Ingredion 2Q13 Guidance Update Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

Comments on Argentina

“As we’ve discussed for more than a year, the situation in South America has posed challenges, and our managers there have worked diligently to navigate a difficult environment. We have also consistently discussed with you that there was risk in Argentina, as the economy was unstable and could deteriorate rapidly. This concern has come to fruition. From a high-level view, Argentina has moved into a rather severe situation that has placed significant pressure on our results in the region. At the same time, the Brazilian economy continues to be somewhat stagnant and our sales to the brewing industry remain soft.”

“The cautionary comments on the year-end call and first quarter call, that if Argentina imploded, we could not hold the range, unfortunately, are playing out.”

“While we still maintain pricing power, limited pricing power in Argentina, it’s not enough to cover the rate of change in the cost structure. So for example, we were able to get about 1/3 of the cost increase covered with pricing, the other 2/3 we were not. So I think our systems are fine, it’s just the rate at which this deterioration occurred was fairly rapid.”

“In 2001 when Argentina blew up, it took us about 12 months to recover. And so if we follow the same pattern, then I would expect that, as we got through the second half of 2014, we see the cost pressures ease and we would see volume pick up.”

“It’s more a margin squeeze in Argentina. And it’s a combination of volume, which would be top line, in Brazil, along with the currency. So I would look at South America as a pretty significant margin squeeze. ”

“If I think about Argentina and what we’re seeing, let’s call it government policies, which is a bit broad, but I want to take it down to policies on the currency, control over dollars, what we would consider hyperinflation. The unofficial inflation rate is probably between 25% to 35%. And the way that this normalizes is that when the currency does blow and goes to, call it, the black market rate, so if we’re at, let’s call it, ARS 5.25 on the peso and it goes to, call it, ARS 8, then the currency control should start to ease, price control should start to ease, we see more economic activity and we see lower costs.”

[In Argentina] “Sure. I think it’s going to occur is that, as they go through their elections this fall, the pressure on the existing sitting government will be intense. There is — our belief is there’s a likelihood that the government will change. Currency will devalue, which will then make it easier to do business in Argentina because you will not have the price controls, you won’t have the distortion driven by the fact that you can’t get dollars and any dollars in order to buy energy. So I think that it’s really the change in government, a devaluation, and then we start to see economic activity pick up.”

Comments on Other Markets

“our business model is holding up in every region other than South America, where the environment is simply deteriorating too rapidly in the short term.”

“The story in North America is actually quite impressive. In spite of a historically severe drought and multiple years of pricing actions to account for rising corn costs, the region continues to deliver.”

“North America is also seeing a general slower-than-expected volume recovery. To be clear, we still expect the region to be flat to up for 2013, but we can’t rely on North America to offset the large negatives in South America. Both Asia Pacific and EMEA are trending largely as originally expected.”

[in North America] “And so with corn prices currently forecasted to be significantly lower than last year, as we head into the fourth quarter, if we do have this awesome crop come out as it’s predicted at the moment, then that should ease off on some of the pricing differential between sugar and HFCS, which would bode for a more stabilized market.”