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

So I would say both. I would tell you it's operational and it's innovation commercial -- on the operational side, first step for us is to continue to drive our priorities. The 2 big ones we are driving right now are manufacturing cost productivity coming in, as Juan has mentioned a few times, coming into through the pandemic. We have seen manufacturing costs higher, but almost companies are seeing manufacturing costs higher. So we are driving a lot of efficiency in our manufacturing, making our plants run better, but also going after cost out. The second piece on the cost side is transaction cost. When you think about the work we can do using data and analytics and digital, we can definitely drive better transaction cost out, whether it's in the office functions or whether it is in the manufacturing space. So that clearly is 1 area. While we are doing that, we want to make sure we keep investing in talent. So there's an investment going on there to keep investing in talent. -- and building the next generation of leaders and making sure we have a strong cash position. So that's like, I would say, table stakes for us. Then when you think about growth, there are 4 or 5 platforms and a couple of them clearly fall under Ian's portfolio, that's where we are investing in growth. So whether you think about decarbonization, you think about biosolutions, functional health, advanced nutrition, precision fermentation, all of those are platforms that we can keep growing. These are in areas that we already have deep customer relationships. These are areas we have existing infrastructure in. So we are making smart bets in these areas that we believe with the knowledge that we have and the relationships that we have, we can continue to grow. So you combine operational excellence with commercial/innovation excellence, and that's what gives you the algorithm that for the long term, ADM will be very successful.

Okay. Now picking up on that and maybe that's 1 for Ian. So you also outlined recently the potential for roughly $80 million to $100 million operating profit opportunity from that shift to natural colors in the U.S. as being 1 of those growth engines. What are you monitoring to evaluate customer adoption and the market size? And does that require any sort of investments and actually to capture the opportunity? .

Yes. Our team is very excited about the opportunity to help our customers with that transition in the U.S. for Natural Colors. Natural Colors is a global market. We're already a strong global player in natural colors. And 1 of the things that excites them is the same team went through the process in Europe, some 10 years ago when we were transitioning from artificial colors to natural colors there. I've talked before about our team's ability to reformulate. And so we've got a lot of experience, a lot of bench strength when it comes to being able to work with customers who haven't done that before, but we can bring our experiences from the last 10 years. And what happened in Europe and then how we can apply that in North America with some of the same products, but also some of the new innovations that we're bringing through the pipeline from a natural color perspective. And so we think the addressable market is about $1 billion in the U.S. in revenue. And we think that we've got a strong position in our portfolio and with the capabilities to bring reformulation -- and as you say, we're targeting $80 million to $100 million of operating profit that we think that we can generate from the transition. And it's not just going to be in North America that you see trends continue. And this is a trend that we think is here to stay for 2 reasons. You've got consumer. Consumers are looking for more natural ingredients in their products, cleaner labels and we're seeing that shift just here from a global perspective as well. And then, of course, there's regulatory push which is driving some of the change and some of the speed of change to. And I think on that, what you'll see is the speed is going to happen as our customers move. And so what we're looking for is we've got pipeline growth. Are we seeing work actively on reformulation with customers? And then are we converting some of those activities into sales. And at the moment, we're seeing positive signs in all of those areas and some commercial wins coming through from our customer base as we're looking to support them. The other thing is as you start talking about color reformulation, it's not a one for one. You don't just take an artificial color and put it in a natural color. You've got to think about taste. You got to think about the other ingredients that are going there, shelf stability, shelf life. And so we tend to have bigger conversations. We might start with a color discussion, and then they'll end up getting larger as you think about the opportunity to help those customers with other ingredients that we already have in our pantry, so they don't need to go and talk to another seeing ingredient player. They can talk to ADM from the pantry perspective, and our teams can bring all of that together, and they do that very well. And then from an investment perspective, we've announced some investments. I think 1 of the things that inside me is that the team has been very smart in how they're thinking about precise investments for what we need to be able to win for where we're targeting to be successful where we think we've got core capabilities and commercial strength. And so we're looking at adding capabilities that we don't have now that we think we're going to need in the short term and for the future for different applications, different use cases. and then as well, expanding our capacity, and we're materially expanding our capacity in North America. We announced recently at our site in Erlanger in Kentucky. And the thing that's exciting is this incremental capacity. So we have an existing infrastructure. We have existing manufacturing footprint, and we're putting incremental capacity on to that, which is great in 2 ways. I think it gives us a speed to market advantage because we now they're having to develop a greenfield site and application. But then at the same time, it's less expensive than building greenfield capacity. And so I'm really proud of how the team is developing and building on that business, and we're supporting them, not just with the investments that we need today, but then future investments as that business continues to grow and expand. Another area that we've got very strong capabilities is upstream. You've got to make sure that you have the raw materials available for natural colors. And so given our experience in Europe and the fact that we're already a large player globally in natural colors, our teams have been very active with our supply base to make sure that we're thinking about strategic partnerships rather than transactional relationships. And then I think more medium term, Monish mentioned, things like precision fermentation, that's a play in natural colors, and we've got teams working on technology in that area as well. to be able to bring to market potential future capabilities where we can deliver natural colors and solutions in our Flavors business and then using our precision fermentation capabilities and the core competencies that ADM already has from a fermentation perspective. So it's very exciting for us.

Thanks for that context, Ian. Now pivoting from growing top line a little bit to the bottom line and on the cost savings side, I think you've highlighted you continue to advance on your plans to save approximately $500 million to $750 million cost over the next 3 to 5 years. Where do you feel you are in this plan? Where are we on the journey and what other major projects still need to go on the way to actually achieve it?

So there's been this program we announced Feb of 2025, where we said we would get $500 million to $750 million of cost out, starting in 2025. And the team did a really nice job of driving cost out in 2025. Where we sit today, I think we feel good on where we are based on what we have done. Number 1 is in 2025, we went after SG&A. We drove some of the cost out there. We had procurement savings, and we started looking at our factories and saying, let's go drive better cost out in our factories, get our up time up, so yield and efficiency higher than where it wanted to be. And also at the same time, we looked at portfolio pretty strong, and we made some moves in EM space in our portfolio moves on the majority pie. The goal of the program was not just to drive cost out, but actually how we work. The goal was to make a simpler company and easier and a more agile company to deal with. That was the initial goal. So as we have gone through 2025, we've made progress in the areas as I said. And then to your question what is next, the next phase of this is largely going to come from continuing driving manufacturing cost and efficiency and driving transaction costs. On the manufacturing cost and efficiency, part of it is making sure we are seeing where our bottlenecks are, doing a good job on root cause analysis and trying to figure out how do we increase the uptime in these factories while at the same time driving cost out because some of you may or may not know, these -- these oil seeds and carbs businesses, there's a lot of fixed cost that goes into the factory. So the more the throughput that I can push through this factory, my average cost per unit goes down. So I get the double benefit. I get the lower cost and I get the higher volume, so I get the higher margin. So that is 1 piece. Transactional cost is another big piece that we can go after. Some of you know, I'm a student of lean. So I'll just give you an example in finance, where I want to give a shout-out to my finance team under an umbrella that we call frictionless finance, the team is using lean to say where is friction and what can we do better. So for example, in our global business services business, our AP accounts payable, cost has come down by 25% since the beginning of the year by just looking at where friction is. You can apply the same in our IT area, which is where we are going after partnerships, we are relooking at some of our service levels, we get from our vendors. We're reducing the number of vendors. And that's -- and then we've also now opened an ACC, GCC in India, that's also allowing us to take advantage of some of the talent especially on the digital side in India. So that's where I look at this an opportunity and say it's manufacturing cost, and at the same time, it's driving transaction cost that gets us there. And the team is doing a fantastic job of finding "waste in the company" that allows us 1 to reduce cost, but more importantly, make it easier for our employees to do their work.

Okay. Then you talk about like simplification and just improving operations. And 1 example was in the Nutrition segment, we've done a couple of things, plant improvements, portfolio actions -- so if you look ahead, how much margin recovery do you think remains versus what has been captured already? And what are like the steps remaining to close the gap?

It's a good question. We've made a lot of investments in Nutrition over the last 10 or so years. And I think we've got a lot of runway from an organic growth perspective and leverage on margin. The things that we continue to focus on, it's been said a few times over here. If you think about commercial excellence, we're laser-focused on our customers but also how we're working with our customers. So things like investments in AI to help our teams go faster from a front-of-shop perspective, discipline around how we're operating as well across the broader commercial teams, but then as well, the teams have done a really good job from an end-to-end perspective and getting better organized, better integrated on how we're operating, and we have this corporate focus on cash, capital and cost, and we're part of a great corporation. And of course, we're very focused in that area, too. And Nutrition team has done a lot in those areas, whether it's improving our working capital, simplifying inventories, Think about our supply chains and our procurement -- but then as well, thinking about how we can take cost out in our value chain, but at the same time, making sure that we're not losing the ability to be fast at responding to our customers so that we're giving our commercial teams the kind of motivation that they're looking for and they're wanting to be able to service customers well and compete effectively across the industry where we're choosing to compete in the segments that we're going after. So that's just day-to-day operations. I mean you talked about some of the things that we work through as well. Decatur East is an area that we've had some challenges over the last couple of years from a supply perspective. I think probably this time last year, the crush plan was coming back up. And so we're seeing now much more reliable supply. So that takes us away from having to buy in our raw materials, source our wine flakes, you've got transportation cost, you've got market costs, you've got the cost of the yields of having to process these products after they've traveled a long way. And now we're receiving wine fleets directly from the crushing plant indicators. So that's great. That's allowed our teams to go back out and sell, but it takes longer to build back customers who have had to go elsewhere to buy their product than it does to get the plant back up and running. But we feel really good about the progress that we're making. So we've gone from a headwind in proteins to now a strong contributor compared to where we were. That's helping the ASI business. You mentioned portfolio. You might remember, we've also rationalized that asset base. So we saw some competition investing in protein in the U.S. And so we shut down some smaller, less cost-effective factories we transition some of that capability into Decatur and we moved some of the Decatur manufacturing into Europe. So we're really thinking about that as a global asset base and how we can best service our customers, leveraging our overall capacity. But the underlying objective there is making sure that we have the lowest cost, best quality protein in the industry. And I think the team has done a good job building that back, and that is resonating now with our customers is we've got better manufacturing capabilities, and we're back now supplying them and launching new products and innovating with them. On the Flavors side, we talked about continuing to build back and the investments that we've been making the organic investments are coming into play now. And then on the Animal Nutrition side, we've been exiting some is returning businesses and continuing to invest in areas where we're getting higher margins and higher growth, especially in the ingredients and feed additives is an area that we're pivoting to. We're building back our pet business, and that's going much more strongly this year, and that has more runway to go. And our joint venture that we announced in complete feed in North America is coming together very nicely. So I think that in the portfolio, you're seeing nutrition now probably think about it as a second wave of growth coming from a very strong base that the team has put in. I'm really proud of all the work the team has done over the last year to build that back. But we're coming from a very low base compared to where we are. That said, we talked about the trends earlier, and we think that we're set for the trends, whether it's functional, clean label, we talked about natural colors. We've talked about biotics, postbiotics We. Think GLP-1 is structural. And so our protein business plays well into that. We've got a strong fiber portfolio as well, which allows us to support our customers from that perspective. And we're seeing a lot more a discussion perspective on GLP-1s and how we can work with our customers there. So we're excited about the future. Our goal is to make sure that we are growing in excess of the segments that we're operating in, and making sure that we're delivering wider margins, and that's really coming from the investments that we've made working closely with our customers, reformulating with the skills that we have with our teams leveraging the ADM pantry where I think we've got an unparalleled capability if you think of some of the things that we've discussed for the ingredients that we're bringing together and then really delivering on our strategy.

Okay. Well, wrapping it up, just real quick, maybe on capital allocation as we are getting against time. So Monish, if you look at capital allocation, just holistically, obviously, a typical decision, CapEx, M&A, investments, and share buybacks and so on. You've announced a couple of debottlenecking efforts for some of the operations. You've already said the $1.3 billion to $1.5 billion on CapEx. How much of that is like kind of like growth, what goes into some of these debottlenecking efforts. And in light of that, wherever leverage stands, how do you feel about buybacks versus M&A?

Yes. So I'll go quick because I know we'll run out of time. Back to a point Ian made earlier, which is we are looking at opportunities on expanding our current plans versus just greenfield. So similar logic that Ian used i Langer with the colors we are using in our ag services and oil seed business. So we -- what we did, Ben, was we said we have an existing infrastructure. We have a very constructive market when it comes to biofuels, how do we take advantage of that. . So 1 option, of course, would have been to do a greenfield. The second option, which I think is a much better option to say, how do we unlock capacity in our plants. So that's what we're doing is debottlenecking. So we looked at all our plants. We have 10 plants where we have an opportunity where we said, if we just put a little bit of money and debottleneck them, so study where bottlenecks are, it creates extra capacity. And at the same time, as I've said before, fixed cost to put more volume through, your average cost per unit comes down. So we just announced, we said let's do it in a phased approach. So we're being very thoughtful and disciplined. We said there are 4 plants that we can do it quicker than the other plants, invest approximately $100 million and get more than 700,000 metric tons of capacity that is created out from this expansion. When you think about that, the underwriting of that case is it's good ROIC because one, you have an existing plant, it's far cheaper than putting in a greenfield; and two, you get the higher volume and the lower cost. So that's how we are thinking about being very thoughtful in phases to keep looking at debottlenecking. You could get similar opportunities in ethanol, you can get similar opportunities in other parts of the world. This was only a North America discussion because that's where also, again, our footprint are so strong in North America that it helps us get a very good ROIC. So that was one. To answer your second question on share buybacks versus et cetera, the policy that for the last few years that I've been here, Juan and I have talked about, we will always invest first organically, whether it's organic capacity expansions like we talked about, productivity initiatives or organic growth, all of that give us the best return. The second 1 is dividend. I know dividend return matters to shareholders. We announced a 379th consecutive quarter of dividend pay and then after that, it's either you do M&A or you do share buybacks. On M&A right now, when we have said this and once said it to at the last earnings call, we are looking at bolt-on acquisitions. We are not looking at big transformative M&A, that doesn't mean if we get one, we are not going to do it because 1 of our biggest things we have worked on is financial flexibility. For the last 2 years with the environment that we were in, Juan and I made the call to make sure we're going to keep driving cash, we've got the rating agencies all back to stable outlooks. We have a leverage ratio that allows us to play offense if we need. But right now, we are looking at bolt-on M&As, and we are always looking at those that enhance. And then if we don't have any great M&A opportunities, we will return money back to shareholders, and we have said that. And we have also said based on the environment that we're in, I just said this morning, too, that we are back in the market with some modest share repurchases that we have started in Q3. So overall, I would just say, as I wrap up, team has done a really nice job executing. There's a lot more we can do. When you think about the constructive environment that we have, whether it's biofuels, ethanol, we are there. We are built for complexity. So when there is opportunities in the market, we'll take advantage of it. We have a strong cash position, so we can play offense. And then some of the innovation ideas that Ian talked about here and other part of the business, is very exciting. So we think about the long-term future of ADM. It's a very exciting place to be. Awesome. And thank you for having us.

Ian, thank you very much for joining us. There won't be a breakout, so thank you very much for joining us this morning. .

Thank you.