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Logo of jester cap with thought bubble.

Ingredion Inc  (NYSE:INGR)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ingredion Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session, instructions will be given to you at that time. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the conference over to your host, Vice President of the Investor Relations and Corporate Communications, Heather Kos. Please go ahead.

Heather Kos -- Vice President of Investor Relations and Corporate Communications

Good morning, good afternoon, and good evening, and welcome to Ingredion's third quarter 2018 earnings call. Joining me on the call are Jim Zallie, our President and CEO; and Jim Gray, 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, www.ingredion.com. The slides accompanying this presentation can also be found on the website and were posted a few hours 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.

During this call, we will 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 II: Non-GAAP Information, included in our press release and in today's presentation appendix.

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

James P. Zallie -- President, Chief Executive Officer & Director

Thanks, Heather, and welcome to everyone joining us today. The Ingredion team is working effectively effectively to navigate both the challenges of the macro environment and capitalize on the opportunities presented by the shifts in consumer preferences and changing customer landscape. We are becoming a more agile company. We are aligning our resources and cost base to drive long-term profitability and are making progress in better positioning the Company for future growth.

With that said, we are disappointed with the third quarter. Specifically, in the latter half of the quarter, our results were impacted by unexpected events. We experienced the effects of rapidly changing foreign currencies, primarily in Argentina, Brazil and Pakistan, and we responded to unplanned power outages at our largest manufacturing facility in North America. We are addressing these challenges by aggressively driving operational improvements, structurally reducing costs and taking necessary pricing actions, while ensuring we deliver on our customer experience commitments.

To accelerate operational execution, we have restructured the North America supply chain leadership bringing intense focus to freight cost optimization and reducing complexity. We continue to make progress on rebalancing starch production and inventories across our network. Further, to better align our manufacturing cost structure to future sweetener demand, we have progressed the transition of Stockton customer volume and service to other plants in our network. We anticipate the cessation of production in Stockton by the end of November.

Now, moving to the third quarter results, Ingredion volumes were flat. Specialty sales growth was offset by core volume decline. North America and South America operating incomes were down. Asia-Pacific continued to be impacted in the quarter by extraordinary tapioca costs, although less than in the first half of the year, due to recent pricing actions. EMEA continued to perform well in spite of ForEx headwinds with operating income flat in comparison to last year.

Consistent with our strategic intent to grow our specialties portfolio, we continue to see strength in our on-trend growth platforms such as clean and simple ingredients and specialty texturizers. During the quarter, we announced $60 million of planned specialty investments in Asia-Pacific. These investments will further expand our capacity in modified waxy corn food starches in China and tapioca and rice specialty starches in Thailand to meet growing global demand.

We remain focused on delivering shareholder value. We continue to deploy cash with nearly $177 million of share repurchases during the first nine months of 2018, including $36 million in the third quarter. The Board approved the dividend increase for the fourth consecutive year and also approved an additional 8 million share repurchase authorization. This morning, we announced our intention to enter into a 4 million accelerated share repurchase agreement.

Before moving to our regional overview, I would like to update you on the progress of our Cost Smart program. As mentioned last quarter, in response to the inflationary increases that are impacting our industry, we formalized our $125 million Cost Smart savings program. We have taken a number of actions that will be completed by year-end including the cessation of production at Stockton, which we expect will save $6 million to $9 million. In addition, we further consolidated finance activities by announcing the opening of our Latin America shared service center in Guadalajara, Mexico building on the successful model we established in Tulsa, Oklahoma last year. Finally, as mentioned, we restructured our supply chain leadership, which is enabling improved operational effectiveness and increased productivity. Anticipated cumulative cost run rate savings of $4 million to $5 million are expected in 2018, and by 2019, we expect $24 million to $34 million building to $125 million by year-end 2021. Collectively, our Cost Smart initiatives continue to move us toward becoming a more streamlined and agile organization.

Now, moving to North America. Third quarter operating income in North America was $138 million, down 22% from last year. Overall volumes were flat, as higher Mexico and specialty volumes were partially offset by lower U.S., Canada volumes. Our production costs were higher due to the earlier mentioned unplanned outages, our rebalancing of starch production and inventories across our network as well as operational inflation. We also continue to experience the residual impact of increased freight costs on our business. Lastly, we continue to experience weaker than expected sweetener volumes.

In South America, third quarter operating income was $22 million, down $4 million from the year-ago period. During the quarter, we experienced significant FX headwinds caused by the weakening Brazil real and the Argentine peso. Volumes were down 4% for the quarter due to weakness in brewery sales. We continue to monitor the macroeconomic environment in Argentina and Brazil and take pricing actions as needed to recover devaluation impacts.

Moving to Asia-Pacific, the region delivered $25 million of operating income, down 17% versus the prior year. Although volume was down 1% due to seasonal issues in Korea, specialty sales were up in the region. The region delivered strong price mix, which led to 4% net sales growth. The pricing actions we took in each quarter this year to offset the rapid rise in tapioca costs led to continued margin recovery in the quarter and we anticipate a return to a historical average tapioca harvest.

Finally, the EMEA region continued to perform well in spite of foreign exchange headwinds, delivering third quarter operating income of $26 million, flat to last year. Higher specialty and core volumes were offset by unfavorable foreign exchange and higher raw material costs in Pakistan.

Now, let me hand it over to Jim Gray, who will discuss our financial performance. Jim?

James D. Gray -- Executive Vice President and Chief Financial Officer

Thank you, Jim. I'll start by covering the highlights of the income statement. Net sales were down for the quarter. Unfavorable foreign exchange more than offset favorable price mix. Gross profit margin was lower by 300 basis points, driven by weaker performance in North America and Asia-Pacific, and foreign exchange headwinds in South America. Reported and adjusted operating incomes were $155 million and $189 million respectively. Reported operating income was lower than adjusted operating income by $34 million. The difference was due to $31 million of restructuring charges associated with our Stockton, California facility, while the balance was attributable to our Cost Smart SG&A initiatives. Our reported and adjusted earnings per share were $1.32 and $1.70 respectively.

Moving to the net sales bridge, our sales were down 2% versus last year. Unfavorable FX of $76 million was primarily attributable to currency devaluations in Argentina, Brazil, and Pakistan. Volume declines were $6 million. This was partially offset by $47 million of favorable price mix.

By region, you can see, unfavorable foreign exchange affected all four regions, but was most pronounced in South America and EMEA. In North America, volume was flat year-over-year. Specialty volumes were up, but this was offset by lower sweetener volumes. Price mix in North America was down given higher freight costs. In South America, volume was down 4% due to weaker brewery sales. Price mix was up, driven by the pass-through of higher raw material costs and foreign exchange in Argentina and Brazil. APAC volume was down due to seasonal issues in Korea. EMEA had strong volume growth, driven by specialties in Europe and Pakistan core demand.

For the quarter, reported and adjusted operating income decreased $76 million and $50 million respectively. North America operating income decreased $39 million due to higher production costs driven primarily by several unexpected power outages at our largest sweetener facility, continued starch inventory rebalancing, lower sweetener volumes, and higher freight and manufacturing input inflation.

South America operating income was down $4 million, driven by significant foreign exchange headwinds. Asia-Pacific was down $5 million, driven primarily by higher tapioca costs and the layout of corn costs in Korea. EMEA was flat with specialty and core volume growth offsetting unfavorable foreign exchange and higher raw material costs in Pakistan.

Corporate costs were higher by $2 million for the quarter given continued investments to drive innovation and to further optimize global pressures --global processes via our Cost Smart savings program.

We'll wrap up the discussion of the quarter with earnings per share. On the left side of the page, you can see the reconciliation from reported to adjusted. On the right side, operationally, we saw a decrease of $0.49 per share, primarily driven by a margin decline of $0.39 per share, attributable to North America. Unfavorable foreign exchange was $0.14 per share. The margin and FX declines were partially offset by increased volume of $0.03 per share and other income of $0.01.

Moving to our non-operational items, we saw a decrease of $0.02 per share for the quarter, largely driven by higher financing costs, partially offset by taxes and shares outstanding. It's worth to note, financing costs were $0.10 per share decrease driven largely by the impact of unfavorable foreign exchange on Argentina's balance sheet including the effects of hyperinflation accounting as compared to year-ago period. Adjusted taxes were $0.05 per share lower, primarily driven by US Tax Reform. Shares outstanding contributed to benefit of $0.03 a share.

Let me move to year-to-date financials. Net sales were flat year-to-date. Gross profit was lower by $64 million as a result of declines in North America and Asia-Pacific, which more than offset better performance in South America and EMEA. Reported and adjusted operating incomes were $545 million and $590 million respectively. Reported operating income was lower than adjusted operating income by $45 million. The difference was due to $31 million of restructuring charges associated with our Stockton, California facility, $9 million of charges associated with Cost Smart SG&A initiatives, and $5 million of other restructuring costs. Our reported and adjusted earnings per share were $4.80 and $5.31 respectively.

Moving to the net sales bridge, our year-to-date sales were flat versus last year. Unfavorable FX of $97 million, primarily attributable to Argentina, Brazil, and Pakistan, was offset by volume growth of $53 million and price-mix of $64 million.

As we look more closely by region, you can see unfavorable foreign exchange affected South America, predominantly driven by the Argentine peso and Brazilian reais. Volumes were up in South America and EMEA. In North America, volume was flat with increases in Mexico and specialty ingredients, offset by lower sweetener volumes.

In total, price mix was up 1%. Price mix was flat in North America due to higher freight costs. In our other regions, price mix was up due to pass-through of raw material costs and FX.

Year-to-date reported and adjusted operating income decreased $89 million and $79 million respectively. North America operating income decreased $84 million due to higher production costs driven by unplanned power outages at Argo, continued starch inventory rebalancing, lower sweetener volumes, higher freight and manufacturing input inflation, and some commodity margin pressure.

South America operating income was up $23 million, driven by volume growth and our more competitive cost structure in Brazil due to network optimization and in Argentina due to our new labor agreement and organizational restructuring.

Asia-Pacific was down $15 million, driven by higher tapioca costs.

EMEA was up $3 million with specialty and core volume growth more than offsetting higher raw material costs in Pakistan.

Corporate costs were higher by $6 million given the same reasons impact in the quarter.

Moving to the earnings per share. Operationally, we saw a decrease of $0.77 per share, primarily driven by a margin decline of $0.89 per share and unfavorable foreign exchange of $0.13 per share. North America and Asia-Pacific declines more than offset margin improvement in South America . The margin decline and unfavorable foreign exchange was partially offset by increased volume of $0.23 a share, and other income of $0.02 a share.

Moving to our non-operational items, we saw an increase of $0.10 per share for the (Technical Difficulty) largely driven by the lower tax rates and shares outstanding. Adjusted taxes were $0.15 per share, benefit driven primarily by US Tax Reform, while shares outstanding contributed a benefit of $0.05 a share. These benefits were partially offset by higher financing costs of $0.09 a share, which includes the impacts of Argentina hyperinflation accounting.

Moving on to cash flow, year-to-date, cash provided by operations was $579 million. Capital expenditures of $234 million were up $12 million year-over-year driven by specialty capacity expansion. Additionally, as Jim mentioned earlier, we bought back 1.6 million shares for $177 million.

Turning to our guidance. As mentioned in our pre-announcement release, we anticipate 2018 adjusted earnings per share in the range of $6.80 to $7.05. This reflects anticipated foreign exchange headwinds in Argentina, Brazil and Pakistan, and a lower operating income outlook for North America. This excludes acquisition-related integration and restructuring costs as well as any potential impairment costs. We expect net sales and volumes to be up from 2017 and we expect continued growth in specialty sales.

We anticipate that the impact of foreign exchange will be $0.25 to $0.35. As we've explained in the past, given our business model, for most regions, foreign exchange is effectively a pass-through over time . We expect operating expenses including corporate expenses to be up year-over-year as we invest in global business process optimization and efficiency to drive long-term structural cost reduction under our Cost Smart program.

We expect financing costs for the year to be in the range of $80 million to $85 million due to higher interest rates on our floating rate debt, refinanced maturities, and the impacts of foreign exchange revaluation for hyperinflation accounting. Adjusted effective annual tax rate is expected to be between 26.5% and 28%. This reflects a benefit of approximately 2 percentage points, compared to our weighted average effective tax rate from 2017, driven primarily by US Tax Reform.

We expect total diluted weighted average shares outstanding to be in the range of 71.8 million to 72.0 million for the year taking into the account the impact of the accelerated share repurchase agreement.

In North America, we expect net sales and volumes to be flat. For the full year, we expect operating income to be below 2017 . We expect higher production cost driven by unplanned electrical outages, continued starch inventory rebalancing, lower sweetener volumes and higher freight and manufacturing input inflation.

South American net sales are expected to be up versus the prior year. Volume recovery and favorable price mix are expected to offset foreign exchange headwinds, and operating income is expected to be up. However, given the rapid pace and magnitude of FX devaluations in Argentina, we expect our business model will require more than a quarter to recover. In addition, we anticipate positive economic growth in Brazil. We remain watchful of the economic reforms and inflation in Argentina, we continue to focus on business performance improvement and expect operating income improvement in the region.

Asia-Pacific, net sales are expected to be up, but operating income is expected be down given tapioca cost headwinds. We anticipate strong specialties' performance across EMEA will continue to support operating income growth in the region. In Pakistan, currency and raw material cost headwinds are expected to be partially offset by higher volumes and price mix.

Excluding one-time cash benefits from tax receipts, we expect cash from operations in 2018 to be in the range of $720 million to $750 million. We expect to invest between $330 million and $360 million in capital expenditures around the world in 2018, to support growth as well as cost and process improvements. Importantly, we remain committed to returning capital to shareholders as we demonstrated through the first nine months with repurchase of 1.6 million shares, our fourth consecutive annual dividend increase, and the announcement of a 4 million accelerated share repurchase. The initial settlement of the ASR transaction will occur earlier in November.

That brings my comments to a close. And let me turn it back to Jim Zallie.

James P. Zallie -- President, Chief Executive Officer & Director

Okay. I would like to announce today that in keeping with our strong commitment to sustainability, we have posted a Global Reporting Initiative, a GRI Index to the sustainability page of our website. This further aligns us with voluntary reporting requirements and the expectations of our stakeholders.

In closing, our leadership team remains focused and we are as committed as ever to drive operational excellence and win with customers. We are tackling our challenges, making the necessary changes to strengthen our business and navigating the impacts to our industry and business. Our global organization is highly engaged in refining and evolving our path to profitable growth. This centers on continuing to deliver exceptional customer value by being easy to do business with and being a true innovation partner. And as we have demonstrated, we will continue to use our strong balance sheet to invest in specialties growth opportunities and pursue M&A. We remain committed to delivering shareholder value.

And now let's open the call to questions.

Heather Kos -- Vice President of Investor Relations and Corporate Communications

Beth, we're ready for questions.

Operator

(Operator Instructions) And our first question comes from the line of BMO Capital Markets. Please state your name.

Ken Zaslow -- BMO Capital Markets -- Analyst

Hello.

James P. Zallie -- President, Chief Executive Officer & Director

Hi, there.

Ken Zaslow -- BMO Capital Markets -- Analyst

Just couple of questions that I have. One is, can you talk about how the outage actually occurred and then what are the ramifications to kind of cleaning it up and what's the time-frame to which that will happen?

James P. Zallie -- President, Chief Executive Officer & Director

Sure. Very much. Yeah. So very unexpectedly, we experienced three successive power failures in our main substation at Argo over a three-week period. The outages basically they shut down our boilers and a plant of Argo's size takes seven to 10 days to stabilize production per incident. We believe complete utility outages of this magnitude in three weeks are extraordinary and something we've not experienced in the three decades -- in the last three decades at Argo. And so, those issues are behind us. They hit us in the middle part of the quarter and the impact financially impacted us in the latter part of the quarter.

Ken Zaslow -- BMO Capital Markets -- Analyst

And what's the time-frame so it's completely past us -- is it --

James P. Zallie -- President, Chief Executive Officer & Director

It is past us and the plant is operating at normal production rates right now and has been for the last few weeks.

Ken Zaslow -- BMO Capital Markets -- Analyst

So then when I think about 2019 and beyond, how much of the issues in North America will reoccur. Will you be able to recover and get to a more sustainable margin. How do you think of that given all the issues that have happened in North America? And then on top of that, just also thinking about the high fructose corn syrup demand that has come out. How do I frame the North American business for 2019 and 2020?

James P. Zallie -- President, Chief Executive Officer & Director

So, let me start by trying to answer the question, what happened in North America this quarter and year-to-date and then try to address all of your questions. I mean, we've clearly had a challenging year and are making the necessary changes to address the situation in North America. So of our North America 2017 operating income base of $654 million last year, let's walk through the full-year outlook bridge. Starting with the most recent events, the unplanned power outages at Argo, we estimate the full year impact of that to be $10 million, the majority of which hit us in this quarter.

Now let's move to something we talked about in quarter one which was freight and then talk also about ME inflation, which we call manufacturing expense inflation, which has impacted us in the year and also commodity pricing pressures combined, so that bucket. We estimate the full-year impact of these to be $40 million.

Next, sweetener volumes and the associated impact on our fixed cost absorption in our network. We estimate that impact to be $20 million. Our starch rebalancing is estimated to be $20 million, and some operational inefficiencies are estimated to be $10 million.

So, in regards to which of those headwinds for the full year are transitory versus structural, what I would say is, at this point in the year there are many unknowns related to the uncertainties in the macro economy, the trade situation, incremental inflation beyond what we've experienced in 2018 and 2019 -- or in 2018 and then going into 2019 and then obviously 2019 contracting, which is an unknown. So we expect the impact of the Argo outage and operational inefficiencies to be short term transitory effects. Our team is working very hard against the $40 million headwinds related to freight, ME inflation, and commodity margin pressures within the industry that are being felt within the industry. We believe the $20 million impact attributable to starch rebalancing should steadily improve throughout 2019. And the $20 million impact of sweetener volumes to be structural in nature, but in response, we've announced the cessation of wet milling at Stockton, which should yield $6 million to $9 million of savings.

So we are obviously taking very aggressive actions and moving with a sense of urgency in our North America business. As mentioned, we restructured our supply chain leadership bringing intense focus to freight cost optimization and working to reduce complexity in our production facilities. So hopefully, that walk provides you a very clear explanation of what's happened in 2018 and our best view right now about what's transitory versus structural and the best view we have right now for 2019.

Ken Zaslow -- BMO Capital Markets -- Analyst

I appreciate. Thank you very much.

James P. Zallie -- President, Chief Executive Officer & Director

Thanks, Ken.

Operator

Our next question comes from the line of Credit Suisse Securities. Please state your name.

Robert Moskow -- Credit Suisse -- Analyst

-- kind of similar. What is the --

Heather Kos -- Vice President of Investor Relations and Corporate Communications

Hey, Bob -- hey, Robbie, that cut off at the beginning of your question, can you repeat it? I'm so sorry.

Robert Moskow -- Credit Suisse -- Analyst

Sure. My question is, as you go into price negotiations with volumes declining in sweeteners, what's the industry logic for trying to get a price increase? Is it to offset commodity inflation because I would imagine corn is pretty flattish. And when are we going to know what the conclusion of that is? Will it be in January like we normally hear?

James P. Zallie -- President, Chief Executive Officer & Director

Yeah, typically, we obviously don't comment at this time of year regarding contracted, but we will in quarter one. Certainly, we believe the entire industry is feeling inflationary impacts right now and I'm going to let Jim make a comment related to corn, because I think it is something that we didn't want to kind of highlight in relationship to what we call commodity price -- commodity margin pressures. Jim.?

James D. Gray -- Executive Vice President and Chief Financial Officer

Yeah so, Rob. One of the things that we're -- we've heard a couple of comments that corn might be flattish for the year, but also recognize that part of our corn cost is offset by our co-products, the sale of our co-products. And what we're seeing is that with the soybeans backing up in the U.S., those have really pressured some co-product pricing, which net increases our overall cost of corn, and I'd say that that it's a pretty unique dislocation related to the current trade disputes between the U.S. and China, that the carryout expected on soybeans is pretty high for the end of this year. So we don't see that unwinding soon, I do think that the layout of our cost of corn or the net cost of our corn will be higher in the first half of 2019.

Robert Moskow -- Credit Suisse -- Analyst

Two follow-ups on that. Does that mean that you think all of your competitors will face similar net corn cost situation and therefore use that as part of the logic? And then secondly, I guess on the starch rebalancing, can you give a little more detail on what you're rebalancing, I mean, does that include just the structural shift away from sweeteners in your starch stream and into more value-added starch products, and if so, I think you said that was, is that a structural cost or is that something with -- I can't remember if you said it was structural or not, because it would seem structural if that means just demand is shifting away from one -- from the sweetener side.

James D. Gray -- Executive Vice President and Chief Financial Officer

Hey, Rob. I'll finish up on corn and hand the starch inventory rebalancing back to Jim, but with regard to corn, I can't say exactly to what our competitors face, but what some of the publicly available quotes on things like cornmeal or corn oil, it's pretty easy to see the trend in those, and those are publicly quoted from multiple sources. Maybe Jim, you can address --

James P. Zallie -- President, Chief Executive Officer & Director

So just in relationship to the starch production imbalance that we refer to, we actually talked about this in earlier quarters because it started to impact us in quarter one, if you remember, primarily on our industrial starch volumes, which typically are much larger in quantity, because they're shipped in bulk and due to -- it's a long time ago, but due to some very cold weather in the harshest part of the winter, we suffered some production imbalances at the same time as we were trying to optimize our North America production across three different plants. So those are challenging moves when things are going normal and then throw on top of it a weather-related issue that impacted industrial starch and also there were some softer customer demand related to those same weather-related issues and supply chain issues that impacted the entire industry or with trucking availability et cetera. So throughout this year, we've been working to rebalance our starch production networks and we see the situation improving and steadily improving throughout 2019, and that's why we said against that $20 million headwind, we see us mitigating to offsetting most of that as we go through 2019.

Robert Moskow -- Credit Suisse -- Analyst

Okay, so it has nothing to do with shifting your stream of how the corn flows through the plant, whether it goes into starch or sweeteners, it's really just within --

James P. Zallie -- President, Chief Executive Officer & Director

No, it's primarily within our starch network, it's primarily optimizing lines that we produce on either food or industrial, and to be quite frank, it's also related to trying to accommodate growth in other base starches that typically we wouldn't produce in North America, because of growth in specialty, tapioca, potato and rice, that typically would be produced outside of North America, but to accommodate customer needs, we've tried to put those in, and when you do that, you create challenges for a plant that is dedicated to corn.

Robert Moskow -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you, and our next question comes from the line of Jefferies, LLC. Your line is open, please state your name.

Akshay Jagdale -- Jefferies, LLC -- Analyst

Hi, it's Akshay Jagdale, Jefferies, can you hear me?

James P. Zallie -- President, Chief Executive Officer & Director

Yes, Akshay.

Akshay Jagdale -- Jefferies, LLC -- Analyst

Perfect. Hi, thank you for that bridge, that's super helpful, I just want to make sure I caught all the buckets, so if I can repeat them, power outage is $10 million, freight manufacturing inefficiencies and commodity costs are $40 million, sweetener demand is $20 million, rebalancing is $20 million and there was another $10 million which was also operational inefficiencies. Is that right?

James P. Zallie -- President, Chief Executive Officer & Director

Yeah, it's kind of a catch-all bucket, but yes, that will --

James D. Gray -- Executive Vice President and Chief Financial Officer

Akshay, sorry, what we were just describing this as freight inflation, some of the manufacturing inputs we've had in place in chemicals and packaging and then we've had some commodity margin pressures, that bucket. We've kind of combined as $40 million because it's largely inflationary or changes in trade regulations that have impacted various prices in our inputs. The operational efficiencies are just more miscellaneous stuff around just various smaller one timer's around different plants.

Akshay Jagdale -- Jefferies, LLC -- Analyst

So I mean, none of that I guess is really price pressure related to overcapacity per se, right, I mean the sweetener demand and the rebalancing gets you back, I guess, the industry back in balance on that piece, is that the right way to think about it, I mean all of these things aren't easy to get back and it takes time, but this is not a structural competitive issue, right, none of these buckets seem to me like they are related to structural competition increasing and pricing coming down that way? Is that a fair statement?

James P. Zallie -- President, Chief Executive Officer & Director

Well, I mean I think the one thing that Jim did highlight though is that when we look at our sweetener volumes, in particularly sweetener that's probably sold in the beverages, we stated for a long time that we see that volume declining over time. So we do expect about $20 million of the impact '18 versus '17 in North America due to sweetener volumes to be structural. Okay. So now we're offsetting that as we transition -- cease wet milling at Stockton and we transition that volume to other plants, we'll get -- that will be about a $6 million to $9 million type of annual savings, but right now, I mean in front of us, we would look at about $20 million of impact '18 versus '17.

Akshay Jagdale -- Jefferies, LLC -- Analyst

Got it. And just one last one on the contracting, so the point you're making is net corn costs whatever people's views are, it's a bit higher than that and what we have heard about contracting is that pricing is up and it depends on which product obviously to estimate how much, but would it be your view that -- I mean, what is your view on capacity utilization because I'm guessing you don't want to comment on margins outlook for next year, but if capacity utilization, what's the view this year versus last year as you are contracting? Thank you.

James P. Zallie -- President, Chief Executive Officer & Director

I think that what I would like to say in relationship to capacity utilization is that we believe with the Stockton closure, that that certainly helps from a standpoint of our network from an industry balance standpoint, and we believe that the industry continues to operate at high capacity utilization rates.

Akshay Jagdale -- Jefferies, LLC -- Analyst

Perfect. I'll pass it on . Thank you.

James P. Zallie -- President, Chief Executive Officer & Director

Thanks, Akshay.

Operator

Our next question comes from the line of Citi Investment Research. Your line is open, please state your name

David Driscoll -- Citigroup Investment Research -- Analyst

Great, thank you. It's David Driscoll. Good morning, everybody.

James P. Zallie -- President, Chief Executive Officer & Director

Hey, David.

David Driscoll -- Citigroup Investment Research -- Analyst

Wanted to follow on these North American questions. So the biggest topic that I hear from some of the competitors is that Ingredion is just more exposed to the freight market, the truck market, and that you guys have a different cost structure than they do, so to be honest with you, I'm not clear on how you will recover all those freight costs in light of the fact if that cost move so much relative to rail and does this put you in a difficult spot in recovering those freight costs?

James P. Zallie -- President, Chief Executive Officer & Director

Well, let me take a shot at it and then let me ask Jim to add some additional commentary. So because we have I think relative to the other players in the industry, a large specialty starch business that is shipped by dry van, dry van was the first freight category out of the gate in 2018 to get hit with pretty steep increases in price, and we see though continued freight inflation it's going to impact and it is impacting rail and will impact ocean freight as well, but because of our specialty starch dry van shipments being relatively larger probably in comparison to other industry players, that's been a headwind for us. We have made significant progress in working with customers and our contract terms have been updated with new freight rates where possible. We're also enforcing longer lead times, which should mitigate the risk and of having to enter the spot market, for example, for last minute shipping and we're working very hard to mitigate the impacts that we experienced this year, but also certainly there is going to be additional freight inflation that the industry is going to experience and we're seeing that in some of the earnings releases I think in CPG world right now. So, but this has been an intense area of focus for us starting immediately in quarter one, and I would say we've actually made very good progress working with our customers to mitigate some of the impacts and are continuing to do that and then we will also move as it relates to pricing for 2019 as well. And Jim, do you want to --

James D. Gray -- Executive Vice President and Chief Financial Officer

Hey, David, may I just follow, this is Jim Gray, that when you're thinking about the value of food starch coming into a customer and kind of where that sells for on a price per ton basis, the cost of the freight is a smaller proportion of that total cost to the customer. So obviously if there is changes there, you can also -- I think there's -- and we have more confidence that those can be mitigated some way, there's either ways you can change between us and our customer, where the inventories were held to help make the transportation cost more efficient and lower and/or the value of -- or the cost of the freight change relative to the cost of the final product is lower. I think if you move to more of a syrup business where you have tanker trucks or railcar tankers, there the freight cost is more expensive given the uniqueness of the asset, and so there I would expect to see if you have freight inflation that it's going to impact, it'll be more of an issue in terms of managing through to customers.

David Driscoll -- Citigroup Investment Research -- Analyst

Two quick follow-ups. On the sweetener volumes in North America -- it's -- the one point that I find a lot of investors keep asking me questions about is that it's been widely known for years that high fructose corn syrup demand is going down. You guys have called it out there this year as like a significant headwind, but your competitors, they haven't. So what's the difference between Ingredion sweetener issues and issues in the industry recognizing that volumes have been in decline for many years now? So I guess I'm not perceiving the sensitivity on how much your sweetener volumes went down and why it became such a headwind? And then similar in this thing, could you just wrap up with North American volume outlook? Is this a flat volume market for you guys on a go-forward basis?

James P. Zallie -- President, Chief Executive Officer & Director

Let me take your first question and then let me have Jim answer the last question. So this is actually also something that we tried to provide some perspective on last quarter, because I feel it is a very important question and it's a very good question. So let me try to put the sweetener market fundamentals into context. Total sweeteners volume for industrial and food usage has been flat over the last few years, but there's definitely been growth for industrial glucose usage such as it's used as a feedstock for renewable chemicals or as a fermentation substrate. However, HFCS has continued to decline and I do want to highlight something, that HFCS decline, this particular year for the industry, is twice the rate of -- in previous years. So it is declining this particular year at a little bit of a steeper decline.

In addition, we, Ingredion, produce sweeteners primarily for food-grade applications and each industry player is impacted differently by their mix of sales for industrial use like I just described versus food-end uses and also across the customer base and geographies. So we are going to be impacted differently by say other industry players. But I think it is accurate to say that over the last number of years, sweetener volumes are -- overall the category is flat, HFCS is declining, it's decline this year is at an increased rate in comparison to previous years, and over this period of time, uses for industrial applications have been actually increasing, which has been offsetting some of that HFCS decline and we're impacted differently because we're primarily food, and again, where we're located with customers and geographies is going to be different.

So Jim, I'm going to ask you to give a comment on the volume outlook.

James D. Gray -- Executive Vice President and Chief Financial Officer

Sure. And I mean, David. Overall -- I think your question was -- is the North America volume outlook flat? I would say that it actually improves as our product sales mix changes over time, year-to-year as corn changes, we're going to pass through changes in corn. So you take that out of the equation fundamentally as we sell more specialty products, we're going to see higher average sales prices per ton and that's going to actually improve our product sales mix over time and we will see sales growth in North America from that.

David Driscoll -- Citigroup Investment Research -- Analyst

Thank you so much. I'll pass it along.

James P. Zallie -- President, Chief Executive Officer & Director

Thanks, David.

Operator

And our last question comes from the line of Goldman Sachs. Your line is open. Please state your name.

Jim Zallie -- president and chief executive officer

Adam?

Adam Samuelson -- Goldman Sachs -- Analyst

Hello, can you hear me?

James P. Zallie -- President, Chief Executive Officer & Director

Hey, we can hear you now.

Adam Samuelson -- Goldman Sachs -- Analyst

I apologize, jumping between conference calls. Can we -- just a first question on capital deployment, this is the big step-up in buyback in the quarter, should we see that as any signal about the the appetite or the attractiveness of M&A in the current environment and the opportunities that you might see to grow the specialty business inorganically?

James P. Zallie -- President, Chief Executive Officer & Director

Yeah. So the share repurchase authorization from the Board and the accelerated share repurchase I think just shows a confidence in the value of the company and to the value of the stock, but we have several specialty growth platforms that we're pursuing, which we have M&A opportunities to invest and which will help accelerate our specialties growth position for the future. So we believe our solid cash generation enables us to execute M&A and specialty investments while being mindful of the return of capital for shareholders. So we are very confident regarding the cash deployment aspect of things.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. And then just a follow-up on some of the profit bridge details that you gave -- thinking about '19 and those are very helpful. The material kind of inflation bucket, the $40 million versus 2017 baseline, I think Jim your comments were you're working diligently to recover those, I just want to be clear that -- there you were expecting additional inflation on top of that $40 million bucket in 2019. So, was the goal to be getting pricing to recover the $40 million plus, whatever incremental you get? And then, if so, or how do we think about how Cost Smart is a part of that or incremental to that recovery?

James P. Zallie -- President, Chief Executive Officer & Director

Let me provide the clarification question and let me turn Cost Smart over to Jim Gray. So the freight bucket -- this freight inflation we've experienced this year, ME inflation, we talked about say packaging and chemicals et cetera additional. And then in addition we had commodity margin pressures that we've talked about as well. So that's a bucket that we are working aggressively from a standpoint of offsetting and to mitigate as we head into next year and we are making progress against a number of those, and I talked about the freight specifically. Let me turn it over to Jim to talk about the other aspect.

James D. Gray -- Executive Vice President and Chief Financial Officer

Well. And just a follow on that, I do think out and that you've characterized it correctly. There was end-year inflation and there is some commodity margin pressures that also impact us in '18. At this point in the middle of contracting season et cetera, it's really an unknown to us, we'll comment more as we get into the next year. I think with regard to Cost Smart specifically though, we are taking actions in Cost Smart against our SG&A, our operating expense globally, and we are very much thinking about what's the wage inflation that we'll encounter in each country, how are we offsetting that, how are we actually trying to restructure and move to a leaner more streamlined and kind of agile support function as well as the supply chain function, here, that kind of impacts our SG&A as a -- in total and as a percent of our net sales as we go forward.

Adam Samuelson -- Goldman Sachs -- Analyst

And I just want to be clear because there is the two parts to the Cost Smart, there is the SG&A part, which is very clear. The $40 million bucket you talked about in the prepared remarks, those seem like almost exclusively in COGS or at the gross profit level and there's kind of gross productivity actions within Cost Smart as well, and so, on top of the $40 million you've experienced in 2018 relative to the '17 base, we would think that there would be incremental inflation year on year, and I'm just trying to make sure, when I start thinking about the '19 versus '18 bridge, kind of is Cost Smart going after the inflation '18 versus -- '19 versus '18 or do you think you can actually recover the '19 versus '17 inflation in kind of gross?

James D. Gray -- Executive Vice President and Chief Financial Officer

Well. So in the $40 million kind of inflationary bucket that we highlighted. So we talked about freight, which in our accounting is actually above net sales and then also the commodity margin pressure is really more against our cost of corn and so within that overall bucket, you do have some manufacturing input inflation this year that we're trying to address as we think about pricing and contracting for 2019, Cost Smart builds upon that, as we go forward for 2019, 2020, 2021. Cost Smart cost of sales is really more trying to look at how we affect kind of permanent changes within our manufacturing expense and with overall how the network comes together. So I think some of that bucket that you've attributed hits us in different line items within our P&L, but Cost Smart works from our '18 base forward.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay, all right. That's helpful. I will pass it on. Thank you.

James D. Gray -- Executive Vice President and Chief Financial Officer

Okay.

Operator

And that is all the questions that we have at this time and turning it back over to the host.

Heather Kos -- Vice President of Investor Relations and Corporate Communications

I'd like to thank you for your time today. And if you have any follow-up questions, just feel free to give me a call. Thank you.

Operator

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconferencing services. You may now disconnect.

Duration: 56 minutes

Call participants:

Heather Kos -- Vice President of Investor Relations and Corporate Communications

James P. Zallie -- President, Chief Executive Officer & Director

James D. Gray -- Executive Vice President and Chief Financial Officer

Ken Zaslow -- BMO Capital Markets -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Akshay Jagdale -- Jefferies, LLC -- Analyst

David Driscoll -- Citigroup Investment Research -- Analyst

Jim Zallie -- president and chief executive officer

Adam Samuelson -- Goldman Sachs -- Analyst

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