Archer Daniels Midland Company (ADM) — Q4 2018 Transcript

Thank you, Jack. Good morning and welcome to ADM's fourth quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at adm.com. For those following the presentation, please turn to slide two, the company's Safe Harbor statement which states that some of our comments constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. These statements are based on many assumptions and factors and are subject to risks and uncertainties. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation, and you should carefully review the assumptions and factors in our SEC report. To the extent permitted under applicable law, ADM assumes no obligation to update any forward-looking statements as a result of new information or future events. On today's webcast, our Chairman and Chief Executive Officer, Juan Luciano, will provide an overview of the quarter and the year. Our Chief Financial Officer, Ray Young, will review financial highlights and corporate results, as well as the drivers of our performance. Then Juan will discuss our forward look. And finally, they will take your questions. Please turn to slide three. I will now turn the call over to Juan.

Thank you, Victoria. Good morning, everyone. Thank you all for joining us today. Last week we were in France welcoming our Neovia colleagues to ADM as we closed on that truly transformational acquisition for our Animal Nutrition business. This morning, we’re speaking to you from our WILD Flavors facility in Heidelberg, Germany. It's a state-of-the-art complex and we're excited to talk to our colleagues here about the great work they are doing to serve customers and grow our flavors and system business. This morning, we reported fourth quarter adjusted earnings per share of $0.88, up from $0.82 in the prior year quarter. Our adjusted segment operating profit was $860 million. The team did an excellent job to deliver stronger year-over-year profits in a volatile global environment in the quarter and completed an extremely impressive 2018 overall for ADM. Throughout the year, we focused on executing our strategy and pulling the levers under our control. The result was a year in which we delivered: full year adjusted segment operating profit of $3.4 billion, 26% higher than 2017; adjusted EPS 44% higher year-over-year; strong operating cash flows, up more than 40%; and fourth quarter trailing ROIC of 8.3%, 200 basis points above our annual WACC. Given those extremely strong results, earlier this morning we announced a quarterly dividend increase of $0.015 per share, or 4.5%. Our Q1 dividend is our 349th consecutive quarterly payment and an uninterrupted record of 87 years. 2018 was a year in which, regardless of market conditions, we continued to execute, improve, and grow, resulting in a range of impressive accomplishments. In our optimize pillar, we divested our Bolivian Oilseeds business, took important steps to optimize our U.S. Origination footprint and engineered significant turnarounds in our Global Trade and South American Origination businesses. In our drive pillar, for the year we delivered cost savings of more than $300 million on a run rate basis, far outpacing our target of $200 million. In our growth pillar, we opened, expanded, and enhanced multiple facilities around the globe, including five new and renovated ingredient manufacturing facilities and three labs and customer innovation centers. We announced Grainbridge, an important joint venture with Cargill in the digital innovation space. We launched the SoyVen Crush joint venture in Egypt and expanded into the Russian starches and sweeteners market with our Aston joint venture. We grew our Brazilian Oilseeds Crush and value-added footprint with the Algar acquisition, and we expanded our Taste and Wellness portfolios with the acquisitions of Rodelle and Protexin. We're also now adding citrus flavor capabilities via our acquisition of Florida Chemical Company. And of course, we just closed on our Neovia acquisition, creating a true global leader in value-added products and solutions for both production and companion animals. We also continued to improve on our safety record in 2018; this was our 18th consecutive year of reducing recordable injuries. And December overall was our safest month ever for our employees, though some incidents at the turn of the year reinforced the importance of continued relentless focus on safety. We made important progress in our sustainability goals, beating our own deadlines to meet our 15 by 2020 objectives for energy, greenhouse gases, water, and waste reduction. And we continued to lead the industry on the important issue of diversity and inclusion. Together We Grow, the consortium ADM began in 2016 to focus on educating, recruiting, and retaining a more diverse workforce in the agricultural sector was recently recognized with the 2018 Innovations in Diversity Award by Profiles in Diversity Journal. And just last week, we announced our membership in Paradigm for Parity, a global coalition of business leaders dedicated to addressing the gender gap in corporate leadership. All of these accomplishments have been supported by our accelerating Readiness efforts. Please turn to Slide 4. One of my goals as CEO of ADM is not just to deliver good results quarter after quarter, but to enact lasting change that will allow ADM to continue improving year after year. That's what our company-wide Readiness efforts offers; a reinvention of our business from the bottom up that provides a structure for ongoing continuous improvement and gives us the tools to deliver a consistently excellent customer experience at the lowest cost. Tools like data and analytics which under our One ADM program, we're collecting, centralizing, and utilizing as a strategic asset that will help us improve our decision making. We're also conducting systematic reviews and improvements of processes around the company with an eye to simplification and standardization that will make us more efficient, more nimble, and reduce waste and defects. Underlying and driving Readiness and critical to its long-term success is fundamental behavioral and cultural change and more effective and productive employees, which are being supported through our ADM ability to execute training or A to E. We are all in on Readiness and our efforts are accelerating. Last year, our team identified thousands of initiatives to standardize, centralize, and digitize how we do business. By the end of the year, we had analyzed those initiatives and prioritized about 525 that, as we said last quarter, will allow us to generate more than $1 billion of run rate benefits by the end of 2020. Today, we're proud to report that as of the end of 2018, we've already completed 120 of those initiatives which together have generated $300 million in new run rate benefits. We're also continuing to roll out our A to E training, which will help guide fundamental change in how we do our work every day. Approximately 2,000 team members have already completed today in-person training sessions. By the end of 2019, we expect every ADM colleague to have taken the comprehensive A to E course. I'll be talking more later in the call about the importance of Readiness to our value creation strategy. But now, I would like to turn the call over to Ray.

Thanks, Juan. Slide 5 provides some financial highlights for the quarter. As Juan mentioned, adjusted EPS for the quarter was $0.88, up from the $0.82 in the prior year quarter. Excluding specified items, adjusted segment operating profit was $860 million, up $67 million or 8% from the year-ago quarter. Our trailing four quarter average adjusted ROIC closed the year at 8.3%, 200 basis points above our 2018 annual WACC a significant improvement from the year-ago period and generating positive EVA of more than $550 million. The effective tax rate for the full year 2018 was approximately 12% and includes large favorable effects of U.S. tax reform and the 2017 biodiesel tax credit recorded in the first quarter, along with certain discrete tax items netting to a favorable $74 million. The effective tax rate for the fourth quarter of 2018 was a positive 2%, which includes a favorable true-up of the transition tax. The effective tax rate for the fourth quarter of 2017 reflects a large credit due to the initial implementation of U.S. tax reform. Looking ahead, we're expecting a full year 2019 effective tax rate to be in a range of 17% to 20%. On Chart 18 in the appendix, you can see the reconciliation of a reported quarterly earnings of $0.55 per share to the adjusted earnings of $0.88 per share. The adjustments include a significant non-cash pension settlement charge related to the transfer of pension liabilities that we discussed in the third quarter earnings call. Slide 6 provides an operating profit summary and the components for our corporate line. Other business results were a negative $14 million, but improved versus the prior year period which was impacted by significant unfavorable captive insurance underwriting performance. Current quarter losses were driven by intercompany insurance settlement relating to sorghum shipments in early 2018, as well as some other underwriting losses and true-ups. ADM Investor Service results were up year-over-year. For 2019, assuming no significant underwriting losses, we're expecting other business results to deliver approximately $120 million for the calendar year with results a bit stronger in the back half. In the corporate lines, net interest expense for the quarter increased due to higher short-term interest rates and new long-term debt issuances ahead of the Neovia closing. Unallocated corporate costs of $173 million were up versus the prior year due to performance-related compensation accruals and higher project spending on information technology and growth-related projects. Looking ahead to 2019, we're projecting some higher corporate costs as we continue to focus on and fund important projects. These projects represent investments in our future that will create shareholder value for years to come. Therefore, we're projecting net interest expense of about $100 million per quarter, higher than 2018, attributable to the higher interest rate environment, and the incremental debt issued. We're expecting unallocated corporate costs in 2019 of about $170 million to $175 million per quarter, an increase over our average quarterly rate in 2018, but similar to the fourth quarter run rate due to continued strategic investments in IT, business transformation, R&D, and centralization of more activities from the business segments. Turning to our cash flow statement on slide seven, we generated $2.7 billion from operations before working capital changes for the year, an increase of almost $0.8 billion. Total capital spending for the year was $842 million, down 20% from 2017 and in line with our target for the year. Spending on acquisitions amounted to $464 million, which includes three bolt-on additions. For 2019, we're projecting capital spending in the range of $900 million to $1 billion, slightly below our forecasted depreciation and amortization rate with the expected increase coming from incremental spending to support our business transformation projects. In 2018, we also returned $835 million of capital to shareholders through dividends and a small amount of share repurchase. Therefore, we continued our balanced approach to capital spending, acquisitions, and return of capital to shareholders. At the end of the year, we had 566 million shares outstanding on a fully diluted basis. Slide eight shows the highlights of our balance sheet as of December 31st for 2018 and 2017. Our balance sheet remains solid and positions us very well for 2019. Our operating working capital of $7.5 billion was up slightly versus the year-ago period. Total debt was about $8.4 billion, resulting in a net debt balance of $6.4 billion. We finished the quarter with a net debt to total capital ratio of about 25%, down slightly from the year-ago quarter. Our shareholders' equity of $19 billion was up from $18.3 billion last year, primarily due to currency translation and net earnings in excess of dividends and share repurchases. We had $8.9 billion in available global credit capacity at the end of the year. If you add the available cash, we had access to $10.9 billion of short-term liquidity. Our higher liquidity position at the end of 2018 also reflects prefunding to support the Neovia closing in 2019. Next, I'll discuss our business segment performances for the quarter. Please turn to slide 9. In the fourth quarter, we earned $860 million of adjusted operating profit excluding specified items, up 8% from the $793 million in last year's fourth quarter. For the full year, our adjusted segment operating profit of $3.4 billion is 26% higher than 2017, with Origination, Oilseeds, Nutrition, and Other all showing year-over-year growth in segment operating profit. Now I'll review the performance of each segment as well as some thoughts on the first quarter of 2019. Starting on slide 10.

In the fourth quarter, our Origination team performed well considering the extremely small volume of U.S. exports, particularly soybean exports to China. Results were down versus the fourth quarter of 2017 mainly due to changes in nonrecurring items. Merchandising and Handling results were lower than the prior year period which included several significant insurance settlements in other income. North American results benefited from weak basis gains due to strong carries as well as solid execution that drove improvements in export margins in comparable year-over-year volumes. The team did an excellent job offsetting significantly reduced exports to China by driving North American exports of corn and soybean to markets outside of China. Global Trade benefitted from good execution in origination and continued growth of the destination marketing business as well as intercompany insurance settlements offset by timing losses in ocean freight hedges which are expected to reverse. Transportation results benefitted from improved freight rates offset by increased operating costs. For the full year, Origination adjusted operating profit of $546 million was 35% higher than 2017. The team not only did a great job in 2018 of moving swiftly to manage changing trade flows allowing us to minimize disruptions and capitalize on new opportunities, but they also continue to grow our value-added services including destination marketing which exceeded 20 million metric tons, doubling the 2014 volumes a year earlier than our goal. Looking ahead into the first quarter of Origination, we expect positive carries in the North American Grain business and improved year-over-year results for ARTCO, partially offset by normalized margins in Global Trade. Overall, we expect first quarter 2019 Origination results to be significantly higher than the first quarter of 2018. Now to slide 11.

Oilseeds results were outstanding as the team delivered adjusted operating profits that were more than double the prior year period. Crushing and Origination results were up significantly year-over-year. Crush volumes for the quarter were among the highest ever as the business continued to leverage its global asset footprint to capitalize on solid demand for soybean meal and strong Crush margins. South American Origination results were solid as the team did a great job managing a more conservative risk position on soybeans in a very volatile market. Refining, Packaging, Biodiesel and Other was up on strong biodiesel volumes and margins as well as higher year-over-year results from food oils, partially offset by challenging market conditions in nut processing. Asia was higher on strong Wilmar results. For the full year, Oilseeds operating profit was up almost 80% over 2017. The team demonstrated their capabilities by managing risk in a volatile market and by utilizing our global asset base, flex capacity, and incremental expansions to set a record for crush volumes. Simultaneously, they continued innovating to expand the value-added business such as finding new solutions and product streams for customers. Looking ahead to the first quarter of 2019, we expect results to be lower than the very strong first quarter of 2018. Excluding the impacts of the biodiesel tax credit in the first quarter of 2018, first quarter 2019 results would be significantly higher year-over-year. Crushing and Origination should see continuing strong volumes and contributions from our investments in Algar, SoyVen, and North American plant expansions. We expect margins to be in line with the first quarter of 2018 when timing impacts from that quarter are taken into account. We expect good performance from RPBO though year-over-year results will be lower due to first quarter 2018 benefit of the retroactive biodiesel tax credit. Slide 12 please.

Carbohydrate Solutions results were lower than the year-ago period, despite solid overall fundamentals in the Starches and Sweetener businesses. In Starches and Sweeteners, North American volumes remained solid with comparable volumes year-over-year. Overall results were driven by lower margins and sales in the EMEA region; higher costs in North American liquid sweeteners in part due to lower production rates at the Decatur complex and lower co-product income. Bioproducts results were lower than the fourth quarter of 2017 when trading results were very strong. Ethanol margins and volumes were down in a continued weak industry pricing and margin environment caused by continued high industry run rates and inventories. Despite full-year results for Carbohydrate Solutions being down versus 2017, the team did a great job managing through difficult conditions. The business delivered higher year-over-year volumes in Sweeteners, showed the value of innovation and superb customer service by working with customers to form new solutions for Sweetener needs and moved quickly to increase Starch production to capitalize on margins and a growing demand environment. With the completion of the contracting season, we can look ahead to a first quarter of 2019, in which the fundamentals for North American Starches and Sweeteners remain solid. Overall results for Carbohydrate Solutions will be somewhat lower versus the first quarter of 2018, driven by continued pressure on European sweetener and North American ethanol industry margins and lower production rates at the Decatur complex. On slide 13, fourth quarter Nutrition profits were down overall versus the prior year period with strong performances in WILD and Health & Wellness more than offset by weaker performance in the Animal Nutrition business, which was impacted by the production issues that compressed margins in amino acids. WFSI sales were up 14% versus the prior year quarter on a constant currency basis with organic sales growth up an impressive 8%. Looking at revenue growth, WILD continued to deliver customer wins and the recent Rodelle acquisition began contributing. Health & Wellness benefitted from the Protexin addition and Specialty Ingredients saw 9% year-over-year sales growth driven by proteins and lecithin. For the full year 2018, Nutrition operating profit was up 9% versus 2017 with WFSI operating profit up more than 14%. In addition to its strategic additions, the business continued to expand its portfolio announcing further advancements in food service concepts as well as individual innovative products such as Versity yeast protein for companion animals and Onavita algal DHA powder, a new Omega-3 product solution. We expect stronger profits for Nutrition in the first quarter of 2019 versus the first quarter of 2018, driven by sales and margin growth, operational improvements, and contributions from Protexin and Rodelle and of course our just-closed Neovia addition. In summary for the first quarter of 2019 for all of our business units combined, we expect overall segment operating profit to be significantly higher year-over-year. Now I'd like to turn the call back over to Ray.

Thank you, Juan. Please turn to Slide 14. We have concluded an excellent 2018 for ADM. As we move into 2019, we are concentrating on leveraging the factors within our control to achieve another successful year. We begin with enhancing performance in specific businesses. Our team excelled in 2018, but some particular sectors fell short of our expectations, indicating opportunities to improve our overall results. We have already implemented aggressive measures to turn those businesses around. For instance, in light of industry overcapacity and reduced margins, we have announced a rationalization of our peanut and tree nut origination and processing capabilities. Additionally, we made some organizational adjustments within that business to ensure it is set up for success in the face of new market conditions. Across the company, we've pinpointed other businesses that we believe can perform better. We have set specific year-over-year improvement targets for each and will closely monitor their performance throughout the year, taking further actions if needed to meet our high expectations. We anticipate $150 million to $200 million in benefits in 2019 from these performance enhancement efforts. The second area that will contribute to strong profits and returns in 2019 is Readiness. Last year, we launched Readiness and integrated the changes across the organization. In 2019, Readiness will accelerate as we implement our current 525 prioritized initiatives and drive cultural and project changes that will permanently alter how we operate, establishing a lasting framework to enhance efficiency and effectiveness. Readiness will boost performance by helping us identify problems and apply effective solutions, sustain our high-performing businesses, avoid pitfalls, empower better decision-making through improved data and analytics, respond to customer needs swiftly and effectively, and support growth by refining the processes we use to identify and assess opportunities while enhancing our integration efficiency. As noted earlier, we had already delivered $300 million in run rate benefits from Readiness at the end of 2018. By the close of 2019, we expect Readiness to add $200 million to $250 million to our bottom line. Growth efforts represent our third focus area for 2019, particularly ensuring our recent growth investments yield their full profit and return potential. Since 2014, we have significantly broadened our portfolio and geographic presence through both organic growth and M&A activities. Altogether, we invested over $7 billion in growth over the past five years, including significant investments like WILD for Taste, Biopolis for Health & Wellness, Neovia for Animal Nutrition, Algar in South America, and Chamtor in Western Europe, along with other bolt-on additions and organic efforts. With an exceptional range of products and ingredient solutions in key growth markets globally, 2019 is the year to start reaping returns from those investments, which we anticipate will generate about $150 million in 2019. Our strategy for success remains focused on controlling the elements we can influence: enhancing business performance, Readiness, and growth. By concentrating on these three drivers and executing effectively, we are well-positioned to achieve continuous profit and cash flow growth in 2019 and beyond. With that, Jack, please open the line for questions.

Yeah. Good morning, everyone.

Good morning, Eric.

Good morning, Eric.

A couple – Juan, just a little follow-up just on your last comment on harvesting growth investments, obviously, you've got Neovia that you just closed on a few days ago, etc. Can you give us a little bit more thoughts on Neovia? Will this be contributing immediately to earnings or is this – will it be accretive let's say in your two – how should we be thinking about the recent acquisition here?

Yes. So, we're very excited about this. I think as I said before Neovia established us as an overnight leader in the Animal Nutrition business as we combine both our businesses. The way to think about it in terms of the quantification of the impact, Eric, is, if you think about my announced $150 million coming from growth initiatives, about 50% of those $150 million, about $75 million belong to Nutrition. So they're going to be accrued to Nutrition. And in Nutrition, Neovia will be the largest of the acquisitions that are coming to compose those $75 million. So, with that you can get a feeling for how much will Neovia contribute and we'll start in 2019.

You had a great year in Oilseeds, and while you will face tougher comparisons moving forward, I believe you were able to create a strong portfolio in the first half of this year based on the crush margins observed last year. Can you provide more insight on how you expect the Oilseed division to perform for the full year?

Yes, sure. Listen, I think that as you said it before, probably the crush environment in 2019 will not be as spectacular as maybe 2018. But we still believe given global demand, the strength that we have around 3% outside China that this business will still maintain crush margins well above the average that we have seen over the last five years. On top of that, I think you need to consider all the incremental contributions that our business will get from the Brazilian acquisition Algar, the SoyVen joint venture in Egypt, and some of the expansions that we have done to our own capacity and improvements in that capacity. On top of that, I would say you will have to add the turnaround we're planning to see in the peanut and tree nuts business in 2019. That was a little bit of an unexpected headwind in 2018. We're not planning to have the same in 2019. So, overall, I would say probably a little bit softer than 2018, but still a very solid performance by the Oilseeds in 2019.

Thank you.

Thank you and good morning everyone. Juan, regarding corporate expenses, they are becoming quite significant relative to the overall profitability of the business. I'm curious about the implications of centralizing these expenses as opposed to allocating them to specific segments. What do you see as the advantages and disadvantages of this approach? I am particularly concerned that centralizing might give the wrong impression about capital allocation in those businesses. What are your thoughts on this?

Yes, I think it's important to focus on getting towards common global processes and standardizing our activities. In 2018, we centralized more of our purchasing and procurement activities, taking some functions out of the individual businesses and consolidating them. The same approach was applied to marketing activities. This centralization is crucial for driving standardization and common processes as part of our Readiness initiative. Therefore, part of the year-over-year increase in costs is due to this centralization. Additionally, we have increased corporate costs from our investments in research and development, information technology, and business transformation. We view these expenditures as investments in the future of the company. Those two factors are the main drivers of the year-over-year costs. When we examine our core central staff costs, they have actually decreased compared to last year. Typically, central costs are expected to increase, but we are working to reduce those expenses, utilizing some of the savings, while some costs are shifting to the corporate level due to centralization. Simultaneously, we are investing more in innovation, R&D, and business transformation.

Okay. Thank you. And just to follow-up. In the quarter in Oilseeds, were there any mark-to-market reversals?

The net impact on mark-to-markets in Oilseeds for the quarter was not material. So, therefore, normally we would call out if it was something above $50 million. The fact we're not calling out anything indicates that it was not a material impact for the quarter.

But it could have been $49 million.

It wasn't material.

Okay. Thanks very much, guys.

Thanks. Good morning everyone.

Hi, Adam.

Hi. So I wanted to go back to some of the pieces on 2019 that you laid out to make sure that I'm thinking about this properly. So I believe you called out $150 million tailwind from some of the growth investments in M&A that you've done. You talked about recovering $150 million to $200 million from some of the operational challenges at Decatur and the nut processing that you experienced in 2018. There's about an $80 million or so headwind on interest expense, if I was doing that right, $20 million, $40 million headwind on corporate. The biodiesel tax credit, if it doesn't come back, that's $120 million headwind year-on-year. And the tax rate is up a little bit.

Yes.

And so after that, which is still modestly positive at the net income line, the question is kind of how much do you net realize on the cost savings relative to kind of broader cyclical dynamics in oilseed crush, ethanol, and Origination. Is that the right framework?

Yes. I think that's the right algorithm. So what we're thinking is you have the margins, the ups and downs of every year and then we have the things that we can control. And we laid them out and I think you repeated them very well. It's improved performance, which is $150 million to $200 million. It's the Readiness activity, which is $200 million to $250 million. We have rolled into Readiness all our previous operation and excellence activities. So we're not going to have that bucket anymore. It’s part of this Readiness. And then we're going to have the $150 million from all the accretion of growth investment that we have recently done. So you take that minus the headwinds that you described plus or minus your view of the market conditions in 2019 and that's what we consider. Still that despite maybe some modest reduction in crush margins versus the previous year, we expect that we're well positioned to grow profits in 2019.

Yes. And Adam, don't forget then the Other segment. Okay? And this year was burdened by a lot of underwriting losses. We're assuming 2019 to be more of a normal year. So I gave guidance of $120 million in Other versus this calendar year was more like a $58 million number. So don't forget that delta as you kind of build up the model as well.

That's helpful. I wanted to discuss the cyclical dynamics of some underlying businesses a bit more. On the crush margin side, it remains strong. I wanted to clarify our position in the second and third quarters, where board crush was over $1.50 compared to the $0.90 to $1 range that has been typical since November. Can you help me understand the impact of different regions, particularly if Europe is performing better than soft seed Brazil, and how this relates to board crush, which indicates a significant challenge in the middle of the year?

Yes. We continue to observe strong utilization in North America. Our outlook for Q1 looks good. We are experiencing gross margins between $30 and $35 per ton in Q1, indicating high utilization rates. We continue to export meal, and domestic demand remains strong. Customers in the poultry sector believe that poultry demand has not yet peaked, and they anticipate that low pricing and new retail options will support an increase in per-capita consumption. We are optimistic about this trend. In the U.S. canola market, margins are between $25 and $45 per ton for Q1, and we have profitable export oil flows. In Europe, the markets are at carry, which means customers are operating a bit more cautiously. As a result, we may not have the same forward book in Europe as we do in North America. However, mid-protein meals are in good demand in Europe and also finding some replacement opportunities in China, which is supporting grape seed meal prices. Overall, margins in Europe are around $35 per ton. In South America, particularly Brazil, there is a wide margin range. We see $10 to $15 per ton crush margins in export facilities, while domestic market facilities are achieving margins of $25 to $30 per ton. The domestic market facilities tend to have better access to beans, and we have seen domestic meal premiums alongside export opportunities while Argentina remains busy with its harvest. Paraguay is experiencing a smaller crop, about 10% to 12% lower due to drought conditions, and we expect utilization to remain in the high 80s there. My understanding is that crush margins in China have recently improved for Q1, now ranging between $10 and $15 per ton. This provides a brief overview of the crush side across different regions.

I really appreciate all that color. I’ll pass it on. Thanks.

Okay. Thank you, Adam.

Yeah, hi, good morning.

Good morning, Ann.

Good morning, Ann.

Maybe two questions, Juan. First we've kind of missed the export opportunity now for the season for U.S. soybeans to China. So could you talk about what that damage has done, what it might do and what are the structural now that at least Argentina is back producing more than it did last year? And then secondly, we're just talking again about Argentina on the crush side. What would you anticipate they'll do? Will they export more beans? Will China pull more beans from them? Or will they export more meal which they generally do? I'm just curious what drives this.

Yes. Regarding U.S. exports, as Ray mentioned earlier, we were able to offset about 70% of the volume we initially expected to send to China for corn exports, which increased significantly year-over-year. This was achieved by directing exports to our own Crush in Europe and other destinations like Thailand. Our destination marketing efforts were instrumental in facilitating this movement. For 2019, we anticipate that the trade dispute with China will be resolved, at least in trade matters, while other discussions may continue. We expect U.S. soybean exports in Q4 to be sizable, although smaller than in previous years. That reflects our current scenario. What was your second question, Ann?

Oh, Argentina.

Argentina's strategy regarding soybean exports will be notable this season as it operates without a DET. It will be interesting to observe if Argentine sellers adopt a more disciplined approach. I anticipate that Argentina will focus on exporting more meal, with Brazil or the U.S. bearing the majority of soybean exports.

Okay. I'll leave it there and get back in queue. I appreciate it.

Thank you, Ann.

Good morning.

Good morning, Heather.

Thank you. I have a follow-up question regarding the operational issues you faced in 2018, particularly related to Decatur and lysine. You mentioned these issues significantly impacted Q4. I'm curious if those issues have been resolved. Additionally, regarding the explosion earlier this year, when can we expect to see Decatur return to normal operations?

Yes, Heather. You should view the Decatur process as a revitalization effort. Decatur has traditionally been one of our low-cost operations, and we have invested significantly in it. It's a highly integrated yet complex facility. In 2017, we experienced outages due to electrical infrastructure issues. However, in 2018, we managed to reduce unplanned outages by 90%, indicating substantial progress. We are currently revitalizing some equipment at the plant with planned outages to enhance reliability, which will lead to long-term operational stability, especially at high utilization rates. Regarding lysine, we have introduced several new technologies in both fermentation and downstream processes to improve cost efficiency, and we've already seen evidence of those enhancements. The challenge we face is ensuring a stable source of dextrose from the corn plant. Consequently, lysine has been affected by the planned outages at Decatur as we work to address those issues. You can expect to see some impact in this quarter, but it should begin to taper off, and we anticipate being fully past this by the second half of the year, leading to improvements. However, the impact on our business in 2018 was considerable, estimated at around $30 million to $40 million for both Carbohydrate Solutions and Nutrition, but we expect that figure to decrease significantly in 2019.

Thank you. Regarding your comment on soybean meal demand, you mentioned an expected increase of 3% for the year and referenced China. Is that estimate based on the current price positioning of soybean meal, while also considering the effects of ASF in China?

Yes. My comment was that we expect growth of 2.5% to 3% outside of China. The situation in China is more challenging to assess at this time. We hope that the ASF situation is improving slightly, as we've observed the government easing some transportation bans for pigs between provinces. This might suggest they see some progress. However, as you know, it takes about 18 to 20 months for animals to reach breeding stages, so rebuilding the herd will take time. In the short term, we anticipate that this will create demand for imports of pork or chicken to satisfy China's needs, and we believe this will also enhance demand in our other production areas. Precisely gauging demand in China will be difficult, especially after the Chinese New Year, as we need to consider the psychological effects that the ASF situation has had on Chinese consumers. We will have to monitor this closely.

What is leading to your lower outlook on demand outside of China? A decrease of 2.5% to 3% is quite significant, so what factors are contributing to that perspective?

We've been close to customers and all that, and so that's kind of where the team is assuming at this point in time the demand to be.

Okay, all right. Thank you.

You’re welcome.

Great, thank you and good morning.

Good morning, David.

Wanted to ask a little bit more about Project Readiness. I believe Juan, the goal is $1 billion in savings in two years. And I think you said on the call here that 2019 will deliver $200 million to $250 million of incremental savings for year 2019. Is that to then say that the subtraction then would be that all the balance of this shows up in 2020?

Yes, just to clarify, the $1 billion run rate by the end of 2020 is indeed a run rate. As we have discussed, not all components of the run rate will necessarily translate to bottom line profits due to potential offsets from inflation or reinvestment of some of the savings. The $200 million to $250 million in savings for 2019 that Juan mentioned reflects the year-over-year improvements from Project Readiness. This means it will add to the results from 2018, combining the savings we expect to generate this year with some savings from the end of 2018, adjusted for inflation. Therefore, we are discussing a net figure that highlights improvements in 2019 compared to 2018 as a result of Project Readiness.

What's the remaining net number then after you complete 2019? So I'm getting lost here between this gross number of $1 billion and the net number that you're calling out to the bottom line. What's the residual that would be left over for 2020 and 2021?

It's probably in the range of $0.5 billion.

Okay. It's still very sizable. Okay. Okay. That's very helpful.

And I think you have to say – David, you have to see we have a quick start in 2018 with the $300 million because there were a lot of ready-to-implement opportunities that actually require less capital or less changes in processes. So you can – you do more of those at the beginning. Then 2019, we'll have more foundational things that are related to processes or technologies. And then you're going to see again an acceleration as all those projects are implemented into 2020. So I think that's a little bit the cadence. We did the easy ones at the beginning. Now we're doing the more fundamental ones that take a little bit more work and then you're going to get the benefit of all that infrastructure into 2020. That's why the $300 million, $200 million to $250 million and $500 million kind of cadence if you will.

Very helpful. Last question for me is just a clarification on some of the answers you guys gave to a few other questions as it relates to China and the potential for a deal with the U.S. and China on trade. Is it – all the numbers that you've given on the call is the base assumption that we get a trade deal with the Chinese by the end of February? Is that the base assumption when you laid out all these various numbers? And then, can you give us some sensitivity of, if we don't get a trade deal what happens to your thoughts Juan on the outlook for the ADM business? How much volatility could we or should we expect, if the outcome does not occur for the base assumption?

Our assumption is not that the trade deal will be resolved in the first quarter; we expect it to take more like half of the year. If there are any benefits, we anticipate they will materialize in Origination during the last quarter of 2019. The outcome depends on the final deal both governments reach. If the situation escalates into a trade war or ongoing dispute, it would negatively impact everyone and complicate forecasts. In a scenario where negotiations continue, especially regarding agricultural products, these could serve as leverage towards a broader agreement. We can navigate various scenarios. Without an agreement, we may see continued low prices for beans in the U.S., sustained high crush margins similar to last year, and decreased soybean exports from North America. Conversely, if an agreement is reached and China increases purchases of U.S. agricultural products, we might experience higher origination margins in Q4, potentially more ethanol exports to China benefiting ethanol margins, and a slowdown in crush in North America, or at least reduced crush margins compared to 2018. We are currently positioned between these scenarios and can manage them, maintaining our forecast for 2019.

Great. Thank you. I'll pass it along.

Okay.

Hi, thank you. This is more of a modeling question. But I think you guided net interest expense. Is it going to be up $200 million year-over-year, is that correct?

I think we indicated that we're going to be $100 million per quarter, so $400 million for the calendar year. That's what we're seeing that should be for 2019.

Okay. Am I adding the difference correctly though? I mean you had only $200 million in 2018 because I think that's the math isn't it? So, it's $200 million incrementally year-over-year of interest expense net?

We were higher in 2018. I believe we will exceed that amount, possibly around $40 million more. We can follow up with you one-on-one afterwards.

Okay. Maybe I'm approaching this incorrectly. What I'm really asking is whether the operating income from your acquisitions can offset the higher interest expense. Additionally, what implications does this have for dilution in 2019?

No, it does. It does. I mean it more than offsets in terms of the impact. So we can follow up one-on-one with you on the incremental year-over-year on a managerial basis.

Do you have an operating income number for how much the acquisition's at in 2019?

Well, I think Juan was talking about growth in general, right? It was going to contribute about $150 million. And while that...

Okay. All right. I’ll go offline. Thank you.

Yeah, hi. I was wondering if you guys could provide us a little bit more of an update on how high fructose corn syrup contracting is going and your expectations for 2019?

Yeah, sure Michael. Good morning. Listen, contracting is done. Of course, we started earlier the process last year and I would say we finished with volumes and margins overall consistent with last year. So we've been able to hold margins and volumes in general. Of course, there were some pickup of both year-end losses there up and down. But in general I would say consistent with 2018 for both margins and volume.

Okay, great. And then shifting over to Origination. Could you give us any idea in terms of how much more room there is for growth in terms of your destination marketing volumes and what the cadence might look like over the next couple of years there? And which markets you're targeting? Thanks.

Yes. I think the team continues to look for more opportunities. It's just, all the numbers have grown dramatically, more than doubled over the past five years. I think the rate of increase that you're going to see going forward volume-wise is going to be probably lower in terms of the rate of increase because we've gotten to a lot of the markets that we are initially targeted. But clearly, they're still markets. For example, in Southeast Asia, in parts of Central America, parts of Middle East that we still view, there's opportunities for further growing that business. So I would say there's still going to be growth, although, not at the same rate that we've seen in the past few years.

All right. Terrific. I'll pass it on.

Thank you, Michael.

Hey, good morning, everyone.

Good morning, Ken.

Hey, Ken.

Two questions. One is, Juan, in the opening comments you said that you improved your Origination in the U.S. What did you do? And what was the process to which you did that?

Yes. We made several changes to our operations by closing some elevators and adjusting our footprint to align better with our production needs. We ensured that we have the appropriate elevator connections to our export facilities or plants, which is part of our routine efforts for improvement. Additionally, we expanded our North American fertilizer distribution business and our stevedoring business. We've seen many positive developments, including upgrades in digital tools and marketing efforts for the grain sector in the U.S., enhancing the support we offer to farmers. Specifically regarding our footprint, we typically operate around 200 buying stations, which often requires some adjustments. The team has been proactive in shutting down locations that were underperforming and reallocating personnel to stations with higher volume potential.

My second question begins as an observation but likely leads to a question. If you consider your competitors in both high-fructose corn syrup and crushing, there are two notable observations. First, your risk management approach in South America regarding crushing was effective and successful. Second, regarding your high-fructose corn syrup margins, the pricing strategy has proven to be quite successful, allowing you to sustain it, which stands in contrast to your competitors. So my question is, do you have a process that sets you apart from your competitors? Additionally, would you gain advantages from having a larger asset in either region?

Hard to know how our process compares to our competitor. Of course, I think one of the big advantages that I always pride ADM for having is, first of all, a great team, but also I think the fact that we keep the company relatively tight. I mean, before the acquisition of Neovia, we were a steady 1,000 people, which we handle about $60-something billion of revenue, helps us to not only the agility but the sharing of information I think. Every Monday morning we have a risk meeting, where, like, 20 or 30 people are in that goal. And I think that these are people that work very well together. They know what they do very well. And in general, you know us, we try to hedge our margins, maybe to do some basis trading. But fundamentally, we try to leverage our asset base, because we believe the asset base of a company like ADM is irreplaceable, so we take advantage on that and that's where we make the money. In terms of, we would like to get bigger anywhere I think that our objective is always trying to get better. And I think that as we get better, we could be bigger one day. But I think that the most important thing through Readiness and everything we do is that we are very honest. And despite we have a very good 2018, we're still not satisfied. We probably left a couple of $100 million on the table on things that we should have done better and Readiness is tackling that is how do we continue to get better before we get any bigger. So, even from a capital allocation perspective you heard us doing Neovia and we did Florida Chemicals and we may conclude that maybe another small deal that we could be negotiating here or there, but in general 2018 was a year of pausing in terms of our M&A and actually consolidating all these getting our returns from all these, and again continue to think about getting better versus getting bigger. I think when we get better eventually we will get bigger, because we will be the best operators of assets out there.

Well, you're starting to differentiate yourself. Well, well done. Thanks.

Thank you.

Hi. It's Victoria. Thank you for joining us today. Slide 15 notes some of the upcoming investor events where we'll be participating. And as always, please feel free to follow-up with me, if you have any other questions. Have a good day. And thanks for your time and interest in ADM.