Ingredion Incorporated : Consumer Analyst Group of New York (CAGNY) Conference Transcript

Event:

CAGNY 2021 Ingredion Q&A Session (Feb 16, 2021)

Speakers:

James P. Zallie, President and CEO

Jim Gray, Executive Vice President & Chief Financial Officer

Moderator:

Tiffany Willis, Vice President of Investor Relations and Corporate Communications Officer

Q&A Session:

Tiffany Willis: Good afternoon, and welcome to Ingredion's break out session. I am Tiffany Willis, Vice President of Investor Relations and Corporate Communication Officer. I will serve as your moderator, for today's session with me, are Jim Zallie our President and CEO and Jim Gray our Executive Vice President and Chief Financial Officer. Now, we will go right into questions.

Our first question, how will your joint venture in Argentina impact your business in South America?

Jim Zallie: Well thanks, for that question let me take it first. So, we are very proud of the joint venture that we just announced on Friday with Grupo Arco in Argentina. Grupo Arco is a very respected company in Argentina, with brands that they sell around the world in more than 100 countries and they have a high-quality food ingredients business. The joint venture that we formed covers Argentina, Uruguay, and Chile and it combines three of their manufacturing facilities, with two of our manufacturing facilities.

The total revenue of the joint venture is going to be approximately $300 million dollars and will really provide an opportunity, for the two companies to leverage their manufacturing footprint across Argentina and for the Southern Cone. And then also, work together to bring a variety of both core and specialty food ingredients to the Southern Cone market, and bring innovation to customers from a stand point of how the joint venture is accounted for, from an accounting stand point, I'm going to turn that over to Jim Gray to handle. Jim.

Jim Gray: Thanks. As we disclosed in our 8-K, we will be having an impairment relative to our books mostly due to our accumulative translation adjustment, approximately $310 million dollars. We will also be impairing some of the existing assets, our property, plant and equipment, as well as contributing working capital to the joint venture. The joint venture itself will be on a stand-alone basis. We will account for it on an equity basis. And, I think to note, which is important is that our hyperinflation treatment for accounting in Argentina; which had traditionally shown up in our financing cost, that will now be against the equity income that comes from the JV. With that, I'll will turn it back to Tiffany.

Jim Zallie: Our core will hold a 51% state in the joint venture and Ingredion will hold 49% state in the joint venture.

Tiffany Willis: Perfect, our next question. How is Ingredion positioning itself with large markets, such as India and China? Can you provide some more color on this?

Jim Zallie: Yes, so from a standpoint of China. China is the largest specialty food starch market in the world. And, Ingredion has been operating in China for more than 30 years and we have been manufacturing in China for approximately 20 years and recently, we are investing more than $85 million dollars to expand our modified starch capacity to meet market growth demands. We weathered 2020 extremely well, when you consider the impact of the pandemic in quarter one and we delivered a very strong performance in China last year. So, we are very excited about the prospects of these investments that we are making to meet the market growth demands going forward and those investments will be commissioning in the first half of 2022. So, Jim any other comments you would like to make about China?

Jim Gray: Not about China. I think overall, ASEANI has also been a focus for us. We include India within our ASEANI region and generally see our ability to bring our starches and some of our other ingredients into India, as it's definitely a growth opportunity for us.

Jim Zallie: Yes, in India we have a small presence today, but a very good import model into India and continue to assess opportunities to enter that market more fully over time.

Tiffany: Perfect, our next question is going to come from Rob Moskow on specialties. It is a multi-layered question. What organic growth rate do you expect from specialty sales over the next five years to hit your 2025 target? Do you need acquisitions to achieve this 50% plus goal? Also, do you expect sale declines in corn-based, starch-based commodities?

Jim Zallie: Yes, I don't think we expect to see declines in necessarily the specialties corn-based products that we have. You're referring, Rob, to the big goal, that I have put out for the organization, which is to get our specialties to greater than 50% and that will come we believe through a combination of both organic and inorganic moves that we will make between now and 2024-2025. The growth rates by growth platform we did layout in the presentation and we expect to see mid-single digits for starch-based texturizers, clean and simple in the high-single digits, step changed growth with plant-based proteins and double digits, mid-double digits type of increases of 15% or so for food systems as well as sugar reduction. And then we intend to complete bolt-on acquisitions that add to the value proposition of each and every one of those specialty investments over time.

Jim Gray: Maybe, I'll just add that Rob I realized you asked a question from the prospective of 2025. What we lay out in our four-year goal is still an expectation for our specialty net sales to grow mid-to-high single digits.

Jim Zallie: Yes, and what I would say is what we are very consciously targeting to do is to diversify our portfolio beyond corn with specialty rice, specialty tapioca, and specialty potato to give ourselves, again, more formulated capabilities to problem solve and deliver more complete ingredient solutions to customers for texturing and that would be furthered complemented by the portfolio of plant-based protein that we offer. We think that approach is going to serve us very well when you think about a gluten-free application beyond corn for example, other snacks like cereals and a variety of other products.

Tiffany Willis: Continuing with the topic is specialties. The next question comes from Ken Zaslow. What percentage of the specialty business is protected by intellectual property? It looks like you are expecting specialty margins to be 18-20% by 2024. What gives you confidence to be able to expand these margins?

Jim Zallie: From an intellectual property standpoint, we have intellectual property that protects, I would say Jim, 20% or less of the specialty portfolio would you say or 25% of the specialty portfolio?

Jim Gray: Specifically, patented? Yes.

Jim Zallie: Yes, probably in that range and we believe because of the vertical integration, because of the investments that we have made, controlling the supply chain specifically around stevia or plant-based proteins and certainly, when it comes to starch-based texturizers. It affords us the best opportunity to maximize the margin and then also the food systems aspect of things. Where customers both big and small were seeing are interested in more complete food systems and solutions. So our approach again, is to have a complimentary suite of specialty ingredients that we can formulate with, and deliver those both as ingredients, where requested, or as food systems to allows us to maximize the margin capture for the offerings we will be making. So, we are confident that we can achieve the kind of margins that we have indicated tied to the specialty growth we are projecting, tied over the next five years.

Tiffany Willis: Perfect, continuing with intellectual property. The next question comes from Adam Samuelson. Can you also discuss your IP and patent portfolio across your specialty portfolio, which you just spoke about, Jim? But, where do you see the durable source of margin and competitive advantage across the key product categories?

Jim Zallie: I see the competitive advantage coming from the intimacy that we will have with customers aligned with being both broad and deep, along every one of those growth platforms. Again, I think our reputation is unparallel when it comes to starch-based texturizers. The franchise that we built in clean and simple and the player that we expect to be in a few short years, in plant-based proteins. Certainly, acquiring PureCircle has propelled us to a leadership position with the leader in stevia, which has a very formidable IP estate that we have acquired and has given us very good technology as well. So, I think by the breadth and depth of the offerings that we can provide for each one of those growth platforms, and again combining the four to produce the fifth, which is the food systems provides us an opportunity for incrementalintellectual property, but at the same time we want to be quick and nibble and agile and delivering and co-creating with our customers to deliver consumer preferred innovation. So, it's going to be about speed, its going to be about co-creation and at the same time developing the technologies that under pin each one of those growth platforms.

Tiffany Willis: Our next question is on M&A activity. Could you give an update on synergies from the recent M&A activity and has COVID accelerated or impacted negatively your initial plans?

Jim Zallie: So, let me take it first from a standpoint of PureCircle and then let Jim make some comments. PureCircle, we acquired I think it was in July of last year, we formally closed on the acquisition. We really were undeterred in relationship to the pandemic, on our ability to get after the cost synergies, the SG&A savings and we delivered and I think we stated in the earnings call approximately $14 million dollars of cost savings synergies there. We are working supply chain synergies right now, very hard and I don't think we are deterred there. The Verdient acquisition is being integrated as well.

One of the benefits, that Ingredion has when we make an acquisition like that in Saskatchewan, even though the border between the U.S. and Canada is closed. So, for someone like myself I can't travel to Canada necessarily without quarantining, but we have a whole team of engineers and manufacturing folks in Canada. In Canada, in our plants, both in Cardinal, Ontario as well as the London, Ontario plant and those engineers have been in Vanscoy and have been helping and assisting and leading that integration so we do not think that project will be delayed. We are projecting for that project to be completed in the first half of this year. Anything I am missing Jim, on M&A and integration?

Jim Gray: No, I would just add that we defiantly leveraged the fact that both virtual meetings with Teams, so you can get your experts where ever they may be in the world to be addressing the problem that you are facing within the integration. But, as Jim alluded to in our Canada example, but also in either Malaysia or China with regard to PureCircle we have local teams that have been able to get into the key facilities and help with whatever challenges we have been presented and keep everything on track and on time with regard to our integration plans.

Tiffany Willis: And the next question will talk about M&A further, but it's also going to talk about capital allocation. It is coming from Adam Samuelson. How do share repurchases fit into your short and medium-term capital allocation plans? Also, can you discuss the willingness to do a larger acquisition to more materially shift the portfolio away from legacy corn starches and sweeteners?

Jim Zallie: So, let me just make a headline comment on capital allocation, and then I am going to turn it over to Jim, and Jim can turn it back to me from a standpoint of bigger transformation acquisition. So, Adam thank you for the question. Over the last four years, Ingredion has deployed approximately $3 billion dollars in cash, spilt between buy backs as well as acquisitions, growth capital, and dividends. Jim, I am going to turn it over to you to give a break