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

Well, thank you very much. Good afternoon. Thanks for coming back. Next on stage, we have ADM global leader in human and animal nutrition world's premier agriculture origination and processing company. With us today are Juan Luciano, Chairman of the Board, President and CEO; as well as Ian Pinner, President of the company's Nutrition business. Juan is going to start off with some general opening remarks, and then we're going to go into our fireside questions. Thank you very much. Juan?

Thank you, Ben, and thank you for hosting this conversation. Very pleased to be here, and I think we come every year. So it's nice to see the conference growing. And I have the slot after lunch. So I need to make an effort to keep you guys awake. So hopefully, you refilled your coffees. So I thought I started with highlighting some comments that we made at the earnings call and maybe run through how is the company doing at the moment. So looking at the dynamic environment, and I promised myself not to use the word uncertain anymore since I think you're all sick and tired of the uncertainty. Having this dynamic environment, we focus the team a lot into the things that we could control. So it was a little bit of an inward focus 6 months of the year, and I'm pleased to report the team responded with that very, very well, and we made a lot of improvement in many areas. So if you think about financial performance, we delivered $0.93 earnings per share in the second quarter, which exceeded market expectations. When you think about the different business units, we have Ag services and oilseeds, which is our integrated, if you will. Delivered results in line with expectations and having made a lot of progress in our network of plants and having had more regulatory certainty is set up very well for a strong second half and 2026. On the Carb Solutions business, our corn and wheat milling business, if you will. That business had a very steady performance, steady results based on the very disciplined risk management and execution. So I think the business has continued to be very consistent over the last 2 or 3 years, and it continues to be that way. And then the Nutrition business, where I have the business unit President here joining me today continue to present sequential improvements -- sequential quarterly improvements and based on the strength of the flavor business, the probiotics business. And the good thing that happened, the highlight of this quarter is that we finally after about 18 months of having a protein plant down. We brought it back to production. So it's at the moment ramping up production, which is very good for the future of the business and for the future of our supply. We also made progress in strategic aspects that we have set ourselves for at the beginning of the year. One is about portfolio simplification. We have -- we run a large company and I would say that's a discipline that we normally have everywhere. Sometimes when we get to the trough of earnings, we highlight that a little bit more because those are the things that we can control the most. So we basically shut down or exited some units where we didn't see ourselves getting the returns that we expected or we think that somebody else will be a better owner or they don't fit our strategy anymore. So things that maybe are outside your knowledge, but an aquaculture unit that we have in Ecuador, a pet and animal nutrition business in Brazil. We have a joint venture we put together in cottonseed in Lubbock here. We shed some elevators here and there that based on changes on the crop, they may not be relevant to us anymore. And we recently announced, and I think you will cover it later, some of the optimization of the protein or the specialty protein portfolio that we have with the shutdown of the Bushnell facility, an old facility we have and now we are consolidating a newer capacity. So this is very good. We continue to make progress in that regard with a lot of discipline by the team. The second thing that I think is important that we continues to make progress is on our cost reduction efforts. We have promised or we look at $500 million to $750 million on aggregate cost reductions over the next 3 to 5 years, and we are on track to do that and on track to deliver maybe $200 million to $300 million this year alone. So that continues to be very well. And maybe to finalize 3 quick things. One is capital allocation. From a capital allocation perspective, we continue to focus on aligning our capital to productivity efforts, so cost reductions efforts or internal innovation. That's where we find the best returns for our investments. That's where we continue to invest the money on. We continue to our very balanced capital allocation. So this year, we increased the dividend again despite being on the trough, we increased the dividend 2%. This is the 375th quarter where we pay dividend, and this is we've been increasing dividends for the last 50 years. So this is a record we feel very proud of and it shows the company commitment to continue to drive cash flows in good times or less favorable times. Second is we are seeing some regulatory tailwinds. Things are getting a little bit more clear in terms of biodiesel, RVOs, SREs. And now we are seeing also some benefit in terms of tax benefits or biofuels and decarbonization that will help the Carb Solutions business as well. So all in all, we are looking at our improvements. We're looking at the favorable regulatory wins that are hitting us. So we think that we're going to finish 2025 strong, and we are excited about 2026 onwards for the company. So still with a lot of uncertainty, but positive overall tone. So maybe with that, I leave it as such. We move to your questions.

Perfect. Juan thanks for that. And we're going to dig deeper in some of those topics you've mentioned. But maybe, first of all, more short term, if we take a look at the second half, clearly, you also guided the fourth quarter to be significantly better than the third quarter. So just walk us through the current market landscape. And as you think about the split between Q3 and how you've been tracking up until what July, August was and how confident you are on the fourth quarter?

Yes. If you think about Q3, you're going to see a Q3 relatively similar to the Q2 for ADM in terms of crush margins, AS&O because by the time RVOs, we announced and all that, we have already sold Q3. So you tend to sell the quarters in advance. So I would say that's where the biggest change will come in Q4 because we think that RVOs will drive better crush margins. And also, the Q4 is where we have all the harvest in the U.S., that's the timing which we use our export capacity a little bit better. So the U.S. export corn and soybeans and soybean meal. So that's a driver normally of our Q4. As I said, Q3, probably from AS&O, you're going to see about the same. And I think the other thing we're going to see in the last quarter of the year will be the full impact of this plant that we have back in operations now in nutrition. You're going to see some of that impact in Q3. But as we work through all the inventory and all that, you would probably see the full impact in Q4. So again, that looks like Q4 is going to be a strong quarter for us.

Okay. And very confident, obviously, on the $4 EPS guidance as a result of that, put together, correct?

Listen, there's going to be mark-to-market. There's going to be noise every day that the administration have waiting period of 30 days for something that happened with RVOs and all that, you see the volatility of these. So it's very difficult to pinpoint on a quarter-to-quarter basis. I think it's we're going into higher grounds. We're going into more positive territory. How much of that falls into Q4, how much of that overspill into Q1 or is Q1, hard to tell at this point. But yes, nothing has changed significantly since we made the announcement.

Perfect. You talked about the cost savings and obviously, asset footprint optimization, so that's kind of like a twofold question here. You set pretty much on track to deliver on those cost savings, but maybe help us with a few more examples, aside from just the crush and the facility changes that you just announced last week. What else is like kind of like under your control? What are the things that you're reviewing in order to really achieve those aggregate savings of $500 million, if not even $750 million?

Yes. I think again, with the low margin -- or the lack of visibility we had with all the regulatory issues at the beginning of the year, we spent a lot of time looking across the board for the company. And again, we are a large company, and we are an operational excellence company. So we always spend time looking at cash, cost and capital. It just comes to live a little bit more when margins are low, and we want to comfort investors and everybody that we're keeping our eye on that and the dividend and all that. So it's not that at other times, we don't do it. But I would say it happens across the board. So we went all the way from simplification of the portfolio, as we talked before, manufacturing improvements. We have big improvements in not only in nutrition, but in the commodity businesses as well. And we have done things. Unfortunately, we had to do a reduction in personnel that -- so it comes across this SG&A, it comes across every area. And I think that we use a lot of technology also in innovation to cut costs. We have a lot of R&D, looking at sidestream valorization. So can we extract a little bit more from all these integrated plants that we have and -- so we spend a lot of time in doing the blocking and tackling of making sure we have the right number of people in the company to all the way to systems and all the way to making sure the plants are running as best as possible. If you look at -- we have about 500 operating plants in the world. So the global system has operated this year so far with the best uptime in more than 5 years. So all the plants are ready to crush, are ready to operate as fully as we can. So we feel very good about the improvements we have made. And that's coming to the P&L through, as I said, the cost savings and is going to enhance margins for all these businesses that we have.

Okay. Got it. You've talked about, obviously, the better conditions in Ag services and also in Carb Solution, how this is coming through and we're going to dig into the biofuel in a second. But as you think about it, you said capacity is up good shape as we go into the harvest season, how do you see the current like market conditions, farmer willingness to sell? How much does that play a role, just given that we've seen like prices come down, farmers may be even more willing to sell early on. So it gives you better capacity utilization, how can you monetize or how can you benefit essentially within your processing capacity towards fourth quarter on the current situation?

Yes. I would say commodity prices are low and some of the input for customers are high. So customers are not happy, farmers are not happy. I'm a farmer in Argentina. We normally complain about the weather and prices. That's normal standard. It's a little bit more exacerbated these days. So depending on the country, people are -- so Brazilian farmers are not selling that much soybean right now, maybe in Argentina, they are selling a little bit more. They depend more on currency. The U.S., I think, so far, we haven't had a lot of problem procuring the material. I think that there is a large crop coming. I think you can call it whatever the number you think, but it's about 182, 183 bushels per acre in corn, maybe 53 bushels per acre in soybeans. So it's going to be a large crop. Brazil and Argentina have record crops. The U.S. will probably have a record corn crop or very large soybean crop. So I think that -- that's why we set up the plants to make sure they run because we're going to have the juice. We're going to have the beans and the corn to run the plants flat out. So we feel good about that setup we lacked the regulatory clarity and now the government, the administration is bringing the regulatory clarity, maybe not with the speed that we all wanted. We're going to have RVOs for 2025, defined probably in November of 2025. So that's not the way you want to run from a price discovery the whole year, but it is what it is. And we're going to have clarity to '26 and '27. So we feel good about it. Carb Solutions has been delivering exceptional performance, very steady. And the flywheel, as you know, in the conference here, demand for snacks and sweets is a little bit soft, if you will. There are purchase of softness there. So the team makes a lot of products, so they managed to offset some of that. That's why the performance has been stable and good because we make more than any 22 products out of corn and the business continues to find new applications, whether it's bio-solution, industrial products and all that. So they do a good job of managing that. And I think if you think about the ethanol that sometimes is a more volatile part, ethanol margins normally for '25 are a little bit lower than 2024. I think plants have been running good despite demand being good. But right now, the plants are coming into more of the maintenance season. We've seen a little bit of a spike in and strength in ethanol margins, very strong export markets, still the strong driving miles with this fantastic weather we had the whole summer. And we're going to have a lot of corn. So things look good at the moment.

Perfect. Getting over to Nutrition. Obviously, Decatur East is now back online. So first, how has ramping the operation back up being running? I mean smooth, any issues? I mean hope not, but that would be first question just to kind of like get a little bit knock on wood exactly. How are things on that facility?

Yes, they're very good. The team has done exceptionally well since we recommissioned the plant. Good strong couple of weeks at the beginning, and now we're ramping at full capacity. We're very excited about that. If you think about the Decatur protein facility, since 2023, we've not been able to operate at full capacity, and we've not been able to leverage the, what I call the umbilical cord, the vertically integrated supply chain that we have, in Decatur. And so with the crush running -- with the protein plant running, we pick up all of those efficiencies and they're almost immediate. You start, you run and you're running at capacity and those then just drop through from a cost perspective, which is beautiful to be able to see and it's credit to the team. The thing that we're working on now, now we're running full is building back some of the market share that we lost during that time. We haven't been able to replace the full capacity with the raw materials that we've been buying in. And so we're now working with our customers to grow back volumes and grow back margins. So that's going to take a little bit longer, but already in Q3, you're seeing good positive effect, and we're optimistic with Q4 as well. Not surprisingly, we're working very closely with our customers to build back. The other thing maybe if I can, talking about the optimization because you mentioned it, I think that's important. In the context of Decatur, now we've got Decatur back, Decatur invested within in the protein business for 40, 50 years, in Decatur as pinnacle quality in the industry. And so as we were looking at our overall network, knowing Decatur is starting up again. And since Decatur went down, we have been working with our acquisition in Serbia. We've got capacity in Holland, which we've had for a long time, and we have the same capabilities in Brazil as well in Campo Grande and so we've taken a hard look at the overall network and talk about how do we better balance where we're shipping our customers to where we're manufacturing from. And that's allowed us to think about taking out some older assets that are going to require more investment going forward and then bringing that into the factory where our customers are asking for more quality and more product from. And so a good capital discipline, thinking about operating costs to help enhance margins and then making sure that we're bringing innovation and quality to our customers now that we're back full on. And the other thing that's changed in the market since the incident we had is a bit of supply and demand imbalance as well through 2019, through to today, a lot of our competitors have built capacity. The whole industry has built protein capacity. And so we're being disciplined as well about our approach as to how do we think that we supply the best products with the best optimized locations and with a good cost position as we were with our customers to help them grow.

Okay. Staying on that topic, I mean, obviously, you said kind of like get it back up everything and then full running to improve the margin profile. But how much do you expect this is going to impact and the run rate is going to be expected, I guess, for full 2026 with Q4 already having most of it, but probably not full back. Is that a fair assumption?

Yes. So we talked about the $20 million to $25 million per quarter impact. About half of that is going to be the operational impact. So we enjoy that when the operations are back, we're running for and the team capture that and they capture it well. And then the rest of it is going to be building back with the customer. So it will take a bit of time. Obviously, the target is to get all of that back and some as we bring innovation through the facility as well. So that will take a little bit longer to come. But these operational costs, the team are already managing those and working to deliver those.