Heather Kos - Vice President of Investor Relations Ilene S. Gordon - Chairman, President & Chief Executive Officer Jack C. Fortnum - Chief Financial Officer & Executive Vice President.

Robert Moskow - Credit Suisse Securities (USA) LLC (Broker) David C. Driscoll - Citigroup Global Markets, Inc. (Broker) Farha Aslam - Stephens, Inc. Adam Samuelson - Goldman Sachs & Co..

Ladies and gentlemen, thank you for standing by and welcome to the Ingredion Third Quarter 2015 Earnings Call. For the conference, all the participant lines are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. And as a reminder, today's call is being recorded.

I'd like to turn the conference now to, Heather Kos. Please go ahead..

Good morning, and welcome to Ingredion's third quarter 2015 earnings call. Joining me on the call this morning are Ilene Gordon, our Chairman, President and CEO; and Jack Fortnum, our Executive Vice President and Chief Financial Officer. Our results were issued this morning in a press release that can be found on our website, ingredion.com.

The slides accompanying this presentation can also be found on the website and were posted about an hour ago for your convenience. As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties.

Actual results could differ materially from those predicted in the forward-looking statements, and Ingredion is under no obligation to update them in the future as or if circumstances change.

Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K.

Now, I'm pleased to turn the call over to Ilene..

Thanks Heather, and let me add my welcome to everyone joining us today. We appreciate your time and interest. Ingredion posted another solid quarter, boosted by volume growth, improved mix, and good operating efficiency.

I'm pleased our business model and strategic plan continue to work with continuous improvements and pass-through pricing, mitigating foreign exchange headwinds. As a result, North America had strong operating income. South America and Asia-Pacific were up from last year. However, EMEA was down slightly due to foreign exchange headwinds in that region.

We continued to expand our Ingredion portfolio during the quarter. Our acquisition of Kerr Concentrates was finalized August 3 and the Penford integration remains on track. Additionally, we announced 2016 plans to further reduce our cost structure in South America by consolidating several plants in Brazil.

Now, let's spend a moment on each region's performance in the quarter. Operating income in North America was $133 million for the quarter, up $20 million from last year. Overall volumes were up 15%. The impacts of our acquisitions, core growth, as well as strong demand for our specialty products drove the increase.

And just like the second quarter, continuous improvement programs continued to drive good operational efficiencies. In South America, operating income was $28 million, up $1 million from last year. Pricing actions, volume growth, good cost discipline and continuous improvement projects helped offset foreign exchange and higher input costs.

Brazil volumes were up, but recall last year was weaker as customers reduced inventories after the World Cup. Given the environment, our local leadership team continues their ongoing focus on cost optimization and price mix management. Although the Southern Cone economy is still challenging, operating income was in line with our expectations.

And the Andean countries continued to perform as expected. We expect the remainder of 2015 and 2016 to be a challenging environment, but believe the South American business has stabilized and the underlying business fundamentals are positive for the future.

Moving along to Asia-Pacific, this region delivered $28 million of operating income, up slightly from last year. During the quarter, margin expansion offset currency headwinds. Finally, the EMEA region reported operating income of $22 million, down slightly from last year.

Currency headwinds and lower volume were partially offset by good cost management through our network optimization programs. For our company overall, our cash flow from operations and strong balance sheet enabled us to deploy cash to advance our strategic blueprint.

During the quarter, we finalized the Kerr acquisition, increased our quarterly dividend by 7% and repurchased 70,000 shares. I'm pleased to now turn the call over to Jack who will spend time on our financials.

Jack?.

Thank you, Ilene. Good morning, everyone. Let me start by covering the highlights of the income statement. I should note that these results include the Kerr operations as of August the 3rd and a full quarter of the Penford operations. Net sales were down $24 million for the quarter.

The majority of the decline is attributable to unfavorable foreign exchange, along with the impact of lower priced corn, which is passed through to our selling prices. This decline was partially offset by volume growth in our core and specialty ingredients and the addition of acquisition-related ingredients.

Gross profit was higher by $32 million as a result of higher core and specialty volumes, the addition of acquisition-related volumes, margin expansion in North America and lower corn costs. Reported operating income was $3 million lower versus last year, while adjusted operating income was $14 million higher.

The increase in gross profit was offset by higher operating expenses, driven by the inclusion of Penford, as well as the $11 million unfavorable swing in other income.

If you recall, last year during Q3, we recorded a $7 million reimbursement related to an indemnification payment from a previously – previous acquisition with the offsetting entry being recorded as higher tax expense.

This quarter, based on the final settlement, we recorded $4 million of other expense, with the $4 million being recorded as lower tax expense. The impact on our net income for 2015 and 2014 periods is zero. Reported operating income was lower than adjusted operating income by $17 million.

Of this, $12 million is related to the – to Brazil restructuring announced on September 8; $3 million is for acquisition-related costs for Penford and Kerr; and $2 million is related to the severance-related charges for the sale of our Canadian facility in Port Colborne, which is expected to close in the fourth quarter of 2015.

We anticipate recognizing an approximately $10 million pre-tax gain on the Port Colborne sale, which will be excluded from our fourth quarter adjusted earnings. On earnings per share, reported and adjusted earnings per share were $1.48 and $1.64 respectively.

For the quarter, our adjusted earnings per share was $0.04 higher than last year's earnings per share. Moving on to the net sales bridge. Our sales of $1.4 billion are lower than last year by $24 million. Volume growth contributed $130 million, but was more than offset by the $157 million of foreign exchange headwinds.

Overall, price mix was relatively flat. Increased pricing for currency devaluations was largely offset with lower pricing from passing along lower corn costs relative to last year. As we look more closely by region, you can see unfavorable foreign exchange affected us across all four regions.

Volume growth in North America and South America helped to offset volumes in Asia Pacific and EMEA. Lower price mix in North America and Asia Pacific was due to passing through lower corn costs. But price mix was favorable by 9% in South America as we continued to price to recover currency devaluations.

Adjusted operating income increased $14 million in the quarter. North America posted strong results due to core and specialty volume growth, acquisition-related volumes, and lower operating costs. North American price mix was down as a result of the pass-through of lower corn costs. South America operating income increased by $1 million.

The change was driven by favorable price mix due to pricing to recover currency devaluations, higher volumes and disciplined cost management. These positives were partially offset by higher operating expenses and other costs attributed to the inflationary environment. APAC was up less than $1 million, while EMEA was down less than $1 million.

In APAC, margin expansion offset the effect of the strong U.S. dollar, while in EMEA good cost management only partially offset the foreign exchange headwinds. Corporate costs were up largely due to the tax indemnification issue. We'll wrap up the quarter with earnings per share.

On the left side of the page, you can see the reconciliation from reported to adjusted. Included in impairment in restructuring is the $0.13 for the Brazil restructuring and Port Colborne severance-related costs. We also incurred $0.03 of Kerr and Penford acquisition-related costs.

On the right side, operationally, we saw an improvement on $0.15 per share, primarily the result of margin improvements with some volume lift, partially offset by foreign exchange and other expense due to the tax indemnity swing I mentioned earlier. The non-operational impact for the quarter was negative $0.11.

Our tax rate was higher, which had a negative $0.15 per share impact. The higher rate was driven by greater earnings in the higher tax jurisdiction as well as the devaluation of the Mexican peso during the quarter. The devaluation increased the tax expense of our Mexican subsidiaries, which use the U.S. dollar as their functional currency.

This was partially offset by other favorable items such as financing costs and the impact of last year's accelerated share repurchase. Despite higher debt levels due to the acquisitions, financing costs were favorable by about $0.01 because of the lower interest rate resulting from the rate swaps executed last year.

The accelerated share repurchase from August of 2014 resulted in about a $0.03 per share benefit. We do not expect to see any benefit from the accelerated share repurchase in Q4. I'm going to move fairly quickly through the year-to-date figures. Just as a reminder, these results include Penford operations as of March 11.

Year-to-date net sales were down $84 million. The majority of the decline is attributable to unfavorable foreign exchange, along with the impact of lower priced corn, which is passed through in our selling prices.

This decline was partially offset by solid volume growth in both our organic business in specialty and core as well as the impact of the Penford and Kerr acquisitions.

Gross profit was higher by $86 million, as a result of higher volumes, lower energy and corn costs, and lapping North America's adverse weather effects in the first quarter of last year. Reported and adjusted operating income was higher than last year by $24 million and $66 million, respectively.

Reported operating income was lower than adjusted operating income by $42 million due to acquisition-related costs of $18 million, Brazil restructuring costs of $12 million, restructuring charges of $10 million for Penford, and $2 million related to severance-related costs for the Port – for the sale of Port Colborne.

On earnings per share, reported and adjusted earnings per share were $4.09 and $4.47 respectively. Year-to-date, our adjusted earnings per share was $0.58 higher than last year's earnings per share. The net sales bridge highlights the volume growth contributing $282 million that was more than offset by the $345 million of foreign exchange headwinds.

The price mix reduction in net sales is largely due to lower pricing from passing along lower corn costs relative to last year, partially offset by pricing actions to recover currency devaluations. On a year-to-date basis, foreign exchange headwinds affected us across all four regions.

Volume growth in North America and Asia Pacific was positive, while volumes in South America and EMEA were flat. Lower price mix in North America and Asia Pacific was due to passing through lower corn costs. Price mix was favorable by 8% in South America as we started to price to recover currency devaluations.

Adjusted operating income increased $66 million year-to-date. North America posted strong results as it had Penford volumes, corn specialty volume growth, lower operating costs, and it lapped the adverse weather from Q1 of 2014. North America price mix was down as a result of the pass-through of the lower corn costs. South America was down $1 million.

Favorable price mix was offset by foreign currency, foreign exchange, higher operating expenses and other costs attributable to the inflationary environment. APAC was up $1 million while EMEA was down $2 million.

In APAC volume offset the effect of unfavorable foreign exchange, while in EMEA, operating efficiencies only partially offset the foreign exchange headwind. Moving to the earnings-per-share bridge.

On the left side of the page, you can see the reconciliations from the 2015 earnings per share reported to adjusted of $0.38, which is attributable to the acquisition-related costs from the Penford and Kerr transactions, as well as restructuring costs from Brazil, Penford and Port Colborne.

On the right side, operationally, we saw an improvement of $0.64 per share, primarily margin improvement with some volume lift, partially offset by the foreign exchange and other expense. The year-to-date non-operational changes were negative 20 – $0.06.

Our tax rate was higher, which was – which had a negative $0.26 per share impact, primarily due to greater earnings in the higher tax jurisdictions as well as the devaluation of the Mexican peso, which I explained earlier.

This was partially offset by other favorable items such as lower financing costs and the impact of last year's accelerated share repurchase. Financing costs were favorable, about $0.05 due to a lower interest rate resulting from the interest rate swaps executed last year.

The accelerated share repurchase from August of 2014 resulted in a $0.15 per share benefit. Turning to our guidance. We expect net sales to be flat, volumes to be up from 2014, and continued growth in specialty volumes. We have raised our range for adjusted earnings per share to $5.75 per share to $5.90 per share.

This includes the anticipated impact of the $0.08 to $0.12 EPS accretion from the Penford acquisition as well as the Kerr acquisition. The Kerr acquisition is expected to have a neutral effect on earnings per share this year. The guidance excludes acquisition-related and restructuring costs.

We anticipate that unfavorable foreign exchange will have a negative impact of $0.50 to $0.55 per share in our 2015 earnings per share guidance. We expect this to be partially offset by incremental pricing. As we've explained in our business model, these pricing actions typically require three months to six months to take full effect.

We expect corporate expenses to be up year-over-year to a more normalized level. Recall that 2014 corporate expenses were lower than normal due to the reclassification of the tax indemnity related to the National Starch acquisition and other small items. For the year, we expect financing costs to be down slightly.

Our financing costs are expected to be slightly lower due to interest rate swaps executed in Q3 of 2014, even though we have more debt outstanding as a result of the Penford and Kerr acquisitions. Our effective annual tax rate is expected to be approximately 32% versus an adjusted rate of 28.3% last year.

In North America, we expect net sales and volume to be up from 2014. It is important to keep in mind that a large portion of our sales and costs are based in U.S. dollars, which helps mitigate some of our foreign exchange headwinds. For the full year, we expect operating income to increase in North America.

We lapped the last adverse – the adverse weather effect in the quarter of last year – in the first quarter of last year, expect to improve product mix and margins, and will include Penford and Kerr's post acquisition-earnings.

The Penford and Kerr integrations remain on track and we remain excited about the broadening of our Ingredion portfolio with solutions that consumers are increasingly demanding. For the year, South American net sales are expected to be down versus the prior year.

We anticipate slow economic growth and foreign exchange headwinds to continue in the region. The Argentine situation remains in stagflation and we are monitoring the election environment. In Brazil, we expect some volume weaknesses offset by good cost management control, and we expect the Andean region to continue to perform well.

Throughout the region, we continue to actively manage our costs to drive efficiencies to offset inflationary pressures, and we continue to look at optimization opportunities. Overall, we expect the operating income to be flat in South America relative to 2014. Asia Pacific should continue to deliver modest operating income growth.

We expect the business to be negatively impacted by currency headwinds associated with the strengthening U.S. dollar, but we expect to overcome these headwinds with good cost management and product mix enhancements from continued growth in our specialty portfolio.

We expect our EMEA region to have lower net sales compared to the prior year, as foreign exchange headwinds offset volume growth. Operating income is anticipated to be down versus the prior year. The underlying European business is anticipated to continue to grow, fueled by our specialty ingredient portfolio, and our investments in the region.

However, we expect currency headwinds to offset the improvement. Pakistan is expected to continue its effective cost management and core product growth. Moving on to cash flow. Our cash flow provided by operations for the first nine months of the year was $481 million, which is $19 million higher than last year.

We continue to deploy our cash strategically, in the form of two acquisitions, capital expenditures, dividend payments and share repurchases. We have a proven track record of both reinvesting and returning capital to shareholders, and we expect to continue this in the future.

We expect cash from operations in 2015 of approximately $650 million to $700 million, unchanged from last quarter. Importantly, we'll continue to deploy our cash for capital expenditures as we concurrently continue to explore M&A opportunities. Additionally, we expect to use cash in shareholder friendly ways, including share repurchases.

We expect to spend around $300 million in capital expenditures in 2015 for growth, as well as cost and process improvements around the world. As Ilene mentioned, we raised our quarterly dividend by 7% and repurchased approximately 70,000 shares during the quarter. Year-to-date, we have repurchased 435,000 shares.

We generally expect to buy back dilution going forward, and we have the flexibility to buy back additional shares, giving us the ability to deploy our cash in shareholder friendly ways while also investing in the business. That brings my section of the presentation to a close now and I'll turn it back over to Ilene..

As we've said before, our business model and strategic blueprints are working. Our underlying business is doing well in spite of currency headwinds and economic challenges. We continue to take actions to optimize our cost structure for the future.

North America is expected to continue its positive trajectory, Asia Pacific is projecting modest growth and South America is expected to be in line with last year despite its challenges, and EMEA is projecting a modest decline in the face of currency headwinds, resulting from a strengthening U.S. dollar.

With this year's strategic actions, which include deploying our capital for growth, optimizing our global network, making acquisitions and raising our dividend, we are confident that we will continue to deliver excellent shareholder value. And now we're glad to take your questions..

And first go to Brett Hundley with BB&T Capital Markets. Please go ahead..

Good morning, everyone. This is actually Omar (25:05) filling in for Brett..

Good morning, Omar (25:08).

Hello. Congratulations on the quarter first of all. I wanted to touch on North America a little bit. Just wanted to get a little more color on how – what are the dynamics there, how is that market performing so well? If you guys could just – giving a little more color there. And also, on the U.S.

market in particular, is it possible for that market to perform better in 2016 in terms of margins and just overall performance? Thanks..

It's Ilene. I'll start out and then turn it to Jack. Well, first of all, we're not going to comment on 2016, but I would say in terms of the third quarter, we continue to do fine in all the different segments. Now, the specialty growth continues, and so that's where we're focused very much, on the on-trend recipes for healthy ingredients.

And so we're working with both large and medium and regional type customers to develop those recipes. GDP is still 2% to 3% in the U.S. And of course, as part of North America, we do talk about Mexico and the specialty growth has continued to go well there, as well as the growth in the population and the Mexico GDP is also 2.3%.

So I think that we feel that it's kind of a steady-eddie type story, and we're well-positioned for both the growth – we talked about the 2% organic growth in North America and with our specialty portfolio, as well as our ability to perform and run well in terms of operating excellence.

Jack, anything to add?.

No, I would just say that, Omar, I think that as usually North America had a very good quarter, it performed very well. And one of the things that's always a little choppy in our business, as you know, is the quarterly layout of our earnings.

And so effectively, it had a strong quarter, which was in our forecast, but sometimes it's a little bit more – there's the time of the harvest, a number of different issues associated with it.

So we've had a couple good quarters in a row with North America, and we expect the fourth quarter to be kind of – as we anticipated in our annual guidance – and I refer to the annual guidance just to make sure that people think through because we always have a little bit of movement between our quarters and it comes down to our annual guidance that we really focus on in North America..

Well, that makes sense.

And going – just following up on your comment on your annual guidance, the new midpoint of the guidance implies a weaker Q4, could you just talk a little bit about that and then what's happening there, if there is anything we should be aware of?.

I wouldn't say there was anything you should aware of. I think it's really just the layout in the quarters. I think that the third quarter came in fairly well, I think it allowed us to have confidence in hitting the top – in that mid-part of the new range, which is really lifting the bottom part of our old range up.

And so we're seeing more clarity into the fourth quarter. And when you say down, I don't really look at it as being down and maybe at the very bottom end of that range, but if you look at the midpoint, we'll still be up from last year..

I think the other thing I would add is, remember, in the fourth quarter, we have been talking about we've been experiencing a higher tax rate this year and of course in the fourth quarter, we won't have any offset from that accelerated share repurchase in terms of the share count. So, that's why you may see a little bit of a difference.

But as Jack said, when you look at the midpoint, we don't see it being down..

Got it. That makes sense. And lastly, I just want to touch on South America. Can you guys just talk a little bit more about what work is being done down there on the costs side and how this might be helping to offset the currency- and growth-related challenges there? Just a little more color there that would be great.

Thanks again for taking my questions..

So, I'll start out and then Jack will see if he wants to add anything. Certainly, in Brazil, as we announced in – on September 8 for next year, obviously, we've announced the closure of two of the facilities, but in terms of the impact this year we've done a really good job on focusing on cost optimization.

And I talked about on previous calls where we've taken our best practices, let's say, as an example energy efficiency, and we've used our people in knowhow and brought in SWAT teams to particular facilities to apply that in Brazil.

And so we're obviously benefiting from that particular effort, and at the same time as we said in our remarks, we've also had an effort to pass through foreign exchange headwinds in the form of pricing – price mix in Brazil that has gone well.

Argentina, Southern Cone is performing exactly as expected for the year and then Colombia or the Andean region, as I said, the GDP actually in Colombia is 2.5%, forecasted to be even slightly higher in the next few years. And so we have a very good operation there and so we've been able to grow with our specialty and our core products in Colombia.

Anything you'd add? Okay..

I don't really think I have anything to add to that. I think Ilene covered it well..

That makes sense. Thanks again guys..

Our next question is from Robert Moskow with Credit Suisse. Please go ahead..

Hi. Thank you. It's good to see North America performing so well. We – and I'm sure others have written a lot about tighter capacity against stronger pricing power in corn sweeteners.

I was made aware of one element of that though that where capacity might not be quite so tight and that was dextrose, and that's a tougher thing for us to get any visibility on.

Do you have any thing you can tell us about dextrose capacity from an industry perspective? And whether your pricing power there or ability to take prices is at all compromised because of that? And also I guess because of its tight relationship with sugar. Thanks..

Yeah, Rob. We usually don't comment specifically on individual products. The dextrose is – it comes in two forms as you know, one is the liquid dextrose and one is crystalline dextrose. And so I'm not aware of anything that is unusual in the environment that has changed dramatically.

Obviously, you have – on the liquid dextrose side, you have some swing capacity that can move into it, and there continues to be a number of new products that are utilizing that liquid dextrose, particularly in the – I'll call it at the biomaterials segment of the customer base. But I'm not aware of anything specific that gives us any great concern.

But if anything on the – in some of the – obviously with energy prices being down, some of the petroleum replacement products made that little soft, but I don't really – I'm not aware of anything specific.

Ilene, I don't think you are either?.

No. No..

All right. So....

Okay. And then, just a follow-up on the guidance again, Jack. If I take all the other regions' guidance, that's pretty easy to put in a model.

But as I look at North America, just kind of a follow-up to the prior question, I believe last year, there was about maybe $13 million, $14 million of like kind of one-time issues in North America related to co-product pricing that dampened last year's results.

So, if I kind of normalize for that, the forecast implies a very little profit growth for fourth quarter in North America. Your pace of improvement is much better than that.

So was there anything there that we should be aware of and am I doing the math right?.

Well, yeah. Your memory is good. I think of it more of as a $10 million type of issue in terms of the devaluation that happened at the end of last year pertaining to our feed both in Canada and Mexico where we didn't price through the feed type of numbers.

In terms of looking at North America specifically, I think that what we're looking at is a pretty reasonable fourth quarter actually. We have a bit of a few things where we're working on pertaining to the sale of the Port Colborne facility, where there is a certain cost in terms of moving inventories around and things like that.

But nothing of any significance that's going to impact our forecast.

As I did mention though, Rob, and this is the one that's always a little bit more challenging is how the corn is laid out and even the timing of the harvest, the harvest came in a little early this year, and so there is a few implications between this quarter and last quarter – I mean next quarter, between how we look at the numbers.

But fundamentally, I think we are looking at the fourth quarter to be a reasonable quarter in North America again, and that would be backing out that $10 million impact on the feed issues that we don't expect to repeat this year..

Great. I appreciate that conservatism. Thank you..

And Rob, I do want to make sure that you recall. Ilene mentioned it in her conversation too though, that the tax rate, because of the Mexican implications in terms of being in a U.S. dollar functional currency and having U.S. dollars down there, has impacted us and it will continue to impact us in the fourth quarter.

And so one of the below – like below the line, we're being impacted, which isn't really being translated quite the same way, because that will have an impact on our fourth quarter forecast as well..

Yeah, it implies like a 33% rate for -corporate rate. That's how we treated that..

Yeah, 33%..

Yeah..

Yeah. We're saying 32% for the full year, so that's basically there. Okay..

All right. Good, thank you..

Thank you..

Our next question is from David Driscoll with Citi Research. Please go ahead..

Great, thanks a lot. Good morning, everyone..

Good morning..

Good morning..

I wanted to spend a little bit more time on South America. You guys have kind of addressed this, but forgive me if I – and I think it's so important on South American pricing and just want to make sure that I understand it.

In the script, I appreciate the comment, Jack, about the three months to six months, I kind of wanted to come back to that and just mention, or ask you, because the currency devaluations are so intense right now, is there any increase in the speed of Ingredion able to effect these price increases, or is there just something like super structural in kind of how people reorder stuff and customers reorder and so forth that kind of makes it at this kind of six-month mark or can you say with some confidence that it's really more of on the three-month side.

Can we start right there?.

Sure, David. And let me kind of go by region, because it's a little bit different in each one of the three regions that we look at in South America.

If I start at the north part in the Andean region, there the economy continues to track very well and where we're passing on our prices very effectively even though the Colombian currency is down dramatically from last year.

We've managed to get people almost – I wouldn't say thinking, but at least, moving with the – almost dollar-for-dollar with the exchange rate in terms of some of our costs, because there most of the competition is from exports and things like that as well, so everybody is moving to pricing in dollars.

When you go into Argentina, it's a much more challenging type of environment, in terms of getting the prices up, partially because of the – that if you recall, Argentina's HFCS largely dominated market and it relates to sugars so it partially depends on the sugar pricing in that marketplace, as well as they still have some of their pricing controls in that marketplace.

So that's probably a bit of a lag in terms of our whole pricing model and we've had challenges getting the pricing through although we are getting some price increases in Argentina. But the devaluation hasn't really taken place there nearly to the extent of the Andean region or Brazil.

But then you come to the big one, which is really Brazil, and I think there our team has done an excellent job in terms of pushing pricing through.

Now, obviously, earlier in the quarter, we've seen the real actually break for 4 for a period of time, and then come back to that 3.8, 3.85 taper range, and so when you see those dramatic changes in pricing, particularly when the demand is okay on our products, like there is still a lot of competition in Brazil, the economy is slowing down and things like that.

And so essentially, there, you're still getting the lag because you've got corn prices, and Brazil is one of those countries where the energy prices are actually increasing a little bit in terms of transportation as well, because there is some of the Petrobras type of issues and sort of passing on energy costs as well as corn costs in that marketplace.

And so I would say it's a tough haul in Brazil, but I think our team is doing an excellent job on it.

And it's interesting because it's always a balance between volume as well as getting the prices up, and we've seen our volumes holding fairly well, because of that underlying Brazilian business in terms of the food and beverage segment, in terms of the brewing segment, has been fairly steady for us.

And so, I still think that three months to six months is a reasonable timeframe, because when you look at it on a weighted average basis and sometimes it's more challenging than other times. But I would say that the team is doing a great job in terms of getting those prices up where they can.

And so I'm holding to the three months to six months, I guess..

So, Jack, just maybe just kind of ask for a little bit of clarification. And so when you say they're doing a good job on pricing, in the first half of the year, foreign exchange was a negative 19% impact to the business. In the third quarter itself, foreign exchange was a negative 33 point impact, so it worsened by 14 percentage points.

Pricing in the first half was up 8 percentage points, pricing in the third quarter was up 9 percentage points; that only gets better by 1 percentage point. So, it doesn't actually look like proportionately pricing got better versus kind of what we saw. Now, maybe this is just the lag issue.

And so the question here then just says in the fourth quarter, wouldn't it be just kind of reasonable for us on the outside to be looking for something like 14 points, 15 points of pricing coming out of South America, up from the 9 points that you reported in this quarter? Is that a reasonable landscape?.

I think the only dynamic that you're also – you have to also factor in is the corn costs in Brazil are very similar to North America, where we're still seeing corn costs in Brazil, particularly in the local marketplace, being down actually this year.

And so you are kind of getting a mix of lower corn costs which would negatively impact or push our price mix down, and then also the adjustment for the devaluation. And so you really have to look at the ratio of those two. And you have to also understand that when we price through the foreign exchange, and we can take this offline a little bit.

But when we price through the foreign exchange, we're trying to lock in our margin in dollars. And so it's not a total impact in terms of the exchange that we have to get back in pricing, because obviously the cost structure changes a little bit as well. And so I'm actually pleased with the way they've been addressing it given the environment..

Is all of this – sorry, go ahead, Ilene..

What I was going to add is, and when Jack talked earlier about the balance of that versus the – what I call the volume equation, consumers, while the economy has slowed down in Brazil, they continue to eat food. As we've said in the third quarter, the beverage or beer side was pretty robust, but that was versus a year ago which was a little bit slow.

So on a year-to-date basis, the consumption will be down. So, it's not a very robust volume environment, and so we are trying to balance both the price pass-through as well as optimizing the running of our plants..

Final part on this is just, is this all the reason why the guidance range remains so large? I mean your $0.40 range with six months to play, you're now a $0.30 range with two months to play, I'm just curious is this South American region kind of the principal genesis of the width within the bottom and top end of guidance?.

I think we also have a couple of items on the guidance pertaining to – let's face it, the elections just took place the other day in Argentina and there was no resolution there.

So you're right, there is a little bit of comfort that we get out of having a wider range, because we're not sure if there will be a major devaluation or not in our forecasts. And if you look at the guidance, it's really $0.15, David.

So I'm not too sure when you said $0.30, I'm not clear in terms of where you meant, but we keep a reasonable range on our guidance because of some of the things in South America and I do think that there is also the volume impact pluses and minuses in the second quarter..

Okay. I'll leave it there. Thanks so much..

Yes, you're welcome..

And we'll go to Ken Zaslow with BMO Capital Markets. Please go ahead..

Good morning. This is Patrick (43:42) for Ken..

Good morning..

Hi. I just want to go a little bit further on the Argentina election.

I guess what are you guys mulling in terms of time of devaluation and how quickly you guys can react to, let's say a 30% devaluation of the peso and what the cost implications would be?.

30% isn't too far off of how we are looking at it; we've kind of got it staggered where we've got a little bit coming in this year. Because as time progresses, I guess, it's pushed out the election results for a little bit, so there will be some pressure.

I think more importantly, in terms of just picking when the devaluation is going to take place, because I think there will be a devaluation at some point in time is more the concern related to, I'll call it the tying up of whether it be corn and things where people are anticipating a devaluation and they want to hold assets.

We've brought in a little bit extra corn ourselves just to make sure that we have corn to run in things.

But you're always worried that during these transition periods of a government that there is some slowness in terms of farmers releasing their corn in anticipation of a devaluation where they could be moving on to the export market later on and things.

And so, I think that right now we are still expecting our Argentine business to come in basically where we had forecasted at the beginning of the year, and given the volatility in Argentina, I think that's a fairly good number from my vantage point.

Next year, when we give guidance, we'll be looking at more, I'd say we'll have more information pertaining to what the government policies will be and we'll roll out more data in terms of how we're seeing that devaluation take hold..

And of course, at this time of the year, down – if there was a major devaluation in December, the impact on this year's P&L would not be huge. So we think we factored that into the guidance, but of course as Jack said it's all about next year..

Great.

Just one more question, I guess philosophically, in terms of containing costs and versus long-term capacity, how does Ingredion think about cutting reactive costs versus maintaining capacity for long term, particularly in Brazil given your recent plant closures?.

Well, I would say first of all, when I think globally, we're growing our specialty products, and so we talk a lot about trading up and delivering value to customers. So of course, we try to balance our facilities and be cost-effective, because we're expected by our customers to be cost-effective.

At the same time, we're spending capital to add features to grow our specialty products. I think as it relates to Brazil, we said – we still believe in long term, the growth in the – growth of the middle class in Mexico as well as Brazil. So we talk a lot about Mexico. But in Brazil, we think that that will come back. So there's a bit of a hiatus.

At the same time, we have to be efficient and that's why we announced the closure of the two smaller facilities and an ability to consolidate, with a great opportunity to do that now along with other cost-optimization projects like energy efficiency.

But long term, we believe in Brazil, and as I said, I look at the specialty growth in Mexico, and I think eventually we'll be growing even more with specialty in Brazil, because the consumers want to eat healthy, they want to eat dairy, they want healthier baked goods, and so we're positioned to do that.

And now, Jack, do you want to add anything to that?.

Yeah. I think the one thing I just want to make sure people recognize is that when we close those two facilities, it drops the fixed cost of the individual facilities.

But we are actually – one of the reasons why it's taking a year to execute upon the project is because we're moving some of our finishing channels into our other two facilities being Mogi Guaçu and Balsa Nova.

And so essentially we are getting the same type of production out in the longer term, particularly on the specialty side where we have moved the equipment back into these other facilities. So it is a consolidation of our facilities, reducing our fixed costs, which is driving the process.

We still believe in the longer term in Brazil it's going to continue to grow and I think it's for us to continue to be – maybe as efficient as possible as we look at those – at our network..

Great. Thank you. I'll pass it along..

Our next question is from Farha Aslam with Stephens. Please go ahead..

Hi good morning..

Hi..

Please go ahead..

Good morning..

Good morning..

So two questions. The first one is related to competition from sugar, given sugar prices have declined well off their bottom.

And particularly first Mexico and South America, do you see any impact from lower sugar?.

No, not – obviously, lower sugar has some impact particularly in Argentina. And as you know, that's the only place in South America we're producing HFCS, which competes directly with sugar.

The lower sugar prices have come down, but so has corn as well in terms of our competitiveness with the substitute product, and as you know, Farha, the Mexican sugar prices aren't really world sugar prices and they still seem – they track closer to the U.S. plus freight into the U.S.

type of numbers, and so I would say that we can be competitive in Mexico on sugar.

The other thing I'd add to is, we talk about it a lot as part of our whole repositioning is to move away from direct competition with sugar and our portfolio continues to move in that direction, so it does not nearly the impact of competitiveness with sugar in the longer term as well.

And so, Ilene, I don't know if you have any comments that you would add on that one, but I think that that kind of handles it..

Yeah. No, and I think that as Jack said, our, we said before that our sweetener portfolio, high fructose for beverage, is tending towards under 10% of the portfolio. And so the growth in specialty products is much more of a focus not only with our organic, but even our whole M&A efforts.

I mean, that was what was behind the whole Kerr acquisition was to really start to enter the simple food arena where you can get sweetness from fruits and other natural ingredients and so it's a way to really grow in healthy ingredients..

And that leads me to my second question.

After Kerr and Penford what portion of your portfolio would you categorize as specialty and what portion in core and what do you expect each of those two to grow at kind of in the next two years or three years?.

Well, what I've said before – and we don't give quarterly numbers per se on this. And now for 2014 our specialty portfolio was about 24% of the total, and our goal over the five years is to get that to the 30%. And what I would say is both Penford and Kerr enhance that and move us in the right direction.

So we will be calculating that number again for 2015, but it's a slow move, and every acquisition has a combination of specialty and core and so what we are looking at are those acquisitions.

We continue to have a very robust pipeline, and we are looking at those that actually are above the 24% so that we grow that percentage because that means that the ingredients are on trend and that will be used in health and wellness type recipe nutrition, and so both of those were important as part of that criteria.

Penford, of course, helped us in participating in the potato side, gluten-free, non-GMO, some nice special applications. So both Penford and Kerr really are enhancing our portfolio..

Thank you very much..

You're welcome..

Our next question is from Adam Samuelson with Goldman Sachs. Please go ahead..

Yes, thanks. Good morning, everyone. I guess, my first question, going back into the North American business a little bit, is trying segregate some of the base margin improvement a little bit more.

I know in the earlier comments you alluded to maybe an early start to the harvest, and maybe you've got a little bit of corn basis help and just the layout of the quarters can sometimes give you some tailwinds.

But the base margins, when you strip out the acquisitions, would seem to be up 200 or so basis points year-over-year, and I'm wondering if you can help to segregate some of the drivers there, and if it's cost and productivity, maybe provide a little bit more color on what's actually driving it?.

Well, to start with things you have to appreciate that last year we did have that incident in the first quarter which was the – I think the polar vortex, which increased our costs and also put....

I was just referring to 3Q, just – and frankly 2Q was the same thing..

All right. And then, as we go through, you've got to remember too, there's a few things that are driving the margin improvements. And if you think about it, some of it is solid operations, as you implied, in terms of getting the margins in place, and some of it is the mix.

And if you think about the specialty mix, one of the things that I do want to come back to a little bit which helped our North American business this year was – is the fact that we put capacity into Europe and we basically feel that we're filling out the capacity in Europe, which freed up capacity by removing some of our specialty products over to Europe.

And those products have been actually sold within the North American environment, which improved the margins in our local environment. So you're seeing a bit of an improvement from that perspective as well.

In terms of the corn layout and things like that, I think that it's a regular type of component where you can't predict exactly when the corn's coming in, and as you get it right off the farm for a period of time, the basis drops a little bit, but that's just noise in the numbers on the quarter and that's why we try to give annual guidance because we don't want to predict the months..

But – and I would say, I mean the three factors, as Jack talked about, the solid operations, cost improvement was positive. The specialty mix continues to grow in that as consumer trends accelerate even more in terms of people wanting healthy ingredients, more dairy, some of the regional companies really growing their demand requirements.

And then the third piece I would say, in Mexico, growth of the middle class, a decent economy in terms of GDP, some growth in specialty and some good cost optimization in Mexico as being part of North America..

Okay. And then I jumped on the call late so I apologize if this was addressed earlier, but the FX headwinds for the year, I think it bumped up to $0.50 to $0.55, I think it was $0.35 to $0.45 in 2Q.

How much of that increment was realized in the third quarter and how much – how much of that goes into 4Q?.

In – pardon me, sorry – in terms of the – what happened is, as we think about year-to-date, it's up $0.47. And so the remaining portion is still expected in the fourth quarter if you look at the year-to-date number. And so that's kind of how that lays out.

The bump up was partially caused by – and Adam, this is where I think you have to appreciate that part of it was in Brazil and South America with the big pieces, and really what we're seeing there is we're trying to get the pricing back through, so we may not feel the full impact of that as a negative on our business.

The headwinds we're offsetting with price increases as best as we can..

Okay. All right. Thank you very much..

Welcome..

And with no further questions, Ms. Gordon, I'll turn it back to you for any closing comments..

Okay. Great. Well, thanks all for your attention. Before we sign off, I just will reiterate our confidence in our business model, strategy and long-term outlook. We remain keenly focused on value creation and we're committed, as we have demonstrated, to delivering shareholder value. That brings our third quarter 2015 earnings call to a close.

Thanks again for your time today. Thank you..

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect..