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Acquisitions insulate Ingredion from HFCS price swings

By Hank Schultz , 08-Feb-2013

Acquisitions have helped Ingredion insulate itself from price swings on high fructose corn syrup (HFCS), according to a company official during the company’s fourth quarter earnings call.

The price of HFCS has risen against the price of sugar in recent  months, partly because of lingering effects of the severe drought in North America.  The old Corn Products International was more heavily reliant on sales of HFCS.  Now with the acquisition of National Starch to form Ingredion, chief financial officer Cheryl Beebe noted that the company is far more diversified.

“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%,” she said.

In addition, she said that fluctuating HFCS prices are not as big a concern as it might seem on the surface.  Corn sweeteners used to enjoy a 20% to 30% price advantage over sugar.

“Obviously, that margin has narrowed and come in quite close,” Beebe said. “Do I think that based on the contracting outcome that sugar is trading significantly better? The answer is no.

“There is very little spot business that is done in the North American market. Most of the volume for (HFCS) 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,” she said.

North America results strongest

Ingredion registered $1.64 billion in sales in the quarter, up 6% year-over-year, and gross profit margin increased 19%.  The results were achieved despite significantly increased raw materials costs.

On a regional basis, the company showed the strongest results in the North American market, with sales up 11%.  Asia Pacific was next, where the company’s sales increased 9%.  A weakening Brazilian economy depressed results in South American, Beebe said.  Ingredion’s sales there declined 4% in the quarter.

Raw materials costs were up across the board as a result of the severe drought in 2012.  But a slightly better US economic picture helped the company raise prices to more than compensate, Beebe said, while reiterating that the company doesn’t disclose specific price targets.

8% increase in 2013 foreseen

As far as projections go, Beebe said the company expects 2013 sales to increase by 8% overall.  Ingredion has been looking to control costs and improve efficiencies, Beebe said,  as that effort will continue. The company expects to be able to raise prices in all of markets to offset rising input costs. 

Risks to that scenario a possible currency devaluation in Argentina.  The country has been in the throes of an economic crisis with high inflation and diminishing investment.  A devaluation of the Argentine peso has been rumored for months, despite official denials that the move is under consideration.

The acquisition of National Starch significantly improved the company’s overall business model, and Ingredion isn’t finished on the M&A front, said CEO Ilene Gordon.

“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,” she said.

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