Good day and thank you for standing by. Welcome to the Second Quarter 2024 Ingredion Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Noah Weiss, Vice President Investor Relations. Please go ahead.

Good morning and welcome to Ingredion second quarter 2024 earnings call. I'm Noah Weiss, Vice President of Investor Relations. Joining me on today's call are Jim Zallie, our President and CEO, and Jim Gray, our Executive Vice President and CFO. The press release we issued today as well as the presentation we will reference for our second quarter results can be found on our website Ingredion.com in the investor section. As a reminder our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those estimated 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 to non-GAAP information included in our press release and in today's presentation appendix. With that I will turn the call over to Jim Zallie.

Thank you, Noah, and good morning, everyone. Ingredion's results for the second quarter exceeded our expectations with a strong recovery in volumes across the portfolio and strong growth in profitability with adjusted operating income up 8% and gross margins up 240 basis points. Profit growth was supported by improving volume, lower input costs, and greater fixed cost absorption. Sales were down 9% due to the pass-through of lower raw material costs as well as the lap of South Korea's 2023 net sales. This record second quarter for operating income is noteworthy as it is against the backdrop of value-seeking consumers facing historically high prices in many markets. We believe our success is due to the breadth and affordability of our Ingredion portfolio and the diversity of our customer and geographic mix. Our strong results were also supported by our cost control measures and productivity initiatives. Going forward we will continue to derive strength from our newly segmented business model by optimizing pricing strategies and leveraging our scale in raw material procurement to deliver customer value and improve our financial performance. Turning to a summary of our volume growth across segments this quarter, I would like to take a few moments to walk you through the segment specific volume drivers behind the quarter two results. We delivered strong across-the-board volume growth for the first time since de-stocking began early last year. Volumes were up 1% in the quarter, however, if we adjust for the volumes that went with the sale of the South Korea business volumes were actually up 5%. Our most significant year-over-year increase came from Texture and Healthful Solutions segment with net sales volumes increasing 8%. As packaged food shipments gradually improved, our distributors have begun replenishing inventories in anticipation of continued demand, particularly in the U.S. and Canada…

Thank you, Jim and good morning, everyone. Moving to our income statement, net sales for the second quarter were approximately $1.9 billion down 9% versus prior year. Gross profit dollars increased 1% with corresponding margins up 240 basis points to 23.7% up sequentially and year-over-year. Reported and adjusted operating income were $240 million and $270 million respectively with up adjusted operating income up 8% versus the prior year driven by lower raw material and input costs and higher volume partially offset by price mix. Turning to our Q2 net sales bridge the 9% decrease in net sales was driven by 204 million and lower price mix and 11 million of foreign exchange impact partially offset by positive volume of 104 million. Additionally, the exit from our South Korea business had an $80 million impact on sales volume. For modeling purposes last year's Korea net sales for Q3 and Q4 were similar to Q2's run rate. Turning to the next slide, we show net sales drivers for the second quarter. As Jim has already highlighted sales volume growth, I'll stick to color comments regarding overall net sales and price mix. For the total company, net sales were down 9% and when excluding the net impact of South Korea's sales from the results down 6%. Texture and Healthful Solutions net sales were down 5%. Price mix was down 11% for the quarter partly reflecting the pass-through of lower corn costs as well as higher pricing from last year when these businesses priced through double-digit inflation for both specialty corn and natural gas primarily in Europe and in the U.S. Food and Industrial ingredients LatAm net sales were down 9% and food and industrial ingredients U.S. can net sales were down 8%. Both of these segments net sales results are impacted by declining…

Thank you, Jim. After experiencing a record second quarter with strong volume growth and lower input costs, we expect those trends to continue in the second half providing the impetus for strong profit growth. Cost to compete is off to a solid start with both the identification and initiation of SG&A and COGS savings. We are confident that we are on a track to meet our $50 million target of run rate savings by the end of next year. Our strong cash flow generation and balance sheet provides strategic optionality for M&A, investment in organic growth, and future returns to shareholders. Before we go to the Q&A, I would like to turn your attention to an exciting event that we are planning for November 14, which will highlight our texture innovation leadership capabilities. With the formation of our global Texture and Healthful Solutions segment we want to showcase how Texture solutions can make healthy taste better. More information will be forthcoming over the next month. Now let's open the call for questions.

Thank you. At this time we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Kristen Owen with Oppenheimer. Please go ahead.

Congratulations on a nice quarter. I wanted to unpack your end-user demand versus restock that you called out in the prepared remarks. I'm just wondering if you can help us with any insight that you have on maybe your distributor inventory levels and as it's related just what's assumed in the high- and low-end of the guide for the full year from a volume perspective. Thank you.

Yes. Kristen, this is Jim Zallie. So our second half is lapping prior year customer destocking that we believe is no longer evident in the supply chain. Our second quarter's strong volume growth builds off of the prior three quarters trend line that we've been reporting on. Our belief is that consumers have not just started this past quarter to economize but have been economizing over the past year and plus despite this, we're seeing an upward trend in volume growth. It's noteworthy that we believe that given the breadth of our Ingredion portfolio and the diversity of our customer base across branded CPG, private label, food service, along with the affordability of our ingredients and our geographic diversification, we believe you know our growth assumptions are reasonable. We're seeing companies offer more promotions to move volume and we have also which we've highlighted active innovation programs to also drive volume growth of which we are part of many co-creation briefs right now and we do track data from a standpoint of food and beverage categories at retail and latest 13-week data shows volume growth in multiple categories in which our ingredients are sold into such as frozen prepared meals, frozen battered protein substrates, soups, dressings, and condiments all have done well. The magnitude of distributor de-stocking going back to say starting in late 2022, but certainly for the first three quarters of 2023 was pretty stark and we have seen distributors replenishing inventories now and so and typically they're very good at managing their cash flow and also have an early indication of what they need to supply for seasonal production for holiday periods as well. So we take that volume restocking that we're seeing and order pattern for distributors as a good sign going forward so that's a little bit as far as part of our calculus. Jim you may want to make some additional complimentary comments.

Just to remind, Kristen and as well as those folks on the call right, probably, we've said in the past our U.S. business in terms of its exposure to modified starch markets, and categories probably about 80% goes into at home meals. And so to the extent that you see the consumer grocery basket economizing maybe a little bit more meal occasions at home those consumers still seeking convenience they want taste and so they lean towards more kind of ready to prepare entrees etc., that that really bodes well for our volume pull. I would say about 20% of our business in the U.S. as an example is really exposed to food service. And there we are seeing more mixed results right because of traffic and some of your QSRs and your fast cash has shown kind of month-over-month declines low single digits. So we raise an eyebrow to that but also see that he's Jim's mentioned more value meals have come back within QSRs to stimulate demand. So it's a bit of a mixed, but I would say that we lean a little bit more towards those in-home eating occasions and that's usually really good for our volume and we do

supply the co-packers that go into private label as well.

Yes.

That's a very helpful color. Thank you for that. I wanted to follow up then on the gross margin expansion three big levers that I see there, and I'm hoping you can maybe help me quantify or contextualize those levers. I mean you've got the improving demand backdrop. You've got the declining commodities backdrop. And then, you've got these efforts that you're making internally to improve your operations. So maybe parse out those levers for us and help us understand as we see that the commodities environment continue to trend lower, excuse me, how much you can hold on to that you know as we think about the 2025 bridge. Thank you.

Yes. I think, maybe I'll lead on this. You're always going to benefit a little bit from an expectation of your raw material cost and if your raw material costs come in lower, remember we hedge about 80% to 85% of our raw material costs so to the extent that there's just a little bit of lower spot prices in the marketplace that's going to benefit. But really it's the volume that we're your second driver that you highlighted the volume growth is really providing some fixed cost absorption. We highlighted that last year, it's a tremendous headwind and so as that comes back particularly in our Texture and Healthful businesses where you have more assets in the downstream production you just get some tremendous fixed cost absorption as we see that, that volume coming through. And then, I'd say on top of that, we're in I would say maybe our third year as a global operations team under our new model really running at harmonizing things like our internal savings metrics, or procurement team. So there are some internal initiatives that we're taking just on a day-to-day basis to drive operating excellence. I would say that that's a bit of a wind in our sails as well that will continue as we go into '25 and '26.

Yes. I think what Jim's highlighting is that it's noteworthy to point out that beyond the cost to compete program Ingredion's strategic pillar focused on cost competitiveness through operational excellence is driving a comprehensive set of productivity initiatives to reduce costs expand capacity and avoid or delay capital investment. And that program which has been underway for multiple years now as part of a global operations operating model is paying dividends on top of that we've initiated the cost to compete program with its $50 million run rate savings target by end of '25. And again, we've reported an update on our progress there. So that's another lever that's helping we believe and will help with the margins the volume growth I think Jim hit it right on the head as the number one issue from a leverage standpoint and certainly not just in the United States, we're seeing raw material costs, corn costs come down. And we're benefiting as that happens related to our pricing and some of the sticky down that we tend to benefit from.

Kristen I would add that the third lever that or maybe there's a fourth lever right but there is a difference in our product mix and to some extent that we have some products that sell for higher average prices per ton and they offer a much more unique value to the customer in the recipe and in the consumer labeling and those sell at higher gross margins.

And those Jim are in the Texture and Healthful Solutions segment which experienced the highest volume growth this past right quarter.

So that's also that plays underneath a lot of gross margin expansion over time.

Thank you. Our next question comes from Josh Spector with UBS. Please go ahead.

So I just wanted to ask at a high level with your guidance at the EBIT level, you didn't change that for the year, the second quarter came in better understanding with some moving parts on price costs and otherwise but it seems like margin expectations moved up. So I guess was there more of a pull forward or was something temporary from a price cost perspective in 2Q that you don't to expect to recur or has anything changed on your view in the second half. Thanks.

Well, Josh, this was a maybe a source of internal debate I just say that mid-single digit op income growth implies a range. And as Noah's advised me, we're probably more towards the upper end of that range. So we're just feeling that Q2 really confirmed some of the dynamics in the business that we wanted to see impacting gross margin. And we have good momentum behind cost to compete. So I think that gives us confidence when you look at Q3 and Q4 for this year's some pretty high op income growth expected.

Okay. Thanks. That's helpful. And just kind of a follow-up to the prior question around volumes it kind of seems like if we look at the two-year stack of things you're expecting things to improve in the second half, I mean you talked about a number of reasons about why our math would be that your volumes need to be up about high single digits to kind of get into the range that you're guiding to. I guess, first, is that right, and then, two, are you seeing the signs now that there's some acceleration in your multi-year stack on volumes into the second half.

I don't know if there's acceleration, but I would you know definitely in terms of the second half volumes we're solidly seeing mid-single digits to high single digits on 3p volume growth.

Yes. And the new segment of Texture and Healthful Solutions in 2024, lapped a very strong first half in the first half and that segment experienced more of the destocking phenomenon primarily because those ingredients transport in dry state in comparison to the food industrial ingredients, which are sold for the majority in bulk liquid, for example. And so they experience more of the destocking phenomenon comparison to food and industrial ingredients. And so from a standpoint of the second half comparator yes we do feel that there'll be strong volume growth in the second half.

Thank you. Our next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

So maybe just the first question on capital allocation and deployment, are we going to see a restart of repurchase activity in the second quarter, and you alluded to more to come in the second half. Can you help us think about the continuation of that versus the M&A pipeline, maybe as it sits today and are you seeing more interesting things, and if you are kind of any framing on sizing of those and just remind us how you'd approach the return and accretion targets for any M&A.

Maybe I will take the first part on share repurchase, Jim, maybe you sure comment on M&A. But just real briefly so with $66 million worth of shares repurchased it in the first half and we're definitely striving towards 100 million for the full year could be more what we're really always consider is, this where's the Ingredion stock price trading and where's the trading relative to the market, so the last couple days have been more interesting as the overall markets have experienced some pressure. And then, we look at that relative to our intrinsic value we calculate a return for remaining shareholders and we're always looking at that versus the returns that we're getting on organic investment and potential M&A. And so I think that we look at that and it may come across as infrequent, but we're very purposeful in deploying cash to the extent that we have actually an anticipation of more strategic cash available as we end 2024, that will be part of our consideration as we are looking at share repurchase. So right now committed to getting to the 100 million, but open beyond that. Yes, we keep dry powder on our balance sheet as well when we look at M&A and Jim you want to talk a little bit about what you --

Well, actually first just to put an underscoring point on the share repurchase, I would say that further share repurchases in the second half beyond 100 million is clearly an option. That being said we're always weighing in the balance what we have in an active M&A pipeline that we're always nurturing. And we have prospects that we're advancing through that pipeline, and those will be anything that can enhance the value propositions to support primarily the Texture and Healthful Solutions. However, we also want to use some of that capital wisely for reliability investments for these very strong cash generative businesses that you're seeing perform and seeing I think hopefully some pleasantly surprising financials for the new segments of food and industrial ingredients LatAm, as well as the solid positions we have in U.S. Canada, which have returns associated with them as well. So we have a number of projects for organic growth investment as well as some cost savings but also we are -- we have an eye towards the M&A pipeline that we're nurturing. And all that being said, we have a good challenge on our hands which is how do we deploy the cash that we have and certainly we're going to be looking at share repurchases as well.

And Adam let me just ask your last question or answer your last question which was with regard to M&A. We do very much think about ROIC once the synergies have been achieved. So we're generally looking at a year three ROIC that's greater than 10%. We keep that kind of firmly in our sights. And then, in terms of accretion we generally prefer deals that are cash accretive and then hopefully earnings accretive by maybe year two or year three.

And that's so helpful. I guess just a follow up on the business and the outlook in the quarter itself the LatAm business has had very strong results. And I'm maybe looking for a little bit more color on pulling that apart a little bit between Mexico which seems like it's had some tailwinds because of sugar prices versus the traditional South American business and how we should think about those two parts of the geography is kind of moving forward through the second half. Thanks.

So I'll take that and then Jim you can add any additional comments. But, you're spot-on Adam that our Mexico business continued to generate record results in quarter two driven by increased sweetener demand and higher sugar prices. In Argentina, the peso did not devalue at the level that we had expected which drove strong results from our Argentina JV in the period. In addition, our Brazil results improved on volume growth and against the lap in higher energy costs due to the biomass boiler startup in Q2 of 2023. And lastly, because this was a topic in quarter one's earnings call, I'm pleased to report that a large customer which is served by our Columbia business that did not pull any volume in quarter one has commenced their full year purchase obligations in quarter two. And we expect them to meet their full year purchase commitments by the end of the year. So those were some of the factors that drove some of the very strong performance in food industrial ingredients LatAm.

Thank you. Our next question comes from Andrew Strelzik with BMO Capital Markets. Please go ahead.

Maybe dovetailing off the last question both your food and industrial segment margins are tracking towards the higher end of the guidance range and you talked about a lot of positive factors that should impact your margins over the balance of the year. I guess I'm just curious and you did pick up the low end but you're giving yourself some cushion I guess for the rest of the year on those margins to maybe revert a little. So I guess I'm just curious but what are the factors that would cause that to moderate in food and industrial segments.

Yes. Hi, Andrew. Thanks for dialing in. I would probably just say that when you take the first half for both food industrial ingredients U.S. Can as well as food industrial ingredients LatAm, you got to put Q1 into the math for the first half. And so therefore then when you look at the second half in terms of the OI margin range, it's really one a factor of several things. One, so we sort of have an angle on where the price levels are because we've generally concluded contracting and we know what that flow rate is. We know where the raw material cost is going to be and we've largely hedged those positions. In generally, I think that we're seeing co-product value relative to corn. It's moving a little bit but it wasn't moving nearly as much as necessarily last year. And so I think that's going to you know basically support gross margins for these two businesses. Other than that I think that we probably do see some volume but not a tremendous amount of volume growth but some volume growth and upside in both of these businesses clearly there's some room in LatAm in the second half of the year.

Okay, great. That's helpful. And then, just a little more clarity on the process and how you're thinking about that for the balance of the year, off to a very good start here especially relative to the 50 million over the course of two years. So how are you thinking about how much of that 50 million you should capture in '24, now versus maybe what you initially expected and how should we think about the cadence of that through the rest of the year.

Jim, why don't you take that.

Sure. So I think that when we look at the cost to compete program and we put out that target for 50 million of run rate savings at the end of year two. We completed a refresher of our strategy in 2023 and our Board decided to endorse our decision to resegment our business. And this is a [indiscernible] of the opportunity to redesign and reorganize each of the segments needs. And most of those the savings that were identified thus far come from redesigning and streamlining the org structure really to align with each segments must have capabilities. And so our teams are committed to delivering that $50 million of run rate savings by the end of 2025. We're going to progress those savings initiatives. We'll provide relevant updates as we go I think right now what we've been a bit bolstered by the start of having the opportunity to have a reorganization really at the end of last year and getting completed in the first half of this year. And so still feel like that $50 million run rate target is appropriate. As we've highlighted before as well as what cost to compete allows is kind of a restructuring a window for events but that doesn't stop us from thinking about being cost competitive and we do that on a day-to-day basis and Jim has highlighted previously some of what the efforts are underway and our operations team as well as our global shared service centers to always think about productivity and efficiency on a day-to-day basis.

Thank you. Our next question comes from Ben Theurer with Barclays. Please go ahead.

So just one quick one and a follow-up. So if we look at the Texture and Healthful Solutions obviously with -- you've explained a little bit like the volume dynamics and some of the de-stocking issues. But one of the thing I was wondering if you could explain as a little bit what's the difference between what you initially guided after the first quarter results on the segment operating income margin that was more like 13% to 16% and now you took it down to 13% to 15%. So just want to understand a little bit the pricing dynamics here is why you took down that higher piece of that margin outlook by about a 100 basis points, if you could shed some color on that. That would be my first question. Thank you.

Okay. What I would say is that for this particular segment, as I indicated that this segment did experience more of the de-stocking phenomenon in comparison to the food industrial ingredients segments. So going into contracting in 2024, it was necessary to adjust pricing to maintain strategic market shares. In addition, these pricing actions along with some inventory downgrades and adjustments specifically in Q2 negatively weighed on profitability. However, the market fundamentals are improving those inventory downgrades are behind us. And on the back of the strong volumes we experienced and a strong customer pipeline and better fixed cost absorption, we obviously see a brighter outlook going forward. But it was really some of those dynamics on the necessary actions to adjust pricing. And then, we had some significant inventory downgrades that we decided to take in Q2 in that business and that was one of the reasons that the margins were compressed a bit long-term, we anticipate that mid-teens operating income margins will improve about 30 to 50 basis points per year in that business driven by the point that Jim was making earlier about strong gross margins relative to the other businesses, which we expect will be double the levels of the remaining business segments. It's also noteworthy then to highlight that the texture and Healthful Solutions segments are absorbing costs from a lot of the capital investments that we've highlighted in previous earnings calls that we would say are still early-stage capacity expansion investments that we made, for example. We more than doubled our specialty starch capacity in China and expanded capacity for specialty starches in Thailand, for example. And we've highlighted in previous earnings calls that not the full percentage of that available capacity or those capital investments are actually generating returns certainly at anywhere close to peak levels. So that's another factor in relationship to some of the things that mute the margins a bit at this moment in time very early in the segmentation. But, longer term we are very optimistic about the prospects for margin growth yeah in Texture and Healthful Solutions.

And Texture and Healthful Solutions carries more D&A and over time as we look at that when you adjust for the D&A you'll see a very I think what we believe is a very healthy EBITDA margin for this segment, which is going to deliver top-line growth.

Fantastic. Very clear. Thanks for that. And then just if we look into some of the more recent volatility a little bit more that. Let me get this again. So if we look at the recent volatility particularly in Latin American markets and it was clearly strong. You've mentioned Colombia highlighted Brazil and Mexico. Just help us understand how you think about the consumer down there and what you're seeing from your customers in terms of willingness to maybe keep pricing into next year. Are you seeing some of your customers trying to push given the lower corn cost for more pass-through that maybe it was the case for 2024, just given signs of a little bit of a slowdown on the consumer side and both Mexico and Brazil.

I would probably respond just initially in that because we don't contract out as far no and not really for full year really across South America. The contracting is really more maybe 12 weeks out or possibly as much as three months to six months. The changes in the cost of the raw material are going to be reflected pretty quick through the inventory and then evident in the pricing to our customers. And so to the extent that there's sensitivity to our customers consumer that would probably be reflecting a relatively contemporaneous value of the products that we're selling. We do have a little fewer contracts in Mexico that tend to go for a full year but we're really more locked into U.S. corn costs on that and then apply hedges there.

Yes. And I would just say, I mean Argentina's economy in '24 shows some promising results due to the new President's reforms, inflation is easing, and macroeconomic indicators are better than expected. And as I highlighted foreign exchange hasn't devalued to the degree expected. And also in Brazil brewing brewery had significant recovery and in fact some of our customers reported very strong volume growth in Brazil this past quarter.

Thank you. Our next question comes from Heather Jones with Heather Jones Research. Please go ahead.

And I wasn't the one for the early part, so I hope I'm not going to be repeating anything. I wanted to ask about the other business. So I was looking at the slide deck and you all are projecting I think roughly a 10 million year-on-year decline in the losses there. But so that business I think is PureCircle, Pakistan and plant-based. And am I right in understanding that it's the plant the alternative protein piece that's dry driving the losses because I think you're making decent returns on PureCircle in Pakistan. Is that correct?

Yes. So thank you for the question, Heather. The group of all other that segment is in fact on a positive trajectory year-on-year if you adjust for the sale of our South Korea business which was in this portfolio last year, all other is the grouping of three businesses, protein fortification sugar reduction and our 71% stake in our Pakistan business. Both Pakistan and sugar reduction businesses are generating positive operating income and they're growing. So over the near future they will continue to contribute toward all other profit growth. As stated previously protein fortification is loss making and we are actively working a turnaround plan to steadily improve the health of protein fortification operating unit over the next one to three years. What we're very pleased to report and say is that protein fortification reduced its operating loss in the first half as the sales of pea protein isolates were up significantly in the quarter and for those of you that haven't been tracking this, it's due in large part to customer wins new customer wins that we've obtained bolstered by tariffs, very high tariffs on Chinese imports. So the market fundamentals in that segment which has been under pressure for the last couple years is showing some really nice green shoots and we're benefiting from that and we're hopeful that will continue.

Okay. Thank you. And then, on this is the part that I think I may have missed but the strong volume growth for Texture and Healthful segment, the slide deck and I think mission distributors replenishing inventory so it's wondering if you could sort of quantify or give some guidance as to how much of that volume growth was stronger in customer demand versus a restocking from last year's de-stocking.

Maybe I'll just jump in because, yes, Heather we have covered this a bit previously. But, generally it's more of a in consumer poll. We've highlighted that particularly in in grocery, club, mass those are categories that we track that unit volume growth and some of those categories, prepared meals, maybe soups, sauces and dressings and batters, so French fries and chicken. We've seen in unit volume growth and during Q2 when we look at the scan data. And so we're seeing pull there, I would say that the offset is maybe a little bit of some noise around QSRs, but within the U.S. Can business you know food services maybe about 20% of our volume pull. So while we see some pretty interesting headlines with regard to some of the bigger fast food service chains and we're watching those definitely I think we're seeing just more in consumer pull in the grocery basket.

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Zallie for closing remarks.

That really concludes today's call and we want to thank everybody for their interest in Ingredion and we hope to see many of you on November 14th at the Texture Innovation Day in Bridgewater, New Jersey.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.