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

Okay. Thanks, everybody, for joining this morning. We'll go ahead and get started. I'm Ben Bienvenu. I cover the food and agri business sector here at Stephens. Archer-Daniels-Midland is here with us to talk about their business this morning. As many of you know, ADM is a leading global agribusiness company participating in numerous components of the value chain. I'm delighted to introduce from the team, Juan Luciano, Chief Executive Officer; Greg Morris, Head of Ag Services and Oilseeds; as well as Victoria de la Huerga; and Michael Cross from Investor Relations. Thank you all so much for being here. I appreciate your time this morning and I look forward to hearing about your business. This will be a fireside chat format, and I'll be leading the Q&A session today. But for listeners, please feel free to submit questions if you like. I'd be happy to ask them on your behalf. But thank you to the team. Appreciate it. And I think let's go ahead and get started.

I think, Juan, Greg, maybe the best place to start is looking back a little bit before we move forward. You've been on what's been a transformational journey the last number of years. Where are you in the journey? What can we expect in the future as we look forward for ADM?

Yes. Thank you, Ben, and thank you for -- to Stephens for having us. As you said, we've been in a transformational journey. I think, listen, you don't get to be 118-year-old company if you're not always adjusting and transforming. So to a certain degree, it's a continuous transformation for us as we try to adjust to consumer needs and different trends in the world in general. So I think that we have a strategy that we are setting in 3 strong trends. One is food security. You know, we are adding 2 billion people every 30 years in the world. So we probably need to produce 50% more food over the next 30 years that we are producing today. So food security is the big one. Health and wellness is the second with consumers, whether old and young, shifting to paying more attention to their health and to their well-being. And the third one is sustainability. And as such, we look at -- we set up a strategy several years ago that have 3 main thrusts with the objective of driving returns. And one of those thrust was to look at the portfolio and to adjust the portfolio to those trends and to the ability of those businesses to provide a decent return for our shareholders. So we divested certain businesses, the noncore businesses, whether it was cocoa and chocolate and fertilizer and palm plantation, sugar plantations in Brazil and things like that. We also set up a strong business, a strong culture and discipline in terms of efficiencies. We started with operational excellence, but we look at how to lighten up capital, how to improve procurement. And then it all morphed into our readiness program, which is a program to improve execution and improve every aspect of our company, all the way from efficiencies to customer relationships and pricing and marketing and innovation. And the third aspect is what we call expand strategically. Early on, we expanded geographically. So now, for example, you have Europe that have the same value chain than North America, originally was just Ag Services and Oilseed, but now it has Carbohydrate Solutions. It has Nutrition. So we have expanded geographically, the same in Asia and same in South America. And of course, we created our Nutrition division, which, in reality, has been with us since the acquisition of WILD Flavors, if you will, in October 2014. And of course, we acquired Neovia in early 2019. And it's a business that is growing very fast. As you know, we posted our fifth consecutive quarter with 20% growth quarter-over-quarter. So we're very pleased with that. So in general, we feel very good. Every business have moved a little bit closer to the customer. That has helped us to spark a lot of innovation, a lot of rejuvenation of our product mix and applications within ADM. And I think that Greg can touch a little bit into what we're doing also in Oilseeds and Ag Services there. So all in all, very pleased with this. But as I said before, we are not done. Sometimes people ask me, what percentage are you done on this? We are not. I mean we have created a mindset that we will continue to build a better company for our shareholders, and we are in that process. We're not going to stop.

Okay. Great. Well, I think it's -- we were just talking about this before the meeting. I think it's become abundantly clear in the last 4 months or so that we're in a different operating environment than we were certainly first half this year and the last several years. Can you help us think about the sustainability of your earnings over the coming years? You touched on Nutrition. That's a clear secular growth driver. But I think there are also some kind of structural demand drivers associated with this current cyclical inflection. So give us in terms of the sustainability of the earnings power.

Yes. Listen, we think that -- so if you look at the different businesses in ADM, I think that we have a business that -- we have 3 different businesses in terms of their growth rates, if you will, their natural growth rates. We have a very strong business in Ag Services and Oilseeds that tends to grow about -- from an underlying growth, 3% to 4% per year. And you may go into periods some more acceleration over periods of slowdown depending on what happened with the different players around the world with the different conditions. But it's a very strong business that has a strong competitive advantage. So you should add on top of that 3% to 4%, and normally, the business will grow. A little bit extra because we do a lot of things. And Greg is going to mention that we continue to advance that competitive advantage. Competitive advantage provided by a great footprint that we have, probably an unparallel footprint. We were reflecting before about our 800 facilities around the world. I think we've been blessed with all that footprint in ADM, and we continue to optimize and make better. And I think with a lot of strong trends, as I said, not only just food security, but sustainability. And all these trends, I would say, were even emphasized more by the pandemic. I think that people went from -- I think Greg always said, from just-in-time inventory to more just-in-case inventory because all of a sudden, reliability of the supply chain, the ability of you to provide to make sure your ports continue to operate, your plants continue to operate through the pandemic became a little bit more acute. And I think for most countries around the world, food securities are the top of their strategic priorities. So the importance of our footprint has been enhanced. And then sustainability is another issue. There's a lot of people wanting to know where their grain or where their product is coming from and where it's being grown and in what conditions. And I think that our ability to be able to connect all the way from the farm and keep traceability of that material, all the way to the final product is something that differentiates ADM, and we are seeing that with customers. So that's a very strong business. Then we have a business that has less of a natural growth, like maybe the Carbohydrate Solutions business. But it's a business that is very heavy in efficiencies. It's a business that operates very, very well. They are also very good at risk management. And there is a business that is getting an influx of new opportunities due to the new economy, whether it's alcohol or hand sanitizer. So whether it's a demand for starches, for corrugated boxes, for all the e-commerce that goes around the world or all the biomaterials, all the opportunity to replace oil-based products or plant-based products. And that's rejuvenating, some of that product needs. And then as you said, we have Nutrition. So that is growing very strongly on all these health and wellness trends. So we feel very good about the next few years. It's difficult to know. We are speaking in the middle of a big second wave of a pandemic. So is this -- it's almost imprudent to talk that much about the future. But we feel good about how we are -- we have positioned our company and our businesses and how we're executing. So as far as I can see, we feel very strongly about our prospects.

Okay. I want to touch on the Nutrition business a little bit, and then we'll go through your operating segments. Can you talk about how that business is progressing? You talked about your entrants with critical mass into that business with WILD. You made recent announcements around your intent to expand probiotics production in Spain. What prompted this? What excites you about the market? And can you just frame up the opportunity for us?

Yes. Listen, what excites me about the whole Nutrition is that we've been building this, what I call today, an unparalleled portfolio. Part of that, we started with. We have some of these capabilities, of course, based on our integration. The fact that we are in carbohydrates and the fact that we are in oilseeds gives us a footprint to start with this. And I think that's very important. And that's sometimes an unseen competitive advantage that we have. The fact that Greg provides white flags for us to be able to make specialty proteins, so plant-based proteins, is a key competitive advantage that we have. And sometimes it's overseeing, if you will. But I would say, we've been very close to customers. We had a great outreach or a great relationship with large CPG and multinational companies as part of ADM, food companies, of course, and also feed companies. And then with Wild flavors, we get a lot of connections to smaller accounts, more entrepreneurial accounts. So all of a sudden, we got that -- this incredible visibility. And candidly, we had the resources, and we have the portfolio to be able to create solutions. So we've been following the customers' lead in that sense, and the customers have been following the consumer leads. So we've been able to do all these bolt-on M&As just to complete the portfolio and making it better. And as we were doing that, whether we were adding vanilla, where we where adding citrus, where we were adding savory products or culinary stuff, I think that we've been able to supply better solutions for our customers. So now we have this big portfolio, and we continue to build capacity for where we see growth. We've built P protein capacity last year. We built plant-based protein of fiber capacity 2 years ago. And now we are seeing this explosion in probiotics and post-biotics given basically by the concern of people about immunity, their immunity system and the realization that there is a strong connection between what happened in your gut and what happened in your health and how do you feel. People are now thinking about their diets, more about how do they make them feel versus how do they make them look. And I think that, that's an important consideration. And probiotics and post-biotics are into that. So we are expanding our plants in Valencia for probiotics and post-biotics, and we are actually expanding fivefold our capacity because that's the kind of growth we are seeing. So we're very excited about what's happening right now. And I think, as I said, this is reflected in the numbers. 5 consecutive quarters growing more than 20% is something that -- it speaks very highly of the receptivity of your customers to your value proposition.

That's perfect. I want to follow up on that. The growth that we've seen in excess of 20%, how should we be thinking about that going forward? It sounds like it's sustainable. What are the things we should be mindful of at the moment? And just risks, opportunities as it relates to sustaining that growth rate?

Yes. Listen, we look at -- the most important thing for us, 2 aspects. One is the strength of the pipeline of opportunities we have because it's a business about innovating and about disrupting categories and bringing new products. So -- and then -- so one is the strength of the pipeline. The second is the win rate. How many of the things that are out there we actually win? So those are the things that our marketing team and our leadership monitors all the time. And I would say, the pipeline, I'm happy to report is a stronger than 2019 pipeline. So even despite all this. I'm just amazed. I mean the business have created all these virtual engagement with customers. So we can continue to do a teletasting, and we ship samples and we taste together the samples with the customer online. And I think there are all kinds of tools that our marketing team and technical team has developed to collaborate virtually with our customers. So that's kept the pipeline intact. And then the win rates continue to be very strong. So we feel good about both aspects of that. When we look at -- the last time we look at the plan, the 5-year planning cycle that we renew every year, but the last time we look at the plan was 2019. So we plan to 2024. And by that time, the business gets to about $1 billion operating profit. And in order to do that, if you take what are we going to finish the year estimated, is about a 15% compounded growth rate. So that's kind of our 5-year projection, if you will. So it -- and that's without any major acquisition. So it could be in the range of 15% to 20%, depending if we find an acquisition that we'd like to make. That's kind of the ballpark.

Okay. Last question on Nutrition. You touched on some of the interconnect business across the organization and synergistic nature of having Nutrition within your broader portfolio. Can you elaborate on that a little bit more?

Yes. Yes. We think -- first of all, there is a customer connection. Again, we are a food company and a feed company. And there are a lot of customers that do both. And they take commodity products and they take more specialty products. So if you go into complete feed, customers or even premix, I mean, you have to see. For example, I've been in customers that are introduced to us by our global trade that they buy commodity products. And we are also discussing in the same meeting an energy drink that they're going to launch or a plant burger that they're planning to launch. So in many places of the world, these customers are the same. So first of all, there is a strong commercial connection there, small customers, large customers, there is a lot of synergies there between ADM, traditional ADM and the new nutrition company. The second is, as I said, the integrated value chain. The fact that why our plan -- our plant-based proteins plants are in Campo Grande, Brazil because there is a crushing plant there. And because there is a grain business there that allows us to get the right beans to crush them into white flags, and then that creates the perfect feedstock for the specialty proteins plants. So I think that some of those things cannot be seen by when we talk about it, but the competitive advantage internally that provides is significant. And then for a relatively small business like the Nutrition business, we have the capabilities of ADM, not only for the footprint but also from the coverage in the world. We can go -- we are in 160 countries. So our business can land somewhere, and they have a relationship and they have an ability to sell. That's what we're seeing in Animal Nutrition with Neovia. We go into Neovia and we go into all our destination marketing customers. And there is automatically an open door and a relationship build for us to bring the new solution for the feeding of those animals. So I think there are many aspects. And think about when we set up all these operational excellence in ADM with all our center of excellence, whether it's for finance or operations or customer service or supply chain, a relatively small business like Nutrition takes on all that operational excellence and all that low cost to come to the market being more efficient than anybody else. So I think that there are incredible number of synergies that are a little bit like an iceberg, most of them underwater and not seen.

That's a nice summary. Thank you for that. Okay, Greg, I know you've been waiting on, as your seat for me to ask about Ag Services and Oilseeds. I want to start with the U.S. export season. And we've had great sales commitments already. It's shaping up very nicely. I want to get a sense in the context of late planning, dryness in South America, what do that portends for extending the export season out of the U.S.? And then also how susceptible does that make the Brazil crop to future yield or weather vulnerabilities as we move through the maturation of that crop?

Yes. Thanks, Ben, and thanks for the question. I think if you just take a step back and you think about what's happening in the world today where you have China certainly has navigated a number of things in the past year or so, they had African swine fever. They've managed to rebound probably faster than most people had expected. They've managed to get through COVID, and we see signs of their economy continues to advance. And ultimately, what that means is that their appetite for ag commodities, specifically corn, beans, wheat, sorghum, et cetera, is actually quite strong. And so even despite the pandemic, global trade flows are actually increasing this year versus previous years. And so when you look at what's happened with the aggressive pace of Chinese buying out of Brazil early in the year, that's essentially drained the available stocks out of Brazil for the balance of this year. It's -- but the U.S. certainly in a great position to be able to have the largest export program ever in Q4. And it's caused a situation where, certainly, there's sensitivity around the balance sheets for corn and for soybeans. And so as we sit here with a very tight Brazilian carryout, certainly sensitivity around that transition from the U.S. export program into Brazil, yes, there were some concerns early on about the dry weather and the late planting of the Brazilian crop and even the Argentine crop. As we sit here today, it looks like the farmers are always amazes at how fast they can get a crop planted. And the pace of planting was very robust. And there's still some cause for concern because the balance sheets are relatively tight, and that will be top of mind for anybody that's trading markets over the next several months. But it's caused -- it's probably changed a little bit about when the Brazilian program will take over in terms of exports. So we've seen some additional export sales being put on the book side of the U.S. for January, even into February. And so we'll have to see how the weather plays out and how that crop develops. I still think there is a potential for a good crop in Brazil. But it's -- the pace of exports has been fantastic and looks like it's going to continue. And interesting, too, everybody focuses on the soybean trade, but as the Chinese livestock industry has professionalized their feeding practices, it means not only the soybean meal demand grow, but it also means that the corn demand grows as well, too. So we've seen a nice uptick in demand from China for corn. We expect that will at least continue through next year. Certainly, a lot to talk about how they're going to -- what their future looks like in terms of agronomic practices and how they address their increased demand for both corn and beans, but it looks good right now for the U.S. export program. I still think there's a good opportunity to raise a good crop from Brazil and the transition will happen somewhere in the middle of Q1 from a U.S. export focus to more of a Brazilian focus.

Got it. Okay. Given the strong export volumes that we've seen, there's some tightness in the supply chain, elevation margins are very good and have continued to strengthen. At what point do we need to think about kind of a breaking point where everyone steps back? I know China is a shrewd buyer, but they need this, as you said, because they're rebuilding hog herds. I know they've had production issues, particularly around corn, domestically as well. They've got substantially higher corn prices than we have here. So where is the elasticity point as it relates to some of these numbers that we're seeing in your minds?

Well, certainly, elevation margins have been great. And I think how we manage that capacity has been a critical part of our execution strategy as we've gone through the year, making sure we have a solid perspective about how we think the future is going to play out and managing our capacity accordingly. But I think in terms of the break point, at this point, it feels like the Chinese buyer has got a nice book of business on. And even despite 5 named storms hitting New Orleans, the industry continues to run very well down there. And so the volumes that we've been able to put through the facilities has been fantastic. You still have Chinese reserves. That's still a lever that they could pull to help in that transition from North America to the South America. You still have some available capacity to sell more. So there's no -- there's still offers in the market. So there's still availability of stocks in the U.S. And so I think the transition is manageable. But certainly, when you look at the premiums, U.S. premiums versus Brazilian premiums, the Chinese will have -- and the world buyer will have every incentive to manage that transition to gain access to the South American beans as quick as they can because the premium structure is going to dictate that.

Okay. Thinking about the crushing business, can you just take us around the geographies and give us a sense? It looks also quite strong. And can you talk a little bit about the board that crush it here in the U.S. because it is quite strong in the front months. It's not as strong as you get further out in kind of the middle section. So just curious to hear your commentary there.

Yes. So on the crush business, it starts with the complexities that the economic struggles in Argentina have caused that industry. The majority of global trade flows of soybean meal is down from Argentina. And so the world needs that industry to run, but the complexity of the financial stress on the Argentine country and the challenges associated with getting the farmer to readily market the soybeans has been a challenge for that industry. And that's caused exports out of other origins to step up. So we've seen good demand out of the U.S., good demand out of Brazil. It's allowed the European industry to see some better margins. And so we believe there's a positive backdrop in terms of crush margins kind of everywhere around the world other than in Argentina right now. The cash margins and the board crush, they generally track. But what we've seen in an environment like this where you have such a fragile balance sheet and fundamentals that are being driven not only by a strong export market, but also by the pace of farmer selling, you've seen some pretty good volatility in the basis levels, too. So you really have to think about bean basis, meal basis, oil basis in conjunction with board crush as kind of the -- all the different building blocks of the actual cash margins. But the strength in the nearby -- I mean, it shows that there's good demand nearby for both meal and oil. As we think about how this thing plays out, as you get into next year, I would expect that some of that strength will roll through. But it's also going to be very -- cash margins are going to be very dependent on how we position ourselves with our base dispositions, whether it's on beans, meal or oil as well as board crush. But a lot of this -- the board crush is really being influenced by the flat price moves. So you see the nearby strength in soybean futures as opposed to the deferreds look at the old new spread, a lot of the board crush and where it's trading at is really just a consequence of flat price movements and bean spreads.