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

All right. We're thrilled to have ADM with us today to discuss the strategy for realizing sustainable long-term growth. ADM has executed on the strategy through improvements to its portfolio mix, capital deployment, returns and operations, enabling it to capitalize on opportunities through a challenging operating environment. And now ADM has enhanced its focus on innovation and productivity to drive enduring value creation. We're joined by Vikram Luthar, ADM CFO. Vikram was appointed CFO over a year ago and is approaching, I believe, his 20th year with ADM, having served in a number of financial leadership positions prior to being named to his current role. We also have Chris Cuddy, President of the Carbohydrate Solutions business, a role in which he's responsible for ADM's global Sweeteners and Starches, Ethanol and Wheat Milling businesses. We're excited to have you both. Thank you very much for joining us. And with that, I'll hand it over to Vikram for some opening remarks.

Thank you. Can you hear me? Thanks, Andrew. It's good to be back here again this year. It is an exciting time for us at ADM. We have significantly transformed the business over the last decade and extended our value chain closer to our customers by building out our Nutrition business. We have aligned our portfolio and our global asset footprint for growth, driven by 3 enduring trends of food security, sustainability and health and well-being. Our strategy, disciplined capital allocation as well as effective execution even in very dynamic market conditions that we have witnessed over the last 3-plus years, has delivered excellent financial performance. Coming off an outstanding 2022, we posted a record Q1 this year with adjusted EPS of $2.09 and returns of 14%. And we've guided that we expect 2023 to be very strong with an EPS range of $6 to $7. And our balance sheet remains very strong. It is giving us the flexibility to look at strategic growth opportunities while still returning capital to our shareholders. In fact, we have consistently increased dividends every year for the last 50 years. And just since the beginning of 2022, we have returned $1.8 billion in terms of buybacks to our shareholders. We're also investing in a very robust productivity and innovation agenda. In productivity, we are harnessing digital to optimize our costs and increase efficiency. In innovation, we are leveraging expansion of organic growth capacity in fast and high-growing markets like crush, in some cases, in specific areas of nutrition as well. In addition, we are leveraging our capabilities and our scale to enable the energy transition as well as lead the decarbonization of the food and ag supply chain. That is allowing us to power new profit pools like Regen Ag, like BioSolutions, like conversion of ethanol to SAF and thus, further expanding our base earnings power. And that's why, as I said at the beginning, it's an exciting time for us at ADM. I'll turn it over to you.

Great. Thank you very much for that. And so maybe we'll start. Obviously, you've talked about a couple of very, very strong years. You've given the guidance now $6 to $7 of earnings for this year. I guess, for us, when we look at it very closely, there's a lot of volatility through the year in the markets and the operating environment. Can you just talk about the swing factors to start? $6 and $7, what gets you to the high and low end?

Yes. So maybe I'll start with the -- with Nutrition, customer-facing business. We've guided that, that business should generate 10% growth for this full year. First half is going to be challenging. We remain confident that the growth will be back-half loaded. So we feel good about the 10% growth. That's clearly part of that $6 to $7. In the Carbohydrate Solutions business, and Chris is going to talk a little bit more about this as you -- as part of your questions, we see robust demand and margin structure in the base Sweeteners and Starches portfolio. And we anticipate ethanol looks to be constructive. But the biggest volatility causing issue in the S&S portfolio is ethanol. While the outlook looks constructive right now, we know it can change. And why is it constructive? For a few reasons. We see strong blending economics. Gasoline demand generally seems to be up, blend rates are slightly higher than we've seen before as well as imports are stronger than what we had anticipated. So the outlook is constructive, but it could change. So that's one of the reasons why maybe there could be some pressure going to the lower end of that range. In the AS&O business, I'd say the fundamental issues are related to crush, how fast we can get the recovery in crush margins as renewable deal capacity -- renewable green diesel capacity coming online, which we clearly anticipate. But there might be a little bit more of a delay, which could put us -- put some more pressure for a longer period of time on crush margins. But generally speaking, today, the outlook remains very constructive. And finally, consumer demand. We got to think about what's happening to the overall macroeconomic situation. And to the extent there's a deep recession, and every day you hear more and more news about consumers feeling pinched, retail sales being lower than what was anticipated even just yesterday, what's going to happen with the debt ceiling discussions, I think the consumer is feeling pressure. And the extent of that pressure might weigh on some of our demand. But it depends. So I'd say those are some of the puts and takes, which give us this range of $6 to $7.

So if we look beyond this year and kind of at the long-term value creation opportunity, what are the areas that really get you excited? And maybe there's opportunity for both of you to chime in on this one just as you think about the range of opportunities.

Yes. So maybe -- I know the Carbohydrate Solutions business is going through a massive evolution. So maybe, Chris, you want to start first and I'll build on the others.

Yes, I'd love to. Thanks, Andrew. It's -- for us in Carbohydrate Solutions, which is our global corn milling and wheat milling operation, I've never seen as much excitement around what we have going on as today, really around sustainability, decarbonization and leaning into new markets. We have carbon capture and sequestration in our facility in Decatur, Illinois. We've had there for 10 years now. We're looking to add to that. We're looking to build pipelines across our infrastructure, both in Iowa to bring that to Decatur as well as in Columbus, Nebraska, our Western facilities going west. We're exploring technology and partnerships for sustainable aviation fuel, and I'm really pumped about the future for sustainable aviation fuel and how we can be a leader in that space. And we continue through our BioSolutions platform to deliver sustainable solutions for our customers, a lot of which are happening today, but it's also a robust pipeline that we're building for the future, and not too far out either in the near future, in the coming years.

So clearly, there's a lot happening in the Carbohydrate Solutions business. But when you step back, and we're going to my introduction, we recognize that there is a cyclical component to our business. What's great is our team is exceptional at execution and capitalizing on the opportunities that become available to us. Is that same amount of opportunity going to be available to us every year? Perhaps not. But that's why it is our responsibility. That's what we are doing, to leverage our scale and capabilities that we've built over the last 10 years to create these new profit pools of value, which are going to be able to more than offset any potential cyclical headwinds over the medium term. BioSolutions being one of them. You talk about Regen Ag, that's a huge opportunity, huge opportunity, especially as customers think about reducing their Scope 3 emissions. And very few companies other than companies like us are well positioned to be capitalizing on that. Then, as well, the conversion, the energy transition, the conversion of A2J, ethanol to SAF, that Chris briefly referenced. And our focus on decarbonizing our asset footprint, our production footprint will enable that continued growth. And don't forget productivity. That's a muscle that we've been building every year. And yes, every business sees inflation. And we've been able to more than offset inflation through our productivity efforts. We continue to see that going forward, plus enhancing it more through what we've defined as automation and digitization of our processing facilities across the world, 70-plus facilities. It's going to take time. Is it going to take capital? But we see strong returns, double-digit returns already being realized with a few of the facilities we've invested in. So that's what gives us a strong level of confidence and optimism about our ability to continue to expand our base earnings power. And we'll talk more about that at the upcoming Investor Day in Q4.

Great. We'll look forward to that certainly. Thinking about capital allocation and the balance sheet, in this environment, you're well below kind of your target levels from a leverage perspective. Are you comfortable with that? Do you -- are you looking to -- I guess how are you thinking about it? Maybe the cycle plays into it, but how are you thinking about that here?

Well, I think the balance sheet is a competitive advantage for us. Maybe it was less so in March of 2022 where interest rates were low. I mean it's amazing how quickly rates have gone up to 5%, and you all know that. But it is today a competitive advantage and gives us the ability to drive return to shareholders, which I talked about, as well as invest in strategic growth opportunities. There is an M&A pipeline that we evaluate all the time. And one thing that you may not know about us, we have done 30-plus acquisitions over the last 10 years. We have undertaken 20-plus partnerships and investments and done divestitures. We have dynamically rotated our portfolio. And the way we've been able to do that is by leveraging our balance sheet. And actually, as you think about it, Andrew, the supply side of the grain environment is getting more comfortable, which means our working capital should actually improve. So that's going to be another inflow of cash. So we've got a liquid and a very strong balance sheet to enable us to drive continued growth by reinvesting in the business as well as strategic opportunities and/or return capital to the shareholders. So we feel very comfortable with our balance sheet today.

So I want to dig in on a couple of things you just talked about. First on the M&A side. So what is the environment right now for M&A? And how are you thinking about inorganic growth, your priorities, whether it's primary processing or crush capacity or anything like that or more on the value-add side?

Clearly, we are looking at exploring opportunities in the value-add side, right? And I'd say we've seen compression of multiples, and you guys are all familiar with that, in that space. And there are opportunities that will likely become available that are attractive, not just from a strategic perspective, but also from a return's perspective, which is vital to the way we think about M&A. The other thing that buyers -- that sellers are looking for always is speed and certainty, right? That's critical to a deal. And we offer that given the success we've had with programmatic M&A over the last decade or so. So I'd say value-add side on the Nutrition, think about Health & Wellness, think about Pet, the opportunities there. But there may also be some scale opportunities available as we see some compression of multiples across other parts of our portfolio. Had you asked me about crush 3 years back, I would have said, probably, we don't want to increase capacity. But today, the structural changes that are happening in crush would suggest if there is an asset business that's available that is attractive, with the right level of returns, we may consider that. So the M&A landscape has broadened as a consequence of some of the structural changes, but the primary focus continues to be on the value-add side.

Okay. Great. And then kind of on the other side of that, returning cash to shareholders, the buybacks in the first quarter were above the $1 billion kind of -- the pace for the $1 billion that you've guided to. I know some of that was opportunistic, but I'm assuming your view of intrinsic value hasn't changed. And you talked about the working capital inflow. So how do you balance the M&A and the buyback side? Is there more room relative to $1 billion? Or how do you think about it?

I'd say there could be more room. But at the same time, we want to make sure that we preserve sufficient dry powder for strategic opportunities that will come by. So we have to make sure we strike the balance. And you know we've been very balanced and disciplined about our capital allocation, and that is not going to change.

Okay. Got it. And then lastly on this topic, from a return's perspective, going more value add, going more higher margin, have the returns -- has the return on capital profile of the business changed more structurally? You've done 14% trailing ROIC, you have a 10% target. Is that target moving higher? I guess, how do you think about the returns in the business?

So we haven't established a revised ROIC target. We think about the right balance between earnings growth and returns, right? So the focus is on also driving EVA growth. But fundamentally, Andrew, if you think about the continued shift to higher margin closer to customers' value add, whether it be Nutrition, whether it be BioSolutions, the margin structure should expand over time. So you think about returns being a function of margins at asset turnover, the margin profile should be increasing, which is supportive of returns. And we'll continue as always to focus on asset turnover. And with potential commodity prices softening, we might see an expansion increase there as well. So you could see, over time, a continued expansion in returns, but we've got to balance that out also with certain strategic opportunities that we might consider because with that may come some goodwill and that for a period of time, we'll have to work through.

And within the Sweeteners and Starches business too, I mean you've seen very nice margin expansion. You have the BioSolutions as well. I mean do you see that in your business as well from a return perspective?

Yes. I would echo what Vikram said, certainly, we've seen expansion of margins, which has helped that return profile. But what you've also seen with inflation and just permitting in the inability for folks to expand from a supply side, it's more and more difficult to expand today than it was, say, 10 years ago. Of course, money is tighter, so to go out and get new dollars for expansion in this space, I think, is more difficult, which has allowed us to expand margins. And why I think they'll stay that way for a while.

Okay. Great. So let's switch gears a little to the Ag Services and Origination segment. And I want to start on crush margins. There's been a moderation in crush margins here. You talked a little bit about the renewable diesel time lines and how that's playing out. But at the same time, we saw the softness last year as well. So I'm not sure how much you think is maybe seasonality? How much of it is the renewable diesel side? Do you think that the new crush capacity is playing a role already as well? How are you thinking about what's going on with the crush margins?

I'd say the dynamics last year would differ. I mean we had supply shocks come through, right? And the world was trying to figure out how to balance trade flow. So let's just focus on what's happening this year, okay? This year, yes, there has been moderation in crush margins. And we think there are 3 primary factors for that, at least in the near term, which we'll adjust towards the back half of the year. One is the renewable green diesel capacity. We know they've had some supply chain and logistics challenges and catalyst issues. We already see that there is increased pull for veg oil. So we remain quite confident that the renewable green diesel capacity, while delayed, will still come back online in the back half of the year. We still believe the renewable green diesel capacity should increase by about 1 billion gallons, increase by 1 billion gallons in 2023. And it's not just in the U.S. It's all over the world. That's one. Two is Argentina. We know what's happening in Argentina. The crop could be -- soybean crop could be 25 million metric tons, about 50% roughly lower than a typical crop. They're going to run out of beans. So not going to be able to crush. They're one of the largest -- they are the largest exporter of crush. So that's going to create opportunity in the back half when they run out of beans in Q2 for crushing in parts of the world that continue like North America and Brazil, in particular. So that is a trend that will support margin structure in the back half of the year. And the third is the tightness in the soybeans, right? Right now, soybeans are tight. But you've seen the expectation of the crop -- the U.S. crop this year. So that should actually help provide some tailwinds even in for the processing business on the crush side as the balance sheets on soybeans get a little more comfortable in the back half of this year. So a combination of those 3 factors gives us confidence on the outlook for crush being stronger in the second half than we likely -- than we're going to be seeing in Q2.

Sure. Okay. And then -- so the other side of the crush margin is on the meal side. And I think with RD, that is a very understandable kind of longer-term demand-pull structural change on the oil side. What do you do on the meal side with the capacity that's going to be coming on? How comfortable are you that there's a home for that or the risk that, that creates disruption over the next several years from a crush margin perspective?

Yes. I mean you asked another question, Andrew, about the crush capacity. Do we see that coming up? So I'll address both those questions. On the crush capacity side, yes, we see that crusher is going to keep coming online. Could there be some delays like in renewable green diesel? Possibly. But nevertheless, if you just do the math, the amount of crush capacity that is currently expected to come online is still going to be much less than the required amount of veg oil for the expectation of renewable grease and deal (sic) [ green diesel ] capacity over the next few years. So veg oil is continue -- it will continue to get supported. But then soybean meal. I think on soybean meal, here are the facts. The facts are that the underlying trend for soybean meal demand is going to be slightly higher, we believe, than even GDP growth. Why? Because as you see, balance sheet is getting more comfortable and soybean meal becoming more available, the inclusion levels should also increase. You'd see consumer diets switch towards more poultry, which, by definition, is a higher level of soybean meal inclusion. So we remain constructive about soybean meal demand in the mid-to-long term. Possibly, as I've said, even above what we had thought before. Previously, we thought GDP growth. We think it's possible to be higher than that. So that would enable the crush -- the meal from the expanded crush to get absorbed from the global markets as crush -- as soybean meal demand also shifts to parts like North America. So we might displace and substitute other soybean meal exports. So I think generally, even on the soybean meal side, we feel quite constructive about the outlook.

Okay. And then on the core Ag Services piece, which has obviously been very strong, there's been some unique benefits there. If we do get a good U.S. crop -- obviously, we understand what's been going on in Brazil. Is that enough to fully replenish global supplies? Do stocks use then get back to normal levels? Or is there still enough kind of -- I guess, do you think that's enough to keep Ag Services above kind of what used to be the baseline from an earnings perspective? Or are we kind of rebasing back towards that?

Well, it depends on how you define base, right? I think it's important that -- so let's talk about what's happening. The supply side is clearly getting comfortable -- more comfortable, right? You're going to have a record crop in Brazil. And based on the outlook from WASDE that was released on Friday, assuming trend lines are unchanged, and weather is good, which is, by the way, a very highly uncertain. But assuming that happens, you'd still have a very good crop in the U.S. next year, and balance sheet should get pretty comfortable. But even with that, even in that scenario, we do see tightness in certain parts of the world, which is in veg oil. Veg oil demand for food and fuel for veg oil is very, very strong. And actually, if you think about the 4 major veg oils, we think there's going to be tightness in palm oil, which is by far the largest inclusion, over 30% of the total veg oil pool. And why? Because plantations are getting a little dated. People were trying to squeeze the plantations to maximize the opportunities because veg oil prices were very supportive. And there's not been enough new planting. So we think palm oil is going to get pretty tight in the back half of this year, early part of next year, which, in general, should be very supportive of veg oil. So while supply side is getting a little -- potentially getting a little more comfortable, we see a lot of opportunities potentially in veg oil, and it should also help us on the processing side. The other thing to bear in mind, we had a strong performance in Q1 in South America, we talked about that. There is this record crop in South America and a potential big crop in North America is going to increase the volume that we can process. Net-net, we have a larger footprint in North America than South America. So net-net might be slightly negative for us, relatively speaking. But it'll give us the opportunity to put a lot more crop through our system. So volume should be higher, although the margin structure will possibly be lower. So we'll have to see what the trade-offs there. But generally speaking, we still see a fundamentally good story for Ag Services, albeit maybe not at the same levels as 2022.

If you put the 2 pieces together in AS&O, is that enough to get you -- with a good U.S. crop, what you just described, is that enough to get you back down towards kind of the longer-term profit profile of the business that you guys have talked about previously at the Investor Day? Or is that still better because the crush is better? I guess how do you think -- what takes you back down to those -- to that range?