Ingredion

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Ingredion is a leading global ingredients provider transforming grains, fruits, vegetables and other plant-based materials into sweeteners, starches, nutrition ingredients and other biomaterials.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Ingredion, a global ingredient solutions provider, operates in a relatively stable industry, providing inputs rather than finished products. This fact alone gives it a distinct advantage over other businesses, as a food ingredient business tends to be a more defensive in economic downturns and more resilient to competitive pressures from new market entrants.

Business Overview

Ingredion (INGR) is a global manufacturer of ingredient solutions that are used primarily in food and beverage but also in industries like paper, packaging, and personal care. Their products are derived from raw materials such as grains, fruits and vegetables.

Revenue Distribution

Ingredion’s business is segmented geographically:

  • North America: Serves Canada, United States, Mexico, and Puerto Rico.
  • South America: Includes Brazil, Argentina, Chile, Colombia, Ecuador, Peru, and Uruguay.
  • Asia-Pacific: Spans South Korea, China, Australia, Japan, India, Indonesia, the Philippines, Pakistan, Singapore, Taiwan, Thailand, and Vietnam.
  • Europe, Middle East, and Africa (EMEA): Includes Hungary, France, Poland, United Kingdom, South Africa, the Netherlands, and other European, Middle Eastern, and African countries.

Ingredion generates about 70% of its total net sales through three regions: North America, South America, and Asia Pacific, which reflects the geographical scope and business operations.

The food and beverage industry is characterized by several trends that impact Ingredion:

  • Increased consumer awareness of health and wellness: This drives demand for natural, plant-based, and clean label ingredients.
  • Growing demand in emerging markets: As populations in emerging markets grow, so does the demand for processed foods and drinks that use Ingredion’s products.
  • Evolving consumer preferences: Consumers are seeking more convenient foods and beverages, which can influence the types of ingredients used.
  • Supply chain disruptions: Due to geopolitical factors and other events, supply chain disruptions are increasingly prevalent, which can affect raw material sourcing.

Margins and Profitability

While net sales in the first quarter of 2023 were flat, operating income saw growth of 3% year over year.

The growth was primarily driven by increased pricing due to supply and demand imbalances in the global market, and lower input costs due to a slight ease in inflation.

Operating margins for the first quarter of 2023 were 10.3 percent. This reflects a trend that has seen operating margin slowly recover to a level closer to what was before the major market volatility.

For the full year of 2023, Ingredion estimates operating income will be higher than what they had in 2022, due to strong pricing and efficiency measures implemented throughout the business.

It appears that the company has the ability to pass on costs to customers, but not always fully, and thus it might not have full power.

Competitive Landscape

Ingredion operates in a competitive landscape, with some of the main competitors:

  • Cargill: A major player in the agricultural commodity business.
  • Archer Daniels Midland (ADM): A large global food processing and commodities trading corporation.
  • Ingredion’s closest peer, Tate and Lyle: a major global competitor.
  • Smaller regional players: Many smaller manufacturers of starches, sweeteners, and other ingredients.

Ingredion differentiates itself through the breadth of its product offerings and its global reach. However, the strength of its moat lies in its ability to continually generate new formulations and products for its clients.

Ingredion is not competing in the end-product food or beverage market, but instead in the ingredient space, therefore, it doesn’t need a strong consumer brand to operate profitability.

Financial Analysis

Revenue

Net sales in first 3 months of 2023 were flat compared to the first three months of 2022, but overall the prices were higher and the volumes were lower.

Gross Profit and Operating Expenses

Gross profit margin has seen a jump in the last period. However, while sales volume may be decreasing, the prices have increased such that revenue and profitability increased.

SG&A was elevated due to higher compensation costs, as management was attempting to attract and retain talent.

Profitability

Net income has been variable, primarily influenced by nonrecurring items and changes in currency exchange rates.

The net income attributable to Ingredion for the three months ending March 2023 is 188 million, up from 98 million in 2022.

Although there seems to be positive trends, much of the success in operating profit has come from higher prices and reducing costs, and not through increased volumes, showing the volatility that may arise in the future.

Balance Sheet

Ingredion has a generally healthy balance sheet. The company’s cash balance is adequate to cover operating needs and it has reasonable debt levels. Cash and cash equivalents were reported as $572 million at the end of March, which is higher than the $401 million it held at the beginning of 2023.

Inventories and accounts receivable are well managed. Net long term debt is at 1.6 billion, down slightly from 1.7 billion from the same period the year prior. Overall, balance sheet seems strong, with good cash flow from operations to make future payouts to shareholders or invest in expansion.

The company has done well to reduce long-term debt, given the increase in interest rates over the past year.

Moat Assessment: 3/5

Ingredion’s moat is narrow, but relatively robust, earning it a 3 out of 5 rating. Here’s why:

  • Intangible Assets: The company’s long-standing relationships with customers and the company’s history of providing specialty ingredients serve as intangible assets. Their large selection of products, some patented, are a barrier for competitors.
  • Switching Costs: Companies that use Ingredion’s ingredients often have difficulty switching because of the need to reformulate recipes, go through new regulatory procedures and supply chain issues, all of which create customer switching costs.
  • Cost Advantages: While Ingredion isn’t a clear leader in low cost, they manage to keep costs down, which allows them to operate with good margins.

Risks to the Moat and Business Resilience

Ingredion faces several risks that could erode its moat and profitability:

  • Raw Material Volatility: The company is exposed to the volatility of agricultural commodity prices.
  • Intense Competition: The food ingredients market is highly competitive, with both larger and smaller firms competing for market share. The firm needs to continually develop better formulations to maintain relevance.
  • Technology Shifts: Changes in technology could potentially make its products obsolete, or more easily reproducible by competitors.
  • Regulatory Risks: Changes in food safety or labeling regulations can significantly affect the business.
  • Macroeconomic Conditions: Economic downturns, particularly in developing regions, can hurt sales.
  • Customer Concentration: Though Ingredion serves a huge client base across many segments, some specific clients make up a sizable portion of the revenue, hence they have limited negotiating power with these clients.

Despite these risks, Ingredion is largely insulated from many external factors, giving it some resilience. Its portfolio of products is diverse and spans a wide variety of industries, which helps it manage volatility within certain segments. Also, since the firm doesn’t cater to the final consumer, but serves as an input provider, they are more insulated from rapidly shifting consumer trends.

Understandability: 3/5

Ingredion’s business model is relatively straightforward, but its complexity in a global scale is a bit challenging to understand. Also, the nuances of the food ingredient market and the underlying economic factors are a little difficult to appreciate without some base knowledge. Therefore, a rating of 3 out of 5 is appropriate here.

Balance Sheet Health: 4/5

Ingredion’s balance sheet is generally healthy, allowing for flexibility in operations and acquisitions. With a net-debt-to-equity ratio of 0.7x and the company able to produce positive cash flows, they are unlikely to face any near-term financing risks. For these reasons, a rating of 4 is appropriate.