Good day, and thank you for standing by. Welcome to the First Quarter 2024 Ingredion Incorporated Earnings Call. Please be advised that today's conference is being recorded.

Good morning, and welcome to Ingredion's First Quarter 2024 Earnings Call. I'm Noah Weiss, Vice President of Investor Relations. Joining me on today's call are Jim Zallie, our President and CEO; and Jim Gray, our Executive Vice President and CFO. The press release we issued today as well as the presentation we will reference where our first quarter results can be found on our website, ingredion.com, in the Investors section. As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those estimated in the forward-looking statements, and Ingredion assumes no obligation to update them as 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 on the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. During this call, we also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted effective tax rate, which are reconciled to U.S. GAAP measures in Note 2 non-GAAP information included in our press release and in today's presentation appendix. With that, I will turn the call over to Jim Zallie.

Thank you, Noah, and good morning, everyone. Ingredion's first quarter results exceeded our expectations against a strong comparison with last year's record first quarter performance. As anticipated, our net sales volumes in the quarter improved sequentially despite the impacts of extreme cold weather on shipments in the U.S. and taking into account the sale of our South Korea business. As you can see on Slide 5, while the consolidated net sales and operating income were lower year-over-year, the operating income for quarter 1, 2024, was still the second highest in the company's history and continues the upward trend from prior years. Inclusive of the current period, we have delivered 5% net sales growth over the last 5 years, compounded annual growth rate at an adjusted operating income compounded annual growth rate of 7% over the same period. Furthermore, while we delivered adjusted operating profit for the first quarter of 2024 at the top end of our guided range, the current market environment would have been conducive to delivering even better profitability had it not been for the impact of extreme cold weather on our U.S. shipments, which we estimate was at least $10 million. Now let me update you on progress against our 3 strategic pillars. Starting with our business growth pillar. During the quarter, we completed the reorganization of our business which resulted in new reportable segments, which we are sharing for the first time today. For Texture and Healthful Solutions, we feel increasingly confident regarding volume momentum as we saw strong demand from distributors in the quarter and volumes overall in April were up nicely year-over-year. Also noteworthy, project-related customer engagements in the U.S. are up 60% in quarter 1, which we view as a positive leading indicator of future growth for our Texture and Healthful Solutions segment. We have completed the commissioning of the capacity expansion for our higher-value stevia product lines at our PureCircle facility in Kuala Lumpur to support our sugar reduction franchise growth. Lastly, in terms of a positive indicator of overall economic growth, we have seen a strong demand recovery for industrial starch from paper making and packaging customers in North America. Turning to our second pillar, cost competitiveness through operational excellence. In February, we closed on the sale of our South Korea business. The proceeds from this divestiture will be used to support our capital allocation priorities. During the quarter, we also launched a multiyear cost savings program, which we are calling Cost2Compete. We are already advancing toward our target to deliver $50 million of savings by the end of 2025, and I'll highlight this program more in a few minutes. Some of the notable Cost2Compete initiatives include a project we have undertaken to unlock capacity across our manufacturing footprint by applying machine learning and AI. In addition, we are continuing to optimize our supply chain, distribution and warehouse network in pursuit of service excellence, efficiencies and savings. Lastly, we continue to be encouraged by the results achieved by our centralized procurement team, which has recorded some big wins on freight cost savings through globally-led procurement strategies combined with strong local execution. Regarding our purpose-driven and people-centric growth culture, I'm proud to report that we were recognized for the 10th time by Ethisphere as one of its 2024 World's Most Ethical Companies. This award reflects the deep commitment of our teams around the world who lead with integrity and prioritize ethics across our organization. Regarding sustainability-related achievements, I would like to commend our team for lowering greenhouse gas emissions by 22% compared to 2019 levels and for increasing the share of purchased electricity from renewable sources to 25%, which is a big jump from only 5% two years ago. This has been done through a combination of investments in solar and biomass energy. In fact, for Brazil, specifically, following the completion of our recent conversion to biomass boilers at our two largest facilities, 96% of all of our energy needs in Brazil now come from renewable sources. I would now like to comment a bit more on volume trends in the quarter. As we have shown in previous quarters, this is a volume index based upon our 2019 quarterly shipment averages, excluding high fructose corn syrup and adjusting for material changes in our portfolio. This graph illustrates the heightened volume demand during 2021 and 2022 in reaction to globally constrained supply chains. In the middle of 2023, we experienced a notable drop in orders as customers destocked inventories, primarily impacting our texture product line. This year, we anticipate a gradual improvement in volumes and have already seen a significant pickup in distributor demand and solid volume growth in April. It is worth noting that for the quarter, on the slide being shown, we are also projecting where volume was expected to land, if not for the impact of extreme cold weather on our U.S. shipments. Ingredion has a legacy of transforming and evolving its business in response to changing market dynamics. Our ability to strategically adapt has ensured long-term prosperity for the company and is one of the many reasons we are approaching a rare milestone to be listed on the New York Stock Exchange for 122 years. Ingredion's previous region structure was instrumental in maintaining local accountability to deliver results. That culture of accountability will continue as we shift to a more customer and market-focused segments in pursuit of growth, which will be further enabled by our maturing global operating model. Our reorganization and financial resegmentation would not have been possible five years ago without the global operating model currently in place. As we look forward, we believe the more compelling natural geographic alignment of the new segments will create operational and market synergies. As we execute our strategy to drive growth and deliver on our winning aspiration, to be recognized as the go-to provider for Texture and Healthful Solutions that make healthy taste better, I'm pleased to announce that Dr. Michael Leonard will join Ingredion as Senior Vice President, Chief Innovation Officer and Head of Protein Fortification effective May 13, 2024. Mike brings broad industry leadership experience in both developed and emerging markets with both CPG and ingredient multinationals as well as high-growth start-up companies, which will be a tremendous asset to Ingredion and our customers. As we mentioned recently at CAGNY, we are committed to driving continuous cost efficiencies as a means to maintain consistent, profitable growth. Cost2Compete will deliver $50 million of run rate savings by 2025. We are pursuing savings in two areas. $25 million will come from SG&A, which will show up in our reported operating expenses, and another $25 million will come from cost of goods sold savings, which will positively impact our gross margin. We see a significant opportunity to continue to leverage our shared services infrastructure that we have built over the past five years. To lead that effort, we are also pleased to announce that Vanessa Bordeaux joins Ingredion as Vice President, Global Shared Services. In her role, she will continue to drive continuous improvement and change with a strong focus on global process standardization, risk reduction and internal controls management. Now I will hand it over to Jim Gray for the financial review. Jim?

Thank you, Jim, and good morning, everyone. Moving to our income statement. Net sales for the first quarter were approximately $1.9 billion, down 12% versus the prior year. Gross profit dollars decreased 14%, but gross margins were resilient, remaining greater than 22% again this quarter and down slightly when compared to the strong lap of Q1 of last year. Reported and adjusted operating income were $213 million and $216 million, respectively. The decrease in operating income was driven by the impacts of extreme cold weather in the U.S., hyperinflation in Argentina and the carryforward of higher cost inventory into the quarter. Turning to our Q1 net sales bridge. The 12% decrease in net sales was driven by $176 million in lower price/mix and $40 million in lower volume, partially offset by a positive foreign exchange impact of $12 million. Additionally, the exit from South Korea had a $51 million impact on sales volume. Turning to the next slide, we highlight net sales drivers for the first quarter. For the total company, net sales were down 12%, and 10% when excluding the net impact of South Korea's sales from the results. Texture and Healthful Solutions net sales were down 10%. Sales volume was flat to prior year, which is indicative of returning volume demand for texture ingredients. Price/mix was down 9% for the quarter, partly reflecting the higher pricing from last year as these businesses price through double-digit inflation for specialty corn and natural gas primarily in Europe and the U.S. Food and Industrial Ingredion's LATAM net sales were down 8%, which was primarily driven by lower corn costs year-over-year being reflected in price/mix. Of note, sales volume was impacted primarily by the timing of customer demand pull in Colombia, which we anticipate to come back during the balance of the year. Lastly, Food and Industrial Ingredients U.S./CAN net sales were down 11%. The price/mix was down 7%, reflecting pass-through of lower corn costs on variable rate customer contracts. Sales volume was impacted by slowed production and reduced U.S. shipments due to cold weather. Let me turn to a recap of our Q1 segment performance. Texture and Healthful Solutions net sales were down 10% compared to the prior year and down 9% on a constant currency basis. Texture and Healthful operating income was $74 million, demonstrating an OI margin of 12.4%, driven by less favorable price/mix, as I mentioned previously, and the carryforward of higher cost inventory. We expect OI margins to improve for the full year to be between 13% and 16%. In Food and Industrial Ingredients LATAM, net sales were down 8% versus last year and down 12% on a constant currency basis. Food and Industrial LATAM operating income was $101 million with an OI margin of 16%, down slightly from last year, primarily driven by the impact of the devaluation of the Argentine peso on our joint venture as well as higher utility costs. We expect OI margins for the full year to be between 16% and 19%. Moving to Food and Industrial ingredients U.S./CAN, net sales were down 11% for the quarter. Food and Industrial U.S./CAN operating income was $87 million, with an OI margin of 16%, up slightly versus last year's quarter. The improvement was driven by the renewal of multiyear customer contracts and tight management of raw material costs, largely offset by higher fixed costs associated with downtime due to extreme cold weather in the U.S. We expect full year OI margins for this segment to be between 15% and 18%. For all other, net sales decreased 35% for the quarter, largely driven by the overlap of the exit of our South Korea business. All other operating loss was minus $4 million, better by $4 million from the year-ago period. The improvement was driven by a lower operating loss for protein fortification and other factors. Our full year outlook for all other is to reduce the operating loss by one-third. Turning to our earnings bridge. On the left side, you can see the reconciliation from reported to adjusted earnings per share. On the right side, operationally, we saw a decrease of minus $0.86 per share for the quarter. The decrease was driven primarily by an operating margin decrease of minus $0.47 and unfavorable volume of minus $0.34 per share. Moving to our nonoperational items. We had an increase of $0.14 per share, primarily driven by lower financing costs of $0.13 per share. Moving to cash flow. First quarter cash from operations was $209 million. Cash from operations benefited from consistent net income and lower-than-expected investment in working capital as we pulled from inventories in the U.S. greater than expected. Net capital expenditures were $65 million, slightly below our expected pace of investment for the year. During the first quarter, we paid out $51 million in dividends and began to repurchase outstanding common shares. As we look forward, our capital allocation priorities continue to be: first, organic investment; second, a return to shareholders through our dividend; and third, strategic deployment of cash into M&A and share repurchases.

Thank you, Jim. Based on our first quarter performance, along with our revised outlook, we believe we remain well positioned for another year of growth with momentum continuing throughout 2024. Volumes continue to show improvement with distributors replenishing their inventories and the headwind of destocking now fully behind us. These trends, along with increased customer engagements to drive innovation, are evidence of more favorable market conditions than we have seen in the last 12 months. During the quarter, improvements in working capital led to another strong quarter of cash flow from operations. We see this continuing as demand gradually improves and we start to see the benefit of lower corn costs starting in quarter 2. Also, Cost2Compete provides us with another meaningful lever to meet our long-term financial commitments with the delivery of at least $50 million in cost savings over the next 2 years. This will positively impact margins and overall profitability. Looking ahead, we will use our strong cash position to continue to invest in areas of growth that offer the highest returns as well as return capital to shareholders. Our strategic initiatives are aligned with our winning aspiration, and we are excited about the opportunities that lie ahead. Now let's open the call for questions.

Our first question comes from Adam Samuelson with Goldman Sachs.

I have a question regarding capital allocation. Jim Gray mentioned in your prepared remarks that share repurchases for this year are expected to be consistent with last year at around $100 million. I would like to understand why the amount isn’t higher, given the company's strong free cash flow, the divestiture proceeds from Korea that have come in, and the net leverage that seems to be tracking closer to 1x by the year's end. Can you help clarify the reason for the expected decrease in leverage given this outlook?

Yes, sure. I think it's always a balance, right? And now, when we look at the end of Q1, obviously, with some of the proceeds from Korea and the cash position of the company looks strong. So therefore, being confident to say that we're going to seek up to $100 million of share repurchases through the year. It does make sense. But as we've always stated that organic capital investment and at least some M&A that accelerates either our Texture solutions or Healthful solutions or solidifies our competitive position in the markets where we play has always been a priority. And if those returns look attractive for the medium- to long-term for shareholders and they're returning rates that are going to be higher than necessarily just buying back shares today, then I think we're going to prioritize those. So it's a balance, I think, Adam, but right now, we're pretty confident to come back and say, we really like to pick up close to $100 million of share repurchases as we finish 2024.

Yes, Adam, at this moment, we are considering the balance of organic capital growth investment opportunities, mergers and acquisitions, and the chances for share repurchases, along with our solidified dividend. This is our perspective right now, and we will keep you updated on any changes throughout the year. Currently, we believe there is significant evidence of the company's intrinsic value that justifies being opportunistic about share repurchases at the same level as last year.

And maybe I could just ask a follow-up on the volume trend side. You kind of commented to April trends kind of continuing to return to growth. I just want to be clear, is that kind of across the three now reporting units or any framing on areas of particular customer strength by region or category that you could call out?

I think we see that the modified starch category and the specialty starch category are gradually improving in volume throughout 2024, with solid performance noted in April. The industrial starch for papermaking and corrugating has been exceptionally strong, which we view as a hopeful sign of increased economic activity. Sweetener volumes were slightly down but generally aligned with historical trends. Overall, we are anticipating a mid-single-digit increase in sales volume demand for 2024. It's also noteworthy that we saw double-digit volume growth in China for the quarter, taking into account that last year, during this time, China was transitioning to herd immunity, and the Chinese New Year was earlier this year. Additionally, the price of corn has dropped significantly in China, which should support further volume growth. This is our current outlook on volume across the world.

Our next question comes from the line of Andrew Strelzik with BMO Capital Markets.

The first one, I guess, I just wanted to ask about the guidance. And if I put a couple of your comments together, you said the first quarter exceeded your expectations. You're more confident in the texture volumes and then also now you have the cost saves. So I guess I'm curious why you're only taking up the load of the guidance a little bit. Are there any other offsets to think about and recognize it's a bit early in the year. But just curious how you approach the guidance given those dynamics.

I appreciate your understanding that it's early in the year. As we mentioned earlier, particularly at CAGNY and at the year's start, we're observing an easier comparison in volume from last year, especially impacted by Q2. We feel confident that volume will return, which, as Jim pointed out, aids in our fixed cost absorption. This is a crucial factor supporting our positive operating income growth. However, we remain cautious, particularly regarding U.S. customers, and to a lesser extent, European customers, as we monitor how they manage pricing and innovation and its effects on unit volume demand. Currently, I'm seeing pricing changes in the U.S. in the mid-single digits, potentially at the higher end of low single digits, leading me to be a bit cautious about whether this will boost consumer demand in the grocery segment. While we want to keep an eye on this, we've observed some positive signs in specific areas. For example, condiments, which you might not expect to be high-demand items, showed strong year-over-year improvement based on early scan data this first quarter, indicating some growth potential. Additionally, we always have to be mindful of external risks, such as political unrest and its impact on oil prices, as well as possible changes in energy availability despite our natural gas hedges. Lastly, global supply chain issues and ocean freight disruptions can lead to challenges over the next three to six months. These are the main concerns we have on our radar.

Okay. That's really helpful color. And then my second question is just digging in a little bit on the cost savings plan. And I guess I'm just curious how to think about the cadence of that coming through over the course of the next 2 years? Maybe a little more color on where exactly that comes from? And does any of it get reinvested? Or should we assume most of that fall into the bottom line?

Let me take a shot at just framing it. And then Jim, you can pick up on the comments. Obviously, when you initiate a program like this. And just a reminder, we have a pretty good track record of delivering on cost takeout. Going back to the inception of what we call Cost Smart in 2019, which was a 3-year program, which sun set in 2021. We originally set that target at $125 million, raised it to $150 million and ended up delivering a little north of $170 million. So hiatus for a couple of years, and now Cost2Compete at $50 million. And with those programs, typically, they ramp up with savings. So there will be more of the $50 million of savings that will accrue in 2025 as opposed to '24. But '24 will have a meaningful amount of savings delivered more so in the SG&A area. And the COGS will come more so into 2025 as we also look at opportunities across our footprint as well. And there'll be more information that we'll be able to share over time related to that, but real substantive cost savings. Now clearly, what we want to do is fulfill our winning aspiration to be the go-to provider for texture solutions and healthful solutions. And so we are going to be investing strategically in capabilities that are going to enable us to deliver on that promise for customers when it comes to things like texture data measurement science, the sophisticated sensory capabilities that you need and formulation management, for example. So those are some of the things that we will invest in. However, some of that is already factored into some of our budgeting process starting this year as well. Jim, do you want to add some color on that?

Yes, Andrew. We're focused on reducing the rate of wage inflation for the company. Every company must pay market rates for year-over-year wage changes. We need to assess our organization to identify which initiatives we can pause, especially since we've transitioned from four regions to three global segments. Additionally, we're looking for efficiencies and tighter operations to make selective choices for reinvestment. Overall, you will notice a decrease in our year-over-year change in SG&A rate. We also have a program called net structural savings aimed at managing inflation and reducing manufacturing expense inflation each year. Moreover, Cost2Compete will help us address specific actions within our manufacturing network. That's our goal.

Our next question comes from the line of Ben Bienvenu with Stephens.

Jim Zallie, you made a comment about the $10 million impact from weather in the first quarter on shipment volumes. Is that $10 million or $0.10, $0.11 of EPS? Does that get deferred into the second quarter or later in the year? Or is that just lost sales? And maybe Jim Gray, as you think about that as another put and take, kind of piggybacking on Andrew's question around guidance, with the solid start to the year, some tailwinds. Wondering how that figured into kind of the posture that you took on guidance.

Yes. Let me make a quick comment. We indicated that there was an impact of more than $10 million in the quarter. This was mainly due to two-thirds being idle fixed costs and one-third resulting from lost sales. We experienced this impact primarily at our larger plants in the U.S. and Canada, in the Food and Industrial Ingredients segment, but also at our plants in India and Kansas City that serve the Texture and Healthful segment. This was largely caused by the extremely cold weather we had for about two weeks in January, which affected our production capabilities at several Midwestern plants, as well as causing challenges with rail and truck deliveries due to everything being frozen during that time. We have quantified this impact, which is why we reached that estimate. Currently, our plants are operating effectively and at full capacity, and we are working to catch up. However, some of these lost opportunities are one-time occurrences since demand was high and available, but we were still impacted by the weather. That’s how we assessed the situation, Jim.

Yes. So the one-third of the impact from lost sales will not be caught up. But as we look at the fixed cost due to some of the under absorption as we continue to run in Q2 and Q3 in order to kind of rebuild some of our inventory levels, then that will help a little bit in terms of some fixed cost absorption in Q2, Q3.

My next question is related to the reclassification of your segments. I have two questions. First, what story do you expect these new segments to tell regarding your business and your long-term strategy and performance across the segments? Second, why did you decide to segment them this way, and how should we approach monitoring these new segments compared to the historical focus on geographies?

Let me explain the reasoning behind our strategic direction. We undertook a comprehensive strategy refresh throughout 2023, utilizing the play-to-win framework, which is straightforward. It starts with defining our winning aspirations, identifying where to play and how to win, determining must-have capabilities, and establishing management systems for execution. Our organization quickly aligned with this simple framework. It became evident that our leadership in specialty starches and texture solutions provides a solid platform for us to expand as a comprehensive solutions provider. In healthful solutions, we recognize the significant trend toward health and wellness, particularly in sugar reduction, protein fortification, and fiber fortification, which present opportunities for us to succeed. Our customer base consists of many global clients, and we've identified common trends that resonate internationally. For instance, in Japan, there are 400 specific terms for texture, and in China, there are 200. This reflects the market's complexity. Additionally, our products are typically not sold in bulk or liquid form, making them suitable for international transport. Our supply network supports a global structure, enhancing our ability to cater to key global accounts effectively. In Latin America, we have a strong presence in Mexico, which has been growing and achieved a record quarter recently. The cultural similarities across the Hispanic market, specifically with Brazil and our joint venture in Argentina, made it logical to reorganize. Mexico was previously part of North America, but we believe there's more potential for talent management with the current alignment. Furthermore, in the U.S. and Canada, we focus on operational excellence while addressing strategic capital decisions related to facilities. Certain slower growth categories, like HFCS, now represent a smaller portion of our sales and gross profits. For the U.S./Canada Food and Industrial Ingredients segment, we reported an operating income of $87 million with a 16% NOI margin, slightly up from last year. This improvement stemmed from multi-year customer contracts and tight raw material cost management, although higher fixed costs due to extreme weather impacted us. Had it not been for the severe cold, sales volumes would have been stable, and operating income would have increased. This segment has a strong margin profile that underscores its stability and capability to generate cash, which we will reinvest in our Texture and Healthful Solutions segment. I apologize for the lengthy explanation, but I hope this provides clarity on our strategic thinking and the rationale behind our segment classifications.

Our next question comes from the line of Kristen Owen with Oppenheimer.

That one is going to be tough to follow up, but I'll do my best here. The first question I have is actually just a clarification on the 2Q guide, the net sales flat down to low single digits. Just remind us that is excluding the SK business. And can you help us with what that SK business was in 2Q '23? So we've got the right comp there.

Yes, it is excluding the South Korea business. I want to say that I think that's going to be around the $70 million, but let me follow up with you on that. And we'll put a clarification out on that.

Okay. Perfect. So then I did want to ask a follow-up to the previous sort of resegmentation, but more granular about what those KPIs are, how we should think about or track, whether it's ASPs or revenue per ton. Just how to think about the proxy for the specialty value uplift that you're getting through this reorientation and appreciate the cash count nature of sort of the core business. But as we're watching some of these higher growth areas with higher margins, what's the KPI that you guys are watching that would be helpful for us to be paying attention to?

Yes. With the new segments, I think that we have an intention to also be disclosing for the three primary segments gross margins, right? So that will be part of our required reporting in 2025. As we work through our 2023 historical, we're going to have a better perspective of the lap and how the gross margins are changing. So we're nearly right in the midst of working all of that historic 2023 and appreciate the work that my team is doing to get us there. But I think as we look forward, you'll see that the Texture and Healthful Solutions is going to have gross margins in the high 20s as well as there's product lines in there that are well into the 30s. So those higher gross margins are reflective of the customer value in terms of the price per ton paid. And then also, as we've spoken at CAGNY as part of our strategy, we look at the texture market globally, almost $20 billion. We think it's growing at least in the mid-single digits, maybe the low single digits. But we've talked about urbanization, we've talked about the pull for convenience to make the eating occasion and the grocery shopping experience easier, and we really play well to that demand pull. So you should see a KPI from us either on sales volume or volume itself, but also the growth that we think is supporting the Texture and Healthful solutions. That will be something that's important to us. And then when we look at, I think our Food and Industrial Ingredients business while we have, I think, very competitive positions in some of those broader product categories. And we're always going to highlight things like, "hey, how do we think the confectionery pull is for glucose syrups," but look to us to also talk about sustainability because we have this wonderful feedstock, and we already have all the infrastructure built. And I think that as the world looks to sustainable sources for either some chemical inputs that may have been previously petroleum-based. I think there's some opportunities for us to take some step change in how we might direct our wet mill output, but in a way that then looks at stabilizing revenue growth and maybe slightly changing the trajectory of revenue growth.

Our next question comes from the line of Ben Theurer with Barclays.

Not much left, there's a lot has been asked, but just wanted to follow up a little bit on the volume in the different regions. And one of the things that I wanted to understand a little bit better. You just called out Mexico being very strong. And I mean, we've seen obviously some of the food and beverage companies reporting very decent volume performance in the region. We also had Brazil results coming through from some corporates very strong. It kind of doesn't align with that minus 3% volume you had. So I just wanted to understand how much of that is still that destocking overhang, that negative impact? And what you're seeing sequentially with your customers in Latin America as to the engagement to buy product again from you guys.

Yes, Ben, thanks for the question. None. So literally, we had a significant customer in Colombia. We have an exclusive arrangement with them. They had some budget/demand management. The volume is such that it's on a contractual obligation for them to take the volume throughout the full year. The customer absolutely needs the volume. There's every intention for them to take it. And it was just kind of an unexpected kind of how they load their channel.

And we've seen it in the past in prior years, but never have seen in the entire quarter that this unique customer did not pull any volume, but there is a contractual obligation and they have historically always met their full-year calendar year obligation. But if not for that, Jim, in LATAM that was all of the 3% decline.

Sales volume would have been just slightly down.

Yes, it's a very insightful observation on your part, and there is a specific explanation for it.

Fantastic. Very good. And then as it relates to like your expectations and what's ultimately been reported in Texture and Healthful solutions that flat volume. Was it like within the expectation range that you had for the quarter? Or were you expecting maybe that already to be a little bit better in 1Q, but then just got impacted by some of these adverse situations that happened during the quarter weather-related.

Yes. Let me take a shot at it a little bit and then let Jim add some color commentary. So first of all, on Texture and Healthful Solutions, to remind you, the performance of what is now the newly defined segment was really exceptionally strong in quarter 1 of 2023. And that was because we were able to achieve some really very strong exceptional pricing in reaction to double-digit inflation at the time for specialty corn types and the run-up in natural gas prices that were happening in Europe. And as these, I would call them extraordinary costs moderated as we enter 2024, there was just a natural reset to pricing levels that was necessary. In addition to the pricing impact, margins in quarter 1 were compressed due to the higher value of 2023 inventory, which carried over into the new year as we move through 2024. However, newer inventory will reflect the lower cost of the specialty corn and lower fixed costs as these items normalize because this is a make-to-inventory business; it takes 2 to 4 months typically for this segment to typically work through changes in inventory and carrying costs. And the other thing that's just noteworthy is the segment is absorbing still some costs from the early-stage capacity expansion investments for growth that we made in recent years. For example, we more than doubled our specialty starch capacity in China and expanded capacity for specialty starches in Thailand and Mexico. So it's a combination of all of that, that hopefully helps to put in perspective Texture and Healthful Solutions this quarter, but we really are very bullish, obviously, on the winning aspiration, the strategy and the health of that position and the assets that we have around the world to support customer growth.

Yes. I think the core of your question, Ben, is that we are indeed observing an increase in volume. However, it is not substantial. For instance, if you examine the first quarter of 2023, the unit volumes for texture products in the U.S. were down about 5% to 6%. Then, as we moved into the second quarter of last year, unit volumes from grocery retail dropped significantly. I believe that the 0% sales volume we reported for the segment is fairly positive, and we are confident that we are experiencing broad customer demand.

I want to respond to Kristen's question regarding Q2. Last year, Korea's net sales were approximately $80 million. I wanted to make sure that was on the record for everyone. Our next question comes from the line of Josh Spector with UBS.

This is Lucas Beaumont on for Josh. I just wanted to sort of go back to kind of the resegmentation. I was curious about sort of why the expectations to the margins in the Texture Health segment are sort of below Food and Industrial. Is any of that sort of being driven by how you're allocating SG&A or transfer pricing across the business? And would you expect that to kind of diverge over time so that texture kind of benefits as you get further scale there?

Lucas, that is kind of dead on. So Texture and Healthful Solutions as a global segment does carry higher gross margins than the other businesses by at least 600 to 800 basis points. And it also gets a higher proportion of SG&A costs, and those are the people capabilities that we need, the technologists, the food scientists, the solution selling, sales capabilities, the marketing insights to be able to really lead with those solutions that our customers are looking for. And so much like some competitors in Europe that may carry like a flavor or a fragrance house that may have more SG&A as a percentage of sales in the business to reflect the competencies and the people capabilities that you need to support this type of business, that's the similar kind of business model and operating expense model that's in our Texture and Healthful solutions. And we do see that as the top line grows, we do expect to get operating expense leverage out of that.

And also, Jim, the investments I highlighted regarding the early-stage capacity expansion we have made are still in the initial phases of generating returns, and these costs are allocated to that business.

Yes. Additionally, I want to mention that since the team is relatively new, when we make acquisitions, including tuck-in acquisitions, we include any amortization of intangibles. We don't exclude or highlight those separately. There is also some amortization related to previous acquisitions that are now integrated into the Texture and Healthful Solutions segment.

Right. And then just secondly, I just wanted to ask you about kind of the free cash flow phasing during the year. So typically, 1Q is sort of a use or a minor contribution, but you got 30% of your full year target already in the first quarter. So I mean you called out working capital as being a factor. But if you kind of just walk us through how you see the progression in the moving parts here through the year, that would be great.

Yes, absolutely. One thing we noted was that due to the cold weather in January, we had to sell more from our inventory rather than maintaining it. I believe we will start rebuilding our inventory in the second and third quarters. Typically, these quarters generate more cash from operations with a smaller investment in working capital, but I see a slight timing shift for this year. Looking at the full year, we're closely monitoring the balance of raw materials moving through our balance sheet, along with our working capital related to accounts receivable and accounts payable. Traditionally, we've had good leverage in accounts payable due to various financing programs worldwide. However, with short-term interest rates remaining high, our suppliers and farming partners may not capitalize on those opportunities as they normally would. I'm a bit cautious about the potential year-over-year accounts payable leverage, but I believe this is mainly a timing issue between the first, second, and third quarters.

Our next question comes from the line of Heather Jones with Heather Jones Research.

So I hate to belabor the South Korea question, but I just want to make sure I'm understanding this correctly. So Jim, you mentioned that South Korea in Q2 of '23 was $80 million revenue, so an adjusted base of roughly $1.99 billion. And so the flat to down low single digits, it's off of that base of the $1.99 billion?

Approximately, yes.

Okay. And then when you talk about OI for Q2 to be up low to mid-single digits. Is that off of the base, excluding Korea? And if it is, what's the adjusted base that we should be using?

Korea is expected to contribute between $5 million to $7 million in operating income, depending on the performance each quarter compared to the previous year. We can follow up on this, but that's about where we stand regarding operating income.

Okay. My second question is about the high cost carryforward inventory in texturants. I understand the dynamics behind that. However, could you clarify if that has been completely resolved as we move into Q2, or are there still some lingering effects into Q2 for that business?

Very small amount that will be worked through in quarter 2. So for the most part, the higher cost inventories are by now through the system. You would say so, Jim?

Yes.

That concludes today's question-and-answer session. I'd like to turn the call back to Jim Zallie for closing remarks.

All right. Well, thank you all for joining us this morning. We look forward to seeing many of you at the upcoming BMO conference in New York on May 16. And I want to thank everyone for your continued interest in Ingredion.

This concludes today's conference call. Thank you for participating. You may now disconnect.