Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Ingredion Incorporated Earnings Conference Call. At this time, all participant lines are in listen-only mode. [Operator Instructions] Please be advised that today's conference maybe recorded. [Operator Instructions] I would now like to hand the conference to your host today, Ms. Tiffany Willis, Vice President of Investor Relations and Corporate Communications Officer. Please go ahead.

Thank you, Liz. Good morning everyone, and welcome to Ingredion's third quarter 2020 earnings call. I'm Tiffany Willis, Vice President of Investor Relations and Corporate Communications Officer. On today's call are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and Chief Financial Officer. We issued our results yesterday in a press release that can be found on our Web site ingredion.com in the Investors section. The slides accompanying this presentation can also be found on the Web site and were posted yesterday 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. These statements include expectations and assumptions regarding the company's future operations and financial performance, including the impact of the COVID-19 pandemic. Actual results could differ materially from those predicted in the forward-looking statements, and Ingredion assumes 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 yesterday's press presentation and 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 in Note two non-GAAP information included in our press release and in today's presentation appendix. Now, I am pleased to turn the call over to Jim Zallie.

Thank you, Tiffany, and good morning, everyone. As societies around the world enter new phases of the pandemic and continue to grapple with its impact we at Ingredion remain guided by our values and three priorities that we established at the beginning of the crisis. As part of our Care First value, our employees' safety, health, and overall wellness remains our top priority. We've taken measures and applied learnings throughout the year to keep our employees safe, and as a result, I'm pleased to say that to date we've had no [technical difficulty]. We have also been supporting our employees' needs to balance their personal and professional obligations, which has allowed us to productively progress both our operational and strategic agendas. Our second priority has been to support the communities in which we operate, and I'm proud to say that our employees have really leaned in. Consistent with our value of Everyone Belongs, our employees around the world have shown tremendous support for racial justice as we've elevated our commitment to diversity, equity, and inclusion. As a company we have enhanced our internal programs, [technical difficulty] involvement and financial contributions. As an integral part of the food supply chain, we're also working to do our part to address the growing problem of food insecurity in the communities in which we operate, and again, I'm proud of our company's and employees' efforts to give back through charitable donations and volunteerism. All of this is in alignment with our purpose to make life better. Lastly, we've maintained an intense focus on business continuity on behalf of our customers which has served them, and in turn served us [technical difficulty] and SKUs, and this has allowed us to get even closer to them during periods of swings in consumer demand. We understand the…

Hey, Jim, let me just pardon you. I think we just need to try and dial back in because the Polycom is breaking up.

Okay, let's go back in.

Okay, so let's…

Sorry, just one minute. We'll pause.

Please continue.

It's page seven, slide seven, Q3 2020 Performance.

Please continue.

Okay. We're going to get started again. We had a little technical difficulty. So I'm starting with slide seven, and I'm going to start with the third quarter. So, turning our attention to the third quarter, we were pleased with our operational execution and financial results in the face of a challenging global environment. For the quarter, our global net sales were down 5% compared to the year-ago period. Absent foreign exchange impacts of $38 million, net sales were down 2% versus prior year. Quarter three results were sequentially better than the second quarter's 13% year-over-year decline in net sales. Adjusted operating income for the quarter was down 7% year-over-year, and down 4% absent foreign exchange translation impacts. Versus the second quarter's 29% decline in operating income, quarter three results demonstrated improved volume demand and better fixed cost absorption. Moving to our third quarter regional results let me begin with South America. South America sales were down 9% versus prior year. However absent foreign exchange, sales were up 7% as favorable price more than offset a modest volume decline. Operating income was $29 million, up 7% versus prior year as favorable price mix more than offset foreign exchange impacts. Excluding foreign exchange impacts, adjusted operating income was up 30% driven by strong price mix. To further highlight South America, we have seen a sequential improvement in volume demand. Consumer activity is returning to informal channels albeit not to 2019 levels. We have seen a strong recovery in sales for brewing ingredients and steadily improving sweetener sales. In addition, the team has managed pricing actions very well given changing customer demand patterns as well as fluctuations in costs and foreign exchange. Shifting to EMEA, our sales were up 2% for the quarter. The increase was largely attributable to favorable volume and…

Thank you, Jim. Net sales of $1,574 million were down 5% for the quarter versus prior year. Gross profit margin was 21.7%, down 15 basis points. Reported and adjusted operating incomes were $153 million and $170 million respectively. Reported operating income was lower than adjusted operating income due to asset closures and restructuring costs related to Cost Smart, acquisition and integration costs related to PureCircle and the impact of the severe Derecho weather which swept through Iowa in the month of August. Our reported and adjusted earnings per share were $1.36 and $1.77 respectively. Third quarter net sales $1,574 million were down 5% versus prior year. We experienced negative foreign exchange impacts of $38 million. Sales volume decline of $28 million was driven primarily by COVID-19 impacts around the world on volume demand. Unfavorable price mix had a small impact of $6 million, largely due to lower raw material costs in some geographies and related pass-through to customers. In North America, net sales were down 6% versus prior year due to sales volume decline of 3% and price mix decline of 3%, driven primarily by the pass-through of lower corn costs to customers with variable pricing contracts. South American net sales were down 9%, driven by a negative 16% impact from foreign exchange weakness. 3% sales volume decline was more than offset by strong price mix, delivering 10 percentage points of favorability. In Asia Pacific, net sales were up 1%, driven by the inclusion of PureCircle. Excluding PureCircle, net sales were down 3%, driven by the pass-through of lower tapioca costs in Thailand to our customers. EMEA net sales were up 2%, driven by higher volume and favorable price mix in Pakistan which offset foreign exchange impacts. For the quarter, reported operating income decreased $12 million, while adjusted operating income…

Thanks, Jim. Our driving growth roadmap continues to provide the direction for the execution of our strategy and value creation. We continue to make meaningful progress against each one of our specialty growth platforms as we diversify and expand our ingredient portfolio in line with the most significant trends, shaping consumer buying behavior. Our PureCircle integration has progressed significantly since we closed on the acquisition in July and we're on track to substantially complete the integration before year-end. Leveraging the Ingredion go-to-market network, we have begun strengthening the customer pipeline for sugar reduction projects and are executing on new customer contracts. We're excited by the talent we have acquired in PureCircle and Ingredion and PureCircle teams are sharing the same passion for customers and innovation, which is leading to new ideas to drive stevia growth. We previously shared that we expect to achieve both cost synergies of greater than 10% and additional revenue synergies starting in the second half of this year. To-date, we're pleased to say that we have begun to deliver upon $11 million of annual cost synergies. This tangible achievement in the first three months of ownership is a testament to the cross functional integration team you put in place on day one. Also in the quarter, we continue to make excellent progress in building out the capabilities for our plant based proteins growth platform. The South Sioux City pea protein isolate facility continued its commissioning startup as we work to obtain food grade certification, which is required for any new food grade manufacturing operation. We hosted members of our board at the South Sioux City manufacturing facility for a ribbon cutting ceremony in mid-September, and we expect to be sampling customers towards the end of the year and fulfilling orders in the first half of 2021.…

[Operator Instructions] Our first question comes from the line of Ben Bienvenu with Stephens. Your line is now open.

Hey, good morning, everyone.

Good morning, Ben.

Hi, Ben.

Thank you for the color on the fourth quarter. Good to see the volumes recover in the third quarter. I'm curious, you know, we've already seen the impact of the COVID spike earlier in the year, I'm curious to what extent given that we're seeing escalating cases in various geographies today. How do you think the business has positioned in the event that we see worsening COVID backdrop in the fourth quarter relative to how it performed in the first quarter, and kind of what actions can you put in place based on your learning that might mitigate some of the risks associated with that?

Jim, you want to take that?

Yes, sure. Hey, Ben, one of the things that we learned I think with broad and severe shutdowns is how much it can strain the supply chain of channels where consumers go for food and beverage choices, primarily in food service or if in -- if you look at the U.K. and kind of food takeaway, and as we saw, our customers, whether they're kind of direct manufacturers or distributors, everybody was adjusting their supply chains to that kind of supply chain constriction. [Technical difficulty] whether there's resurgence in particular cities or in particular countries what we're really watching for is how consumers have adapted, whether it's curbside pickup or ordering food from a -- food from away-from-home occasions. And I think the adaptation has probably moved beyond maybe the April and May shutdown that we experienced in the United States. We will still see -- as a caution, I think we will still see where certain governments may take more severe actions with stay-at-home restrictions and broad testing, and that can have [technical difficulty] two-week periods, and speaking I think primarily to Asia-Pacific. So what we're doing is, is we're keeping our inventories ready and, well, we may carry some inventory as we finish out the year, but we're really just trying to stay closer to our customer supply chains and understand where they're at with regard to their demand.

Yes, and I would say, just picking up on what Jim said, is that we've learned a lot through the last six to eight months in relationship to how our customers are looking at their supply changes. They've learned a lot, we've learned a lot, and we're very close to them in relationship to how they're looking to forecast for their brand [technical difficulty] in many cases as they have looked to rationalize and prune their product lines and SKUs and support some of their bigger brands, we equally have done the same cascading back to our supply chains. So we're applying all those learnings to make sure that we have the right products at the right level of inventory, and taking some forward-looking bets based on some of the products that go into retail for stock-ups that we're seeing in going into the winter months -- and into the fall and winter months, both in North America, as well as in EMEA.

Okay, great. Thanks for that. My second question is also related to COVID but is more from a long-term perspective. We heard from you at CAGNY earlier this year about your outlook longer-term for the growth of your specialty ingredients business. The world's changed a bit, but still is in flux. I don't think it's lessened the importance on the growth of that business, either to your customers or to your businesses, but I'm curios how has COVID, do you think, impacted the pace and magnitude of growth in the specialty ingredients business, if at all?

So, our global specialty ingredients have performed well this year in the face of the challenges due to the COVID pandemic. Year-to-date our sales are up slightly on a constant currency basis, and we're performing well with larger customers. We expect specialty ingredients [technical difficulty], and we expect to return to historical specialty rates when COVID-19 restrictions ease and away-from-home approaches the pre-pandemic levels. We believe that every one of our five global growth platforms remain as relevant today as they did pre-pandemic, when you think about starch-based texturizers for affordable formulating into a variety of retail and big branded-based products, when you think about clean and simple ingredients, and the trend towards simpler and cleaner labels. Sugar reduction in relationship to one of the comorbidities around obesity, or [technical difficulty] and formulating more complete food systems to support customers' needs to have more integrated solutions, given how labor costs in the workplace have increased, and just simpler, faster ability to streamline their manufacturing and supply chain. So we think every one of those specialty growth platforms are as relevant today as they were prior to, and to date through the pandemic, we're pleased to be actually up in our sales in constant currency terms.

Okay, great. Thanks, best of luck.

Thank you.

Our next question comes from Ken Zaslow with Bank of Montreal. Your line is now open.

Hi. Good morning, everyone.

Hi, Ken.

Hi, Ken.

So I -- just a question on North America, there's a lot of things going on in North America, between your strategy for ingredients, but then you have the potential for Mexican labeling and somewhat -- the lower fructose corn syrup demand, and stuff like that. So when you think about the North America, what do you think of the path to recovery? Do you think 2021-2022 is growth years? Are you looking to hold profitability? How do you frame that, and not just for this year, just how do we frame it a little bit longer-term given all pushes and pulls?

Yes, let me start, and then I'll turn it over to Jim. I think that one of the keys to North America's recover is going to be the pace of food consumed away from home, so food service overall consumption, which obviously both in Mexico and in U.S.-Canada got hit very hard, and that recovery is going to be linked with the recovery of the economies related to reduced cases and COVID-19 impacts abating. So that's to me the biggest key to the path to recovery, and as the same time what we're doing is we're obviously investing in the larger customers that are doing the best right now through the pandemic, and are looking to innovate with them as it relates to the micro trends and pockets of growth, we call it, that are emerging through the pandemic. And that will be to heavily continue to invest in our specialties -- to leverage our specialties investments that we have made, where we have made significant investments that we're expecting, starting next year, to provide an additional boost to our North America sales in the form of plant-based proteins, for example. As well as sugar reduction, popularity is very significant both in U.S.-Canada as well as in Mexico. You talked about the labeling in Mexico. We're watching that obviously very closely. That began October 1 for all packaged and processed foods, and regardless of that change we do know that there's interest in health and wellness, and there's going to be a lot of reformulation opportunities, and that'll provide opportunities for reduced calorie, reduced sugar, and we have products like Allulose and stevia in Mexico that will perform well. We are encouraged also by what we've seen in regards to the bounce back in certainly the brewing segment in Mexico. Jim, do you want to add to that?

Hi, Kim. The one thing I'd add is that if you look at North America segment Op income and if you take what were done year-to-date, down about $50 million, and you look at our outlook for Q4, largely that decrease -- three-quarters of that decrease has really been driven by volume demand, and I'd say there's another portion of that which is higher fixed cost absorption given that volume demand has been down. As we look forward to the factors that Jim highlighted in Mexico as well in U.S.-Canada, we'll see as once we get through winter, hopefully as vaccination programs start, begin in the first-half of the year, we'll see volume demand return both from our medium and small customers who participate in retail, as well as probably more broadly from other parts of our customer set that serve food service and serve -- use of all our ingredient into away-from-home uses, and so we just, when we look at that, we really think it's about that volume recovering and the pace of that through 2021, probably more into kind of a full recovery by 2022.

Perfect. Thank you very much.

Our next question comes from Robert Moskow with Credit Suisse. Your line is now open.

Hi, thank you. I was surprised to see mix down in North America in third quarter. I think that's a change from the first-half of the year. So, if specialty sales are doing well, Jim or Jim, why would mix be down?

Jim, I'm going to let you take that one.

Hey, Rob, one of the -- as we've highlighted in the past, in primarily our U.S., Canada business, but also some in our Mexico business, we have variable pricing on contracts, and as we saw the prices of corn drop through -- really through Q2, they kind of hit a low, really it's just the re-pricing of those contracts given where the monthly corn costs for those customers is.

And that impacts the mix, not the price?

Well, also what you saw was that your larger customers were also pulling I think a higher proportion of our volume. So, that's the mix portion in that. [Technical difficulty] branded retail customers or customers that serve food products into grocery, retail etcetera, I think that their supply chains were acting very swiftly to get product back on to shelf. They were pulling a higher proportion of our ingredients, and as larger customers, they tend to have better pricing.

So, you had -- you're kind of cutting in and out, but you said big retail customers had a lot of -- had stronger volume because [multiple speakers]…

Yes, it was basically -- Ken, it was a larger proportion of sales to larger customers that have better pricing.

Okay. Will that continue into fourth quarter or was that just kind of a transitory inventory thing?

I think it may continue into quarter four, and again, a lot depends on the mix of the customer base in quarter four, vis-à-vis quarter three.

Okay, and then, the last question is can you talk a little bit about the pricing environment for sweeteners going forward -- I imagine everything is getting pushed back, but what do you -- how do you see that shaping up in North America?

Yes, Rob, I would say that prices for the 2021 crop year for corn have increased approximately 15% -- [technical difficulty] prices for the 2019-2020 crop at the same time last year, and obviously that's being driven by increased import demands from China for commodities, and looking forward, we expect higher corn prices, and therefore, industry logic would typically translate into elevated pricing to customers. That said, there is more corn wet milling capacity available in the short-term due to the pandemic, which may temper price increases. That's really the best outlook I can give you right now. It's too early to comment on 2021 pricing outlook, but those are the two key variables that will be taken into account by the industry.

Okay. One more question, in terms of your investment into digital, does that include vendor's earnings calls or…

Sorry Rob, could you just repeat?

I think he was making a joke and the answer is yes, it will certainly, Rob, of course.

Okay. Yes, thanks for the acknowledgement. Okay, bye-bye.

[Operator instructions] our next question comes from Adam Samuelson with Goldman Sachs. Your line is now open.

Yes, thank you. Good morning, everyone. I was hoping to continue on the -- maybe just on -- [technical difficulty] a little bit and with the increased investments on the plant side, you got the [technical difficulty] Mexico ramping up. I'm just trying to make understanding of what's sort of reasonable expectation on contribution from some of those growth investments next year on a year-on-year basis? I'm just trying to think about balancing kind of the cyclical dynamics in the base business and some of the comments on contracting that you just made with some of the internal investments that you have underway and how much we can reasonably expect those to be kind of company-specific growth drivers?

Hey, Adam, this is Jim Gray. As we've said, when we invest in new facilities where we bring on substantial capacity [technical difficulty] we usually plan over a kind of three to five-year horizon for the ramp up of volume through that facility. So, usually in the first year while we are having samples out and we are working the customer pipeline and we are shifting those initial orders, our expectations for volume and revenue tend to be at fifth to a quarter of the capacity, and we are having cost impacts necessarily in the first year as we are running the facility, but ramping up in that volume. So, I think we are just on this path where we understand the path for both our allulose expansion at our San Juan del Río facility, but also a the [technical difficulty] for 2020. Those are continuing on a path of ramp up in the early years.

Yes, and I would just build on that in relationship to say PureCircle, in the near term our expectation is the net sales are going to grow high single digits next year, and the synergies are going to deliver greater than 10% savings, and so, we are very optimistic and bullish based on what we've been able to do in the first four months after 15 months of PureCircle really being challenged in the last four months with customers as well as internally with our optimization program and our plant based protein with regard to [technical difficulty] 2021. The return on that investment is really going to be dependent upon on the rate of customer adoption and market growth, and so -- at that is looking very favorable right now. So, we feel that that investment is perfectly timed with the growth in the marketplace for plant based proteins right now.

Okay, that's helpful, and then, my follow-up is really just any comments on the M&A pipeline and opportunities to further growing organically and especially with tax reforms potentially on the agenda maybe that gives [technical difficulty] family owned or private companies to make some decisions there, but any comments you have on that front and scope for anything on the larger side of the M&A front?

Well, I would just highlight that we've been opportunistic with M&A in relationship to the acquisition of certainly PureCircle and Verdient announcement that we are making on this call and being able to acquire 100% of Verdient we're pleased with, and again, all of our M&A focus is around enhancing the value propositions for the five growth platforms. So, I think you can expect to see that any announcement that we would make would be to support those five growth platforms, four specialties primarily in the bolt-on area as we go forward [technical difficulty] whatever we were to buy would enhance shareholder value creation.

Okay, I appreciate the color. I will pass it on. Thanks.

Thank you.

That concludes today's question-and-answer session. I'd like to turn the call back to Jim Zallie for closing remarks.

Okay. Let me just interrupt real quick, we do understand that there was some technical difficulties on the call, so we apologize for that, and we're obviously going to look into whether it was the transmission lines at this point, but we will try and capture it all in the transcript. Jim?

All right, that concludes the comments. I just wanted to thank everybody for joining us today. We look forward [technical difficulty] conferences, and until we speak again, I just want to wish anyone a safe holiday season. Thanks so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.