INGR
#Let me take that question.
First of all, we don't break out our specialty and core ingredients splits or anything like that and last year as we know we said we were around 25% specialty.
And if you think about our specialty growth, we have commented that they should be in the mid to high single digit type of ranges and I think we are tracking fairly well in the first quarter with those type of components.
In our core ingredients, what you have seen is that as the growth was ---+ as we exited our Port Colborne facility through that sale, what we have seen is the trade up within some of our core ingredients as well which improved our profitability or improved our margins there as well particularly in North America.
So we were very pleased with both the margin improvement in both specialty and core this year and most of the growth is coming out of our specialty ingredients as we move those forward.
The thing I would add is that also recall that those acquisitions that we announced last year, we really did not own first quarter last year so it is not a huge piece but it is certainly important that added to our margin and our specialty mix.
Penford would be potato starch, gluten-free non-GMO and then the Kerr Concentrates again fruit type products also a non-GMO focused on different types of smoothies and frozen novelties.
Penford, you are right.
This was I call it a free quarter because by closing March 11 it wasn't in first quarter, you are right, Kerr is small but of course our organic portfolio, our R&D investment of $40 million, $42 million is going towards developing solutions for our customers with these on-trend investments and capacity that we are bringing on to satisfy this specialty mix certainly will be a factor as we build on our growth algorithm.
Just one other point of clarification as well and I just want to make sure because we have commented on this in the past and sometimes it is good to reiterate some of our comments.
Is when we are looking at the valuations in our core ingredients, our raw material increases and things, effectively we usually price through to keep a constant dollar margin.
And so while we had foreign exchange headwinds in the quarter, we passed most of those through but at a margin level, not at the sales level.
And that has a tendency of improving the margins as a percentage as well.
And so there is a little bit of lift on those margins as a percentage of revenues just from that component as well.
Let me just reiterate a couple of comments that we have stated in the past as well.
When there is a devaluation particularly in our South American region, if you look on chart 9, there is about a 22% price increase there.
Some of that is to offset that devaluation because given the input of both our investments, the raw material being corn which is a US denominated commodity principally and energy costs being principally US denominated to a large extent although there's local issues associated with it, we are pricing through those devaluations to a large extent.
That is one of the things that I think makes our business somewhat unique is we always talk in US dollars, we always maintain it there.
I'm sure in Europe maybe a completely a euro zone where people thinking euros, and raw materials are in euros but to a large extent we actually think in terms of dollars and try to get our pricing back and getting the margins there.
And even in North America, I commented in the script that a large part of our revenue base whether it be in Mexico or Canada is in dollars as well and so therefore, I don't want to say that the earnings would go up dramatically without the devaluation.
The thing we do indicate is that usually is about a three to six month lag before we can get those evaluations passed through in terms of our margin.
And I think that is a very important thing for people to recognize as they evaluate our business which is somewhat unique to some other people who try to restate based off of just constant exchange rates.
Thank you very much for that question.
I think if I look at North America and as you mentioned, it is in fairly good balance in terms of supply demand.
I think the demand is moving fairly well and think there's a lot of growth opportunities even in the core ingredients area and the utilizations in the industry are quite high.
Corn being below $4 means that a substitute type of products whether it be sugar, whether it be soy or anything else or wheat types of starches, are very competitive with our corn refined type of products, can be very competitive in those marketplaces.
So the outlook, assuming that there is ---+I'm always worried about the meteorite that could hit someplace in the business but fundamentally I would say that the industry itself is in a fairly good balanced position.
Maybe I will ask <UNK> to just make a couple of comments.
The other thing I would add is that you know the way that we are set up with our footprint that we are able to redirect our capacity to specialty products and so if you take North America with a growing Mexican economy, the growth in specialty in Mexico driven by the awareness of Mexicans to eat healthy, some obesity taxes.
But even in North America, the consumer is wanting healthy food and ingredients that we can redirect our capacity by adding finishing channels that we talked about a little bit earlier.
So you know you are asking questions about core in the future but I think of the whole system and that our strategy is really to grow the specialty and so our goal is really to satisfy the customers' needs with a portfolio of products and growing specialty continues to be the primary importance and we have the footprint and manufacturing capability to do that.
Obviously we can't comment on what our competitors are thinking in terms of capacity or anything like that in the industry.
But my guess is though if you had it on placement value basis, returns probably wouldn't justify a new facility in the industry or anything like that.
So I just think if the demand is relatively in balance with supply, I don't see any reason that would drive further changes in that type of area.
I guess obviously there is a lot of competition in the specialty area and there is continuing changing trends in the food industry and there is a lot of competing products in this business.
And so therefore, I think that the industry itself is faced with continuing to innovate to continuing to drive new growth opportunities.
I think that is the biggest stress that we are trying to deal with and that is why we continue to invest in our R&D and some of those capabilities for our future so that we can develop products that are on trend.
Sure.
We are one year into Penford probably just over six, seven months for Kerr.
But Penford, the portfolio is terrific in terms of having potato starch as a manufacturer as part of our portfolio.
We are excited about the specialty portfolio.
We are still learning and integrating that and certainly the incremental synergies that we talked about today came from the cost synergies in the areas of supply chain and procurement that we talked about before.
But our focus on potato as gluten-free and non-GMO continues to be an exciting part of the portfolio.
As I've talked about before, there were some biomaterials dilutions that Penford was very focused on like in liquid natural polymers and bio-adhesives and we continue to bring those to market.
So we are excited about the specialty portfolio of Penford.
Kerr, again, it is still early days but we see the whole berry side enhancing our portfolio and so our ability to formulate with starches and take berries and create recipes for our customers is again non-GMO very, very exciting.
The China part of your question, this acquisition that is pending regulatory approval is exciting because this company has been a supplier to our totally focus of specialty food in China.
And so it will enhance our capability to grow that business.
And so again, we are very much focused on the specialty foods side of the business and this will be an enabler to have the capability to have the front end supply side.
And so we are excited about being a more important supplier to food companies in China where they are looking for solutions as an example on the dairy side of the business, starches for dairy that are healthy.
This will enhance our capability to grow that even more with our capacity.
I would say that first of all, the quarter itself I want to reiterate we had Penford lapping this quarter so therefore we were advantaged through that so that was what <UNK> said was a give me type of thing.
The quarter itself had a few one-time benefits in it.
But we do see North America having a very strong year.
I think that the year is basically predicated on North America.
It continues to grow in terms of its specialty business, it continues to execute extremely well on its cost management throughout the segment.
So it is going to be up very solidly this year.
You know, I think for us, <UNK>, one of the things with our network optimization is many of the other participants are actually supplying more into Mexico than we are at this point in time.
If you recall, we have our own local production down in Mexico which is really servicing that marketplace.
And you are right, the exports into Mexico have gone up.
I haven't been tracking it nearly as closely as I used to but they have been up by the USDA numbers and so my expectation is that will continue as well.
Utilization is fairly tight within the industry.
I would say that the only thing that could potentially go away is the mild weather that we had in the first quarter.
There is always a whether issue and a few things like that or energy rates could move around on us.
But fundamentally the fundamentals basically should be the same next year.
We don't give guidance on 2017 yet.
I would say that fundamentally at this point in time, I can't see major changes in the quarters.
And I would say that we talked about the capacity coming on in 2016 in the specialty area and so our expectation is to grow in the specialty area continue along that trajectory for 2016 and 2017.
I think this year we said it would be relatively flat to last year which is in that $25 million to $30 million range of EBIT.
What we have said is it we will return back to a more normalized profitability but we are kind of watching those government policies and how sugar gets exported and things like that to give better timing on that.
It could be pushed a few months as it starts to move forward and then the real issue is does that economy really stabilize for the longer term.
Because I would like to reiterate that it is a very good corn position in terms of raw material sourcing.
It should have a good position against sugar for its HFCS demand and it is really getting the cost under control in terms of the environment there because it is still a heavy inflationary environment.
So I'm not going to predict when exactly that economy will return whether it is 2017 or 2018 at this point in time.
Look, we have some great competitors but we have a great R&D portfolio with technology and people and know-how with many years of experience and great customer relationships that have been built up over many years.
And so as Ingredion combination of corn products, national starch, we have become even more important to our customers working on different challenges that they have brought to us.
So we use our R&D know-how and capability to develop those solutions and work closely with our customers that competitors do something where they have expertise but we are the texture leader and have many years of experience in that area.
And now that we are broadening our portfolio with other raw materials to solve the problem, we have been in non-GMO for 10 years.
We have capability to modify starch with key [set of] enzymes.
That type of technology and know-how is very valuable to address the consumer trends like clean labels.
We continue to build on that.
I will start with M&A and then I will turn over the share count to <UNK>.
Look, the pipeline continues to be robust and I've talked about this before and I spent a lot of time looking and meeting with different candidates and again, we look at M&A around the world, the priority being to broadened the portfolio and what are the features that we could acquire for the right value proposition as we bring it on and we are more important to our customers, we can create these solutions.
And several of these companies, some of them are publicly traded, many of them are divisions of larger companies or privately held so we want to do the right thing in terms of building the relationships over time.
So we continue to work that but again, we have a track record of making them at the right value proposition, valuing people and technology and bringing it into our portfolio even as evidenced today as talking about Penford how it has gone well and we are very methodical about how we analyze the opportunity.
So I am excited.
We have a great balance sheet but we also are patient and want to do the right thing and so while we have done some bolt-ons, this China one for Shandong Huanong is a bolt-on.
There are other bolt-ons that we look at and again, the sweet spot being the $300 million to $500 million.
<UNK>, do want to address the other part of the question.
Just to address the share count, one of the things we look at all the time is how we buy back tat dilution over a period of time where executives get share compensation and we monetize it.
And it is a timing item where it obviously depends on the days outstanding and all those type of areas so there may be a little bit of creep in one year and we will make up for the following year or at the appropriate time.
I do think that we continue to look at shareholder friendly ways to return money to our shareholders and that is one of the reasons I commented also on the dividend policy as we continue to look at say as our earnings grow, we should be looking at those annual increases of our dividend to reflect that payout ratio as well.
And so we are very comfortable with our cash flows at this point in time and so we anticipate that as we look into the future we will continue to look to keep that dividend payout ratio very solid.
Let me start with the synergy question and we are actually ---+ what we are seeing is we are getting up to that $25 million run rate of synergies compared to the prior year.
So it will depend on when we recognize them last year in terms of the comp but they will be fully recognized as we move forward at those type of rates.
So you can think of it as a couple of million dollars a month of synergies that we are getting out of there.
In addition, <UNK>, just to remind you that we didn't have the comps for the Penford earnings in the first quarter so the full $47 million won't be delayed ---+ every quarter or anything like that.
And then let me just explain, I do want to address this Port Colborne issue because I think it is important.
When we talked about $8 million, it was really the fixed cost we were taking out of Port Colborne on an annualized basis and we are moving some of the volume obviously where we are shedding and things like that as well.
I think that we are still going to see some of that benefit spread into the other quarters.
What really transpired was is we were able to get the utilization of the other facilities up in that first quarter which will not be repetitive particularly in the second and third quarter.
It may happen again in the fourth quarter depending on supply and demand at that point in time.
So some of that was even additive I would say to the $8 million and that is my we moved our guidance up a little bit because I think when we originally looked at that business, we were thinking about just setting that $8 million and getting the benefit of the fixed cost and really what we found is that the incremental logistics cost and things like that did not set the volume that we were able to run through the facilities.
And so we did get some uptick in terms of that in addition to the $8 million.
So I hope that helps your thoughts there.
<UNK>, first, I would like to highlight the fact that we do talk in terms of absolute dollars versus percentages because sometimes when that denominator comes down, you've got to remember when you're talking about the 11%, we had much higher corn costs and that is principally a pass-through from our perspective.
And so there is some of that component going on as well where your denominator is shrinking.
The other component is that just in general, we were seeing our Mexican market very, very strong in terms of growth opportunities.
The business is staying strong, we continue to look at that network of facilities that we have to say how do we optimize our freight and our production processes within North America to drive costs out.
And so if you hold off the exchange, raw materials constant, the real thing we have is the continual trade up of our product into specialties which is obviously going to continually improve those margins.
So I would say that I don't see any dramatic changes except for that trade up strategy to our margin improvement in North America at this point in time.
I think that is how I would answer that question.
The other thing I would add is if you think about our long-term algorithm of growing specialties to 30% or so, North America, the Western economies are certainly trending and our goal is to be at that number if not more.
South America, while it is growing from a very small base, Europe is a much higher percent and places like China which are smaller are also a higher percent.
So as we become more of a specialty ingredient company, North America's percent specialty is going to grow.
So we feel good about that and having more capabilities to formulate help us do that and then therefore that helps the whole product mix trade up that <UNK> has been talking about.
I would say yes as evidenced by selling the Port Colborne facility.
It is just part of our job to constantly look at those opportunities.
We were successful, we brought on National Starch.
As we talked about some of the synergies, we are moving specks around.
We took a small piece of capacity outside off of Indianapolis a number of years ago.
So we are constantly looking at ways to optimize that absolutely.
In fact, North America was leading and now South America is basically consistent with the factors in the different regions.
I think it is still early.
We continue to hear about local consumption of food.
I think beer is down a little bit though I heard in April, the consumption was okay in food in different products.
So we don't really know politically what the impact will be but we do know for our business in food, that is one of the things we love about the business is that people eat and drink no matter what is happening in the economy.
<UNK>, anything you want to add.
I think the Mayor in Rio de Janeiro has kind of taken control of the Olympics and so that seems like it is progressing very well.
And it is kind of always interesting to me the underlying economy still seems to function and even though it is challenged with headwinds in terms of the individuals who you see the GDP continuing to fall partially because of the energy complex, but the real has strengthened.
I don't know that is because of the fact price of oil went up or because of the political situation, there's a lot of different dynamics working on it.
I do think in the longer-term though that if you look at Brazil, the fundamental population is still very young, it is a very industrious population and we are very optimistic in terms of the longer-term growth view in Brazil and we do think it will return to its growth days, maybe not the go-go days of a few years back but certainly a very growth and high consumption type of marketplace for us.
We see some growth in specialty products in Brazil.
Again, it is small but focus on dairy, even gluten-free and other sweeteners, low-calorie sweeteners are growing there.
So there is a large interest in healthy food.
I would say that is one of the things we are tracking very closely there is we are seeing the original devaluation and a continual devaluation of that currency.
We have also seen inflation particularly driven by the fact that it is one of the few places in the world we have seen energy prices actually rising at the consumer level partially because they are taking off subsidies of the past.
And so there is a lot of dynamics going on in that marketplace.
We continually watch our wages in terms of ---+ where we are having negotiations down there with our unions and things like that.
And so the cost equation in Argentina has not quite equalized where I always think of the valuation and inflation kind of getting back in check.
It is not quite there yet.
I think the policy that Macri is putting in place kind of lead to that movement.
I would like to see it happen faster from my viewpoint but he has made right steps and kind of reconciled to some of the bondholders and things like that.
So the trajectory is right but there will be a lot ---+ that is why we say the volatility in Argentina will still exist for the next little while.
Before we sign off, I will reiterate our confidence in our business model, strategy and long-term outlook.
We remain keenly focused on value creation and delivering that value to shareholders.
That brings our first-quarter 2016 earnings call to a close.
Thanks again for your time today.
