Good day, and thank you for standing by. Welcome to the Q3 2024 Ingredion Earnings Conference Call. At this time, all participants are in 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 of investor relations. Please go ahead.

Good morning, and welcome to Ingredion's third 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 third quarter results can be found on our website, ingredion.com, in the Investors 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-Ks and subsequent reports on Forms 10-Q and 8-Ks. During this call, we will 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 on 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 achieved a significant milestone in the third quarter with a 29% increase in adjusted operating income, marking not only our best third quarter performance ever, but also the second-highest quarter in the history of our company. In fact, all three of our segments delivered double-digit operating income growth in the quarter, which is a testament to the dedication and hard work of our teams across the world. Operating excellence and contract management across each of our segments were key drivers of the exceptional profit growth. Despite facing input and wage cost inflation, our sales teams successfully adjusted multiyear contract pricing with customers, which supported margin recovery. Furthermore, volume recovery improved fixed cost absorption, and our operations and procurement teams drove structural savings, which complemented the savings coming from our cost-to-compete program. Turning to a summary of our sales volume growth. All three segments reported year-over-year increases, resulting in 4% net sales volume growth compared to last year when adjusted for the sale of our South Korea business. Starting with Texture and Healthful Solutions. The double-digit sales volume increase that we experienced was the result of notable food and beverage category growth in the U.S. In areas such as savory, packaged meals, and frozen prepared meals. Additionally, our sales volumes in Europe also experienced double-digit growth, driven by an uptick in consumer buying behavior as more and more people are commuting to work and seeking convenient meal and snacking options. We are experiencing the greatest volume growth with our most differentiated products and solutions, which generally offer higher profitability. We anticipated strong second-half organic volume growth for Textured and Healthful Solutions, and our new global segment is better enabling our commercial and operations teams to identify opportunities and capture growing global demand. In…

Thank you, Jim, and good morning, everyone. Moving to our income statement, net sales for the third quarter were approximately $1.9 billion, down 8% versus prior year. Gross profit dollars grew 14% with corresponding margins up 490 basis points to 25.6%. Reported and adjusted operating income were $268 million $282 million respectively, with adjusted operating income up 29% versus the prior year, driven by lower raw material costs, higher sales volume and better fixed cost absorption, partially offset by price mix. Turning to our Q3 net sales bridge, the 8% decrease was driven by $150 million in lower price mix and $20 million of foreign exchange impact, partially offset by positive sales volume growth of $86 million. Furthermore, the exit from South Korea had a $79 million impact on sales volume. For modeling purposes, last year's Korea net sales for the fourth quarter were similar to this quarterly run rate. Turning to the next slide, we highlight net sales drivers for the third quarter. For the total company, net sales were down 8% and excluding the impact of South Korea, net sales were down 4%. Texture and Healthful Solutions, net sales were flat. Price/mix was down 12%, and for the quarter, primarily reflecting the pass-through of lower corn costs as well as last year's higher pricing due to double-digit inflation experienced in our specialty corn and energy costs. Food and Industrial Ingredients LatAm net sales were down 6% and Food and Industrial Ingredients U.S. can net sales were down 9%, both resulting from the impact of the pass-through of lower corn costs. Let me turn to a recap of our Q3 performance by segment. Texture & Healthful Solutions net sales were flat compared to the prior year and down 1% on a constant currency basis. Texture & Healthful Solutions operating…

Thanks, Jim. Our strong sales volume growth from Texture and Healthful Solutions, coupled with operational excellence, has enabled us to increase margins despite inflationary pressures. Cost-to-compete savings are ahead of target in year one of the program with line-of-sight to network optimization projects that have been scoped and will be the focus of cost of goods sold savings over the next 15 months. We continue to deliver profitable growth and strong cash flow with a commitment to return cash to shareholders as evidenced by our 10th consecutive annual dividend increase and our full year $100 million share buyback goal. We anticipate building on our highest-ever third-quarter operating income performance enabling us to carry momentum through year-end and into 2025. And finally, our driving growth roadmap continues to guide long-term value creation for our shareholders as we leverage the benefits of our new segment structure and capture new market and customer opportunities. Before we go to the Q&A, I would like to remind everyone about an exciting event that we are planning for November 14 that we will highlight our texture, innovation leadership capabilities. During the event, our leading scientists and culinologists will lead participants through a delicious journey of texture and how it impacts taste. We will explain the strategic vision and the differentiated solutions that will drive incremental profitability and growth for this business segment. We are excited to demonstrate how we intend to use our vast ingredient library and expertise along with the capabilities we are building to provide texture solutions that make healthy taste better. Now let's open the call to questions.

[Operator Instructions]. Our first question comes from Ben Theurer from Barclays. Please go ahead.

Good morning. Jim and Jim, congrats. So just two quick ones actually on my side. So first of all, you obviously have very impressive volume growth, again, in the Texture and Healthful Solutions segment, right? We got 8% last quarter, 11% now. but there seems to be a little bit higher down on the price/mix. And I wanted -- I was just to understand if you're doing something with your customers to push the volume on the price mix. So, is it more price? Or is it more mix? What's driving it? Did you get the very strong volume, but then at the same time, a little more negative on the price mix piece within Texture and Helpful Solutions, just understanding what's been driving it? That would be my first question. And then I have a quick follow-up.

Yes. Ben, thank you. I think what we feel good about is that if we go back to the pricing centers of excellence that we put together probably 3 years, 4 years ago that served us so well through the ramp-up of inflation. That also led to us becoming very clear minded in relationship to the customer base and the marketing categories that we wanted to position ourselves in. And we've invested a lot in consumer and customer insights to anticipate where the puck is going in relationship to consumer buying behavior. And with inflation, we've sought out pockets of growth. So, I would say that we feel fortunate that we are well positioned to grow in those categories and those the end uses that are generating growth. So, if for example, in this past quarter, we've seen low single-digit volume growth in the Sircanadata across the categories of savory, prepared meals, bakery and snacks as well as dairy. And our volume growth in these same categories was reflected by our sales in the quarter. And also, though it's worth noting that we are lapping last year's soft demand as customers were optimizing their inventory levels. In Europe, there's evidence that consumer sentiment has turned more positive versus last year's economic challenges. And we believe we're seeing more worker mobility as professionals return to the workplace and the demand for the products that we're selling into for convenience and takeaway items pick up. And right now, we anticipate that this strength in demand will continue through the end of the year. Jim, do you want to have any additional comments?

I would just highlight, too, in that Jim started to know upon kind of more our more differentiated solutions I would say that the way that those show up in our call is that we do sell some ingredients that might be very clean label that have high functionality, they show up at a higher value per ton. And we're selling that volume, that's helping to drive the gross profit dollar growth to some of the products that were in Texture and Helpful Solutions that might be a bit more kind of functional in terms of their week-to-week, month-to-month use. As corn price comes down, it does get passed through and that's what I think you're seeing in terms of the price mix. And so very confident in the profit pool and the growth that we're generating in Texture and Helpful.

Okay. Got it. And then just a quick follow-up on -- from a capital allocation point of view, you significantly upped your free cash flow guidance, call it, roughly $300-ish million, give or take. At the same time, CapEx seems to come in a little bit lower. What's it going to do with the excess cash?

Yes. Well, fair enough. I think that those are both, I think, beneficial to our overall balance sheet and our financial position. I think most importantly, I understand that we've said this in the past that our capital allocation, we really look at, first, what are those organic investment opportunities. We're going to be very disciplined on the dividend. We have increased it for the 10th year in a row. It does generate excess cash on our balance sheet. We're looking at and are very committed to our share repurchase goal for the year. So, we plan to meet or exceed that. And then yes, I think also that there has to be a bit of timing involved. It can't necessarily just be every quarter. There are opportunities in front of us, both organic investments as well as we're always looking at M&A. And I think that we have to look at what we have done as a team to deliver results for shareholders. And just note that when cash flow was against us, like in, say, 2022, corn was going up, and we had a significant investment in working capital. Since then, if you look back over the last 2 quarters and 3 quarters years, we've delivered 50% TSR. So, I think that now that we just have a bit of a surplus of cash flow because working capital is a little bit favorable that's temporary. Our business invests in working capital, and so we'll invest that cash very wisely.

And Ben, I just think to address the capital investment phasing aspects of your question, I think it's just a reminder that we have spent the most historically of our capital investment for projects in the fourth quarter. And our teams have many projects underway, and we anticipate we will invest a significant amount of capital into our growth and the reliability of our manufacturing assets and it's natural from a phasing standpoint to incur some delays from equipment suppliers and the availability of local skilled labor to complete projects on time. And that can impact the timing of the spend 1 year to the next. But we do anticipate getting close, I guess, to our full year target despite being at 170 through the first 3 quarters on capital spend.

Our next question comes from Kristen Owen from Oppenheimer. Please go ahead.

Good morning. Thanks for taking my question and congratulations on the nice results. Hoping we could start with the demand question. You noted the improved European consumer behavior that's been sort of a lackluster performer for the entire sector year-to-date. So, I'm wondering if you can double-click on that. Help us understand what's driving the volume growth? Is it lack of destock? Or are we seeing some real green shoots in that region?

Yes. I think that the first thing to highlight is that against the prior year quarter, we are lapping a softer quarter. So, I think that, that's important to put in perspective, just as I highlighted in relationship to the U.S. situation as well. That all being said, it does appear that the European consumer is more mobile and is spending more in relationship to convenience type offerings. And that's one of the outlets that we've deciphered back to the customer based and where we think we're doing well. That's basically how I would summarize it.

Okay. Maybe just a quick follow-up. The level of inventory, if you could comment on how you're seeing channel inventories there. Are we really still at this stage where a little bit of growth because the comps are easy? Or is there any restocking that you're seeing in the channel?

Yes. I don't -- I'm not necessarily seeing necessarily the restocking is driving the sales volume growth. I think that there was a surplus of inventories in some of our packaged foods and some of our private label customers within both the U.K. as well as Europe they just -- they had to get rid of those inventories. That's what they used during 2023. I don't think that they ever really pressed their inventories down to a level where like they were really trying to manage cash flows. I think what we're seeing is just a nice steady demand pickup as both, as Jim alluded to, there's greater consumer mobility, a little bit more takeaway kind of lunch and breakfast activity, as well as just the kind of that overall need for convenience, I think, is really driving some of the demand we've seen in our customers.

Yes. I don't think there are any concerns at a macro level globally to rebuild inventories with safety stock that would be in excess of anything that would be typical. If anything, we're taking a cautious approach in relationship to the outlook as it relates to how customers will manage inventories between now even and the end of the year, always the case as you go into a new year of contracting. So, we don't see anything where it's any kind of a robust pipeline refilling or restocking.

Yes. Demand is very steady. Utilizations are up. Yes.

I did have one follow-up question just on the COGS side, some nice improvement in the gross margin here. I'm just wondering if you can help us unpack -- how much of that is the improved volume backdrop versus you're continuing to roll off that high cost for?

Yes. I think that obviously, we've renegotiated the multiyear contracts, which we referred to, and that enabled us to recover the margins and the costs that we had absorbed over the last couple of years. And that has helped us in the Food and Industrial Ingredients segments. Clearly, there is a benefit from the reduction in raw material input costs which is share with customers. But I would say, look, it's also that -- I mean we noted last year that the volume -- the production volume was down, and that was creating a fixed cost absorption headwind as we've particularly seen volumes come back in Texture and Healthful Solutions, and we benefit from better fixed cost absorption on those assets that's really driving some of our better performance, right? And we're really managing that well. It's those three things. It's the pricing. It's the cost and it's the mix and volume on Texture and Healthful Solutions and the fixed cost absorption.

Our next question comes from Ben Mau from BMO Capital Markets. Please go ahead.

Good morning, and thanks for taking my question. So, industry sources suggest that 2025 sweetener contracting is tracking better than buyers maybe initially expected. So, what is your visibility on contracting so far? And do you foresee a chance that pricing could be up modestly and I have another question.

Ben, can I just clarify your question? And you said tracking better than buyers expected?

Yes. Sorry, then sellers expect it.

Better than sellers expected. Okay. Well, what we would say is contracting appears to be moving slower than last year. And I think that, that's probably attributable to the change in the value of corn that is modest year-over-year. But just a reminder, in relationship to contracting for 2025 and really, for that matter, for any year when we're at this point of the year, that approximately 50% of our revenue dollars in North America comes from fee contracts or should I say, U.S. Canada primarily from fee contracts that reprice monthly with corn cost inputs from our customers. We anticipate some pass-through of lower corn costs in 2025 if the markets remain with a similar outlook as today. But Jim mentioned earlier the fact industry capacity utilization has also lifted up a couple -- a few percentage points as well, which has kind of tightened up overall supply-demand. And we believe that our experienced commercial teams and our pricing centers of excellence are well prepared to manage pricing and volume trade-offs thoughtfully in response to customer demand and the competitive market conditions. And I guess, although raw material and input cost inflation has moderated, the wet milling industry is a high capital-intensive industry and needs to earn a fair return. So that's all yet to play itself fully out. So that's kind of how I would summarize where we're at right now with contracting. It is still early, Ben. It is early.

But I would say that we see that industry grind utilization is up year-over-year and so that's always a nice backdrop.

Yes. That's very helpful. And my second question is around M&A. So, you previously talked to kind of focusing more on more like bolt-on type acquisitions, call it, under $400 million. But given your healthy cash balance, would you consider -- or are you starting to consider more transformative type acquisitions. Fully understanding that, that would have to probably be outside of the U.S.

Ben, I think as we've always stated, we consider the M&A landscape broadly, right? So, while the Street may characterize tuck-in, we look at acquisitions that accelerate our capabilities and our market position, particularly in Texture as well as Healthful Solutions. And we're always going to take a disciplined approach to that. We're going to be front and center on what's the return to the Ingredion shareholder really first and foremost. And that, I think, guides us. I think in terms of maybe market opportunities, Jim, I...

Well, I think that one of the things we feel very clear-minded about is the strategic direction of a company because of the enterprise-wide strategy refresh work we did all of last year and then the activation of that strategy with our winning aspiration, which is to be the go-to provider for Texture and Helpful Solutions that make healthy taste better. That is what is uniting the company going forward. And that will shape the M&A approach that we take. And anything that we can do to enhance the value propositions inherent in that strategy is what we're looking at. And I would say that we're always actively managing a pipeline of M&A opportunities across the spectrum of size. But I would say that what we want to buy is we want to buy revenue. We want to buy profit and we want to buy talent and capabilities that are going to complement that winning aspiration culture and obviously, cultural fit as well. So -- but that's what we're looking to do to. We're encouraged to expand growth. And honestly, I think the landscape is fertile with some opportunities out there. So, we're actively working those.

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

Good morning. I guess the first thing I want to ask is you hit on these maybe different ways, but specifically how much of the earnings improvement when you look at the last couple of quarters, would you say is structural? So, this is the earnings power of Ingredion today, you've recovered corn, you're running at better utilization rates. Let me stop there and get your thoughts first.

I think -- let me take a shot at it and let Jim kind of complement. I think that what we're seeing, what we're feeling in relationship to our performance over the last number of quarters is the result of our operating model in support of the new segment structure. So, the decision to move to the new business segment structure, which followed the enterprise-wide strategy refresh work that was done company-wide in 2023, as you would expect, has brought additional clarity and focus within those segments to their customer base, to their raw material base, to the need to reduce earnings volatility within each one of those segments. And we're absolutely getting benefit from the dedicated focus and leadership from the clarify segment work that we did. But what I don't think has been fully appreciated and what we're also recognizing is overlaying all of that is a global operating model that we began to put the foundation together with about 3 years to 4 years ago. And the benefits of that, that's always a work in progress. It leads to an awful lot of productive tension internally from a standpoint of where roles and responsibilities accountabilities lie. But we're through the tough part of all of that. And example are operations and supply chain team, we have moved from internal metrics with customers that used to be delivered in full on time to now perfect order, which is a higher standard of delivery, and we're at well over 90% perfect order and our Net Promoter Scores are showing that. Our procurement teams have been continuously finding opportunities to optimize. We're scheduled to hold our first procurement supplier day next year, something we never would have thought of or conceived of back 2 years, 3 years, 4 years ago. So, there's a maturity aspect and Jim certainly can comment on shared services. And the work that is going on there and how we've evolved that. And so, I think there's structural cost savings that are coming about from the global operating model across all aspects of global -- what we call global business services, and Jim can comment on that. But I think we're in the early innings of the benefits coming from the resegmentation. We kind of highlighted some of that. And that's coming from that laser-like focus, I think that these now more global or multiregional segments are bringing and the accountabilities that the management is feeling with the line of sight to their customer base. Sorry to be a little bit long winded, but it's a good question. And we, ourselves, to be quite frank, are doing some sole searching and reflecting because we're pleasantly surprised, pleasantly pleased, but nonetheless, trying to make sure we clearly understand it. But we feel good about multiple levels of performance.

Josh, I would add that when we look at our Food and Industrial Ingredients types of businesses, there's a cadence in the business that we've tightened, right? So, it's around how is the raw material cost changing? How do we implement our pricing and our contracting, how does that reflect against expanded hedging and then just running the assets at a reasonably good utilization? So that is helping support the higher op income margins that we're seeing both in our U.S. can F&I business as well as in our LatAm F&I business. I think on our Texture and Helpful Solutions, the structural improvements that I think Jim alluded to are still a little bit in the early innings is it's really is around kind of which products and which solutions we can provide for customers recognizing that the better job we do there, there's even more utilization of our downstream assets, which really enhances our gross profit growth. So, I think yet to come there.

Really helpful. I appreciate all those comments. I guess I did want to follow up that. Earlier in the call, you talked about a balance of pricing with volume growth to deliver year-on-year growth next year. I think your comments earlier on contracting seem somewhat optimistic there. So, I don't know if that comment is geared just with concerns on what demand growth looks like or if there's increased competition elsewhere but how does you see that balance playing out for you?

Yes, not to be evasive, I just think it's early yet still in the process. And we feel good about the momentum that we have as we finish the year and don't sense anything other than perhaps the normal working capital management that goes on at customers in December month. And corn is fluctuating a bit and...

Reasonably affordable. Yes. And generally, you're seeing, I think, GDP across the globe in some of our key countries of improving is somewhat the -- if I could generalize the global interest rate environment softens, that's generally good for demand, and that's the type of industry utilization that we're seeing is increasing year-over-year.

Yes, then interest rates are remaining elevated. So, I think that...

But as they come down, we might see some management towards GDP growth.

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

Good morning. Congratulations on the quarter. I would normally start with this because -- but this year, your financing costs have been very volatile given what's been going on with currency and down almost $100 million -- not $100 million, almost $50 million from original guidance. So just -- this is a big if, but if currencies were stable from here on out, which is unlikely, but if they were, how should I be thinking about net financing costs for '25?

Yes. I think we've had some FX gain which is offset or lowered our financing costs. I want to say we're about $9 million to $10 million year-to-date, favorable. I can follow up with you on that. But that's generally, if I think about what's happened in the quarters. I think the other really unanticipated piece, Heather, was that the lower cost passing through our working capital, we just didn't have to invest in working capital this year. In fact, it's been a bit of the reverse. It's been a source of cash. It's allowed us to pay off or pay down any kind of short-term lines of credit. We're not carrying any CP and obviously, short-term rates have been in the 4% to 5%. So instead now we have some cash balances, and we're earning some interest income. So that's -- I think that's really been the two big drivers of the expectation for financing costs for the full year.

Okay. Perfect. And then on the protein fortification business. So, I think, if I remember correctly, you guys were reducing your losses there by roughly 1/3 this year. Is it fair to think that you could reduce it by a similar amount going into '25? Or how are you all thinking about that?

Yes. That's exactly how we're thinking about it. We've had those internal discussions, obviously, as we're putting our budgets together for next year. And again, just a reminder, protein fortification is within the -- all other category. And that group does consist of our protein fortification or sugar reduction and our Pakistan business of which we have a 71% stake and Pakistan and sugar are generating positive operating income and they're growing, and they will continue to contribute positively. But protein fortification is loss-making but we have been actively working a turnaround plan to steadily improve the health of that trend operating unit over the next 1 years to 3 years. And this year, there will be, we have line of sight to a significant year-over-year improvement in operating income. And proportionately, we estimate that we should see that same order of magnitude of improvement next year based on business that we have actually contracted heading into next year for that relatively small segment but because it's loss-making it's worth highlighting, and I appreciate the question. So, thank you.

Yes. So, when you're thinking about that improvement in '25, is it similar for the Canadian and U.S. assets? Or is one of those benefiting more? Because I know I can't remember the magnitude, but there was antidumping duties put on Chinese imports. So, are you seeing more of the improvement in the U.S. assets? Or how should I think about that?

Yes. I would say that my comments were based on the entire protein fortification business operating segment and the higher value or P-protein isolate business is the business that is carrying the improvements right now and that was what my comments were predominantly based off of in relationship to this year's improvement in operating income and then what we project for next year being proportional.

Okay. Thank you, so much.

Thank you.

I'm showing no further questions at this time. I will now turn it back to Jim Zallie for closing remarks.

All right. Well, thank you all for joining us this morning. We look forward to seeing many of you at the upcoming Texture Innovation Day in Bridgewater, New Jersey next Thursday. And I want to thank you for your continued interest in Ingredion.

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