Good day, and thank you for standing by. Welcome to the Ingredion Incorporated Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Tiffany Willis, Vice President of Investor Relations and Corporate Communications Officer. Please go ahead.

Thanks, Joelle, and good morning, everyone, and welcome to Ingredion’s second quarter 2021 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 today in a press release that can be found on our website, ingredion.com, in the Investors section. The slides accompanying this presentation can also be found on the website and were posted today 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 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 in Note 2, 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.

Thank you, Tiffany, and good morning, everyone. We delivered exceptional second quarter performance, demonstrating the strength and breadth of our customer base and the resiliency of consumer demand for the range of food products that use our ingredients. In every region, we saw double-digit growth from demand recovery across all customer segments as well as very strong specialties growth. Our strong sales execution and price management in the face of robust and fluctuating demand contributed to our 31% net sales growth. Adjusted operating income for the quarter was up 64% versus prior year and marks our strongest quarter since 2017. All four regions performed extremely well with South America delivering another remarkable quarter driven by favorable price/mix. Shifting to our strategic pillars, we've made meaningful progress against each of our strategic pillars throughout the quarter and these continue to provide execution focus for creating long-term shareholder value. Beginning with specialties. We continue to drive sales of these higher value ingredients and systems, and we are pleased to share that they are now and even larger portion of our total net sales at 33% as of the end of the second quarter. We experienced strong demand across our entire specialties portfolio, which led to healthy double-digit growth in all four regions. Moving to commercial excellence. Our teams are working exceptionally closely with customers as consumer demand recovery has created pressures throughout the entire supply chain. We are supporting increased foodservice demand as well as solid demand for packaged foods. This quarter, we also enhanced our digital capabilities for customers by completely renovating and integrating many independent websites into one global user-friendly, content-rich customer destination. I'll speak to Cost Smart details momentarily, but I am excited to share now that we have already actioned and captured $135 million in run rate savings…

Thank you, Jim. North America net sales were up significantly for the quarter when compared to the prior year. This was driven by volume recovery from the pandemic impacts on consumer mobility in the same quarter last year, the pass-through of higher corn costs and continued specialty ingredients growth. These increases were partially offset by the cessation of ethanol production at our Cedar Rapids plant. North America operating income was $149 million, up 48% versus the prior year. The increase was driven by favorable price/mix, volume recovery and volume growth and favorable corn margins due to higher-than-expected co-product values. South America net sales were up 47% versus prior year. The increase was driven by favorable price/mix, including the pass-through of higher corn costs and volume growth. Absent foreign exchange, sales were up 45%. South America operating income was $33 million, up 154% versus prior year as favorable price/mix more than offset higher net corn costs. Excluding foreign exchange impacts, adjusted operating income was up 149% in the quarter. Moving to Asia Pacific. Net sales were up 33% in the quarter, which includes PureCircle results. Excluding PureCircle, Asia Pacific net sales were up 17%, benefiting from volume growth and favorable foreign exchange. Asia Pacific operating income was $24 million, up 9% versus prior year. Excluding PureCircle, first quarter operating income was $26 million, up approximately $2 million from the year-ago period driven by higher volumes and favorable foreign exchange In EMEA, net sales increased 35% for the quarter. The increase was due to higher volumes and favorable foreign exchange. EMEA operating income was $32 million, up 52% for the quarter. The increase was driven by lower raw material costs, favorable price/mix and higher volumes. Let me turn to the quarters income statement highlights. Net sales of $1,762 million were up 31%…

Thanks, Jim. As mentioned in my opening, we are very pleased with our strong second quarter financial results. Our results are particularly noteworthy when recognizing that we have been able to react to the sudden snapback of exceptionally strong customer demand as our teams work closely with customers to meet their changing needs. Furthermore, our strong topline growth is evidence of the breadth and diversification of both our product line and customer base and the importance of the ingredient solutions we provide across many different sectors of the food and beverage spectrum. As highlighted previously, our driving growth roadmap serves as our compass for creating value for customers and shareholders. This most recent quarter provides further evidence of just how much value can be created when the components of the roadmap all performed well together and concurrently. In closing, we look forward to sharing more about our long-term plan for shareholder value creation at our 2021 Investor Day, which is scheduled for Friday, November 12, 2021. We plan to hold our Investor Day in person and more details related to the location and time will be forthcoming. Now let's open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Ben Bienvenu with Stephens. Your line is open.

Hey. Good morning, everyone.

Hi, Ben.

Hey, Ben.

Congrats on the quarterly results. I wanted to ask the first half of the year has been exceptionally strong, I think the stronger than any of us expected. The full-year guidance, I think if I just think about operating income relative to your prior operating income guidance is higher, but it does look like things will slow in the back half of the year. So I think, Jim Gray, you made some comments around net corn costs, I suspect that's a meaningful component of it. I'm wondering if you could tease out the other puts and takes embedded in the guidance relative to how you were thinking about it previously?

Yes. Sure, Ben. As I mentioned in my remarks, when we began – let's take North America as a region, but higher corn costs are impacting I think all of our regions somewhat equally. Within North America, as we enter a year in our contracting season, we're setting price and about half of our revenues come from contracts that have a flat price throughout the year. We're laying on hedges and covering the gross costs of that corn, more so those hedges are in placed in the first half and as we go through the year, we place the hedges to fill the second half corn risk coverage. And we are largely covered on our corn risk. Obviously, corn has moved up significantly in the second half versus the second half last year, corn will be up more than $1 and $1.50 a bushel as you can see through looking at CBOT futures. Co-products have also moved up, but generally what we're having is, we have a price that's fixed on our contracts, we've had a move up in our raw material costs in the second half and that leads to the compression in the corn margins. And so hopefully, our guidance is just helping you with the favorability in the first half due to the – how we laid on our hedges and higher co-product values. As we move into the second half, we have higher corn costs. Yes, we still have some higher co-product values, but we really have flat pricing, which then we'll look to that inflation and how we looked to the 2022 season.

I do think it's also noteworthy, Jim, to highlight the fact that we started to see the uptick in quarters three and four of last year, and quarter four was our highest sales quarter last year. So from a competitor standpoint, I believe quarter four net sales were up 4% on prior year which was 2019 pre-pandemic. And South America, in particular had a tremendous quarter in quarter four last year. So we're up against some tighter comparisons or really very good comparisons, which is just showing the momentum, I think that's in the business that actually picked up in the second half of the year and just continues onward. And I don't think it's just all about the corn compression in North America necessarily – you got to look at it related to the comparisons to the second half and especially quarter four last year and the momentum that continues in the business.

Yes. Okay. That makes sense. Thank you. My second question is as we think about PureCircle and the continued integration there, if we just pan out bigger picture, I'm curious to hear your thoughts on the broader adoption rate of stevia, and you talked about the receptivity to the fermentation based Reb M. I'd be curious to hear how big you think these categories within the sweetener category overall can get in your mind? And just the long-term view of that business.

Yes. So if you remember, at CAGNY, back in February, we talked about the size of the total addressable sugar reduction ingredient market was estimated at $5 billion by 2026, and the size of the global stevia market we estimated by 2028 to be $1.6 billion. So we think there is a tremendous headroom for growth with these products and what we are particularly excited about is the fact that when it comes to a natural sweetener or a perceived natural sweetener, a high intensity natural sweetener, an alternative to artificial high intensity sweeteners, that our product offering is the broadest in the industry when you think about PureCircle's leaf extract stevia. The success that we're seeing and the investments we'll be making to expand capabilities in bioconverted Reb M which is taking a leaf and enzymatically converting it into a better tasting Reb M. And then the fermented Reb M, which has just tremendous benefits from both the costs and sustainability platform, and we couldn't be aligned with a better technology partner in Amyris, a leader in synthetic biology. So all three of those capabilities are coming together at the same time and different customers have different preferences when it comes to labeling, when it comes to the nuances of how to formulate a sugar reduction solution for a particular product, and so we just think this gives us a palette of capabilities to choose from to solve sugar reduction challenges and where we're seeing that right now and we're very excited about the prospects.

That's great. Thanks so much for the questions and the answers and best of luck in the back half of the year.

Thank you.

Thanks Ben.

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

Hi. Thank you. Jim and Jim, when I look at the mass implication for the back half of 2021, I think it's an EBIT margin below 10%, and totally understand how the timing of the net corn costs flow through. But as you look to pricing in 2022, is this margin structure in the back half reflective of a new base like a lower base of the business because it's never really been below 10 before or is it just kind of like a reset year in 2022, where you will take pricing to the extent that the market affords it and supply demand conditions afford it? And then I have a follow-up.

Yes. I don't think it's a new structural level of profitability. I think that these evolutions in a year happened in our industry from time to time just related to the way that the corn cycle has moved in this particular case and the way our business model tends to operate, but we are right now related to inflationary increases that everyone is experiencing, moving up prices where we can now, even pre-contracting and certainly when you have inflationary increases in freight and manufacturing costs, that's an example right now of where our operating model allows us to pass-through the majority of freight increases, and we're doing that right now passing those on in accordance with our contract terms. In addition, when it comes to other inflationary type inputs of chemicals and packaging, contracting will address that and we intend to pass those through in pricing this year. But right now, it's early obviously to talk about 2022 contracting term. Jim, do you want to comment?

Hey, Rob. Just also kind of level set, last year, early November, we're largely completing our contracting within the U.S., Canada, North America market and there wasn't any light at the end of the tunnel with regard to an effective vaccine and there was impacts on particularly, syrup volume in U.S., Canada with regard to foodservice, quick-serve restaurants as well as other foodservice establishments being down. Move forward 12 months and we've seen kind of a rapid change and bounce back both in overall foodservice in the last few quarters, but also obviously quick-serve restaurants are significantly up both in traffic as well as dollar sales. You're seeing a pull for fountain drinks, you're seeing a pull for beverages, which is largely leading to improved volume recovery in some of those syrups. So that's having an industry impact right, there's just better utilization in the industry as we head into the second half. And so I think with better utilization and the fact that many of our customers are seeing and taking price increases themselves, I think the environment sets up well for us to recapture enterprise or increase in our corn costs.

I got it. And then maybe a deeper dive into, you said half your business is fixed, half is kind of variable. Is there a difference in that mix for specialty versus the rest of the business? Is your specialty business also have fixed, half variable?

No. Not at all, majority is fixed. Vast majority is fixed.

Okay.

Higher price points per ton and higher value-add and tend to be more of a flat price.

Yes.

Okay. And so most of it is fixed, but you also said that there is some freight cost kind of riders in the contract, where if your freight costs are rising higher you can price up for that this year?

Yes. If you remember, Rob, 2018, we got caught in relationship to a sudden spike in freight and all of that has been corrected. So what we're saying is, right now, we're passing through the majority of those freight increases to customers in accordance with our contract terms.

Okay. All right. Thank you very much.

Thank you.

Thank you. Our next question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Hi. Thanks. Good morning, everyone.

Good morning, Adam.

Good morning. So I guess first question, just making sure we're thinking clear on the corn cost side in the layout, especially in the third quarter, I'm just trying to think about the cadence between the two periods and you provided some comments on South America having a particularly challenging corn, but in North America on corn is basis a bigger issue in third quarter that we've got to be mindful of as we think about the layout of the op income for the second half in the North America segment?

Yes. Hey, Adam. And just for everybody, there is a couple of components when we think about what the net cost of the corn to us, obviously, the gross cost of the corn plus or minus the hedges. The basis, which is really the cost from the farmer that's paid to the intermediary to get the corn to our facilities and then the value of the co-products that we sell. So we've spoken to the fact that we've hedged most of our gross corn. We think our hedge program is working well. I do see a bit higher basis in Q3 than in Q4. I do think that second half basis is elevated relative to the first half and then you can see and we've all seen that we've had higher co-product values and we think that those will come down a little bit from their peaks, but those will continue to contribute, I think positively offsetting some of the higher gross corn costs that we're experiencing in the second half as well as part of the basis. But the basis is one of the factors, Adam, that's impacting Q3 a bit more than Q4.

That's really helpful. And then on specialties, I know you gave the global growth for the second quarter and that did have the impact of the PureCircle and the KaTech in there. What was organic specialty volume in the second quarter? And maybe as we think out into 2022 given the ramp up on plant protein, some of the maturing of PureCircle within the portfolio, anyway at this point to frame incremental year-on-year kind of contribution from those businesses next year?

Yes.

I mean, just real quick in the notes, as Jim was speaking, our PureCircle sales are highlighted in my notes in the region performance for Asia-Pac, so we break out the net growth there and so all of PureCircle within the Asia-Pac, made a number and then we've talked to it excluded. And then KaTech, it's early days. It's out about five points, a little bit more positive to the EMEA specialty performance for Q2.

We had very strong double-digit volume growth in specialties across all platforms and a lot of that was to drive the pullback of or the demand increase for foodservice, and the fact that our products find their way into those products as well as packaged foods at retail.

Okay. And then as we're thinking about 2022 with some of the plant protein capacity that's in ramp process now kind of year two of PureCircle, where the EBIT contribution of that business has been pretty modest today, just help us think of kind of reasonable baseline step up in contribution there?

I think we see steady increases in both sales and profitability from PureCircle. And we have a goal, but by the end of this year to be exiting the year at breakeven for that business and that excludes obviously any contribution from the partnership that we have with Amyris. So we anticipate going into 2022 that we're going to see incremental both sales and profit contribution coming from sugar reduction at PureCircle and especially, when it comes to plant-based proteins, so that's one of the big toggles that should drive incremental price/mix as it relates to specialties in 2022. And I guess we're going to be able to communicate a lot more related to that specific question at the 2021 Investor Day in November.

Yes. I mean, Adam, we firmly believe that PureCircle as it continues to drive that revenue growth in the topline along with the mix, the very favorable mix that Jim highlighted in his comments that that's going to be on an op income margin basis, very attractive and relative and similar to what our specialty op margins, op income margins look like. So we're progressing that. As Jim mentioned, we'll get to breakeven here by the end of 2021. We'll see a step up in 2022 well on our way I think in 2023, 2024 to that type of specialty op income margin.

Got it. That's really helpful. I'll pass it on. Thanks.

Okay.

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

Hey. Good morning, guys.

Hey, Ken.

Hey, Ken.

Your South American profitability is coming back to, I wouldn't quite say back to the good old days, but it's definitely moving in that direction. Can you frame how – I know couple of years ago, you kind of framed how you thought it would kind of get back to a certain level relative to the history. You seem like you're getting closer to the number. Can you talk about the long-term opportunity that's there? And how big that operating profit growth can get to, say in the next two to three years? Or as you kind of peter out over the next couple of years with this? Just kind of give that framework for that. That's a hard business to kind of frame.

Yes. Well, Ken, first of all, thank you for the question about South America. It's worth to note that this is the fourth consecutive quarter of year-on-year operating income growth, and it's the second highest quarter performance in nearly a decade in South America. And as I've been saying in prior calls, we're very proud of the work that has been done by the team in South America over the last three years to get their cost structure in line, eliminate waste as well as increase efficiency. Our operations there are running exceptionally well. And also get close to customers to drive specialties growth, which again we called out South America specifically for specialties growth as the highest performing region this past quarter. So as it relates to the quarterly results, the net sales in South America were driven primarily by pass-through of higher corn costs and also benefited from higher volumes in Argentina and Brazil for beverage and brewing ingredients, respectively. I've commented it in the past also, just in relationship to foreign exchange devaluation and our ability to price through price increases. And this quarter again was another example of those pricing muscles in the center of expertise around pricing in a region that really calls for it and being able to deliver. South America's first half operating income benefited from really well executed contract management at corn hedging as well as higher co-product recoveries. And they're just doing a very good job down there. And so I think the prospects for a team that knows the region exceptionally well has gotten closer to customers, positions us to continue to find pockets of growth, continue to innovate and be a very strong player down there in the future. But thanks for the question because we are very proud of the performance in South America.

So the idea of how that is going to grow in the future, how do you think about that? I again, I think that your performance is good. I just trying to figure out maybe a little bit more in duration, do you think the growth rate is still sustainable? Do you think as you get more specialty, are we thinking that that one day we can get to that $200 million level in like four, five years? Just kind of framing that is kind of what I'm trying to get at. Thank you.

Yes. No, I think that what we see is steady year-on-year progress building on what's already been achieved from a standpoint of increasing the mix more toward specialties, which again is a major strategic area of focus and continuing to find ways to renovate our position in the core and grow with increased foodservice consumption. And remember when we all have to remember that these results are in spite of a region that's been hit very, very hard by the pandemic. So when that begins to lift, I believe, we'll see even more opportunity for continued sustained growth there based on the strength of our market position and based on how the team has learned to execute under very difficult circumstances. So I think that we can expect steady year-on-year long-term growth. I would call out again, the exceptional comparison that we're going to see in quarter four of where South America performed in quarter four last year to this quarter four, that's an extremely tough comparator. But long-term the growth prospects for South America, I think for incremental steady growth is still quite positive.

Yes. Hey, Ken. I just want to add though that, when you look back historically that 2011, 2012 era, you had some performance in Argentina that really contributed to that overall $200 million number that you're referencing. And Argentina has had, as a country and economically along with the value of the peso has had a set of challenges, obviously which we've highlighted over the last couple of years. If you net that out, the remaining business, so Brazil and all of our countries in the Andean that business is net-net much better, much stronger than kind of where we've been.

And that's a really good point, Jim. And so what Jim's calling out is back in the high watermark of 2011 in South America, Argentina's net corn was virtually zero just related to the export policy and export tariff policy of the country at the time. So in a sense, there were anomalously high profitability coming out of Argentina at that time. And then of course, we have the Arcor joint venture right now, which will be another factor to consider as it relates to the rebasing of our South America outlook. And again, it's another thing that I think will bring clarity on as we go into the 2021 Investor Day.

Okay. Thank you very much.

And our next question comes from Seth Goldstein with Morningstar. Your line is open.

Thanks, and good morning, everyone. Appreciate the question. Just one quick one on plant protein sales. So they more than doubled in the quarter. Has your near-term outlook changed for the capacity ramp up and the speed that you can do that? And do you see an opportunity to hit the $200 million sales target earlier than expected?

So what we said at CAGNY was we expect net sales of $130 million by 2024 with operating margins of 11% to 13%. We have a – an internal stretch target would be even larger than that, but right now, we're very pleased with the progress with pulse-based flours and concentrates and the sales ramp up there, particularly from our Vanscoy, Saskatchewan facility. And we're still very bullish on the prospects for the pea protein isolate and the whole formulation capabilities that the suite of plant-based protein type ingredients offers for alternative dairy and alternative meats and our pipeline for customer projects just continues to be very strong. And we anticipate sales to continue to develop in the second half, so we're remaining very bullish on the prospects for plant-based proteins.

Yes. And Seth, as we've mentioned, as we start a new facility up and we really plan for that capacity to be taken up over kind of a four-year period. I think one of the important things to recognize is that our technical solutions team and our sales teams are working with customers. They are making sure that the ingredients and the specs around the ingredient are really fitting into what the customer wants, so that we're not getting customer churn or really actually meeting exceeding customer expectations early on and then we have the ability to continue to supply that same quality and spec of an ingredient to our customers. And so we want to make sure that we're taking each of these opportunities in our pipeline and we're building that, so that we're building good really solid customer relations into novel ideas, where we think the isolates, the concentrates and flours will play a key role in that ingredient, formulation, that recipe for those products going forward.

I appreciate the detail. Thanks for taking my question.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Jim Zallie for closing remarks.

Okay. I want to thank everybody for joining us this morning. We look forward to a time when we can see each of you again in person. And until then, thank you for your continuing interest in Ingredion, and we hope you and your families remain safe.

This concludes today's conference call. Thank you for participating. You may now disconnect.