Ingredion Incorporated (INGR)
Q2 2013 Earnings Call
July 31, 2013 9:00 am ET
Aaron H. Hoffman - Vice President of Investor Relations & Corporate Communications
Ilene S. Gordon - Chairman, Chief Executive Officer and President
Cheryl K. Beebe - Chief Financial Officer and Executive Vice President
Brett M. Hundley - BB&T Capital Markets, Research Division
Kenneth B. Zaslow - BMO Capital Markets U.S.
Timothy S. Ramey - D.A. Davidson & Co., Research Division
Farha Aslam - Stephens Inc., Research Division
David Driscoll - Citigroup Inc, Research Division
Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division
Christine McCracken - Cleveland Research Company
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Aaron H. Hoffman
Great. Thank you, Marla, and good morning, and welcome to Ingredion's Second Quarter 2013 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 uncertainty. 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 S. Gordon
Thanks, Aaron, and let me add my welcome to everyone joining us today. We appreciate your time and interest. As we discussed with you several weeks ago, our business is under pressure from a number of macroeconomic forces. These headwinds caused us to deliver a down quarter and necessitated a downward revision to our 2013 outlook on July 14.
This is disappointing to our management team, which prides itself on delivering against our commitments. We have a great track record established over many years, and we are taking the necessary actions to manage through these challenges.
Our business model, which emphasizes growth opportunities and strong risk management, remains intact and is helping us deliver good results in North America, Asia Pacific and EMEA in spite of their local challenges. However, South America, particularly Argentina, poses a unique set of issues that have arisen rapidly, and thus, are difficult to offset in the short term. Our South American business is in a tough position this year. Cheryl will walk you through far more detail. Our team in the region is working diligently to manage the economic environment as well as can be expected.
Now let's spend a minute on each of the regions and our second quarter business performance. In North America, in spite of low sugar costs, high corn prices and a lackluster consumer environment, our business delivered another good quarter. This capped off the strongest first half in the region's history. We were able to accomplish this through ongoing cost reduction initiative, as well as mix improvement from the deliberate exit of some low-margin accounts. At the same time, we also continue to pass through appropriate pricing to cover our input costs throughout the region. And our risk management strategies, which include hedging of commercial contracts and good inventory management, had helped mitigate the impact of the commodity situation. While the back half of the year isn't expected to be as strong as the first half, we still anticipate a flat to up year, which is a reflection of a good planning and execution by our management team.
Clearly, South America is the challenge this year. The economic situation in Argentina and Brazil has worsened. In Argentina, we are facing a cost squeeze, and sweetener pricing is constrained. At the same time, Brazil's economy remains soft, and our sales to the brewing industry are down. Cheryl will provide you with much more color around the overall situation.
The Asia Pacific region continues to deliver solid bottom line results as overall economic activity remains robust. Excluding the exit of our Chinese joint venture, our sales would have been flat. As we've previously discussed, the challenge in South Korea is high corn costs and lower sugar prices, while the economy has slowed a bit.
And the Europe/Middle East/Africa region delivered strong sales results, driven by good volume and price/mix. We are pleased by the ongoing strong performance of our European specialty starch business. However, high cost, particularly for specialty corn which is sourced from the U.S., has impacted the region's profitability.
The other cost headwind was in Pakistan where the energy infrastructure continues to pose cost challenges for us and our customers. We continue to actively manage the situation using liquid propane gas and an investment in cogeneration.
Overall, in spite of a tough environment in South America, and especially Argentina, our business is performing well. The business model is holding up, and we remain confident in our long-term commitment to deliver 10% to 12% EPS growth. Cheryl?
Cheryl K. Beebe
Thank you, Ilene. Good morning, everyone. As I pointed out on the first quarter earnings call, let me remind you of a few items from last year that impact comparability in our second quarter and first half results.
The 2012 financial numbers include the now exited industrial starch joint venture in China and the closure of our Kenyan plant.
The net sales impact for the second quarter was $7.7 million and $2.1 million for the Asia Pacific and EMEA regions, respectively. For the first half, the net sales impact to these regions are $12.6 million and $7 million, respectively. At the operating income level, for both the second quarter and the first half, the impacts for each region are minimal.