WESTCHESTER, ILL. — Ingredion, Inc. on July 12 announced a $125 million cost savings plan that includes transitioning its corn wet milling plant in Stockton, Calif., into a shipping distribution station by the end of 2018.
Ingredion said it will accelerate its Cost Smart savings program by establishing a $125 million target beginning in 2018 and running through year-end 2021 that includes reductions in cost of sales and selling, general and administrative (SG&A) expenses. The July 12 announcement included preliminary second-quarter earnings per share and revised adjusted earnings per share guidance. The formal second-quarter earnings call will be Aug. 2.
The actions to optimize Ingredion’s North American network by cessation of corn wet milling at the Stockton facility, which mainly produces 42% and 55% high-fructose corn syrup and industrial starch, are expected to save $6 million to $9 million and will reduce its fixed cost footprint, the company said.
“We’re taking this necessary action to balance our capacity versus sweetener demand, focus future resource investment toward our specialty growth initiatives and continue to deliver on our customer experience commitments,” said James P. Zallie, president and chief executive officer.
Ingredion experienced lower-than-expected sweetener volumes sold into beverages and higher-than-expected manufacturing costs in North America, the company said.
On a July 12 call with analysts, Ingredion said May and June sweetener volumes were light and that carbonated soft drink customers warned that volumes may be lighter for the rest of 2018, due in part to demand elasticity on pricing actions to recover higher aluminum and other cost increases. On the call, Ingredion said it was closing the Stockton plant in 2018 to give enough lead time as customers make plans for 2019 contracting, which has begun as early as August in recent years. It is estimated that the Stockton plant accounts for more than 2% of the U.S. front-end industry corn grind.
In a letter to customers dated July 10, which did not mention closing of refining operations at the Stockton plant, Ingredion said cost drivers that will affect corn sweetener and starch pricing in 2019 include significant increases in production and shipping expenses. It cited sharply higher manufacturing costs in 2018 with further increases expected in 2019, inbound and outbound freight costs that were increasing at double-digit rates, and higher 2019 net corn costs as higher freight costs and lower byproduct values more than offset lower corn prices. In addition, Ingredion said it expected capacity utilization rates in the wet corn milling industry to remain high due to increasing demand for regular corn syrup, liquid dextrose and starch, and due to high sugar prices in Mexico that support strong HFCS exports from the United States.
“This simultaneous escalation in our manufacturing, shipping and net corn costs is something that we have not experienced in years and is expected to significantly increase our sweetener and starch costs in 2019,” Ingredion said in its customer letter.
After the transition, Ingredion will use the Stockton facility to distribute finished products to customers in the western United States, primarily in California.
Ingredion’s five remaining corn wet milling facilities are in Bedford Park, Ill.; Indianapolis; Cedar Rapids, Iowa; North Kansas City, Mo.; and Winston-Salem, N.C., according to data from the Corn Refiners Association. Ingredion continues production of other ingredients at several North American plants it acquired through the purchase of Penford Corp. and Kerr Concentrates, Inc. in 2015 and TIC Gums, Inc. in 2016, as well as numerous plants in other parts of the world and 27 Ingredion Idea Labs innovation centers.
The company said it expects second-quarter earnings per share of $1.51 to $1.59 and adjusted earnings per share of $1.63 to $1.68 (compared with $1.92 expected by analysts) due to lower-than-expected North America performance. Ingredion revised its full-year adjusted e.p.s. to $7.50 to $7.80 from $7.90 to $8.20 previously.
In trading July 13 on the New York Stock Exchange, Ingredion shares tumbled 10% to a $99.46 closing price.
Ingredion said it remains on target to grow its specialty portfolio business to $2 billion in annual sales by 2022, which will comprise 32% to 35% of net revenue.
The company introduced its cost savings initiative in its first-quarter earnings call on May 3. It set out Cost Smart program targets to improve profitability and deliver increased value to shareholders that include an expected $75 million cost of sales savings, including global network optimization, and $50 million in anticipated SG&A savings by the end of 2021. Restructuring costs are expected to be incurred earlier in the program.
“Establishing firm Cost Smart targets will ensure the most effective use of our resources to better navigate future cost pressures and ensure long-term shareholder value creation,” said Jim Gray, executive vice-president and chief financial officer. “We remain steadfast in our efforts to operate efficiently and simplify our global business while mitigating the impacts of inflation.”
The company recently extended cost savings initiatives to support functions, which included streamlining its finance organization and establishing a shared service center in Tulsa, Okla. Cost Smart supply chain initiatives will address manufacturing, freight, procurement and future opportunities to optimize its global manufacturing network, the company said.
Ingredion is a global provider of ingredient solutions to customers in more than 120 countries with annual net sales of about $6 billion.