Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Aaron Hoffman – VP, IR and Corporate Communications

Ilene Gordon – Chairman, President and CEO

Cheryl Beebe – EVP and CFO

Analysts

Ken Zaslow – Bank of Montreal

Heather Jones – BB&T Capital Markets

Tim Ramey – D.A. Davidson

Farha Aslam – Stephens Inc.

David Driscoll – Citigroup

Ingredion Inc. (INGR) Q4 2012 Earnings Call February 7, 2013 9:00 AM ET

Operator

Good morning and welcome to the Ingredion Incorporated Fourth Quarter 2012 Earnings Conference Call. All participants will be on a listen-only mode until the question-and-answer session of today’s call. This call is being recorded. If you have any objections please disconnect at this time.

I’d now like to turn the call over to Mr. Aaron Hoffman, Vice President of Investor Relations and Corporate Communications for Ingredion Incorporated. Sir, you may begin.

Aaron Hoffman

Okay. Thanks, Sue, and good morning and welcome to Ingredion’s fourth quarter 2012 earnings call. Joining me on the call this morning are Ilene Gordon, our Chairman and CEO; and Cheryl Beebe, our Chief Financial Officer. Our results were issued this morning in a press release that can be found on our website ingredion.com. The slides accompanying this presentation can also be found on the website and were posted about an hour ago for your convenience.

As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties. Actual results could differ materially from those predicted in the forward-looking statements and Ingredion is under 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-K and subsequent reports on Forms 10-Q and 8-K.

Now, I’m pleased to turn the call over to Ilene.

Ilene Gordon

Thanks Aaron, and let me add my welcome to everyone joining us today. We appreciate your time and interest. Ingredion concluded 2012 with another very good quarter, capping an outstanding year. I’m particularly pleased with our performance in the face of headwinds that included rising corn costs, foreign exchange devaluations, and challenging macroeconomic conditions in a number of markets. As we stress on previous calls and recently, at our Analyst Day, the Ingredion business model provides for significant resiliency to these disruptions.

Over the past two years, we’ve realized about $1.2 billion in pricing to account for the rapid rise of our input cost. In 2013, we anticipate the need to achieve an additional $500 million in pricing.

With North American contracting essentially complete, we now had visibility on pricing in our largest region. We believe that these actions appropriately reflect the increase in raw materials that we’ve seen. At the same time, as a result of operating efficiencies and mix improvements, we expect our dollar spread to increase.

Turning back to the business model, I’ll remind you that our products are largely used in key consumer markets like food, beverage, brewing and even in personal care and pharmaceuticals. Said another way, we sell to industries that are generally stable or growing and are important to consumers.

In addition to serving these staple markets, we thoughtfully mitigate risk at the same time. Those risks include foreign exchange fluctuations and input cost volatility. As our results and our outlook indicate today, we have managed through these headwinds admirably.

From an operational perspective, we saw particularly strong results in North America and Asia Pacific in the quarter and the full year, which combined represent about two-thirds of our total business.

In South America this year, we held our ground in the face of a weaker Brazilian economy and a meaningful currency headwind. While we are never entirely satisfied with being relatively flat in the region, I can tell you that the business and local management did an exceptional job and performed as we would expect in light of the challenges.

And in EMEA, as we have communicated to you since the beginning of the year, results were generally down for the year though we saw some positive signs in the fourth quarter.

Let’s now take a quick look at each of the regions and their performance in the quarter. Starting with North America, continuing the trend of strong performance we saw in the first nine months, this region delivered another good quarter highlighted by further volume growth a variety of industries including beverage and brewing. Importantly, we covered escalating import cost in 2012 and expect to do so again in 2013.

Operating income grew by 46% as a result of a good volume trends, improved product mix and operational efficiencies carry to the bottom line. It’s worth noting that our business in Mexico continues to show good performance as we are well positioned to participate in the economic and population growth there.

Our South American business continued to face some challenges in the face of slower economic activity, rising cost and currencies devaluing, we continued to price and adjust volume accordingly. In spite of these challenges, we effectively managed the volatility. For the fourth quarter sequentially or quarter over quarter, the operating income trend improved, giving us confidence as we enter 2013.

Turning to Asia Pacific, we delivered further volume and grew operating income by 31% in the quarter. The results were driven by increased revenues, the food and beverage industries, as well as volume growth, incremental pricing and lower raw material cost. We remain well situated to participate in the expected growth in this large diverse region.

And finally, our Europe, Middle East, Africa region continues to face a variety of challenges that we’ve highlighted since we first provided 2012 in February. However, volumes were up and we were able to achieve sufficient pricing to offset higher import cost and foreign exchange headwinds. These all resulted in a 14% increase in operating income.

As I turn the call over to Cheryl for a review of the results, I will reiterate that we remain confident in our business model over the long term and are pleased that we’ve delivered good results this year and are positioned for further growth earnings in 2013.

Cheryl?

Cheryl Beebe

Good morning and let me add my welcome to everyone joining us. I will start with the fourth quarter financial review then move on to a brief synopsis of 2012, and last but not least, the 2013 guidance.

As we discussed on the third quarter call, we expected North America and APAC businesses to be up year over year on pricing and volume, and they were. South America continued to be a challenge with slower economic activity in Brazil. Sales were about 4% below last year primarily due to the weaker real [ph]. Despite the lower sales, South America did show improvement in operating income.

EMEA performed better on improved volume and pricing while the euro and the Pakistani rupee declined. All in all, we met our expectations.

We had several items in the quarter that I will point out. We realized the benefit from the continuation of our benefits harmonization plan and from a land sale in Chile. The impacts on operating income were $4.8 million and $2.3 million respectively and on an EPS basis the impacts were positive, $0.04 and $0.02. We also concluded our restructuring efforts in Kenya and China. The operating impact of these items was negative $8.6 million and the EPS impact is a negative $0.11 net of the tax benefits. The net impact of these items is $0.05.

So the reported earnings per share for the quarter were a $1.42 excluding these items. The adjusted earnings per share were $1.47.

Net sales were $1.644 billion up 6% or $96 million versus the same quarter last year. Gross profit increased 19% or $53 million and the gross profit margin expanded 220 basis points from 18.1% to 20.3%. As I have mentioned before, the quarterly comparison can be eschewed based on how our raw material cost are laid out over the year.

For example, in 2011, our lowest raw material costs were in the first quarter versus 2012 where the lowest were in the fourth quarter. The more meaningful comparison is the year to year.

Moving back to the quarter, raw material costs were up versus last year. Other manufacturing costs were up in several areas; energy, chemicals and packaging. Operating expenses were mainly up on higher employee cost as a percent of sales. Operating expenses are 9.2% comparable to last year fourth quarter.

Reported operating income was up; 12% or $19 million and adjusted operating income was up $36 million. Again, the adjusted numbers excluded the items previously mentioned. Last year’s fourth quarter excluded the gain on benefit plans of $29.4 million and the $10.5 million in the integration cost along with the $3.8 million in restructuring and impairment cost.

Turning to the net sales for the quarter, the pattern of strong price mix and volume growth continued as did the stronger dollar impact from foreign exchange. In terms of numbers, price mix contributed $97 million, volume was positive by $32 million and weaker foreign currencies were a negative $33 million.

North America’s net sales increased 11% or $89 million on a combination of strong price mix contributing 8% or $64 million, volume was positive 2% or $21 million, and foreign exchange as a positive 1% or worth $4 million in revenues.

South America’s net sales declined 4% or $17 million. Price mix was positive 6%, and contributed $24 million, volume was negative 2% or $7 million and the foreign exchange was negative 8% or $34 million with about 80% of the impact in the currencies coming from a weaker real.

Asia Pacific’s net sales grew by $17 million or 9% with volume up 6% or $11 million, foreign exchange was a positive 2% worth $4 million, primarily from the Korean won, and price mix was positive $2 million.

EMEA’s net sales were up 6% or $8 million, volume was positive for 6% or $8 million, price mix was up 5% worth $7 million and the weaker currencies had a negative $7 million impact, primarily from the Pakistani rupee.

Operating income on a reported basis grew 12% from a $166 million to $185 million. On an adjusted basis, operating income was $187 million versus $151 million last year, up $36 million or 24%. Raw material costs were up about 2% versus last year and manufacturing expenses were up in energy and chemicals.

North America’s operating income grew 46% from $74 million to $108 million, increasing by $34 million. Operating margins were 11.7% versus 8.9% last year. Volume pricing and high utilization more than covered the increased corn cost. The stronger pricing on animal feed helped mitigate the higher corn cost as well. It’s important to point out that the raw material cost layout impacts the quarterly operating income and margins.

Moving to South America, operating income was up $1 million, operating margins were 15.4% versus 14.5% last year. Pricing actions were enough to cover higher raw material cost, manufacturing and foreign exchange. This is the only time in 2012 that we exceeded last year’s operating income on a quarterly comparison.

Asia Pacific’s operating income grew 31% or $5 million on a combination of good volume, lower cost and manufacturing efficiencies. Operating margins 11.3% versus 9.4% last year.

EMEA’s operating income grew $3 million or 14% on better volume, pricing and lower manufacturing cost. Operating margins were 15.8% versus 14.7% last year. Similar to South America, this is the only quarter in 2012 for EMEA where the operating income comparison to last year was favorable.

Corporate expenses were $7 million primarily on higher compensation, legal cost and charitable contributions. Operating expenses as a percentage of sales were comparable to last year’s at 9.2%.

Looking at the results on an EPS basis, $0.31 is from above the line and $0.05 below. Margin contributed $0.30, volume $0.06 and a penny from other income while currencies had a negative impact of $0.06.

Below the line, financing cost were favorable by $0.04 on a combination of lower interest expense and higher interest income. The effective tax rate for the quarter was 33.7% versus the fourth quarter of last year’s effective tax rate of 34.2%. Again, the fourth quarter tax rate is a function of what the full year’s affected tax rate is.

The tax rate used for the adjusted earnings per share calculation was 32.2% versus 33.1% last year. The weighted average shares outstanding on a diluted basis was $78.5 million for the fourth quarter versus $77.6 million last year.

I will quickly run through the highlights for the full year; net sales at $6.5 billion are up 5% or $313 million versus last year. Gross profit increased 10% or about $112 million. Gross profit margin increased 80 basis points to 18.9% versus 18.1% last year, primarily reflecting the combination of pricing, cost reductions, high utilization rates in the North American market.

Reported operating income $668 million in down $3 million from last year on an adjusted basis, the operating income is up $77 million. Earnings per share on a reported basis increased $0.15 or 3%, and on an adjusted basis, EPS is up 19% to $5.57.

The increase in revenues was driven by another year of strong pricing, which on a total Company basis delivered approximately $377 million in additional revenues. All four regions maintained strong pricing to cover rising costs. Volume contributions came from North America and Asia-Pacific and, in total, contributed $136 million.

The major currency devaluations were the Brazilian real, worth $122 million; the Argentine peso, $36 million; and the Pakistan rupee at $17 million; and finally, the euro at $15 million. In total, the devaluations negatively impacted sales by almost $200 million.

Moving to operating income. Clearly, the leader was North America. The combination of strong pricing to cover rising raw material costs, volume growth, and the continued focus on driving cost down through operating efficiencies, delivered these outstanding results. While operating income in South America was down $5 million, the team was able to minimize the impact of rising costs, devaluing currencies, and the weaknesses in economic activity in Brazil.

Asia-Pacific delivered an increase of $16 million in operating income or 20% growth. Volume, improved price mix, and the continued focus on lower costs were the key drivers to the local team’s success. Last but not least, EMEA saw a year-over-year decline of $6 million.

Our original outlook a year ago was that given the European economic crisis, the devaluing euro combined with energy issues in Pakistan, we could have been down significantly more. Again, the local team minimized the negative impact.

Corporate expenses rose by $14 million, reflecting the investment in people, processes and systems to run a substantially larger global business.

From an earnings per share perspective, the changes from operations contributed $0.67 or about three-fourth of the improvement. Margin accounted for $0.69, volume added $0.19, which combined were more than sufficient to offset the negative $0.26 from foreign exchange. Other income, which is mostly comprised of insurance settlements, was a positive $0.05. Lower financing cost contributed $0.09 and a lower tax rate accounted for $0.11.

The effective tax rate for 2012 was 27.8% versus 28.7% in 2011. When calculating the adjusted EPS, the tax rate was 30.4% versus 31.7% in 2011. The non-controlling interest was positive $0.02. Shares outstanding were $78.2 million for both years resulting in no impact.

When you think about the headwinds in 2012, foreign exchange devaluations, the real down 17%, the peso down 10%, the euro and the rupee were both down 8%, economic declines and rising input costs, the accomplishments of our local teams highlight one of our competitive strength.

Another one of the Company’s strength is its cash flow. Cash flow from operations delivered $732 million, up $432 million from last year. The major swing is the positive impact from working capital. Last year’s working capital increased by $256 million to support the increase in sales and inventory. The margin account last year was up by $78 million. Compared to last year, we decreased working capital by $33 million and had no margin account increase.

Capital expenditures, net of proceeds from disposals for the year were in line with our expectations, at $304 million. The dividend payout was $69 million, which is up $19 million from a year ago. Cash and short-term investments on the balance sheet at year-end increased to $628 million versus $401 million last year. Total debt declined to $1.8 billion versus $1.95 billion last year.

In wrapping up 2012, it was another outstanding year with revenue and earnings growth combined with strong cash flow generation, leading us in a strong position.

Turning to our outlook for 2013, we expect sales to grow approximately 8% to $7 billion, driven by pricing actions to recover higher input costs, primarily corn, and improve volumes. Barring a major devaluation in Argentina, we estimate the currency headwinds in South America and EMEA, namely Pakistan, will have a smaller impact on sales than in 2012.

Despite the record high corn prices resulting from the US drought, we expected our business model will continue to serve us well. We are forecasting modest operating income growth resulting from strong pricing actions, volume gains and continuous cost improvement efforts, partially offset by the US drought’s impact on specialty corn.

We are forecasting 2013 diluted earnings per share to be between $5.60 and $6. We anticipate that our financing cost will remain in line with 2012 and that the effective tax rate will be between 28% and 30%. We are forecasting another year of strong cash flow from operations, assuming minimal impact from margin account. We expect to generate $700 million in cash from operations. We anticipate investing between $350 million and $400 million in capital projects.

Looking to our regional businesses, we expect North America to cover the higher corn cost resulting from last year’s extraordinary drought. We are forecasting a modest decline in volumes, reflecting the mix improvement initiative which results in us shedding some lower-value business. We also foresee relatively stable HFCS volumes and expect lower animal feed volume.

As a result, we anticipate holding operating income in line with our record 2012. As in 2012, the quarterly operating income will reflect the layout and hedging of our corn cost. We estimate that the first half will have higher corn cost than the second half.

In South America, we expect our business model to hold and that we will be able to pass through the impact of currency devaluations and higher input costs. We are forecasting volume recovery driven by GDP growth across the region. We are expecting operating income to grow with volume.

In the Asia-Pacific region, we expect to take pricing actions to recover higher input costs. We are forecasting modest volume growth as the comparison to 2012 will be impacted by the exit from our Chinese joint venture. The net sales for the joint venture amounted to $23 million last year.

We expect operating income growth on improved volume and spreads. We also expect pricing actions in our EMEA region to cover higher input costs. We are forecasting a single-digit volume increase despite the ongoing energy challenges faced by our customers in Pakistan. The negative foreign exchange impact is expected to be the result of a devaluing Pakistani rupee. Thus, we expect operating income to grow in line with volume and pricing.

All in all, despite the high corn cost resulting again from last year’s extraordinary US drought, we expect to deliver another year of good results.

I will now turn the callback to Ilene for closing remarks.

Ilene Gordon

Thanks, Cheryl. As I’ve done on previous calls, I’ll conclude with our strategic blueprint, which continues to guide our decision-making and strategic choices, with an emphasis on value-added ingredients for our customers.

The blueprint is a good reflection of our successful business model, which enables the delivery of good results in an often volatile world. With a broad portfolio of ingredients sold to many industries across a diverse geographic footprint, we have an enviable position.

As you’ve heard this morning, we were able to achieve necessary pricing to cover import cost in 2012 and expect to do the same in 2013. At the same time, we are growing volumes. This has resulted in a very robust earnings growth with the past several years, and we believe that growth will continue in 2013 and beyond. At the same time, investors can be assured that we have prudent, thoughtful risk management practices.

In sum, I believe that we are well-positioned to deliver another good year while always keeping an eye on our future growth opportunities.

And now, we’re glad to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions)

The first question comes from Ken Zaslow. You may go ahead with your question, and please state your company name.

Ken Zaslow – Bank of Montreal

Bank of Montreal. Good morning, everyone.

Ilene Gordon

Good morning.

Ken Zaslow – Bank of Montreal

Let me just start off. How much cost savings and how much expansion do you expect to add in 2013 in terms of your outlook? Can you give us a little color on that?

Ilene Gordon

Ken, it’s Ilene. We don’t give those numbers specifically, but I would say that you know that our cost reductions are focused on the capital investments that we’ve made over the past few years as well as the process improvements that we’re engaged in right now, and it really varies by region.

We’ve talked about, as an example, in Europe, we added some specialty capacity which will also help us be more efficient there. North America, we talked about our optimization project and where we moved grounds and specs [ph] during 2012. And so, we would be getting some of that impact from, obviously, those in 2013 and similar in the other regions. But we don’t specifically give those numbers.

Ken Zaslow – Bank of Montreal

Okay. And do you have share repurchases in your payments as well?

Ilene Gordon

I’ll let Cheryl answer that.

Cheryl Beebe

We have a combination of buying back some of the dilution. As you know, we have an outstanding authorization for a share repurchase program, and we will begin to modestly employ the share repurchase program.

Ilene Gordon

But I would say – this is Ilene – that again, Ken, I always say as I did at the analyst day that our priority is first to fund our capital project opportunities around the world. We are still looking into the process of evaluating M&A opportunities that create shareholder value. We also of course look at our dividend. And as we said at the analyst day, we’re targeting a 20% to 25% payout in our dividend. And then, of course, share repurchase is an option if we don’t find the right M&A opportunities.

Ken Zaslow – Bank of Montreal

So my final question, really, I mean, I’m sure everybody is going to be thinking about this too, but the guidance obviously, you can drive a truck through it in terms of the size of it. And if I look at the low-end of it, what would get me there? Because it seems preposterously low given that the amount of activity that you have going on at the company, it seems like there’s a lot in your control. So what would go there?

And then, on the flipside, I guess, more rightly, more relevant is, given that you beat your last guidance by 9%, especially it’s more than the growth you’re actually assuming here, what would it take for you to – what assumptions would you state are beatable throughout the year that you’d expect that takedown number to come in much more likely?

Cheryl Beebe

To get us to the lower-end of the range, we would have to be off on our expectations with the growth in volume, which as I said, Ken, we expect North America to be, I’m going to call it, relatively stable on a net sales variance analysis, when I take in to account the shedding program, which is what we’ve talked about over the last six quarters of the manufacturing optimization and the mix improvement. So there’s a bit lower volume coming from that, and then we had pretty robust animal feed sales, which we don’t expect to have in 2013.

So the growth is coming from the international arena. So we have to see the economic activity in Brazil pick up. We did better when I look at the quarterly layout. You know we don’t really get into the country-level specifics. I will say that Brazil picked up as we came through the fourth quarter compared to the previous three quarters.

Clearly not putting a major devaluation into these numbers for Argentina. We are expecting a devaluation, but looking at the 10% to 15% devaluation, not looking for a 50% or more clearly not putting a major devaluation into these numbers for Argentina. We are expecting a devaluation but looking at the 10% to 15% devaluation not looking a 50% or more.

So to get ourselves the lower end of the range truthfully has to be that we could come up short on the volume. And it’s the same thing year in and year out if we have been too conservative in forecasting the volume around the world, then we’ll get up to the higher end of it.

Ken Zaslow – Bank of Montreal

It is fair to say though when you say animals going down, you have particular in [inaudible] standing hundreds of products and expanding, are you just saying that you guys had extra sales somewhere in there or is that you guys like forecasting production costs in the industry then?

Cheryl Beebe

No. We’re not forecasting production cost in the industry. If you think about we’re a little bit less on the grind relative to some of our shedding programs. And we’re not looking for as the same rate of growth that we had last year. So it’s basically just as we optimized our operations.

Ken Zaslow – Bank of Montreal

Okay. I appreciate it.

Ilene Gordon

Okay, this is Ilene. I would just also add that we’ve dialed in some of the growth that’s expected in Brazil and the GDP there getting back to more of a 3% range that it being posted to the 1%. We expect that to be happening and economic activity in terms of anticipation of the sporting event.

So we think that that’s all in process. But if, for some reason, the country had policy that slowed it down, that’s something else that might contribute to a lower volume.

Ken Zaslow – Bank of Montreal

Great. I appreciate it.

Ilene Gordon

Okay.

Operator

Thank you. The next question comes from Heather Jones. You may ask your question and please state your company name. Heather Jones, your line is open.

Heather Jones – BB&T Capital Markets

Hi, can you hear me?

Ilene Gordon

Yes. Good morning.

Heather Jones – BB&T Capital Markets

Okay. BB&T Capital Markets. Sorry about that, I had my mute button on. Really quickly, I want to go on your EBIT guidance. Cheryl, on your prepared comments talked about EBIT roughly flat year on year, but then if we go through the regional outlook, each of the geographies you’re either saying flat or up. And so, wondering what causes consolidated EBIT to be flat year on year.

Cheryl Beebe

I didn’t say it was flat, I said we’d see modest improvement in the operating income. And so basically, we’re looking at holding roughly flat in North America and everybody else being up.

Heather Jones – BB&T Capital Markets

So, not to get too detail-ish but when you say slight, I mean, the slight mean 1%, to 2%? Could you give us a range that you’re thinking about when you use the word slight or modest?

Cheryl Beebe

When you think about modest growth, I think about modest growth being the 2% to 5%, 6%.

Heather Jones – BB&T Capital Markets

Perfect. That’s very helpful.

Cheryl Beebe

So if everything goes our way, we get on the higher side. If everything doesn’t go our way, you get on the lower side.

Heather Jones – BB&T Capital Markets

Does your outlook for North America assume meaningful, incremental synergies from the National Starch combination.

Cheryl Beebe

No. Actually, we’re fully integrated with the National Starch. What we do have is some mix improvement in the North American operations but we also have the North American operations – remember, we do a lot of our specialty grain processing here that we ship out to the rest of the world. And so North America is feeling the burden relative to those specialty grain types. And so the cost associated with growing are more typically higher than the yellow dent number 2, and the specialty corn is grown for us in the Indiana region. And so it has the same issues of the yellow dent number 2. So while we got pricing, we still have to be able to move this in the international market, and that’s where some of the squeeze is occurring, which is more of a one year issue.

Ilene Gordon

But we are continuing to employ the cost reduction actions that we took during 2012 in getting the annualization of that in 2013 as I said a little earlier.

Cheryl Beebe

We haven’t given back the synergies.

Heather Jones – BB&T Capital Markets

Right. Not to overanalyze but would it be fair to say that on specialty starch side, are you assuming maybe some decline there because of these costs associated with specialty corn but actually growth and more of the legacy of business of that and a flattish outlook for North America?

Cheryl Beebe

The growth is there, it’s the issue around the cost side of it, Heather. All right. We priced for the raw material cost in general when we get down to the really specifics by a product line which is really not the way that we necessarily report out the business. The logistics costs, the issues around who you can sell your feed to and the prices around it because you got the higher aflatoxin issues. That’s what’s challenging a piece of the specialty business and that’s why I say it’s for us more of a one year issue than anything else.

Heather Jones – BB&T Capital Markets

Okay. My final question is on North America again, and there’s been a lot of concern and talk regarding the gap between corn sugar and regular sugar narrowing and the potential impact on volumes. Some of your competitors have struck a fairly benign tone on that and it would sound like given you talked you about for the volume outlook that you’re not expecting much switching. So I was wondering if you could give a little more color there.

Ilene Gordon

Yes. I mean, this is Ilene. Certainly, the gap has narrowed between sugar and high-fructose when you look at some of the area of Mexico. And true, there are some spot prices that seem to have come down. On the other hand, our business has been contracted and we feel that we’ve been able to cover our corn cost and we’ll be able to maintain our volume there.

So we’re not overly concerned about any kind of squeeze or volume decline. I think that North America as a region is well balance and that should continue to provide similar results in North America that we’ve been able to provide before, Cheryl just said.

And Cheryl, is there anything you want to add to that?

Cheryl Beebe

No. I think I kind of like the word benign but on the other hand, I think it really is again, compliments to our North American team is that they are very focused. They understand that given the nature of the business which is a basic ingredient, and obviously, we do have our specialties that they have to be able to get pricing.

And every year is another nail-biter. I’ve never had a year where it was not a challenge and that there weren’t headwinds, whether it be in North America or the rest of the world, and the team just does a really solid job of being able to manage that business. So I would say we’re looking at stable market and stable results as come in to 2013.

Heather Jones – BB&T Capital Markets

Okay, perfect. Thank you.

Ilene Gordon

You’re welcome.

Operator

Thank you. The next question comes from Tim Ramey. Go ahead with your question and please state your company name.

Tim Ramey – D.A. Davidson

Good morning. It’s D.A. Davidson. A couple of questions, I think I heard you mention feed two or three time and aflatoxin as well. Is that the source of the expected shortfall in revenues from feed, i.e. with volume it’s appropriate for is or is it higher cost by-product.

Cheryl Beebe

It is primarily the first. There is a piece of the second but it’s mostly the first.

Tim Ramey – D.A. Davidson

Okay. The outlook in Brazil is pretty important to 2013, and I wonder how you’re thinking about that. I mean, it seems to me over the years that a 3% growth is almost always wrong. It’s either 0% or 8% [ph] or something like that.

Cheryl Beebe

[Inaudible].

Tim Ramey – D.A. Davidson

Are you thinking that there is more volatility there in your forecast than perhaps 3% would suggest.

Ilene Gordon

Hey, Tim, this is Ilene. No, I think that when you look at our business in South America and Brazil, again, we’re a global ingredient company and we’re serving regional customers and global customers as an example in Brazil and we’re serving a variety of industries. So of course, the brewery industry is important to us as well as the soft drinks in Argentina.

But the processed food industry is growing with the population and the growth of the middle class in Brazil; bakery and dairy. I mean, these segments all require ingredient solutions and we take our capabilities from R&D and product development around the world and we apply them to the local taste.

So we continue to be excited about the long term opportunities even medium term in Brazil and Argentina and Colombia, the rest of continent. So we feel good about that.

Tim Ramey – D.A. Davidson

Okay. And then just quickly on a CapEx forecast, can you remind if there’s any lumpy projects in that or if that is primarily, as you suggested, cost reduction maintenance type items.

Ilene Gordon

Yes. It’s Ilene again. We started some projects in the last year but we completed our Pakistan third plant. So that large one is done that we’ve called out before. We continue to invest in Brazil for all the future growth that we’re anticipating. So that’s just kind of a three-year plan that we announced maybe two years ago. Europe – we’re completing some projects.

So no big, large projects that to continue investment in capacity in growing areas of the world, as well as cost reduction opportunities. So it’s a combination.

Tim Ramey – D.A. Davidson

Thanks so much.

Ilene Gordon

You’re welcome.

Operator

Thank you. The next question comes from Farha Aslam. You may go ahead with your question and please state your company name.

Farha Aslam – Stephens Inc.

Hi, good morning. Stephens Inc. I want to just delve down more into your country-specific comments, and first of all, just starting with the results because it is so important to next year. You’re looking for roughly 3% growth, could you just tell us how you’re thinking of the energy issues that might emerge because of the low-river levels in Brazil versus kind of all the sports events that are going to kind of startup starting in 2013 and going into 2014?

Ilene Gordon

We’re not looking at a major issue with energy for us in Brazil. Our facilities are mostly run on coal generation with long term gas contracts.

Farha Aslam – Stephens Inc.

Yes, but I’m just wondering because there’s concerns that all of Brazil might have energy issues this fall. So it would be similar to what you’re experiencing in Pakistan where it’s not an Ingredion-specific issue but the whole country might have issues with energy.

Cheryl Beebe

I can say that I haven’t had discussions with the operating team that they were particularly concerned with the energy issue in Brazil. We talk about what’s the economic activity, will people be consuming more beverages, what’s the impact coming from the brewing industry with the dye [ph], significantly weaker and has devalued over the last couple of years, will their export business pick-up.

I think, really, it’s been more focused on the economic outlook as opposed to being energy specific. Ilene?

Ilene Gordon

And we also have five different facilities around the country, so we’re not concentrated at any one particular region. So, sure, if there was a regional issue, we’re not focused on that. At the same time, we do cover the north, the south, the middle, so we feel like we cover the population.

Farha Aslam – Stephens Inc.

Okay. And then in terms of sporting events, I think the World Cup is coming up. When we think of your volume growth in light of sports events, should we think it starts up a quarter ahead of time, and is volume up kind of 10% during that sports period or is it up more of 5% – there’s a more moderate rise. We just want to try and gauge as we look out longer term into your earnings.

Ilene Gordon

Well, this is Ilene. When we had our analyst day, I know that our head of South America, Julio des Reis, talked about the big parties in the winter for South America that are coming up and of course, that will attract a number of people. And I don’t really have a percent for that. But the way I think about it is getting ready for the events and the people that are working in the country on infrastructure and roads and hotels and getting so that they can accommodate all the different visitors. And so there’s a ramp there.

And so, I don’t think that you have to think about it as suddenly there’s so many more people and you get a 10% spike in one month. But rather, I think it’s part of the anticipated growth in getting the country ready for the future in those events and that’s what that 3% is forecasted on for the next few years.

Farha Aslam – Stephens Inc.

Okay, thank you. And one final question just on Asia. It was particularly strong in this last quarter. Could you just highlight that country? Which country has really performed well for you and what we’re the drivers there?

Ilene Gordon

The countries performed well. The drivers were, as we indicated in the third quarter call on this one, it was volume and pricing and the volume came from beverage, food, and a bit of paper on the industrial side.

I mean, we are enjoying, obviously, these opportunities in Korea. And again, we have a good business there. China is important to us and there’s some growth coming back there, and as Cheryl said, Thailand – where we had three facilities. So there’s been some opportunities there. So I think it’s generally in the region. It’s not in one particular country.

Farha Aslam – Stephens Inc.

Okay. Thank you very much.

Operator

Thank you. The next question comes from David Driscoll. You may go ahead with your question and please state your company name.

David Driscoll – Citigroup

Citigroup, and good morning, everyone.

Ilene Gordon

Good morning.

David Driscoll – Citigroup

First off, congratulations on a terrific 2012 and the long term execution of a solid strategic plan. I’d like to just ask a little bit more on the guidance for 2013, and again, you’ve answered this a bit but I just like to try, make sure I understand. The low end – maybe there’s a wide range. When you look at the 560 that would effectively say, no growth versus what you did in 2012. I think you’ve been pretty clear that your expectations are that the international side is where you’re supposed to get for profit growth in 2013 if it happens.

But on the North American operations, I just like you to talk a little bit more about the sugar prices and the fructose price. The USDA has quotations for 2013 HFCS at something like $0.38 a pound, maybe $0.40 a pound on an equivalent basis to sugar prices. And they also quote the Mexican sugar prices at about $0.34 cents a pound. So it would look like fructose has gone on, and again, purely equivalent basis, not wet quotes, has gone premium versus sugar. Do you agree with that and then why wouldn’t you be a little bit more concerned?

And maybe the final point, if you work this in on Mexico, on January 21st, there was a major protest among the sugar millers, demanding the government do something. Ilene, Cheryl and I lived this over years of the debacles in Calico [ph] because of the sugar industry down there and how much power they wield. Are you worried about that at all?

Ilene Gordon

I’ll just start and then I’m going to turn it to Cheryl. But look, I think we have very good relations, our countries and NAFTA has been a very successful opportunity for everybody. And so, sure you get a motion in different parts of the regions but we feel confident that it will continue to remain a well-run NAFTA organization and the way our business has operated.

So again, I think that most of the contracting, it’s really been done. So that is what gives us the confidence that I mentioned earlier that we believe that we’ll have a similar opportunity to ship our volume throughout the region. Cheryl?

Cheryl Beebe

Dave, relative to the USDA numbers and the percentages and premiums and discounts you were quoted, I would just remind everyone that we don’t talk about what we price to our customers at a specific level. And as we’ve said on multiple calls and we’ve said on various analyst days that basically, there is contracting which can be firm price, it can be grain-related formulas and that our customers, depending upon their size and their nature of risk will determine how they want to enter into contracts with us.

So is the spot price of sugar below, has it deteriorated the premium that we have talked about, the 20% to 30% that corn sweeteners traded below sugar? Yes. Obviously, that margin has narrowed and come in quite close. Do I think that based on the contracting outcome that sugar is trading significantly better? The answer is no.

And the last component is there’s very little spot business that is done in the North American market. Most of the volume for the product that you’re talking about is done under annual contracts. The second thing is that these are long term relationships that exist with us and our customers and while nothing is impossible, the probability of our customer reneging on their contracts is pretty slim.

And last but not least, the beauty of having done the acquisitions, doing the trade-up strategy among the product portfolio is that HFCS as a total percentage of the company is relatively small, 14%. Granted you have to [inaudible] a larger percent in the North America as we pointed out in the analyst day back in November. But again, the company’s fortunes don’t rise and fall strictly on HFCS.

The thing that I find fascinating about the Ingredion business model, and whether it’s in the North American market or the rest of the world, is the ability to maintain the spread. And then the additional profitability, when there are squeezes like this has to come from the team’s relentless focus on driving cost down.

David Driscoll – Citigroup

Thank you for all the color. I’ll pass it along.

Ilene Gordon

Thank you.

Operator

Thank you. (Operator Instructions) One moment please to see if we have more questions. There are no further questions at this time, I’ll turn the call back over to the speaker for any closing remarks.

Ilene Gordon

Okay. So it’s Ilene again, and just again, thank you for your questions and before we sign off with my few final comments. The Ingredion business model is performing very well and delivering strong results. We believe that our model allows us to consistently deliver shareholder value which is our clear focus.

So again, that brings our fourth quarter 2012 earnings call to a close. We’d like to thank you again for your time today. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ingredion's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts