Archer-Daniels-Midland Company (ADM) Earnings Call Transcript & Summary

Okay. Good morning. Good morning, Juan and Vince.

Good morning, Ken.

Good morning, Ken.

I'm more appreciative than ever that you are here to have an open discussion about the opportunities and challenges that lie ahead for ADM as well as ADM's critical role in the food supply chain. Juan, as CEO and Chairman, you have structurally changed ADM's identity in terms of capital allocation, efficiency, culture and product fit. ADM has better prioritized capital towards growth initiatives and cost efficiency programs. And together with Vince, the President of ADM Nutrition business, ADM has transformed its product portfolio and created a high-growth, highly consistent business. Again, thank you both for being here. With that, let me turn it over to you, Juan, for some opening comments, and then we'll turn it back to you for Q&A.

Thank you. Thank you, Ken. It's great to see you. And good morning, everybody. I'm very pleased to be here as -- at BMO like every year for the Farm to Market Conference. And while we're doing this virtually, we will make do. So I would make some brief opening remarks today, and then we can go into Q&A. Vince will join me for the acquisition, the President of Nutrition. I would like to share with investors where ADM is in our evolution journey, and I will do that today as well. But I'd like to start my thoughts on how we're thinking about the more immediate future. These are obviously extraordinary times and is -- this pandemic is challenging our ability to learn, to adapt and to deliver every day basically. Our team has made an exceptional effort to keep our colleagues safe and to keep our company running. And also, we are planning for life post COVID-19 and what that transition looks like. When it became clear that COVID presented a growing risk both to our colleagues and our operations, we activated the global pandemic leadership team that meets every day, 7:00 a.m. in the morning, to review the situation, evaluate new risks and make timely decisions to protect our teams and our business. We put into place from the beginning strict guidelines to protect our employees and contractors, from travel restrictions to social distancing requirements. Our first priority was always to operate safely, and our second priority was to operate effectively. And we managed to do that over 800 facilities that we have around the world. They are all operating. And we have the rest of the people working remotely. We -- the IT team ordered, in fact, more than 12,000 new laptops. We added more than 22 new servers to the company, and that serves for the company to be able to operate remotely. If you have asked me 6 months ago, can we operate a complex company like this remotely? I will have doubted. And to be honest, the team has stepped up to the plate and show the resilience of ADM. We, of course, at the beginning, was all about, do we have the raw materials? Do we have the people to run the facilities? Operations, supply chain, procurement did a masterful job of that. Immediately, you go into, okay, there is a recession coming. Will the credit markets dry out? So we wanted to make sure that from a liquidity perspective, we were in a very good position. And of course, our team in late March put together a successful issuing of long-term debt, $1.5 billion. And so we finished the quarter with a very comfortable position from a liquidity perspective. So I would say, around the world, our 38,000 colleagues have done an outstanding job of keeping food and nutrition flowing through the pipelines, and we have insured anybody. So I'm very proud of that. But also, simultaneously, I would say, Ken, we're also planning for post-COVID-19 transitions. So we are working on our protocols to reenter the workplace. Of course, we have the benefit of being a global company. We've seen the evolution of the virus from East to West. So we have now the teams in China back in to work 100%. And we have used all those learnings, of course, to improve our protocols. So we have very strict protocols. We will be slow in our reentering because, to be honest, we are operating successfully as we are today. And we don't want to lose the gains that we have made in that regard. So in some cases, some of our colleagues will continue to work from home. So we're also analyzing a lot of consumer behaviors as regions of the world start to reopen and how consumers come back. What is the mindset of consuming coming back to the more normal, if you will? So we're using technology to stay engaged with customers much more than before. We are conducting, for example, virtual innovation sessions to work with our customers and making sure that all our pipelines of new products is not slowing down. And we continue to adjust to meet their changing needs. Of course, and I think probably the other presenters explained it to you as well, demand is changing weekly as customers are trying to adapt and to make the shift from foodservice to retail and whether you load or ship to this plant versus that out of the plant or whether that product mix is shifted. So we have been as close as ever with our customers. And I think if something good about this that I reflected a lot is that during this period, we came to learn the company even better than we learned -- than we know before. Now we know every raw material for 800 plants, the difficulties in each of those locations. The major of any of this -- of those towns, if we didn't know it before, we have on a first-name basis today. So I'm very encouraged at how much better we're going to get out of this just by the true knowledge that we're getting in the company. And finally, with the rest of the world coming back to certain normalcy, we're also continuing to advance our transformation or our evolution to make sure that ADM remains even more competitive and more vitally 10 years down the road. So our long-term strategy continues to be there and being implemented. So we continue to make great progress on all the businesses that maybe were not performing to our expectations before. We continue to drive efficiencies in our businesses, including advancing our One ADM goals. We continue to expand our capabilities, our portfolios, our geographic footprint and our talent base. I mean we have a lot of new colleagues joining even in these circumstances. Our Readiness pipeline remains robust with $920 million in run rate benefits on an annual basis unlocked since the program began. And as you know, and we have Vince here to talk a little bit about that, we have invested significantly in becoming a nutritional leader. And I'm very proud of what Vince and his team have accomplished. Last year, they grew operating profit by 23%. In Q1 of this year, that growth has continued and even accelerated. And we also have achieved our Neovia synergy targets 2 years ahead of schedule. And we haven't forgotten because it continues to be our key financial indicator, is our ROIC of 10%. We continue to pursue that goal, and we continue to make progress. And there's been a lot of things that we had to handle over the few years, but I think it's clear the direction we are going. I think all our indicators showed progress toward that direction. And I think, if anything, this pandemic shows how ADM purpose of providing nutrition to the world couldn't be more important. So with that, Ken, I will leave it to you, get back to you so you can enjoy the Q&A.

Great. I'm actually going to do this exactly opposite of usually how I do it. Because generally speaking, you said something, you're going to come out learning more about your company, and you kind of come out better than you came in. So usually, I would save this as the last question, but I'll do this first. How do you envision ADM's earnings power, base earnings and growth algorithm? Does -- if it doesn't change, do you actually feel like it could get stronger? Is there an opportunity to get a return on invested capital to 10% at a quicker level? Can you talk about your earnings power [ estate ] when you see this? And what have you learned to be able to enhance your earnings power?

Yes. Ken, all this situation have not changed at all my view on our long-term earnings power. I think we have talked about that before in previous instances that I presented every year at BMO, and that continues to be there actually. None of these have changed. I think all this -- I think even you mentioned in your commentary, every year, whether it's a trade dispute or ASF or now the pandemic, there is something. But there is a constant which is we continue to improve. We continue to create value through that. And I think that, that gives me the confidence to say some of these things are temporary, but our earnings power continue to be there. On achieving the 10%, Ken, let me point clearly this. We could have achieved the 10% had we not invested in creating the Nutrition division. As I told you before, if our ROIC in, let's say, 2018 was 8.5%, 8.3%, that was a combination of about 9% of the regular businesses and maybe 4% of the Nutrition division because we were building that Nutrition division. And at that point in time, I remember you -- I mean you all challenged us and saying, okay, when are we going to see the improvement in profit in Nutrition division? Because basically, we were growing it organically. We were investing in many, many plants around the world. And I think now you've seen that. And all our improvement in getting to the 10% ROIC needs to come basically by the Nutrition division, getting the ROIC to where the other businesses are. So when we see 23% growth of operating profit in 2018 -- in 2019 versus 2018, you see that's where we are catching up to that ROIC target. When you see the, like, 75% growth year-over-year in the first quarter of adjusted operating profit, you're going to see that for us making inroads into that 10%. So we -- I think we are on the road to that. And then it will be the balance of how much do we continue to invest in Nutrition to capture all that growth that is there for us versus how much do we want to harvest to try to get that ROIC up. So I think that we will get there within the next few years. How quickly or how slowly? It will depend a lot on the realities of opportunities that we find to continue to accelerate the Nutrition division.

And if I just stay on the Nutrition business a little bit, why -- has that -- has the demand in that business waned at all? Has it strengthened? How has it fared in this COVID-19 environment? And given the idea that some of your business may be more customer-facing, how does that work out? And is there any sort of reduction in that business? How do you think about that business?

Yes. So I will answer briefly, and then I'll let you, Vince, comment more specifics on that. I think -- listen, we've seen so far, of course, a very strong first quarter. We were coming very strongly with a lot of momentum into COVID. We had a very good January before COVID significantly impacted. We have a very strong February. So if there was a little bit of a pantry loading, maybe it was a little bit of March, but it's not at the root of what happened in the first quarter. First quarter was truly outperformance by the business itself. And we haven't seen a big leg down as we go into April. So I think the strength continue over there, but I will let Vince maybe provide more granularity in the different segments that you see.

Good morning, Ken. Good morning, everybody. So yes, maybe I'll add some commentary to Juan's thoughts. And when you look at the business and the breadth and the depth of the portfolio, we're still able to innovate, and our customers are still innovating. And we have the ability in a virtual environment to tell a taste and send product and still do rapid prototyping. We're setting virtual office hours with our sellers and our cross-functional teams. We have a disciplined schedule. We're still doing -- even though we're in a customer-facing business in an unprecedented environment, we're still finding ways to differentiate ourselves with our level of customer intimacy and customer contact. I think the other thing that sustains our demand is really the global trends and our ability to participate in those global trends. If you identify a few areas, plant-based proteins, for example, we're the world's leader in plant-based proteins. Whether it be in beverages or alternative meat categories, that category continues to grow. We continue to innovate and create systems to support. You look at in these unprecedented times, everybody is focused on health. Holistic health is one of the largest global trends that we have. And our focus really there where we've planted our flag is the microbiome. And we have solutions in digestive health, immunity. We look at pharmaceutical oils. We look at natural health and nutrition products, botanicals and extracts, really well suited to meet that trend. You look at clean-to-clear label in sugar reduction, very well suited for our natural systems from the flavor perspective. You look at the humanization of pets, again, very well suited for our Animal Nutrition business. Our Health & Wellness business and the humanization of pets is blurring the lines between human and animal and bringing the requirements for products together. And I think the last piece is you look -- continue to look at the trends, you wrap that all up in sustainability or what our team calls sustainable goodness in providing high-quality natural foods to the global food supply chain. So we think those things can -- will continue to drive our demand, keep our performance strong as we head into the second quarter, obviously 1 month in, and the balance of the year.

Okay. If I continue with that line of question, can you talk about the -- so just going a little bit into the Animal Nutrition business. I know that the animal protein supply has kind of been protracted. How will that affect not only struggling meal demand in U.S. crush, but will that also affect your Animal Nutrition business? So how does a problem like -- of the animals out there is going to actually impact your business, both on the Nutrition business but also on the crushing side? So 2 parts.

Yes. So let me answer the general part and the oilseeds part and let, Vince, do the rest. So in crush, of course, this temporarily is impacting our business. And you have both issues on the crush side. Of course, you have foodservices with the oil impact. You have a little bit of the biodiesel impact with the lockdown of the economy. And then you have this issue on some of the packaging plants not being operating -- or not being operated at full capacity. So of course, our expectation for soybean meal demand growth in the U.S. is a little bit lower than it was in January when we were thinking about 2020 year. But we think this is temporary, Ken. It's just a temporary effect. And I think that now that the government has grown the full power of USDA and the whole executive power behind this plant, providing them with the PPE equipment, the testing and everything they need to come back safely, I think that we're going to see that correction. In the -- in between and in order to address supply and demand potential imbalances, the industry has taken capacity down. We run at very high capacity full out in the first quarter. And then at the end of March, we started to see these, in our connection with customers, some of these issues, and we adjusted capacity. We're taking capacity 5 percentage points down. I think what is important to remember in crushing in general, because I'm very bullish about that business, the prospects of that business, is you still have the 10 million tons of protein imbalance in China driven by ASF. And we see that the herd has started to recover in China, so the worst is behind us in ASF in China. And there is this rebuild of the herd that have kept soybean meal demand good and crush margins relatively good in China. So we see that with optimism. We see China importing much more pork and other meats from the rest of the world and certainly from the U.S. as well. We saw at the beginning in Brazil, but we see it certainly in the U.S. And we see the overall per-capita consumption of protein continues to go up. So we are not concerned medium term. We have adjusted in the short term. I think in the feeding side, of course, some of the livestock animals, we've seen reduction in demand in the U.S. But I will let Vince address that. Vince?

Ken, maybe I'll pick up there where Juan left off. And there is some decreased demand for livestock in the U.S., but with our geographic footprint and diversity of our portfolio, a couple of things. There's still some increasing livestock demand in parts of Latin America and Mexico and particularly in Asia Pacific and Southeast Asia when you think about the Philippines. So there are still some livestock opportunities. But I think the other thing that helps the Animal Nutrition portfolio and a primary driver as to why we acquired Neovia is really the breadth and depth of that portfolio. So we're focused on additives. We're focused on premix. We're really driving that business in the pet care arena, and there's massive growth in pet care on a worldwide basis. We're focused on aqua. So with the diversity of the geographic footprint and truly having a global footprint and the breadth and depth of that portfolio, we're still seeing strong demand as we try and shift that portfolio again to the more value-add side of things. So essentially, what we're trying to do in animal is follow a blueprint that we developed in the Human Nutrition side in terms of really valuing up the business.

And I would add to that, Ken, do not forget the period we are in, in our Animal Nutrition business, which, remember, when we acquired Neovia, we said very clearly that Neovia was a margin-up story. And that's what we're doing right now. When we bought Neovia, our Animal Nutrition business, if you recall, was about 9% EBITDA margin on sales, while Neovia was like in the 5%, give or take. And that's why we saw the opportunity to margin up to our 9% first and then take probiotics and all these other products and improve the product mix and take it even further. So what we have done now -- and if you look at first quarter, I think first quarter EBITDA margin on sales for animal -- for Neovia was like 9.5%. So we have taken that up to where we -- so at this point in time for us, it's more important, all that ability, to get better versus getting larger. So demand, yes, of course, it's nice to have demand. But as Vince said, demand in Europe is kind of stable, and demand in Asia is growing. It's growing in Turkey, and chicken in Indonesia is growing. In pork, [ it's demand ]. So that demand is growing. So it's balanced, but the story for us is a margin-up story at this point in time. And that will continue because a lot of that, it depends on us. It depends on our optimization, and we -- the team is very, very much focused on that.

Juan, you mentioned the other -- you mentioned the soybean meal side, and you alluded to the vegetable oil side. But I would just want to provide another question there. How is ADM impacted by the foodservice shutdowns? Are you starting to see changes as markets are starting to open up? How is your vegetable oil business as well?

Yes. Yes, of course, that was the biggest impact. When we came into the year, we were thinking, Ken, maybe we have another story here to come along with the meal story. And there you go, all of a sudden, you have this. The balances look at the beginning of the year, like most of the oils, we're going to be short of the demand. And of course, things change in a bit. So foodservices went down significantly. And I would say, if we look at China, again, as a harbinger of what things to come because they are coming back, foodservices is coming back. Of course, dining in, in those restaurants, this is still low, but I would say the QSR are coming back. So we see that with optimism. I would say, for us, if I look at our order pattern, late March, early April was when we saw the biggest decline, especially here in the U.S. and also, to a certain degree, Europe. And I would say, over the last 2 or 3 weeks, things are starting to improve. They are not spectacular, but they are getting better. So I would say, if you think things -- well, probably in Asia, we have probably recovered half of what we lost. Let's say, if you think that they went to 50% of capacity or demand when all this hit, they're probably at 75% today. And I'm sure every day, they're getting closer. And I think the U.S. and Europe are starting to navigate that recovery road, if you will. And then you have the dichotomy or the particularity by customer, depending on, is your customer heavy on drive-throughs, is your customer heavy on deliveries. [Audio Gap] people just want to get out of their homes. So they get into their car and they go and drive and they pick up the food or current delivery or things like that. So I think people are -- we're seeing the different reactions of customers, not just if it's in foodservice or retail, but also what kind of foodservice company they are. Are they a true restaurant with dine-in? Or do they have ability to serve online if you were a customer?

So is your U.S. business starting to get more orders? Are you starting to see it in -- go like down? How do I frame it?

Yes. It's difficult to say because the different businesses are different. And also we have some impact in high-fructose corn syrup as well. We have some impact in the oils. So difficult to put a number. I'm just saying when we look at the orders day by day, week by week, which still is a very irregular pattern, I think there was a little bit at the beginning, Ken, of, okay, let's make sure we have enough material. That probably was March. So you have a lot of orders. Then you get into, okay, the supply chain is resilient, and I get everything I want. So people adjusted a little bit. I think that was -- and a stricter lockdown. That was probably early April. And then we start to get out of that, and order patterns start to normalize a little bit. People work through their excess inventory and they start to normalize. And now the economies are starting to open, and then the weather starts improving. So people are thinking about, okay, I might have more demand in the future. I start building up the chain again. So we're starting to see that transition, but it's still a little bit of a seesaw. So it will be very imprudent for me to put a number to that. But I just wanted to express the dynamics of the trend that we are seeing at the moment, a little bit better, not spectacular yet.

Would you say the same thing about the high-fructose corn syrup supplies? Is that...

Yes, I think it's similar. Everything that goes to foodservice is having a similar performance, yes. But it's still a very irregular pattern.

And just thinking a little bit about your agribusiness. So obviously, you had a very difficult late crop, all that. How has it progressed through the year? And you've been very clear that the first half is not going to be fantastic, but you should start to see a big pickup in the back half of the year. What are the key drivers to helping that business recover? Are you worried at all about the U.S. trade relationships? President Trump seems to have said some comments that will throw the trade agreement into some sort of lesser than it might be?

Yes. So let's talk about Ag Service. First of all, Ag Services had a very good first quarter, as you saw, Ken, in the results. A lot of the things that we put together in the past are working. Remember, destination marketing, when we talked about that like 3 years ago, when we acquired Medsofts and Industries Centers and all that, and we opened in offices in Vietnam here and there, that's playing up. And I think it was very beneficial during this time in which there was potential concern about uncertainties about the supply chain and whether the ports will be operating and all that. Having local products, having products available domestically to some of the customers, that was very beneficial, and customers embraced that value proposition. So the Global Trade did a fantastic job helping the businesses, helping the U.S. export soybean meal, helping also all the Oilseed business moving oil because we didn't want oil to be a restriction of our crush rates. So you needed to be able to evacuate that oil. So that integration of the businesses, Oilseeds with the Global Trade, was very useful to get that business going. And that's where you get some of the benefits of the block trades and some of the improvements in performance. The other part that did well this quarter is that we get record volumes and margins in South America. The export -- the loans in South America were spectacular. And we also got record export in Romania. And the U.S. exported reasonably. I mean -- so elevation margins went up during the quarter. Recently, they have come down a little bit because now I think people are more relaxed about the ability of South America to continue to export. Our -- there were no disruptions in the ports in South America. A little bit of an issue in Argentina. You know the Paraná River has very low level of water, so that created some inefficiencies. Instead of loading in the Russia SECO, we load in Bahía Blanca or in the oceans, but not significant. So that has tempered a little bit the elevation margins in the U.S. over the last couple of weeks, but more to a normal rate. This is not the time of the year in which the U.S. should be exporting. The U.S. will be exporting -- the U.S. needs to be exporting when Brazil will run out of beans. And so if you look at -- going back to your China commentary, I'm still as optimistic as I was before all this commentary. I think we continue to talk to China, Ken, and continue to see food security is a top priority of China. And I think that being diversified -- and it's very difficult to ignore a producer like the U.S., whether it's pork or whether it's beans or whether it's wheat or corn or sorghum or cotton or whatever it is that you want to think about. So I would say we need to look more at the facts more than the rhetoric. There is an election year and all that, and this probably bodes well, but that's not the business we are in. The business we are in is that we know USTR checks weekly with their Chinese counterpart. And the Chinese have been delivering on all their commitments to do -- to remove nontrade barriers and to improve the ability of both countries to trade. So -- and if you look at their order pattern in terms of soybeans, everybody says they've been ordering a lot of soybean from [ rhetoric ]. And of course, we've been supplying all those, and that's why we have great results in Q1. But if you look at their order pattern, their book for August is only 25% bought. And then their book for February is 22% or 25% bought. But September, January, they left open. They are completely open. They have purchased 0% because that's what the U.S. window is. So they buy when it's convenient to them because it's in our harvest, then that's where Brazil runs out of product. So I think to me, every action that they have taken shows that they are still planning to do that. Let's say, can I promise that they're going to buy $40 billion in the first year? That started in February 14, the effect of this. So with these lower prices, maybe they don't squeeze the $40 million in the firm, but it's a 2-year agreement. My point is, I do believe they have the intention to comply and they have the benefit. Think about this, we always said they are rational buyers. Think about this, they are perennially short of raw materials, of commodities. China, that's what it is. China is short of commodity, long on people. Think about the time like this in which all commodities, natural gas is $1.80, oil is $20, corn is $3, why wouldn't you buy in these times? I mean this is a time for -- if I need to build reserve, so it makes a lot of economic sense for them to rebuild their reserves and rebuild everything they need to consume. So I'm a believer this is going to happen. So as I said, I look at the data, and the data supports that. The rhetoric, sometimes it doesn't.

I want to slip in one more question. I know we're kind of at the end of it, but I just -- I think this is really important is, can you talk about what your internal projects contribute to your growth algorithm? And can we -- I know we only have a couple of minutes, but I think that's really important. Can you kind of delineate what it will impact, not just what your run rate is, but where you think it will be in 2021, 2022, just as an earnings power adjustment?

Yes. So we declared early this year or last year that we were seeing the portfolio of products under our control to being in the net, I would say, net of inflation, but gross of other things like biodiesel tax credit or others, say, or COVID impacts in terms of operating profit improvement of about $500 million to $600 million. And we maintain that statement. All these projects, as I said, are under our control. And when we look at the first quarter, we started the year, Ken, with a lot of momentum that COVID have not stopped. We started the year with a very strong January, not only in this project, but also in Vince's business. We continued the year with a very strong February. And I always remember, so this -- I always remember, I checked with Joe -- the forecast for Readiness, with Joe Taets, he runs Readiness. I checked the forecast for Readiness in January. And the forecast for Readiness was a certain number at the end of the quarter. And then when we ended the quarter in the middle of COVID, that number was $20 million better than what we take in January. So even with everybody remotely, those projects have not decelerated. So the -- if you think the big buckets of that, part of that was improving businesses. And you see Golden Peanut, you see Decatur plant, all running much better. Decatur plant is running 30% more grind than before, 10% better yields. You see harvesting -- Vince is doing a terrific job of harvesting all our investments. You see Readiness. So I would say -- I know we need to wrap up. But if I think about, we've been through 25% of the year, we have probably been through 30% of the achievement on that goal. So we are running ahead of schedule in that $500 million to $600 million goal. So I'm still optimistic for the end of the year, we will deliver what we promised.

And what about beyond? For 2021, 2022, are you still thinking you'll have opportunities?

I do believe that there are opportunities. I do believe Nutrition is just getting started in all this growth momentum. I think improvements of some businesses, hopefully, will not come back into that. Some of those opportunities, like flooding improvement versus last year, that's not going to happen. I don't think we're going to have any other restructuring, but there are a lot of those projects. I think you can count of $200 million to $250 million improvement on Readiness to come every year. And I think you should count with more harvesting coming every year as this will continue to grow in this kind of rates that it's growing.

It's awesome. Guys, I can't appreciate -- I can't express my gratitude. I really truly appreciate you guys coming on the call and doing this for us. Thank you very much. We're going to end there.

Always a pleasure. Stay safe. Great to see you.

Great to see you.

Ken, just thank you.

Take care. Ta-ta.

Bye-bye.