Leading global ingredient solution provider, which sells plant-based ingredients into a wide range of foods and beverages to personal care, pharmaceuticals, and papermaking applications. Besides its core ingredients platform, which includes glucose syrup for confectionery and sweeteners for beverages, Ingredion is focused on growing its specialty ingredients platform, which consists of starch-based texturizers, clean and simple ingredients, plant-based proteins, specialty sweeteners, and ingredients to enable sugar reduction. The company aims to showcase purpose-driven and sustainable sourcing as it brings together the potential of people, nature, and technology, all for a common goal to make life better. We're excited to ask Jim Zallie, Ingredion's President and CEO, as well as Jim Gray, Executive Vice President and CFO, join us for today's session. Jim Zallie joined Ingredion in 2010, was appointed CEO eight years later. He previously served as Executive Vice President of Global Specialties and President of the Americas.
Following a 12-year tenure with PepsiCo, Jim Gray teamed up with Ingredion back in 2014, and formerly served as Vice President of Corporate Finance and as Chief Financial Officer for North America. Jim will give a quick 10-minute overview of the current environment, and we'll then take it deeper into Q&A. Thank you very much. Jim? Okay, the stage is yours.
All right. I wanna thank everybody for coming this afternoon and for your interest in Ingredion. I'm gonna just go through about 10, 12 slides to give a brief introduction for those of you that may not be intimately familiar with the company, and then we'll do the fireside chat. So what I'm going to say will be protected by our safe harbor forward-looking statements and safe harbor provisions. And so, last week, Jim Gray and I were in New York City, and we had the honor, which, we've done, a couple times, and that is to ring the opening bell at the New York Stock Exchange. And we were reminded by the New York Stock Exchange that we are, believe it or not, the thirteenth oldest company through derivations of the origins of the company to be listed on the New York Stock Exchange.
So, from that standpoint, we are a long-standing, long-serving ingredient supplier to the food industry, with a reputation that's pre-established around the world as a high quality ingredient supplier to the food industry. We have 12,000 employees. We have 18,000 customers in locations around the world. One of the things we pride ourselves on is controlling the supply chain so that we can certify the origins of our products from a standpoint of whether or not they are sustainably sourced, whether they are organic, whether they are non-GM, et cetera. So we have a goal, which we are on target to meet, to have 100% of our Tier 1 crops sustainably sourced by 2025.
And a breadth of ingredients that we supply, where we have transformed our portfolio to be a much more relevant ingredient supplier to the food industry. 70% of the new product launches globally, that were launched in the food industry, contain the kind of ingredients, the categories of ingredients, that Ingredion supplies. So from a standpoint, again, of the relevance of us to be a valued supplier to the customer base, we're very, very relevant. We operate 32 what we call Idea Labs, which are co-creation centers where we engage with customers around the world locally. Food is a very local business, and we are a technology-based company with 500 food technologists and R&D scientists. We finished last year with approximately $8 billion in sales, 54% into food, 16% in beverages and brewing.
So in total, food and bev, 70% of our sales are into food and bev. 19% goes to a combination of, paper making, packaging for corrugated, board. Also into the pharma space. We made two acquisitions in the pharma space for pharmaceutical-grade excipients, at the end of last year, but we had an established pharma business prior to that. But see that as a growth vector for higher margin growth, as well as, sales from, say, texturizers for skin and hair care, for clean beauty, as well. And we sell obviously, agri products, co-products that go into animal nutrition as well. And the most recent, quarterly results or set of results that we released, have offered net sales for the full year, projected to grow at mid single digits, $8.3 billion-$8.6 billion.
Our adjusted EPS, we took up our full year guidance to a range of $8.80-$9.40, which would project out to approximately a 22% increase year-on-year in adjusted earnings per share. Quarter Two was the second strongest quarter, or was the strongest second quarter in the company's history, where we delivered 4% increase in constant currency and net sales. Our operating income increased 17%, and we delivered a 9% increase in adjusted earnings per share. We did also increase, for the ninth consecutive year, our dividend, or raised our dividend 10%. When you think about Ingredion, and you think about-...
The company that we are today compared to the company we were, say, five or six years ago, and I'm gonna show just a slide on the investments that we've made to transform our portfolio. Think of us as a leader in texturizing of foods, with really a tremendously deep understanding of how our ingredients impact texture or taste, the whole eating experience. Also, we are a very respectable player in plant-based proteins with a range of concentrates, protein-based flours, as well as isolates, the highest protein content ingredients, for a range of protein fortification and for texturizing of foods for dairy alternatives, as well as snacks and as well as sports nutrition products, for example. And we are a leader in high intensity natural sweeteners to reduce sugar, and impart mouth feel, which is typically lost when you replace sugar.
We work with customers to co-create, to bring ideas to them, to bring concepts to them, and really partner on how we can influence their front-of-pack claims to deliver consumer preferred innovation on behalf of our customer. We do that by working at our Idea Labs, which are positioned in many countries around the world. For a company of our size, and we're very international, with pretty sizable positions in Asia Pacific, which is about a $1 billion business. In EMEA, about a $1 billion business, multiple billion dollar business in South America. Mexico is a very... We have a very respectable and large position there as well. So we're not really overly reliant on, say, the United States, but we have a market leadership position in many segments in the United States, especially in starch-based texturizers.
Our specialties platforms, we have four leading platforms and then a fifth growth platform, which is combining the ingredients in these four into something called Food Systems, which is formulating more complete solutions for customers to deliver, say, clean label enabled systems, sugar reduction solutions, ingredients like that. But it's all based on what we consider to be enduring, sustainable megatrends, starch-based texturizers, driven by affordability, convenience, simple ingredients, which is about, again, labeling, transparency, the authenticity, where a product has been supplied from. Plant-based protein certainly is driven by such things as mindful consumption as well as health and wellness, and sugar reduction certainly driven by the avoidance of disease prevention as it relates to obesity, diabetes, et cetera.
Those market segments in which we play are large and growing segments, so we do have headroom for growth when it comes to the texturizers market, which is an $18 billion market, and where we believe there's an opportunity for us to continue to innovate, continue to differentiate, to deliver texture for taste as an opportunity for food companies to differentiate their offerings with unique taste profiles that are based on interesting textural experiences that a consumer could enjoy. Sugar reduction is a large and growing market. It's being driven by regulations, it's driven by government positions towards labeling, towards taxes, and just the overarching interest in avoiding sugar in the diet, as well as concerns over high-intensity artificial sweeteners.
And we've seen some of the news around those only in the last few months, and that bodes well for our position with high intensity natural sweeteners, where we're the largest supplier of stevia, for example. Certainly the plant-based protein segment, it's going through a little bit of an adjustment right now. The long term projections are still positive, but still a already established market that we see an opportunity over the long term to continue to grow and penetrate. Our position, our heritage as a company, has been as a leader in providing starch-based texturizers based on eight different varieties of corn. We're the leading producer of tapioca in the world. We're a very large player when it comes to potato starch as well as rice starch.
We really have an unmatched knowledge of how to modify those products, physically, chemically, enzymatically, to impart unique functionality to foods and to other, non-food applications for functionality, whether it be, imparting a unique mouth feel, stabilization, shelf life stability, or emulsification. These trends that you see highlighted here were some of the drivers that caused us to decide to double down and invest to ensure that our leadership position in starch-based texturizers endured for the long term, because what the pandemic exposed is obviously challenges to supply chains. We have localized over the last few years, more of our supply chains through investment in China, in Taiwan, in Mexico, in the United States, in Europe, and we've expanded our capacities.
And one of the reasons why this is so strategically important to have localized supply is because customers are increasingly wanting to know what is the environmental footprint of the product which you're supplying to me, and making sure that it is being produced in as sustainable of a way, from regenerative agricultural practices, sustainable sourcing, but also in how far the product has had to ship to get to them on a local delivery cost basis. So this has been a significant part of our investments, and as well as with high-intensity artificial sweeteners, we made an acquisition in 2020, which was the PureCircle business, which was the leader in high-intensity natural stevia-based products.
We've supplemented that with positions in what we call bioconverted Reb M, which is the best tasting, it's called a glycoside of the stevia molecule, as well as producing that same molecule through fermentation. So we're the only company that has what we call a perfectly sweet trifecta of those three products, which really are in high demand right now, given the concerns over some of the high-intensity artificial sweeteners. And because of our global network and infrastructure, we've been able to increase the customer base of the PureCircle business since we, since we acquired it, by 185 customers. And we are commissioning a significant expansion in bioconverted Reb M to meet market demand, in quarter three at our facility, in Kuala Lumpur. But it's a very large market, and we see growing at 6%.
Over the last six years, we have invested $850 million in growth capital. The important takeaway from that is that only 60% of that has begun generating returns in the last 1-2 years. An example would be a $100 million investment in China. China is the largest modified food starch market in the world. We are a very significant, the largest specialty modified food starch supplier in China. We just commissioned that facility at the end of last year, so the returns on that are just starting. At those proteins, we made significant investments. We don't even have the returns on that yet. That's a tremendous opportunity for us to get leverage. It's a challenged market segment right now, but nonetheless, the opportunity for it increased there. So that's 60% there.
We have a very active M&A pipeline. As you can see, we've been very successful over the years, bolting on different businesses to expand our capabilities in any of those growth platforms. Lastly, we have a very disciplined approach to capital allocation that I'm sure Ben's gonna ask us about. We did raise our dividend 10% this past quarter, and target to have a dividend payout ratio of about 30%-40% of our adjusted earnings per share. We'll talk more about that, but that's a little bit of introduction, and let's-
Take a seat, and thanks for already answering question number 10. That makes it easy. A lot to unpack here, but maybe let's start off and go a little on, go short, medium, and long term. You've highlighted, obviously in your presentation, the strength of growth on the top line, but even more so on the profit side. Interestingly enough, we saw a lot of still positive momentum on pricing, but at the same time, volume has gotten a little under pressure. So maybe help us understand what the current drivers are and what's the underlying issue on the volume side, and how you think you're gonna be able to overcome that, as it goes forward into the second half or maybe even into 2024.
Okay, I'll start, and I'll turn it over to Jim afterwards. I think that one of the things that we, I believe, have done extremely well, and it was born out of the necessities that the pandemic brought upon the industry at large in relationship to the pressures on the supply chain, is that we did a very good job of standing up actually before the pandemic what we call our pricing centers of excellence. And they really served us well as we navigated through 40-year high inflation. But those supply chain disruptions also forced us to look critically at our at customer and product-related segmentation. And given constrained supply we looked critically at how to prioritize our customers and how to optimize our product mix.
So we did that collectively as an organization, with our commercial organization, with our global operating model, with our global operations, I believe extremely well. That's allowed us to optimize price and as we demonstrated this past quarter, expand margins for four consecutive quarters. What has occurred just in the last, I would say, three quarters, that the entire industry is enduring and also scratching their head a bit to try to figure out, but some of this, I believe, is commonsensical to understand, is the volume impacts. So what we said on the earnings call, and we genuinely believe is true, is that customers went from a .
Just-in-case mentality from a standpoint of their ordering, to most recently, the last couple of quarters, as inflation, as interest rates have increased, the cost of carrying inventory has increased to a just-in-time mentality towards their approach to inventory. So we're seeing, we believe, a long tail of inventory rebalancing and destocking that's taking place. And in addition, I think consumers are behaving very rationally to try to economize, given what they've endured in relationship to inflation. So that, we all believe, is working its way through the system. We believe it's going to be steadily increasing, although we believe that recovery will be somewhat bumpy. But we believe our ingredients be indispensable ingredients that find their way into so many formulations.
Again, I draw you back to that figure that I highlighted on the second slide, which is that the kind of ingredients we supply are in 70% of the new product introductions that are food products that are introduced. So we believe that when the volumes pick up, that our volumes will obviously increase and pick up, 'cause they're also very valuable from a affordable formulating standpoint as well. Anything to add?
No, I mean, I just characterize that, you know, when you, when you look at consumers and economies where they're used to high digits, you know, high single digit, low double digit inflation, they've seen wage increases that keep pace with that. You're not seeing as much of a kind of a destocking impact or, you know, anything of where consumers are going from really how are they emptying out their pantry to what Jim really highlighted, which was a sensitivity to extremely rapid food price increases. So you go to a developed country like the United States, like what we see and we all kind of study in our IRI data, or Nielsen data, or you go to Korea, or you go to Western Europe, and traditionally very low inflationary environments and low wage increases. And so you have this shock of food price increases.
You've had it two years in a row now, and you see the packaged food companies keeping pace because they have to take price, 'cause price is the most important lever. And the consumer is a bit standing back and thinking like, "Oh, my gosh, look how much it costs me for an animal protein," or, "Look at how much it costs me in the center store solution." And I think that as you realize that wages will eventually catch up, you're gonna see a bit more normalization and a return back to what we would call a normal grocery basket. But it just takes time.
Yeah. Great.
Now, if we compare and contrast, health and wellness has been a segment, very solid on the growth side, and actually also on from a volume perspective, so quite the opposite of some of the things we've talked about. What should we expect from the health and wellness exposed products forward, and are there any opportunities how you can accelerate growth?
So I think it depends on the categories. But overwhelmingly, I think long-term enduring trend in our industry, ingredients and food products that are positioned as healthier offerings are gonna continue to be supported by, consumers' interest in living more healthy, vital lives and, you know, avoiding healthcare costs and, and all of that. So I think that that is something that we expect to continue to see. That's why you can expect us to continue to invest significantly and expand our capabilities and offerings in sugar reduction, for example. The other thing is that, you may not realize that we do sell ingredients that we use for that that are sold for use for digestive health. For example, fructooligosaccharides, as a prebiotic galactooligosaccharides, but the prebiotic resistant starches for that function literally as a fiber in products.
So we have those ingredients as well. The other thing is that our starch-based franchise enables what we call free from formulating. So gluten-free, for example. So tapioca starch, potato starch, rice starch are all used in gluten-free type offerings. Certainly sugar-free, fat-free, reduced fat. So free from type offerings, we have a significant presence in. So that's how we're looking to continue to play in, say, healthier offerings, which we believe long term will be a great opportunity for us.
On sugar reduction, can you give us, like, an example of, like, what the replacement factors are and what types of sugars you replace, and how you actually work with your customers to maybe get the sugar content down? We're joking about the potato chips here, but less fat in that case. But what are, like, the steps? How do you need to... with your formulation to alter the product with your customers, help them reduce sugar?
So it's a great question, and I'll try to indicate this as quickly as I can. But on the last earnings call that we had, we talked about a capability that we have developed, which is called our ATLAS Simulation Conjoint Analysis work that we do with customers, which is basically working with a customer to profile a product and how that product would best resonate with a consumer based on its labeling, based on its front of pack claim, based on its label declaration, based on its positioning. And we have access to a proprietary database of consumer insights that we share with customers and then co-create concepts and prototypes.
So very recently, to answer your question specifically, as it relates to the kind of offerings we have in our sugar reduction portfolio, we replaced 100% of the sugar in a functional beverage that's used for gut health that would be marketed as completely sugar free. And that's with one of our high intensity, best tasting Stevia products. In addition, we've formulated a what was positioned as a light or reduced sugar orange juice that would contain allulose, which is another product that we have in our portfolio for sugar reduction. It's called a rare sugar. It has 70% the sweetness of fructose, but about four-tenths of the 4.4 kilocalories per gram, so 10% of what a typical carbohydrate would have. And that's being used in that orange juice product.
And then we have other sweetener offerings that are labeled as a flavoring ingredient. And so that we have formulated most recently into another product that would have 50% reduction in sugar, but it would have... It would not have stevia on the label, but would have a natural flavoring declaration. So it gives you two different examples of two different types of beverages where we work in a very nuanced way with customers to position our products.
Let me just interject that, you know, while you can hear that we're always focused on the functionality, we're also focused on the economics and use. And so with stevia, it's about 280 times sweeter than sugar.
And so then when you look at, "Oh, am I gonna use a kilogram of stevia, or I'm gonna use 280 kilograms of sugar to get to the sweetness profile that I want?" And we looked at the economics and the cost of that, and so with sugar prices elevated, our goal of being able to offer a stevia solution that's at equal or lower economics in use than regular sugar, we start to bump against that threshold, particularly in markets like the U.S., where you have a relatively expensive domestic sugar market. And so then that's, you know, then you take, you know, an industry where we characterize about $5 billion in terms of of revenue demand, and you're going up against a $90 billion market for sugar globally, right?
And so sometimes that functionality really, really starts to work, not just in terms of what our mouth and what we taste, but also in terms of the PNL for our customers.
Okay, great. Just coming back, you also mentioned during the presentation a little softer environment in plant-based, but still very positive on the medium to long term. So maybe help us understand how you would frame what are the issues in the shorter term, and why you believe the medium-term outlook is still unchanged and favorable?
Yeah. I think when it comes to the plant-based market opportunity or the market itself, the first thing I think everybody should realize is that it is an already very significant, well-established category, plant-based products.
When you think about how long soy products have been around and soy protein has been around, it's a very well-established category, first and foremost. It was a category that saw very, very rapid growth, but has been probably impacted more so than other categories by inflationary input cost increases as a category unto itself, and that has caused those products' price points to be increased versus, say, the alternatives that were dairy-based products and/or say, meat-based products, animal-based products. And so consumers have voted with their wallets, and this past quarter was a tough quarter for the entire segment, where I believe the numbers are dairy alternatives and meat alternative volumes were down 10% and 18% respectively for the category in the quarter, year-on-year.
So what that's providing is it's providing opportunity for us and our customers to work that much more closely to understand what's needed to drive consumer preference and adoption. Because I believe it's pretty widely accepted that consumers would like the alternatives from a standpoint of the sustainability element, the health and wellness perceived benefits. However, there are some things that need to be overcome when it comes to the perception of the labeling being clean label or whether it's not clean label. That affords us an opportunity, because one of our growth platforms is clean label formulating. So we're working to innovate the next generation of plant-based proteins that would be low in salt, higher in solubility, delivering the right texture and/or, say, clarity in a beverage. So that's where our focus is.
So we see still opportunities for protein fortification in snacks and sports nutrition. We think the dairy alternative category is gonna be a significant opportunity long term. In the near term, the category is gonna remain probably under pressure for, you know, another quarter or two, but long term, this is a category that we believe in and that we want to continue to play in. And it opens up doors for innovation for our starch-based texturizers. You know, I can't tell you the number of product briefs that we're working on for customers that want to innovate and develop and launch a plant-based offering, and also a starch-based product in there. So all of this thing works synergistically for us and our portfolio.
Perfect. Just another question just around, like, the commodity volatility, and obviously you're exposed to that to a degree, but you've, you've done very well more recently just because of expanding the hedge program. So maybe a question for you, Jim, just talk us through what you've changed and how that helps your business as it relates to visibility in the short, medium term, versus what might be in the past, would have been a little more exposed to volatility in the commodity markets and where you actually expect commodity markets to go.
Yeah, I mean, I think that when we look at our business in terms of, you know, Mother Nature provides an ag input, and then we do an arbitrage on that to create a molecule, to create an ingredient solution. And there's quite a bit of value add in between. So what we need to be able to do is say: Okay, well, in which of our markets, what's the variability of that ag input? And first and foremost, can we price through in our contracting to our customers to pass that risk through? And to the extent that we can't pass that risk through, and the customer says, "No, we really want that... you to absorb that risk for us," then how can we either time the purchase of our ag inputs, you know, and do that in shorter cycles so we're less exposed?
Or in markets where our customers want, you know, a commitment that may be as much as a year or maybe a few longer, that we really have expanded our hedging practices both on both the heads of the corn as well as some of the co-products. And the timing in between, with the desire really just to get to a nice portrayal of the profit stream that we think we earn off that business. And that's the whole idea, is to be able to say, for our product lines that tend to be a bit more core, that we just really earn a nice, steady profit stream off of those, so that you can focus on the investment and the growth markets that Jim's highlighting, and then what we call our specialty ingredients portfolio.
Okay, perfect. So in summary, if we balance short-term headwinds, but also some of the tailwinds, you presented some long-term targets, not so long ago, and I think you've updated them to a degree on your CAGNY just about six months ago. How comfortable are you with those medium-term targets, and where do you see opportunities to maybe in the short term, leverage what is a very strong cash flow generation?
Yeah.
It's kind of a capital allocation question.
Yeah, I'll make some quick comments, and, Jim, you can make some comments. I think that, I would remind everybody that we have increased our dividend by 10%, which means we do have confidence in our future cash flows, going forward. I think in the near term, we're all watching volumes very closely, but again, we think we have a very pragmatic, view towards how volumes will develop going forward. That's fully baked into our guidance, and we see, again, opportunities to continue to drive specialties growth, specifically in those segments around, clear and simple labeling, that are supported by, enduring consumer trends, sugar reduction, affordability and convenience, et cetera.
So I think the prospects for our business, the company, given our market position and our diversification globally, and our diversification across the customer base, given how long we've been an established player in the industry, you know, really, really bode well for us. We're not just selling high-end niche products, but we are very relevant to customers across a broad spectrum that affords us an opportunity to have a dialogue with customers to solve their needs in, in many, many ways. Jim, you wanna wrap it up?
Yeah. I mean, we always put out a four-year outlook. And within that outlook, just to clarify, so we don't know what the price of corn or tapioca is gonna be year two, year three out, right? And so we assume a constant cost of our ag input, we assume constant pricing, and we assume constant FX. And yet, against that four-year outlook, we think on average, we're gonna grow adjusted operating income 7%-9%. We're gonna use our cash flows to purchase back shares and pay a dividend, or we're gonna target a TSR that's gonna be in the 12%-14% range, for all in our shares. We're coming off of two years of tremendous price and revenue growth, given the underlying commodity input.
But the fix of the business towards specialty, towards higher value per ton, products in our portfolio is continues to grow. And that is geometric in terms of its impact on our revenue per ton. And so I think that's also geometric in terms of our growth and gross profit dollars per ton. And so I think we feel very confident as we look to, you know, whether it's next year or the next three years. I think while the ag input cost may change, we may pass through some of that in our revenue, but we're very much desirous of growing the right types of tons and doing so that at gross profit per ton, that aggregates, and I think fuels our outlook for our business.
Well, Jim. Jim.
Thank you very much.
Thanks, Ben.
We're over to the breakout in case the audience has questions. Thank you very much.
Thanks very much.
Yeah. Thank you.