Headwinds south of the border depress Ingredion earnings

By Hank Schultz

- Last updated on GMT

Related tags: South america, High-fructose corn syrup

Ingredion supplies a wide range of food ingredients including starches, texturizing ingredients, and sweeteners.
Ingredion supplies a wide range of food ingredients including starches, texturizing ingredients, and sweeteners.
Food ingredient giant Ingredion reported a steep drop in year-over-year earnings in the third quarter of 2013, mostly from problems in South American markets.  In addition, the company foresees a complicated impact from a newly-passed tax in Mexico on soft drinks and junk food.

First to the results: the company reported earnings of $86.3 million, or $1.10 a share, which represented a 28% drop over year-ago adjusted earnings of $118.2 million, or $1.52 per share.  Most of the damage to the company’s bottom line came in South America, where Argentina has been a soft spot in terms of demand, volume and currency exchange.

Argentina has biggest impact

“This is disappointing to me and to our management team. Ingredion has a long history of delivering against our commitment, and the results that we've reported over the past 2 quarters are simply not acceptable. With that said, the primary issue over both quarters can be very clearly isolated to South America and particularly Argentina. We continue to believe that these are short-term issues,”​ said chairman Ilene Gordon in an earnings call with analysts.

Results in North America were flat, Gordon said, which she viewed as a good thing, considering what she called “challenging conditions.”

“Our North America business has faced tremendous headwinds in the form of a historically bad drought in 2012, extremely low sugar prices and a weak consumer environment. The third quarter was the worst of the impact from the drought as basis went to all-time high and corn availability was scarce,” ​she said.

Impact of Mexican food, beverage taxes

The Mexican Congress recently passed a budget in which a 5% tax on junk food was added to a 1% tax on soft drinks in an effort to stem the county’s rapidly rising rate of obesity. Mexico, with an obesity rate of 32.8%, has now surpassed the US in this measure.  The US rate stands at 31.8%. The tax is expected to depress demand for high fructose corn syrup in the Mexican market by 10% to 15%.  But Gordon said the new tax environment opens some doors for the company as it partially closes others.

“Of course, (the soft drink tax) will have an impact in the beverage side of Mexico. But the heightened awareness of some of the issues that that tax is addressing on obesity actually creates a positive environment for some of our starches and specialty starches that are targeted at healthy food products in Mexico, and we're a local producer there. So that's kind of a positive side for us,”​ Gordon said.

The continued slow recovery in South America has led the company to ratcheted down its guidance on future earnings. Earnings per share for 2013 are now expected to be in the range of $5-$5.15.  The company had previously forecast a range of $5.10-$5.40.
The company has not provided earnings guidance on 2014.

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