Q3 2024 Earnings Summary
- Ingredion's structural improvements and resegmentation are driving operational efficiencies, cost savings, and higher margins, with benefits still in the early innings, indicating potential for further margin expansion and earnings growth.
- The company is experiencing strong volume growth in its Texture and Healthful Solutions segment, with 11% growth in the recent quarter, driven by strategic positioning in growing categories and investments in customer insights, suggesting strong future growth potential.
- Ingredion is reducing losses in its protein fortification business by approximately one-third this year and expects a similar reduction next year, moving toward profitability in this segment and contributing positively to operating income.
- The company's protein fortification business remains loss-making and will continue to negatively impact earnings for the next 1 to 3 years, despite efforts to reduce losses. ,
- Anticipated pass-through of lower corn costs to customers in 2025 may lead to reduced revenues and margins, as contracting is moving slower than last year and pricing negotiations may be challenging. ,
- Volume growth in key segments may be partly due to lapping weaker quarters from the prior year rather than strong organic growth, indicating that underlying demand may not be as robust as it appears, potentially affecting future performance. ,
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Capital Allocation and Excess Cash
Q: What will you do with excess cash?
A: The company plans to allocate excess cash by investing in organic growth opportunities, maintaining disciplined dividends—increasing it for the 10th year in a row—and committing to or exceeding its share repurchase goal. They are also considering timing for both organic investments and potential M&A opportunities, emphasizing a disciplined approach to enhance shareholder value. -
M&A Prospects and Transformative Acquisitions
Q: Will you consider larger acquisitions?
A: With a healthy cash balance, the company is open to acquisitions that accelerate capabilities and market position, including both bolt-on and larger opportunities. They are actively managing a pipeline of M&A prospects, focusing on buying revenue, profit, and talent that align with their strategy to be the go-to provider for Texture and Healthful Solutions, aiming to enhance growth and shareholder returns. -
Structural Nature of Earnings Improvement
Q: Are earnings improvements structural?
A: Management attributes the earnings improvement to structural factors such as the new segment structure and benefits from their global operating model. They highlight the focus and clarity from resegmentation, improved fixed-cost absorption, and ongoing structural cost savings, suggesting these improvements are sustainable and the company is in the early innings of realizing full benefits. -
2025 Sweetener Contracting Outlook
Q: Could pricing be up modestly in 2025?
A: Contracting for 2025 is moving slower than last year. About 50% of U.S./Canada revenue comes from fee contracts that reprice monthly with corn costs. They anticipate some pass-through of lower corn costs if markets remain similar, but note that industry capacity utilization has increased, potentially tightening supply and affecting pricing positively. -
Financing Costs and Outlook for 2025
Q: How to think about net financing costs for '25?
A: Due to FX gains of about $9 to $10 million and lower working capital needs—turning working capital into a source of cash—the company has paid down short-term debt and is earning interest income on cash balances. This has lowered financing costs in 2024, and if conditions remain similar, this favorable impact might persist into 2025. -
Gross Margin Improvement Drivers
Q: What's driving gross margin improvement?
A: Gross margin improvements are driven by renegotiated contracts that recovered margins, reduction in raw material input costs shared with customers, and better fixed-cost absorption due to increased volumes, especially in Texture and Healthful Solutions. These factors collectively enhance the profit pool and support sustainable growth. -
Protein Fortification Business Improvement
Q: Will losses reduce further in '25?
A: The company expects to reduce losses in the protein fortification business by a similar amount as in 2024, projecting significant year-over-year improvement. The higher-value pea protein isolate segment is driving these improvements, and they have contracted business heading into next year to support this positive trajectory. -
European Consumer Demand and Inventories
Q: What's driving volume growth in Europe?
A: Volume growth in Europe is attributed to increased consumer mobility and spending on convenience offerings, rather than restocking. The company is lapping a softer prior-year quarter and observes steady demand pickup without significant inventory rebuilds, suggesting real improvement in the region's consumer behavior. -
Volume Growth and Price/Mix in Texture and Healthful Solutions
Q: What's affecting price/mix in Texture and Healthful Solutions?
A: Strong volume growth is accompanied by negative price/mix due to passing through lower corn prices to customers. While selling more high-functionality, clean-label ingredients at higher value per ton, the reduction in corn costs leads to lower pricing, affecting the price/mix figures despite healthy profit growth. -
Balance of Pricing with Volume Growth for Next Year
Q: How do you see pricing vs. volume growth playing out?
A: Management feels positive about their momentum but notes it's early to make firm predictions. They expect demand to remain steady, with improving GDPs in key countries and increasing industry utilization, which could impact the balance of pricing and volume growth in the coming year. Factors like fluctuating corn prices and global economic conditions will play a role.
Research analysts covering Ingredion.