Poor performance in North America contributed to weaker earnings at Ingredion, Inc. in the second quarter of fiscal 2018, prompting the company’s top executive to vow “aggressive actions” moving forward.

Net income in the second quarter ended June 30 totaled $114 million, equal to $1.59 per share on the common stock, down 12% from $130 million, or $1.81 per share, in the same period a year ago. Net sales increased 3%, climbing to $1,496 million from $1,457 million.

In the six months ended June 30 net income was $254 million, equal to $3.47 per share on the common stock, unchanged from the same period a year ago. Net sales increased 2% to $2,965 million from $2,910 million.

“We are disappointed with our (second quarter) and year-to-date results, and we are taking aggressive actions in response,” James P. Zallie, president and chief executive officer, said during an Aug. 2 conference call with analysts. “In particular, our performance in North America has not contributed as we had anticipated, wher we were negatively impacted by operational headwinds. First, higher production costs, coupled with operational inefficiencies, resulted from our ongoing efforts to rebalance our starch inventories across our network; second, freight inflation continued to impact our business; and third, we experienced softer-than-expected sweetener volumes, leading to a weaker outlook for the second half of the year.

“We must be, and we will be, more agile in addressing and navigating these changes impacting our industry and our business. We are currently taking swift actions to improve our cost structure in response to inflationary headwinds, and we are optimizing our network capacity in North America in response to lower U.S./Canada production volumes.”

Operating income in North America in the second quarter of fiscal 2018 totaled $150 million, down 17% from the same period a year ago. Sales in the division increased 1% to $916 million from $905 million.

Mr. Zallie said Ingredion expects to realize immediate savings in the second half of fiscal 2018 as part of the company’s $125 million Cost Smart savings target. Part of the new program includes the closing of wet milling and production of high-fructose corn syrup and industrial starches at a facility in Stockton, Calif., by the end of the year. He said the conversion of the Stockton facility into a shipping distribution station should enable Ingredion to remain well positioned to serve customers in the western United States.

Also sustaining a decline in the quarter was Ingredion’s Asia Pacific division, wher operating income fell 10% to $27 million. Sales in Asia Pacific, though, increased 7% to $201 million from $187 million.

“Our specialty capacity expansion investments in Korea and China are complete and commissioned and continue to grow our specialty ingredients throughout the region,” Mr. Zallie explained. “As discussed for the past two quarters, Thailand’s excessive rainfall, starting late last year, impacted both the tapioca harvest and root quality, which significantly increased raw material costs during the first half of the year. Consistent with our business model for tapioca, we are actively working to adjust pricing to offset the rapid cost increases. Pricing actions helped mitigate the impact of tapioca cost in (the second quarter) in comparison to the impact felt in (the first quarter). We expect higher tapioca cost to continue in the third quarter until the situation improves in the next harvest in the fourth quarter.

“Although we experienced an unprecedented run-up in tapioca cost over the last nine months, our extensive production and sourcing network in the region has enabled us to ensure continuity of supply to our customers.”

Strength was noted in the company’s South America business, wher operating income jumped to $20 million from $4 million. Sales increased 2% to $232 million.

“Our Brazil and Argentina network optimization and restructurings have positioned us to be more cost competitive and are delivering against the expected benefits,” Mr. Zallie said. “Volumes were up 8% for the quarter. We expect the 2017 actions we’ve taken will continue to drive operating performance and specialty sales growth. Although, our Brazil operations were faced with a trucker strike during the quarter, we were able to manage through with minimal impact. We continue to monitor the macroeconomic environment in Argentina and Brazil.”

In EMEA, operating income was $29 million, unchanged from the same period a year ago. Net sales increased 7% to $147 million.

James D. Gray, chief financial officer, noted during the call that Ingredion expects 2018 adjusted earnings per share in the range of $7.50 to $7.80, which would be down from the forecast of $7.90 to $8.20 following the release of first-quarter results and down from the company’s initial guidance of $8.10 to $8.50.

Mr. Gray noted that Ingredion expects net sales and volumes to be up from 2017 and expects continued growth in specialty sales.

Ingredion forecast cash from operations in 2018 to be in the range of $800 million to $850 million, down from an earlier forecast of $830 million to $880 million.

“We expect to invest between $330 million and $360 million in capital expenditures around the world to support growth as well as cost and process improvements,” Mr. Gray said. “importantly, we remain committed to returning capital to shareholders, as we demonstrated in Q2, with the repurchase of 1.25 million shares.”

Mr. Zallie noted that Ingredion intends to operate with a “strong sense of urgency” to recover from the first-half earnings setback.

“Our actions at all levels of our company consist of a necessary focus on cost reduction, operational excellence and pricing actions,” he said. “importantly, we are also driving commercial excellence and innovation, with an intense focus on our customers. We will continue to use our strong balance sheet to invest in specialties growth opportunities, including specialties M.&A. We remain committed to returning cash to shareholders. All of this is consistent with our commitment to deliver our long-term earnings growth algorithm.”

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