about is that it's been widely known for years that high-fructose corn syrup demand is going down. You guys have called it out though this year as like a significant headwind; but your competitors, they haven't. So, what's the difference between Ingredion sweetener issues and issues in the industry recognizing that volumes have been in decline for many years now? So, I guess I'm not perceiving the sensitivity on how much your sweetener volumes went down and why it became such a headwind. And then somewhere in this thing, could you just wrap up with North American volume outlook? Is this a flat volume market for you guys on a go-forward basis?

Yeah. Let me take your first question, and let me have Jim answer the last question. So, this is actually also something that we tried to provide some perspective on last quarter because it is a very important question and it's a very good question. So let me try to put the sweetener market fundamentals into context. Total sweeteners volume for industrial and food usage has been flat over the last few years. But there's definitely been growth for industrial glucose usage such as it's used as a feedstock for renewable chemicals or is a fermentation substrate. However, HFCS has continued to decline. And I do want to highlight something that HFCS declined this particular year for the industry is twice the rate of in previous years. So, it is declining this particular year at a little bit of a steeper decline. In addition, we, Ingredion, produce sweeteners primarily for food grade applications. And each industry player is impacted differently by their mix of sales for industrial use like I just described versus food end-uses and also across the customer base and geographies. So we are going to be impacted differently, by say, other industry players but I think it is accurate to say that over the last number of years, sweetener volumes are – overall, the category is flat. HFCS is declining. It's declining this year at an increased rate in comparison to previous years. And over this period of time, uses for industrial applications have been actually increasing which has been offsetting some of that HFCS decline and were impacted differently because we're primarily food. And again, where we're located with customers and geographies is going to be different. So, Jim, I'm going to ask you to give a comment on the volume outlook.

Sure. I mean, David, overall, when – I think your question is the North America volume outlook flat? I would say that it actually improves as our product sales mix changes over time, year-to-year, as corn changes we're going to pass through changes in corn, so you take that out of the equation. Fundamentally, as we sell more specialty products, we're going to see higher average sales prices per ton and that's going to actually improve our product sales mix over time and we will see sales growth in North America from that.

Thank you so much. I'll pass it along.

Thanks, David.

And our last question comes from the line of Goldman Sachs. Your line is open, please state your name.

Adam? Adam Samuelson - Goldman Sachs & Co. LLC: Hello. Do you hear me?

Hey.

Yeah. We can hear you now. Adam Samuelson - Goldman Sachs & Co. LLC: I apologize, jumping between conference calls. Can we – just the first question on capital deployment. There's the big step up in buyback in the quarter, should we see that as any signal about the appetite or the attractiveness of M&A in the current environment and the opportunities that you might see to grow the specialty business inorganically today?

Yeah. So, the share repurchase authorization from the board and the accelerated share repurchase, I think, just shows a confidence in the value of the company and the value of the stock. But we have several specialty growth platforms that we're pursuing which we have M&A opportunities to invest and which will help accelerate our specialties growth position for the future. So, we believe our solid cash generation enables us to execute M&A and specialty investments while being mindful of the return of capital to shareholders. So, we are very confident regarding the cash deployment aspect of things. Adam Samuelson - Goldman Sachs & Co. LLC: Okay. And then just to follow up on some of the profit bridge details that you gave thinking about 2019 and those were very helpful. The material kind of inflation bucket, the $40 million versus 2017 baseline, I think, Jim, your comments where you're working diligently to recover those. I just want to be clear that there – you were expecting additional inflation on top of that $40 million bucket in 2019. So, is the goal to be getting pricing to recover to 40-plus whatever incremental you get? And then, if so or how do we think about how Cost Smart is a part of that or incremental to that recovery?

Let me provide the clarification question and let me turn Cost Smart over to Jim Gray. So, the freight bucket is freight inflation we've experienced this year. ME inflation, we talked about, say, packaging and chemicals, et cetera, additional. And then, in addition, we had commodity margin pressures that we've talked about as well. So, that's a bucket that we are working aggressively from a standpoint of offsetting and to mitigate as we head into next year. And we are making progress against a number of those and I talked about the freight specifically. Let me turn it over to Jim to talk about the other aspect.

Well – and just to follow on that. I do think, Adam, that you've characterized it correctly. There was end-year inflation and there is some commodity margin pressures that have impacted us in 2018. At this point and in the middle of contracting season, et cetera, it's really an unknown to us. We'll comment more as we get into next year. I think with regard to Cost Smart specifically though, we are taking actions in Cost Smart against our SG&A, our operating expense globally. And we are very much thinking about what's the wage inflation that we'll encounter in each country, how are we offsetting that, how are we actually trying to restructure; and then move to a leaner, more streamlined and kind of agile support function as well as a supply chain function here that's kind of impacts our SG&A in total and as a percent of our net sales as we go forward. Adam Samuelson - Goldman Sachs & Co. LLC: All right. And I just want to be clear because there's the two parts to the customer; there's the SG&A part, which is very clear. The $40 million bucket that you had talked about in the prepared remarks, those seemed like almost exclusively in COGS or at the gross profit level; and there's kind of gross productivity actions within Cost Smart as well. And so on top of the $40 million you've experienced in 2018 relative to the 2017 base, we would think that there would be incremental inflation year-on-year. And I'm just trying to make sure – and I start thinking about the 2019 versus 2018 bridge, kind of is Cost Smart going after the inflation 2018 – 2019 versus 2018 or do you think you can actually recover the 2019 versus 2017 inflation kind of gross?

Well, so in the $40 million kind of inflationary bucket that we highlighted, so we talked about freight, which in our accounting is actually above net sales, and then also the commodity margin pressure is really more against our cost of corn. And so within that overall bucket, you do have some manufacturing input inflation this year that we're trying to address as we think about pricing and contracting for 2019. Cost Smart builds upon that as we go forward for 2019, 2020, 2021. Cost Smart cost of sales is really more trying to look at how we affect the kind of permanent changes within our manufacturing expense and with overall how the network comes together. So, I think some of that bucket that you've attributed hits us in different line items within our P&L but the Cost Smart works from our 2018 base forward. Adam Samuelson - Goldman Sachs & Co. LLC: Okay. All right. That's helpful. I'll pass it on. Thank you.

Okay.

And that is all the questions that we have at this time. I'm turning it back over to the host.

I'd like to thank you for your time today. And if you have any follow-up questions, just feel free to give me a call. Thank you.

And ladies and gentleman, that does conclude our conference for today. Thank for your participation and for using the AT&T Executive TeleConferencing Services. You may now disconnect.