Ingredion Incorporated : Inc at Baird's 2019 Industrial Conference

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INGR - Ingredion Inc at Robert W Baird Global Industrial Conference

EVENT DATE/TIME: NOVEMBER 07, 2019 / 5:30PM GMT

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Client Id: 77

NOVEMBER 07, 2019 / 5:30PM, INGR - Ingredion Inc at Robert W Baird Global Industrial Conference

C O R P O R A T E P A R T I C I P A N T S

James D. GrayIngredion Incorporated - Executive VP & CFO

P R E S E N T A T I O N

Unidentified Analyst

(technical difficulty)

for joining us. We're really pleased to have Ingredion here at the conference. We've got Jim Gray, the EVP and CFO, who's going to give a presentation. We'll have some time for Q&A afterwards. But Jim, please take it away, and thanks again for coming. Appreciate it.

James D. Gray- Ingredion Incorporated - Executive VP & CFO

Great. Thank you. We'll just -- since we're post earnings call, but not in a webcast environment, our forward-looking statement. Some of our statements here may be indications of performance, but things change. I don't necessarily know -- we have not been to this conference. So some of you may or may not know Ingredion. I'm going to go kind of quickly into an overview, and then I'll tell really kind of what our business is about and maybe how it compares.

So we're $5.8 billion company. We sell into about 112 plus countries. We operate in 26 countries. We're a long-timeChicago-based company. Corn Products used to be the, kind of the precursor company. In 2012, we merged with a company named National Starch out of Akzo Nobel, and it really kind of diversified our footprint. So overall, what we try and do is look at total shareholder return, both in forms of a dividend as well as kind of earnings growth. And generally, we've tried to focus in that high single-digit to low double-digit type of TSR.

We've had some challenges in our business in '18 and '19. It's a little bit related to the foreign currency markets and a little bit related to -- so how corn trades in the U.S., and I'll explain a little bit about that. But generally, we're a fairly high-margin business, fairly high value-add, and the ingredients that we sell into food and beverage across the globe, a very, very diversified customer base. And we generally work more towards higher functionality and higher value-add in the products that we're providing.

One of the things that we focus on outside in, when you think about the world and you're looking at actually as you eat your lunch and you're thinking about things like, well, what's the salad dressing that's on that? What's the sauce? And how hot is that gnocchi that you're having? Is it retaining heat? We're in the business of helping food service. We're in the business of helping consumer packaged goods with things like sauces and condiments as well as overall texture. And some of the functionality that we achieve is actually delivering things like heat retention and delivering creaminess, delivering polish or sheen. These are where our starches and our ingredients play a role in providing some of that mouth feel, some of that texture, okay?

So why does that matter? When you look at consumer trends, a lot is happening in our world. And it's probably happening in your own household. There's probably members of your household, maybe even yourself, where you're looking at what's on the ingredient panel, and you're reading in the ingredients and you're looking for fewer words. You're definitely looking for fewer multisyllabic words that describe things like preservatives and things like that. So we do very simple things like tapioca, corn syrup, right? So we're very much in the business of delivering very high-functional starches, where they're from natural sources but employ a fair amount of technology to get to that type of performance in that ingredient.

Consumers want stuff that's traceable. They want to know what cornfield or what tapioca farm in Thailand did it grow on, how did you track it in the batch that came into your factory? When you transferred it how did you track that all the way through? So we're very much into a traceable supply chain worldwide in our ag inputs. We're mindful of consumption of sugar. Yes, we sell high-fructose corn syrup, but we also sell a number of other blends. And we sell high-intensity sweeteners, and we're very much focused on that worldwide transition and being a player in that worldwide transition.

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Client Id: 77

NOVEMBER 07, 2019 / 5:30PM, INGR - Ingredion Inc at Robert W Baird Global Industrial Conference

We're also very cognizant that food anywhere, literally food on-the-go, right, largest on-the-go food market in the world is in China. Yes, thank you very much for throwing that out. And we learn from what the demands are from our customers and what -- how they want the food to show up at the doorstep, okay? And that's really important for the stresses that a hot meal or a soup or a sauce goes through as it travails (sic) [travels] from kitchen to motorbike to up to the stairs to your front door.

Jim Zallie is our CEO. We've laid out really 4 strategic priorities that we're following for the year. The specialties business is what I'll highlight for you here today. We have a cost reduction program, which we call Cost Smart, which is chasing sustainable cost reduction. We're very much focused on commercial excellence, and we have a broad purpose and values that we've implemented with our overall team.

I want to talk about our business in terms of specialty versus the other part of our business, the core. We've been able to grow our specialty business. This part of the business is growing mid-single to high single digits. It delivers about 2x the profitability of our core business. I would say it's much more differentiated and has a deeper competitive moat relative to the core business.

We play in a really big market. So the specialties market is focused against this $41 billion global part of ingredients. Within that, you'll see things like starches, which is in the red, but we have a gums business that is in hydrocolloids. Plant-based proteins is 1 of our newer platforms where we're really focused on non-soy proteins.

This is our driving growth road map. Within that, if you think about each of these planks and you can -- this is on our web page. It's on our Investors site. But really, I want to -- the 5 pies in the middle are where we're focused. The 1 on the far left, the starch-based texturizers and then the clean and simple version, that stake's about -- that's your corn starch, your tapioca starch, your rice starch, your potato starch and all versions of functionality, right?

So how many of you have made pudding? You ever had chocolate pudding, vanilla pudding in your home, right? And you sit there and you take and you go. You put that powder in the bowl. And then also -- and you add milk, and you wonder like wait a minute, how does it get to that texture, right? How does it get to that sheen? How does it -- that's a cold wet swelling starch, right? It's an older technology, but it's a cold wet swelling starch -- it's, by the way, cold wet swelling starches are very popular for instant soups, all throughout Asia right now.

So we employ the technologies to get those starch molecules so they don't stick together and they don't spread, okay? So that provides that very consistent texture in the food product that you're experiencing. We don't have to do the taste. We don't have to do the chocolate powder, right, because that may only be half a teaspoon. But the bulk of what is in your bowl, that's usually the starch that we're providing.

I've outlined here starch-based texturizers. Clean and simple is the way that we do this with a non-GMO product, all-natural. This meets all of the strict food standards within Europe in terms of not being artificial. You may have heard us do plant-based proteins. We have put a significant amount of assets into plant-based proteins. These are yellow peas, fava beans, chickpeas. Basically, we're trying to get to a more complete protein. These are input into meat alternatives that have been -- some companies have had kind of fun runs in Wall Street. I will say that the meat alternative or the plant-based protein trend is massive, broad and wide.

So there is a lot of companies desiring to make food products that have a little bit less carbohydrate and a little bit more protein. So it's not just the newfangled hamburger that's coming to you at Burger King or someplace like that. This has been a trend for a while. And what we're doing is really making some breakthroughs on how you deflavor this and how you deliver it at different value price points and you deliver it with compelling ingredients, right? And that -- our world is going to change that way. There's going to be ingredients that we never really thought of that are more complete proteins that all of a sudden are going to become -- it may be the next new fad trend, right, but it actually is delivering fairly good nutritional profile at a reasonable workability.

We're also into sugar reduction. One of the things -- obviously, we know the sweetener space really well. We know how to formulate with sweetener syrups, but the idea is to be able to say, take out the bulking property that a liquid sugar or corn syrup provides in a cupcake, in a soda, in ice cream, and you try and replace that with something that's either high-intensity natural like stevia or replace it with something that is artificial. And you just took out about 10% to 12% of the weight.

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Client Id: 77

NOVEMBER 07, 2019 / 5:30PM, INGR - Ingredion Inc at Robert W Baird Global Industrial Conference

So now, wait a minute, what are you selling to the consumer? You're not selling frozen water, vanilla and stevia because that's not going to taste the same. You don't want to put more milkfat in because that's really expensive. So you have to figure out how you build back that texture and that bulk, and you want to do that in a way that's affordable. And by the way, the world consumes millions and millions of gallons of ice cream.

So 1 of the things that we do in our business is we think about what are those ingredients that allow you to actually have that texture to simulate that mouth feel but don't provide the caloric input, okay. One of the newer products that we're just commissioning is allulose. Allulose has some wonderful mixing properties to it. It's very low calorie. It's a derivative of the fructose molecule, pretty exciting stuff, can kind of start to change the landscape if it actually has a lower cost in use.

We do think about ESG. We're very, very much, much more into ESG than probably a lot of my counterparts. When I talk to CFOs in the U.S., it's kind of a much more interesting experience to talk to CFOs in Europe. We are obviously a medium to heavy manufacturer. We have a lot of energy use. We have wastewater that we're very, very conscious of managing. But more importantly, we really try and track the sustainability of our agriculture, okay. And that's not easy, and we've been doing it for a long time. We're up to almost 2 million acres of sustainable farms from which we pull corn and other crops.

We operate across the globe. We operate in 4 geographic segments. North America is our biggest, just over $3 billion, but we have a leading position in South America. We have a leading position in EMEA with a large business in Pakistan. And then we're really more focused both in China as well as kind of Southeast Asia, with a very strong presence in tapioca.

Our performance, and so what has for you all in terms of where stock valuations are today, I'm a bit of a contrarian. Maybe that's a surprise. Our performance has been challenged from '17 to '18 and into '19. We've really had 2 impacts, I think broad impacts, against the company. One has been FX. Over that time, we've probably faced almost $400 million of net sales impact on our business. Corn is priced on a dollar basis globally. When I get FX weakness, I get higher corn costs, we need to pass through price in order to recover the cost of that corn in our countries. We've been doing that. We've been catching up. That's a tailwind behind the company. But if there's a strong dollar, generally where we operate in the world, there's going to be some FX. We're always going to be playing that game to catch up.

In our North America business, we've seen some disruption in terms of the cost of our corn. That has been mostly impacted by the U.S.-China trade dispute, a backup of soybeans into the United States. And as we press soybeans, we've seen a byproduct that we sell is at a lower value relative to soybeans because there's been so much -- such a surplus of soybean protein and soybean oil. These have been -- I don't know if you'd call these temporal or structural. I think these impacts are lasting, definitely, the back half of '18, all of '19. We're having customer conversations around this impact of cost of corn to us for 2020. I don't see the soybean necessarily unwinding in 2020. I think that will take another 2 years.

It doesn't help that African swine fever is really impacting the hog herd in China, and therefore, you have less -- just less demand from China for soybean overall. But these things in our business, much as you track other industrial companies, we have our own little cyclicality. So we try and explain these and try and talk about these impacts. I would just say that there's a nice range of profitability for our company. We're typically in a 13% to 17% type of adjusted op income margin business. And yet, the specialty part of our business is really growing and continues to grow.

If you have a chance and you're interested in the company, this is from our presentation in February to the City (sic) [Consumer] Analyst Group of New York. I'll lay it out because the navy bar is our specialty revenue. It's about 29% of our company's sales. In the bottom, it's about 40% of -- 48% of our adjusted op income. As you look forward in our 4-year profit growth outlook, the blue bar is where we're going to get all of our sales. That's where we've documented our 5 growth platforms. That grows and that becomes upwards of 55% to 56% of our profit pool.

And these are businesses that, again, are growing mid-single to high single digits and have a lot of technology and a lot of know-how and a lot of go-to-market differentiation in order to design in these ingredients into recipes for customers. So there's -- it's pretty -- not -- this is not a starch pun, but it's a very sticky business. Okay. It is a starch pun, but.... We have a savings program. We have a goal of $125 million. We're upwards of $40

million as we end the year here in '19.

Our outlook. We really anticipate 1% to 4% net sales growth, constant currency. If you look at our operating income, we really think from where we're at here, mid-single-digit operating income growth is very, very possible in our outlook. And as we think very much about how we use strategic

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Client Id: 77

NOVEMBER 07, 2019 / 5:30PM, INGR - Ingredion Inc at Robert W Baird Global Industrial Conference

cash and return it to shareholders, we should see EPS growth more in the high single digits, and that's what we're targeting, okay. Stock trades at about a 13 P/E right now. So I would say that relative to the performance, we still need to perform for '19 and for '20. And then I think we'll start to kind of more demonstrate that this type of profit growth algorithm is achievable.

How we use cash? We measure cash from ops. We really have CapEx that is -- both stay in business, but we have put a fair amount of CapEx into growth capacity for these new platforms around the world. We're very conscious of returning money to -- in the form of dividends to shareholders. And then that free cash after dividends, we really think about for either incremental M&A, if I'm targeting something that's well above my WACC at 8% or so, or if not, then we're thinking about share repurchase, okay. Fairly balanced -- fairly good balance sheet right now.

So our overall outlook, more than $2 billion of net sales from our specialty business. Again, this is kind of twice the profit rate of our core business. And from that, just in terms of the weighted mix, you'll see kind of margin expansion as we go forward.

That's it. So maybe any questions? We have a few minutes left.

Q U E S T I O N S A N D A N S W E R S

Unidentified Analyst

So if anyone has any questions feel free to e-mail them to [e-mail], and we'll weave them in. Already a few in here. So I guess 1 thing that someone asked is on the shift towards the specialty business, and maybe can you talk about the drivers of that shift? How you're executing on it? And then also the implications for the P&L. So is the shift to specialty enough to kind of drive operating income and free cash flow growth offsetting the headwinds in kind of the other business over the past 5 years?

James D. Gray- Ingredion Incorporated - Executive VP & CFO

Yes. We highlighted the consumer trends that I think are pulling those ingredients. But really, if you look around kind of developed countries and you see a bit of households that are more educated and/or have higher income levels. These are households that are actually -- they're scrutinizing labels. And they're putting pressure on Mondelez, and they're putting pressure on Nestlé, and they're putting pressure on Danone. And they absolutely -- these multinational FMCs as well as the foodservice outlets, you've seen it with Chipotle, you've seen it with Panera, they absolutely want ingredients that are clean label. So not modified -- they want functionality, but they don't want them going through a chemical modification process, right? And they want non-GMO. They want certifiable ingredients. And by the way, they also want them 24/7, 365 days a week, rain, sleet, snow, whatever, right? So you have to still deliver against the supply chain, but you have to be able to take that functionality of whether it's a starch, gum arabica, plant-based protein and be able to work it into those recipes. So that's absolutely pulling this ingredient demand as we kind of go forward. I think it's important to note that we sell a syrup for about $500 a ton, but we'll sell a specialty starch for way upwards of $1,500 to $2,000 a ton. So as we go up in terms of value per ton, not only are you selling a product that's more dollars, but also has a higher profit margin on it. So it's affording the investment as well as changing your overall mix of your op income. Yes.

Unidentified Analyst

And then, I guess, following on pricing dynamics. Can you discuss kind of the customer contracting process? How easy it is to implement pricing increases? And then the question from the audience is on tariffs specifically, impacts there and the success you've had in passing through cost headwinds to customers?

James D. Gray- Ingredion Incorporated - Executive VP & CFO

Yes. So well, unlike the U.S., depending upon what country you're in, some countries are very, very acclimated to price change and price increases. So in Argentina, our price changes every 4 to 6 weeks. That shouldn't be surprising to folks, if you're familiar with inflation rates in Argentina. I think

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Client Id: 77

NOVEMBER 07, 2019 / 5:30PM, INGR - Ingredion Inc at Robert W Baird Global Industrial Conference

where you have price changes that are more structural and difficult is in more developed economies where the businesses that we sell into are kind of used to low inflation. But for example, in Korea, we've had a devaluation of the Korea won relative to the dollar. All of the starch makers in Korea buy U.S. dollar-based corn, right? Whether they're buying it from the Ukraine or they're buying it from Europe or they're buying it from the U.S., corn's priced in dollars. So it lands in Korea at a higher transactional cost, and now they're trying to price through.

So what we generally see in our business is a little bit of delay. So sometimes, is it going to take 3 months, 6 months, 12 months, in some of those economies, but we're very focused on -- we have to be able to recover that cost of corn. Tariffs have impacted us mostly where we're exporting a pretty high-value starch from the United States. And specifically, we've called out in our earnings call landing that product in China. And so we have seen tariffs go from 6% to 21%. And so that particular product, if you're trying to go into China and push through a price increase that's based upon a higher tariff, that's very difficult to do.

So we'll see if that mitigates as we go forward. We do manufacture in China, too. So we have alternatives, but they're kind of less functionality relative to our customers. So we're seeing some customers think about churn. China, the customer market is very different. So the customers are led by the big brands. The big brands are the ones that are growing. The big brands are the ones that are driving all the growth. So they have the ability to say well, wait a minute, I can make the decision if I want to downgrade on my ingredient to something that -- so that's how a tariff has a secondary impact on the customer market.

Unidentified Analyst

Another one is, how much of your innovation in specialty ingredients comes kind of from in-house versus M&A? And I guess, wrapped up in that, how does that compare to competitors? And maybe can you talk about market share, who your competitors are?

James D. Gray- Ingredion Incorporated - Executive VP & CFO

Yes. If you talk about kind of leading functional starch, we have the leading market share in the United States and Canada, I would say we're kind of 1 of 4 or 5 players in Europe, all with relatively kind of equal share. We're clearly the leader in Mexico. We're the leader in South America. I would say that we're the leader in China, and -- with regard to the type of starches that we're selling. The -- overall, what really helps in that position is, is that we innovate along multiple dimensions. So you have, obviously, the incremental tweak that you need to do, and there's many, many of those. We have idea labs. So places where we can innovate with customers, really kind of in the field solving with our tech service team. But you see trends as you look around the globe in terms of where starch might need to evolve. Plus out of our process technology team we can see breakthroughs like, wow, we can make a starch without using water, right? And so the innovation really comes as we look across the globe at the thousands and thousands of recipe designs and modifications that we do a year and see where is the trend. So I'd say innovation is really more kind of internally driven.

Unidentified Analyst

That's helpful. And unfortunately, that's all the time we have here. But the team will be downstairs at a breakout question (sic) [session], if anyone has any follow-up questions. So please join me in thanking Ingredion and Jim for their presentation here.

James D. Gray- Ingredion Incorporated - Executive VP & CFO

Thanks very much.

Unidentified Analyst

Up next in this room, we have Quaker Chemical Corporation; next door in the South Ballroom is CNH; the State Room, Thermon Group Holdings; downstairs in LaSalle, Hannon Armstrong; in the Delaware room we have Concrete Pumping Holdings; in Lake View, Flogistix.

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Client Id: 77

NOVEMBER 07, 2019 / 5:30PM, INGR - Ingredion Inc at Robert W Baird Global Industrial Conference

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