Ingredion Incorporated : Morningstar Management Behind the Moat- INGR Fireside Chat Transcript

	Morningstar Management Behind the Moat- INGR Fireside Chat
	Wednesday, September 15th, 2021
Seth Goldstein:	... just because we're going to talk about food and beverages today. Within the
	food and beverages industry ingredients allow us to get the perfect taste,
	texture, have the right amount of sweetness while also meeting our health and
	nutritional needs. Ingredion is a premier food and beverage ingredients
	company operating in this space. And I'm excited to be joined today by
	Ingredion's Chief Financial Officer, Jim Gray. Jim, thanks for joining us.
Jim Gray:	Glad to be here Seth.
Seth Goldstein:	So before we get into Ingredion as a company, let's start at a high level.
	Ingredion sell ingredients primarily to the food and beverage industry and you
	categorize ingredients as either specialty or core ingredients. How do you define
	a specialty versus a core ingredient?
Jim Gray:	Sure. Great question, Seth. I think companies that sell ingredients into various
	packaged food companies and into food service may have a host of different
	reasons. We use essentially kind of four or five criteria when we look at an
	ingredient. First, it has to have pretty unique functionality that is going to be of
	high value add to the customer. Two, we're looking at a market that we think is
	growing. Three, we're looking at what's our intellectual property and know how
	around making that ingredient. Four, is it differentiated versus what
	competition may have. Not saying that a competitor may also have the same
	technology, but usually it's not multiple competitors. And maybe two or three
	competitors that are providing the same ingredient and have the same or
	similar type of know-how or approach.
	And then five, we look at gross margin and what we think the sustainable gross
	margin for that product will be over a long horizon. And so that's just to clarify,
	we only make a classification of an ingredient as a specialty once, when we
	introduce it to the portfolio. And so we're never switching from a core
	ingredient to a specialty. So you either start as a specialty and you live and exist
	as a specialty, or over time some specialty ingredients may actually become a
	bit more common or the value to the customer, the unique value to the
	customer may fall over time. And then we'll reclassify that as core.
Seth Goldstein:	That makes sense. And Ingredion has targeted five categories, four specialty
	ingredient growth, starch based textures, clean and simple ingredients, plant
	based proteins, sugar reduction and specialty sweeteners and food systems.
	Will you define each specialty category and how Ingredion wins in this space?
Jim Gray:	Sure. I think in maybe the first two, so starch based texturizers, and then it's
	close cousin clean and simple. Here we have a starch molecule and it can be of
	different sizes. But really what we've gone is from a native starch to some type
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of modified starch. And then if that modification and involves either an enzyme or a chemical, then we've also figured out a physical process that can get us to a modified starch, but that is by using no chemicals. And so along that continuum, which you really have is you could have a corn starch, a tapioca, potato, rice, really kind of a whole suite of starches. And what they do is... starch is just a pure form of a flower. And as such it has an ability to act in a recipe where it provides separation and it provides volume. And so you and I know that as consistency.

So we eat something and we're eating a porridge and it's very soupy, or we're eating a pudding and it's a bit creamier and thicker, or you're chewing a cracker and the cracker crumbles easy, or we're chewing a cracker and the cracker is really hard. And same is true for cheeses and yogurts and dressings, condiments, et cetera. So that's really where our starch based texturizers. When we say texture we're talking about what's the composition of the food item that we're eating and how does it feel in our mouth and how does that provide crunchiness or smoothness? Okay. And so textures are really big part of taste and appeal that people have towards specific foods. Clean and simple is just one version of that that is really natural and allows us to work really well within the EU guidelines around what's a food product.

The third platform that I highlight would be sugar reduction and specialty sweeteners where we're really looking at both high intensity sweeteners that are natural, like stevia, as well as the other ingredients that may be non caloric, but also add back bulk. So whether it's erythritol, whether it's allulose. What we're trying to do here is both mimic both the sweetness profile of sugar, but also what does it feel like in our mouth? And so that's one of the things that we're really driving. We think it's a massive growth opportunity globally. And obviously it goes toward low calorie or very no calorie type of sweeteners. Our fourth platform is plant-based proteins and we specifically focused on alternatives to soy proteins, particularly in the US market where we think there's a lack of supply.

And you see things like yellow pea and fava bean proteins, which have a great amino acid structure to really help with muscle rebuilding. Quite popular and obviously very sustainable, but really it's the right type of proteins that I think make it... deliver the nutritional benefit. We think that plant-based proteins can continue to be just a really large market opportunity, multi-billion dollar market opportunity, complimenting the whole thinking towards wellness and how much we eat animal proteins versus alternatives.

And then our fifth and final growth platform is food systems. And this is where we're looking at, hey, how do the different ingredients combine to move us a little further down the value chain towards our customer where we can help them both with value add, but we can also help them with a really unique combination, whether it's texture, natural fiber, we're delivering protein, or potentially some of the bulk build back and sugar reduction. So it's, how do we

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	bring these various components together in a way that's very symbiotic that
	delivers a unique value to the customer.
Seth Goldstein:	That makes a lot of sense. We award Ingredion a narrow economic moat rating
	based on intangible assets from the creation of the specialty products and
	switching costs, where once these products tend to be in a food or beverage,
	customers are very hesitant to switch for fear of turning away consumers. But
	what do you view as Ingredion's competitive advantage?
Jim Gray:	Yeah. I don't know if a narrow moat versus a deep mode is warranted. I would
	offer that... First one you have to figure out if you look at our value chain, very
	simply, what's the ag input that you're buying? So we have some pretty unique
	ag inputs, waxy corn, versus just a normal dent corn. We do a lot of non GMO
	corn, which is special contract. We have tapioca sourcing and where we source
	yellow peas and gum arabica. So how you pick the ingredient and then, two,
	your conversion process while we have relatively large assets, but there's also
	just a tremendous amount of know-how and how you both efficiently and
	effectively convert that ag input into a very consistent and pure ingredient. And
	you can do that economically, right? So that means valorizing all parts of the
	leaf or all parts of the corn kernel and making sure that you do that well.
	And then third, as you look at a how our tech team designs in that recipe for
	customers, and that's the very sticky part of our business, right? Because there's
	certain functionality and how the molecule works. But we also save a lot of
	value. So, as an example, if we pre dry or pretreat a starch and then it's used in
	making a turnover, an apple pie, a cherry pie. And we can make that cross both
	flakier but also easier to bake. We save the customer time in terms of energy in
	the oven, we speed up the conveyor belt, so we expand capacity. And what
	we're asking for is the modest value in return for the pre-cooked or the
	pretreated starch that we're selling there.
	So there's ways that we can really impact the value-add for the customer, by
	getting the recipe and the molecule right, by making the ingredients that we
	make pure and consistent every day. And then still polling those from
	everything that's plant based, right? Because everything we make is plant
	based, right? It's interesting as a company to say, wow, everything that they're
	making is coming out is from some type of plant. And so I think when you string
	those together, it's very difficult to replicate. And look and that's why Seth when
	you look around the world we only have two, three, four competitors in various
	countries in various regions, right? You can't catch up after time when you just
	have that group of competencies and they string together in that value chain.
Seth Goldstein:	That makes sense. Let's talk about your strategy. And if we go back to 2015,
	Ingredion sold nearly all corn based products. And while corn based ingredients
	are still the majority of sales, they continue to decline as a percentage total. And
	[inaudible 00:10:53] multiple tech and acquisitions focusing on new specialty
	ingredient platforms. What was the strategy when you started back in 2015 and
	how has that evolved today?
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Jim Gray:	Yeah. When you look at what our deep expertise has been, it's been obviously in
	corn and there's several varietals of corn that we use. We do grow some seeds
	to grow our own variety. And we really looked at what was the type of starch
	molecule that we're pulling out of the corn. And we had completely explored
	that functionality. And then when you start to get into some other raw material
	inputs like tapioca, you can see that it had slightly different properties in terms
	of either the molecule length or the functionality. When we'd already built this
	great go-to market team, and we just needed more tools in the toolkit to be
	able to be even more robust in solving the customer's design, recipe design
	issues. And so we added tapioca, potato adds a very long starch length, we've
	added rice, which is a very short starch length.
	And we've done this all in terms of being able to say, hey, let's fully leverage
	that customer acquisition opportunity. Well, we're in front of that customer
	let's be as robust as we can be and as agnostic as we can be in providing that
	ingredient solution. And so that got us into TIC gums, which added gum arabica.
	We continued to look at other hydrocolloids. We continue to look at natural
	fibers. All in the effort that by being able to provide these very complimentary
	ingredients we can really tweak and get just the right type of composition and
	taste that the customer's looking for.
Seth Goldstein:	And how do you view the evolution of the portfolio going forward? Are you
	satisfied in all the areas you're playing in today or do you see the need for
	further complementary industries?
Jim Gray:	Well one of the things that we outline in is, hey, how big is the ingredients
	market and which specific ingredient segments are we looking at? So one was
	when we looked at plant-based proteins focusing on a protein versus a
	carbohydrate is very different for us in terms of selling. But actually separating
	the protein from the carbohydrate and from the fiber is something we've been
	doing for a hundred years, right? Corn has protein in it and gluten meal is what
	it's commonly referred to. And we pull out that four to 5% of that gluten meal at
	a molecular level, in a wet milling process. And we valorized that, sell that to the
	marketplace. So looking at yellow pea or looking at fava while technically a bit
	different, you're still pulling out the protein molecule from the starch.
	And so we knew from a manufacturing point of view that we could get there,
	but now what we're doing is really saying, hey, how does this particular type of
	protein work within recipes and how is it viewed by packaged goods
	companies? Protein was very incremental to our entire portfolio. And you could
	kind of say, we did the same thing with corn syrup, right? So obviously one of
	the leading corn syrups is HF, a high fructose corn syrup. And in certain markets,
	it's fine because it's growing along with younger populations. In the US, it has a
	bit of a headwind is kind of full calorie soda has declined. But we said, well, wait
	a minute, let's flip that into an opportunity. And instead of looking at necessarily
	artificial sweeteners, we said, let's look at what we think is naturally based
	sweeteners because we thought that long term naturally nature or from nature

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	or organic would have a long term appeal to younger generations and
	consumers.
	And I think that's proving hard quite a bit. So we really then focused in on stevia
	and we were able to acquire three quarters of PureCircle, the global leader in
	stevia production last year. And again, that's very complimentary, right? Same
	types of customers but we're offering them a different solution yet pretty
	different set of competencies and value chain and extracting stevia and
	converting it. So those again, what I really like about these businesses is they're
	complimentary to, 100% incremental to what's our texture business.
Seth Goldstein:	Yeah. That makes sense. Let's zoom out and look at the industry as a whole.
	How has the competitive landscape changed over the past several years,
	especially in light of some pretty large competitors doing mergers and
	acquisitions? And how do you see Ingredion's competitive position evolving
	going forward?
Jim Gray:	Sure. Seth, one of the challenges that I think that we're facing and it's maybe a
	combination of two trends, which is one, when you really look at flavor houses,
	right? So a lot of companies really have a deep expertise in just creating what's
	the right mixture of a few molecules and they sell flavor and they might sell a
	flavor now while high value add and a lot of competency behind that, it comes
	in pales and buckets and you usually smaller quantity because it's actually, the
	flavor is so strong, it can just infuse across the entire batch that you're mixing up
	for your cupcake, so to speak. But when you actually then think about, well,
	what's in that cupcake, what's the flour, what's the oil, what's the milk, what's
	the butter, the sugar and you start changing the major ingredient components.
	And all of a sudden you want to go from what was traditional to something
	that's completely new and surprising.
	So I want to make a vegan yogurt, wait a minute, you're going to make a vegan
	yogurt, yogurt's dairy based, right. And you're like, okay, I'm going to make it
	with something completely different. And so now that requires a change in the
	big ingredient components. And so that's when you find, hey tapioca, or
	coconut milk or other types of gums can come in and then replicate what that
	creaminess is of what we think is traditional yogurt, but surprise and delight the
	consumer it's actually vegan. And now what you do is you introduce yourself to
	a whole different audience of consumers because they had dairy sensitivity and
	now they can actually still have a yogurt, but without any of the side effects of
	that dairy sensitivity.
	Our strategy is that, hey, when it comes to changing the entire composition of
	the ingredients not just the flavors, the flavor houses... we work with flavor
	houses, they're our customers, right. But when you're going to change that
	entire composition, now you got different aspects of aroma, different aspects of
	texture. And that's introduced by these things like, hey, I have a potato starch, I
	have a pea protein maybe I have some beet juice and that's formulating, hey,

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