Archer-Daniels-Midland Company (NYSE:ADM) Q3 2023 Earnings Call Transcript

Archer-Daniels-Midland Company (NYSE:ADM) Q3 2023 Earnings Call Transcript October 24, 2023

Archer-Daniels-Midland Company beats earnings expectations. Reported EPS is $1.63, expectations were $1.5.

Operator: Good morning, and welcome to the ADM Third Quarter 2023 Earnings Conference Call. All lines have been placed on a listen-only mode to prevent background noise. As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s call, Megan Britt, Vice President, Investor Relations for ADM. Ms. Britt, you may begin.

Megan Britt: Thank you, Alex. Hello, and welcome to the third quarter earnings webcast for ADM. Starting tomorrow, a replay of this webcast will be available on our Investor Relations website. Please turn to Slide 2. Some of our comments and materials may constitute forward-looking statements that reflect management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These statements and materials are based on many assumptions and factors that are subject to risks and uncertainties. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation.

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To the extent permitted under applicable law, ADM assumes no obligation to update any forward-looking statements as a result of new information or future events. On today’s webcast, our Chairman and Chief Executive Officer, Juan Luciano will discuss our third quarter results and share some recent accomplishments on our strategic priorities. Our Chief Financial Officer, Vikram Luthar will review segment level performance and provide an update on our cash generation and capital allocation actions. Juan will have some closing remarks, and then, he and Vikram will take your questions. Please turn to Slide 3. I’ll now turn the call over to Juan.

Juan Luciano: Thank you, Megan and good morning to all who have joined for today’s call. Today, ADM reported third quarter adjusted earnings per share of $1.63 with an adjusted segment operating profit of $1.5 billion. Year-to-date, this equates to an adjusted earnings per share of $5.62, that will represent ADM’s second best EPS year achieved in just the first nine months and an adjusted operating profit of $4.8 billion. Our trailing four quarter average adjusted ROIC was 13.2%. This result reflect yet another strong quarter for ADM. I’m proud of the team’s nimble execution against our strategic plan while adjusting our business model in light of both global macro trends and the evolving needs of our customers. The global market is increasingly dynamic with factors that create both opportunities and challenges for ADM to address.

Consumer behavior has shown growing variability, spending more in some categories, while slow in spending in others. And our team has a proven ability to manage through these and the impacts of geopolitical tensions, inflationary pressures and the constantly adjusting balances of commodity supply and demand. Within each business, we are focused on navigating these external factors carefully, while we’re also building on the momentum we’ve seen through the year-to-date. As we look ahead, we are on track to exceed our 2023 previous expectations for the total company. In Ag Services & Oilseeds, we saw the accelerated energy transition support strong demand for vegetable oil, leading to a solid crush environment. We leveraged our flexible logistics footprint to manage Brazil’s record crop and our Global Trade franchise to best match supply to demand worldwide.

In Carb (ph) Solutions, we delivered a record third quarter on the strength of solid margins in starches, sweeteners, and flower, as well as robust ethanol demand that help us drive strong volumes and margins. In Nutrition, Flavors growth continued to outpace the market, while we both grew and executed on our revenue opportunity pipeline. The deliberate productivity and cost management actions we have taken in Animal Nutrition are enabling improved performance as we also see market volume recovery and we continue to navigate pockets of soft demand in certain categories of the Nutrition portfolio. Next slide, please. One of ADM’s greatest competitive advantages is the breadth and integration of our business model, reaching from farm to fork.

2023 has offered several examples that of how we are creating new areas of growth in each business units. On the farm, ADM has one of the largest and most sophisticated global origination networks, connecting with hundreds of thousand farmer partners worldwide. We have unique and deep relationships with the people and technologies that are shaping the future of agriculture. So as more of our customers are looking for traceable, sustainable crop sources in their own supply chains, we are a natural connector and influencer. We are proud to have announced partnership with PepsiCo, Nestle and Carlsberg, and have a target of 4 million regenerative acres and goal by 2025. The carbon equivalent of power in more than 100,000 homes a year. Moving into production, as the pace of energy transition accelerates, demand for renewables fuel sources is growing rapidly and ADM is in a leading position to capitalize on this trend.

With our Spiritwood JV with Marathon currently being commissioned, we are ready to fit the production of a targeted 75 million gallons of renewable green diesel per year. We have announced the Broadwing Energy Project, delivering lower emission power source and a critical part of lowering our carbon emissions used to power Decatur operations. And we’re innovating to deliver a new low-carbon intensity products within the fast growing BioSolutions portfolio. And as we connect to the consumer, we’re working closely with our customers to serve the challenges of their consumers, whether it’s sustainable solutions, the latest flavor or a cost effective ingredient replacement or explore in the future of nutrition through work with ADM Ventures partners like Air Protein and Nourished.

And we have differentiated our offerings with the next-generation of evidence-based health and wellness solution. With the world’s largest probiotic manufacturing facility in Valencia, more than 50 clinical trials underway and a growing team of deep scientific experts, we are well positioned for the expanding demand for functional foods and personalized nutrition. And to efficiently execute on all areas of growth while maintaining an efficient cost structure, we continue to vigilantly focus on productivity, as well as the culture that let our ADM colleagues bring their best every day. Across our global organization, we’re standardizing processes and systems through One ADM and modernizing our operations through digital transformation, driving greater efficiencies while enabling the best use of our workforce and production capacity.

Our planned modernization program continues to deliver impressive operational benefits, including advanced analytics and safety improvements across the 17 operations facilities currently in implementation phase. With more than 70 plants in the scope, the planned recurring cost savings associated with automation across our footprint in 2024 is already nearing $20 million per year. Our cultural efforts are the critical foundation for all of these strategic initiatives. We have ramped up our focus on a culture of caring, specifically in regards to the safety of our colleagues. This is our top priority. And our recent performance in this area has not lived up to our expectations. We are committed to taking action to improve and have already begun to do so with the assistance of both internal and external experts.

We will do better. By actively managing productivity, innovation and culture and aligning work to the interconnected trends in food security, health and wellbeing and sustainability, ADM is well positioned for sustainable long-term profit growth across new and adjacent avenues. And with the strong performance in 2023 and a constructive expectation for the remainder of the year, we are again raising our full-year earnings outlook. For a deeper look at our Q3 performance, let me hand over to Vikram, who will cover results of operations.

Vikram Luthar: Thank you, Juan. Please turn to Slide 5. The Ag Services and Oilseeds team once again delivered solid results in an increasingly dynamic environment by leveraging our experience, scale and integrated global footprint. Ag Services results were lower than the strong third quarter of 2022. South American origination results were higher year-over-year as our team delivered significantly higher volumes and margins on strong export demand. Prior investments in port capabilities have enabled us to structurally grow our earnings while capitalizing on a stronger margin environment across the region. North American results were lower year-over-year as a result of the shift of export demand to Brazil, due to the large crop there as well as low water levels in the U.S. river system, limiting volume and barge capacity.

Effective risk management, combined with higher volumes and margins in Global trade led to strong results. However, much lower than the record quarter last year. The current quarter also included a $48 million insurance settlement related to damages from Hurricane Ida. In Crushing, we delivered another strong quarter, but lower than the prior year as global crush margins remained healthy, but lower than the very strong levels of a year ago. Our strong results were led by North America, as the crush margin environment remains well supported by structurally higher demand for vegetable oils. We officially opened our new crush facility in Spiritwood, North Dakota to meet growing demand. We are currently in the commissioning process and expected to be running at full rates in early November, adding an additional 1.5 million metric tons of crush capacity per year.

In EMEA, we continue to optimize our flex capacity to prioritize crush of higher margin softseed, in line with market opportunities. In the quarter, there were large net positive mark-to-market timing effects which were lower than the net positive impacts in the prior year quarter. Refined Products and other posted another strong quarter, higher than the prior year period, results were led by solid volumes and margins in North America. In EMEA, robust export demand for biodiesel and domestic demand for food oil drove higher results versus the prior year. In the quarter, there were large net positive mark-to-market timing effects, which are expected to reverse as contracts execute in future periods. Equity earnings from Wilmar was significantly lower versus the third quarter of 2022.

Looking ahead, for the fourth quarter in Ag Services and Oilseeds, we anticipate strong results that are slightly lower than last year, excluding the $110 million legal settlement in the ag services subsegment from the fourth quarter of 2022. We expect Ag Services results to be in line with the prior year, excluding the legal settlement. We anticipate similar year-over-year North American export volumes, a competitive South American export program and continued strong performance from global trade. We forecast our crushing subsegment will deliver strong results similar to the prior year. We expect robust soy and canola crush margins and with the ramping of our Spiritwood operations higher volumes. We expect RPO to perform well, but be significantly below last year as positive timing impacts from prior quarters are expected to reverse.

Slide 6, please. Carbohydrate Solutions delivered an outstanding quarter that was significantly higher than the prior year, enabled by the ongoing optimization of our production and supply chain network. The starches and sweeteners subsegment were higher year-over-year on a healthy demand and strong margin environment across starches, sweeteners, wheat flour and ethanol. Our team generated new customer wins and delivered double-digit growth year-to-date in our BioSolutions platform. As Juan touched on earlier, we also signed a formal agreement with Broadwing Energy to provide lower emissions power to Decatur facility, extending our ability to provide low carbon solutions across the value chain. In the Vantage Corn Processors subsegment, our team executed well in a strong ethanol demand and margin environment, leading to significantly higher year-over-year results.

Looking ahead for the fourth quarter, we expect steady demand and margins for our starches, sweeteners and wheat flower products. We remain constructive on ethanol margins driven by solid domestic demand and healthy U.S. exports, supported by lower competing exports from Brazil due to higher sugar prices. We anticipate results to be similar to the prior year period, but with upside potential if the current ethanol margin structure holds. On Slide 7. In Nutrition, strong results in Flavors, health and wellness and recovery in the base Animal Nutrition business were more than offset by continued lower demand for plant-based proteins and persistent demand fulfillment challenges in pet solutions. Flavors reported impressive results in a complex operating environment, delivering a 29% growth in operating profit on a constant currency basis.

Results were led by pricing actions in EMEA and strong win rates in North America. During the quarter, we also implemented a successful go-live of our One ADM project in the EMEA region across 18 locations in 12 countries. This represents a significant milestone as we continue to harness digital across the enterprise to drive productivity gains. In Specialty Ingredients, weak market demand, particularly in the alternate meat category, inventory adjustments and unplanned downtime resulting from the recent Decatur incident led to significantly lower year-over-year results. The plant-based protein market has been experiencing destocking and consumer demand softness over the course of the year that will likely persist into next year. Given these recent market dynamics, we have re-scoped our Decatur protein modernization investment project to better match the expected lower growth demand environment.

Also, we are leveraging our expertise in creation, design and development to differentiate our product offerings to serve evolving consumer needs. These adjustments will enable a faster pivot to higher growth and more resilient categories such as specialized nutrition, which have synergies across the nutrition portfolio, and we are rapidly building this revenue pipeline. Health & Wellness results were higher year-over-year due to double-digit bioactives sales and a favorable impact related to the revised commercial agreement with Spiber. During the quarter, we realized a significant expansion in our revenue pipeline, reinforcing the demand for evidence-based solutions. In Animal Nutrition, we are beginning to see the cost optimization actions and the expansion of offerings in the specialty feed and ingredient space from earlier this year, driving improved performance.

However, the recovery in the base business was more than offset by normalized year-over-year amino acids margins as well as lower profit contribution from the Pet Solutions business. Looking forward, we anticipate flavors to finish the year strong, driven by growth in EMEA and North America. Health & wellness operating profit is expected to finish similar to last year. Animal Nutrition operating profit is expected to continue to recover sequentially quarter-over-quarter. Specialty Ingredients operating profit is expected to be down significantly, impacted by the recent Decatur East incident and demand softness. All in, we now expect full year 2023 operating profit for Nutrition to be around $600 million. While our results in 2023 have been below our expectations, we expect nutrition to return to growth in 2024.

We will continue to build on the Flavors momentum from 2023. Health & wellness should maintain its steady performance. The cost actions in the shopper pivot to higher-margin products will enable Animal Nutrition to drive growth, further reinforced by improved go-to-market capabilities. Lastly, for SI, we will work aggressively to restart operational capabilities at Decatur East to minimize the impact in 2024. Slide 8, please. Other business results were significantly higher than the prior year quarter due to improved ADM investor services earnings on higher net interest income. Captive insurance results were slightly lower on higher claim settlements partially offset by premiums from new programs. In corporate results, net interest expense for the quarter increased year-over-year, primarily on higher short-term interest rates.

Unallocated corporate costs of $298 million were higher versus the prior year on higher global technology spend to support our digital transformation efforts. Other corporate was favorable versus the prior year, primarily due to foreign currency hedges. We still forecast corporate cost to be approximately $1.5 billion for the year. The effective tax rate for the third quarter of 2023 was approximately 20% higher than the prior year primarily due to a change in the geographic mix of earnings. For the full year, we still expect our effective tax rate to be between 16% and 19%. Next slide, please. Through the third quarter, we had strong operating cash flows before working capital of $3.8 billion. We continue to invest in the business, allocating $1.1 billion to capital expenditures and have returned $1.9 billion to shareholders through share repurchases and dividends.

We have ample liquidity with over $13 billion of cash and available credit, and our balance sheet is very strong, with an adjusted net debt-to-EBITDA leverage ratio of 0.9. Our fortress balance sheet gives us the financial flexibility to drive our long-term strategic agenda while also returning capital to shareholders and is also a competitive advantage, particularly in a higher for longer interest rate environment. We have completed $1.1 billion of share repurchases through Q3 and expect to increase the pace of repurchases in Q4. Even with the softness in nutrition, and lower-than-expected profit contributions from Wilmar. We are raising our 2023 earnings outlook again and now anticipate full year EPS in excess of $7 per share. Juan?

Juan Luciano: Thank you, Vikram. As we close today’s call, let me share a few thoughts about how we’re seeing our efforts in 2023 position ADM to continue solid progression into 2024. External factors that influence ADM’s forward look are closely aligned to the enduring macro trends we have positioned ourselves to be nimble in managing. We continue to see the interconnectivity across food security, health and well-being and sustainability having an amplifying effect across the industries we serve. More frequent extreme weather, extreme weather, geopolitical events and the recent pandemic have all highlighted the criticality of food security within those geographies and for the regions that are served by their agricultural exports.

Connected to this, we see areas of supply abundance growing as evidenced by Brazil’s record recent crop cycles and areas of need shifting. In some cases, this has resulted in either more domestic consumption in countries like the U.S. or elevated import demand situations where our unparalleled global asset base and deep experience are critical. Government policies beginning to support new demand patterns, whether based on a move to more renewable energy sources or an effort to increase regenerative agriculture supply. Science continues to accelerate innovation in Nutrition with an ever-present consumer interest in turning their food, beverage and supplement consumption to their personal health and dietary needs. Beyond the challenges and opportunities connected to these external factors, we believe ADM is positioned to leverage productivity and innovation to build momentum in the coming year, a continuation of the strategic efforts we have been driving throughout 2023.

We anticipate our Services and Oilseeds continue to leverage its extended value chain and deliver structural changes to demand. We anticipate that crush margins will remain healthy while our productivity measures enable us to have a more efficient cost structure. We continue to drive opportunistic extension of our destination marketing scope, grow our regenerative agriculture acres and partnerships, and expand our renewable fuels feedstock production. In Carb Solutions, the compounding effects of our transformative investments coupled with early contracting for starches and sweeteners and what we believe to be a positive ethanol environment are setting up for another strong year in 2024. For Nutrition, we expect continued growth in our revenue opportunity pipeline with significant conversions continuing as we move past some near-term demand weakness.

Our expanding results in flavors continue to signal acceleration across our broader portfolio. We expect the positive revenue growth trends in Health & Wellness to drive into next year, and we’re already pivoting Specialty Ingredients towards high potential areas like alternative daily and specialized nutrition. Our actions in Animal Nutrition are delivering a positive impact and sustained opportunity growth, which we believe will expand further through the segment in the coming year. And by applying our commercial excellence efforts to this portfolio, we are focusing on the value of innovation in the specialty parts of the business. In closing, I want to express my gratitude to the ADM team for their dedication, hard work and resourcefulness.

With the momentum we have been building upon the foundation for growth we have established, I am confident in our ability to continue to deliver solid results as we move into 2024 and continue to pave a path for long-term profit growth. Thank you. Operator, please open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question for today comes from Andrew Strelzik of BMO Capital Markets. Andrew, your line is now open. Please go ahead.

Andrew Strelzik: Good morning. Thanks for taking the question. I guess I wanted to ask about the U.S. crush margin outlook. You commented that you expect crush margins to remain healthy. And I guess this is really a question about 2024 where the U.S. broadcast features have come down. What’s your perspective on what’s going on there? Do you think that the crush capacity that’s coming on is having an impact, or how is that being absorbed? I guess, just trying to frame your commentary around momentum with what’s going on in crush? Thanks.

Juan Luciano: Yeah. Thank you, Andrew. Listen, our perspective have not changed. If anything, the perspective that we have for the market has been confirmed by what we’re saying. Of course, it’s a very dynamic environment with the market trying to balance a lot of issues, whether it’s more availability of products, more demand, the Argentine situation. We have seen board crush explode back to near the highs recently. And this is just only a reflection of the incredible demand that is coming for soybean meal into the U.S. This drives the board crush has — it was mill driven maybe before it was oil driven, this was mill driven. You see Argentina situation, they are getting to the end of their inventory. There are probably enough beans at this point for crushers to run until November.

So what we see the export book of the U.S. for soybean meal is a record export book from the U.S., something that is higher than over the last 10 years. So I think that, that will continue well into Q1 of 2024. And fundamentally, what has changed, and you have that, if you were island of strong crush margins in the U.S. is this demand for oil. We see crush margins have been a little bit lower for soybean, certainly in Brazil or in Europe, and it’s because some of the oil prices have declined. But in the U.S. with the new demand for renewable green diesel and the new – all the new capacity coming, we expect that to remain strong for years to come. So we will continue to be very constructive at our crush margins in the U.S.

Andrew Strelzik: Great. Thank you very much.

Juan Luciano: You’re welcome.

Operator: Thank you. Our next question comes from Ben Theurer of Barclays. Ben, your line is now open. Please go ahead.

Ben Theurer: Yeah. Good morning. Juan, Vikram, thanks for taking my question. Wanted to follow up on Nutrition and the updated guidance calling that roughly $600 million op income for the year. Help us understand if you can, putting that into context to what just a while ago, we’ve talked about the path to make this business a $1 billion operating income business. What has gone into the wrong direction and what do you still need to correct to bring this business back on track to make it a $1 billion contributor? Thank you.

Vikram Luthar: Yeah. Thanks for the question, Ben. So let’s take it by different business lines. So in flavors, as I mentioned, Q3 had a very strong performance. And if you actually look year-to-date, Flavors operating profit is up 16%. And I think that’s been a very important growth engine, and typically, the sales cycle in Flavors tends to be shorter than some of our other product portfolios. So just keep that in mind, that momentum is building and we see that momentum through our revenue pipeline, which is increasing month-over-month, we anticipate momentum in Q4 and frankly, continuing into 2024. The other aspect is EBITDA margins of Flavors is also increasing. It’s not just revenue growth. The profit is also as a consequence of EBITDA margin expansion.

And finally, Flavors contribution year-to-date overall as a part of nutrition profitability is a little over 50%. So important to keep that as a back of your mind as we think about the future. The second part of the Human Nutrition business, Health & Wellness. Health & Wellness have been steady. Actually, the dietary supplements market, which was a little bit of a headwind has — we see the destocking tend to see the bit, and we are optimistic about the outlook next year. The other thing that Juan mentioned is the evidence-based portfolio of ingredients is expanding and our ability to apply that into functional food and solutions gives us confidence and that business to continue growing into next year and beyond. Specialty Ingredients. Actually, it’s a tale of two cities within Specialty Ingredients.

There’s a texturants (ph) portfolio that has done exceptionally well because of expansion of margins. We don’t talk much about that, but because it’s a smaller part of the business, but that has performed exceptionally well this year. The challenge has been on the plant-based protein market. And the plant-based protein is driven by market softness, right? There is a softness in the market, and we’ve gone down as a consequence of what’s happening in the market. What we are doing from that perspective is pivoting the portfolio into some of the more resilient categories like specialized nutrition like or to dairy. It doesn’t happen overnight. But remember, we — through our CD&E capabilities, it allows us to pivot our product portfolio into the categories that are growing, and we will do that.

We are in the process of doing that. What happened in the interim is the Decatur East incident. What that’s created is a challenge in terms of white flake production for specialty proteins in North America. So that’s been a drag that we clearly had not foreseen and that drag is going to continue into 2024. So within Human Nutrition, Flavors performing exceptionally well outpacing the market, Health & Wellness study, SI is kind of in line with market, further exacerbated by the recent Decatur East incident. Then step into Animal Nutrition, what happens with amino acids. We were coming off very high margins in 2022. The good news is, we are going to reset in a much more normalized margin levels in 2023. So therefore, ’24 onwards, we won’t have that lapping impact of higher amino acid margins.

But if you exclude amino acid margins, the base Animal Nutrition business, excluding pet solutions, we talked about all the actions of business is undertaking to optimize costs as well as drive focus on Specialty Ingredients, that is being recognized in performance. We are seeing the benefits of that and you’ll see sequential quarter-over-quarter growth. So that, we feel very good about this in Q4 as well as going forward. Ag Solutions, demand creation remains solid, that category has been fantastic. We’ve had challenges in demand fulfillment in North America, and particularly, we talked about that primarily in the recent acquisition that we did in 2021. Those are still lingering, but we have very clear action plans, and we feel confident that by the end of this year and early next year, we will be able to more than offset that.

So all in all, combined with that a new innovation, we feel pretty confident that nutrition will return to growth in 2024. And albeit maybe at a slightly lower growth rate than we had anticipated before. But getting to $1 billion is definitely within the horizon. It may not happen in the next year or in year falling, but definitely in the near term or in the medium term.

Ben Theurer: Thank you.

Operator: Thank you. Our next question comes from Tom Palmer of JPMorgan. Tom, your line is now open. Please go ahead.

Tom Palmer: Good morning and thanks for the question. The details on the crush moves, I think Andrew’s question was helpful. But maybe we could dig a little bit more into what’s happening on the oil side. I mean we have seen soybean oil prices come down over the past couple of months. The futures curve does suggest some continued pressure as we move into ’24. It sounds like you have plenty of visibility that demand is very strong on this side, but maybe just some color on what might have caused this downward price move and whether it’s more temporary in nature in your view?