Archer Daniels Midland Company (ADM) — Q3 2019 Transcript

Thank you, Jack. Good morning, and welcome to ADM’s third 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 2, the Company’s safe harbor statement, which says that some of our comments constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry condition, company performance and financial results. These statements are based on many assumptions and factors that are subject to risks and uncertainties. ADM has provided additional information in its report on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in its 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 statement 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 important actions we are taking to meet our strategic goals. 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 3. I will now turn the call over to Juan.

Thank you, Victoria. Good morning, everyone. Thank you all for joining us today. This morning we reported third quarter adjusted earnings per share of $0.77, down from $0.92 in the prior year quarter. Our adjusted segment operating profit was $764 million. Our team delivered solid results this quarter. We stayed focused on the levers we could control advancing our strategic plan despite the difficult external environment. North American grain export volumes and margins remained limited. Crush margins were part of the record high 2018 levels and ethanol industry margins remained challenged. Despite all of these, we delivered the performance consistent with the perspectives we provided last quarter, including the strong year-over-year growth in our nutrition business. Throughout the quarter, we continued to deliver on our strategic plan. In our optimization pillar, we are successfully capturing synergies offered by the midyear combination of our Ag Services and Oilseeds business. By looking at the combined value chain of the new business, we've identified a wide range of opportunities to improve capital efficiency. We have already executed more than $200 million of capital reduction initiatives. As part of our ongoing efforts to optimize our U.S. origination footprint, we completed our previously announced transaction with Cargill to exchange grain elevators in Illinois and Indiana. We also celebrated the opening of our new state-of-the-art mill in Mendota, Illinois, an important milestone in our ongoing process of replacing older, higher cost plants with more efficient facilities. And as we anticipated earlier this year, we're starting to see the positive impact of the measures we took to improve the long-term reliability of our Decatur complex. In our drive pillar, we are continuing to see growing benefits of the improved analytics, technologies and processes we put in place after we launched Readiness last year. We're implementing innovative uses of AI, machine learning and robotic process automation across the Company to do everything from identifying and solving IT issues to reducing costs and improving efficiencies in our global business services center to helping our customer-facing teams meet needs with more speed and flexibility. On the organizational redesign we completed in the first half of the year, including transforming our IT foundational services and centralizing our global operations organization is delivering higher service levels at lower costs. In our expand pillar, a key element of our growth strategy is focusing on major global trends, trends that have the potential to fundamentally change markets and in which we are solidifying our global leadership position. The first of those game-changing trends is one we see in the headlines every day now, flexitarian diets. ADM has a rich history of being a leader in plant-based meat alternatives. Today, our full pantry of great tasting, innovative flavors, ingredients, and solutions make us the provider of choice for customers looking to grow with this fast-moving market. Our new plant protein facilities in Campo Grande, Brazil and Enderlin, North Dakota are supporting the increased demand from our global customer base. And in the third quarter, we entered into a partnership with the world's largest beef patty producer to co-develop and produce a 100% alternative protein burger that is now being offered in Brazil. Another major global trend is nutrition for health. We are capitalizing on our investments in Biopolis and Protexin with the goal of building a leadership position in science-based microbiome solutions for human and animal health. There are tremendous opportunities here, such as our recent announcement of promising results from clinical trials of our probiotics for skin health. Another growing trend is sustainable materials. Our long-standing expertise and technology and fermentation along with our research and development capabilities give us industry-leading abilities to provide the review of feedstocks and underpin the creation of innovative sustainable products. Last year, in partnership with DuPont, we opened the world's first production facility for SBME, which has applications as a sustainable replacement for plastics. Last month, we announced an agreement with LG Chem to develop sustainable super-absorbent polymers. This is a growing area, and we plan to continue to expand our presence in it. Please turn to Slide 4. Readiness continues to underpin our strategic work and help drive our results. This quarter, our list of completed initiatives has grown to 218 which taken together will account for about $515 million in run rate benefits on an annual basis. We remain on target for our two-year goal of $1.2 billion in annual run rate benefits by the end of 2020. As of the end of the third quarter, Readiness has contributed close to $200 million in 2019 in year accrued results. We are confident we will reach our goal of $250 million to $300 million of accrued benefits by the end of this year. Finally, more than half of our global workforce of 40,000 has now completed our comprehensive training to execute our initiatives since we began the program. This training is a critical part of Readiness. It lays the foundation for the permanent culture change that we're working to instill to make our Company better. In some ways, we are entering a new phase of Readiness. We are moving on to more complex projects that will take longer to complete but will deliver more fundamental changes to how we run our Company. And while external conditions in 2019 are impacting overall results, the benefits we're seeing from Readiness are real. More importantly, they are long-lasting. These changes will make ADM better for the long run. I'll discuss Readiness more later. Now, Ray will take us through our business performance. Ray?

Please turn to Slide number 5. Beginning this quarter, we are simplifying the financial information that I will be speaking to on our calls. However, all the data we have included in the past will be included in the appendix of our quarterly slide deck. As Juan mentioned, adjusted EPS for the quarter was $0.77, down from the $0.92 per share in the prior year quarter. Excluding specified items, adjusted segment operating profit was $764 million, down 11%. Our trailing four-quarter average adjusted ROIC was 6.5%, slightly below our 2019 WACC of 6.75%. The effective tax rate for the third quarter of 2019 was approximately 19%, in line with the range of guidance we provided last quarter. For the full year, we continue to expect an effective tax rate in the range of 17% to 20%, which was our initial guidance. We generated about $1.7 billion of cash from operations before working capital in the first nine months of the year, slightly lower than the prior year period. Return of capital for the first nine months was about $740 million, including about $150 million in opportunistic share repurchases throughout the year to offset dilution. We finished the quarter with a net debt to total capital ratio of about 30%, up from the 27% in the year-ago quarter and continuing to improve from the first quarter high related to the acquisition of Neovia. Capital spending for the year is forecast to be around $850 million, in line with our previous guidance of $800 million to $900 million. Turning to Slide 6, other business results were $47 million, significantly above the prior-year period, largely due to favorable underwriting results in captive insurance. Revised full year estimate for other will be in the $70 million to $80 million range, lower than the $80 million to $90 million we previously guided, largely due to lower expected underwriting performance in the fourth quarter. In the corporate lines, unallocated corporate costs of $139 million were down versus the prior-year period, principally due to lower accruals for performance-related compensation and the benefits of our restructuring earlier this year, partially offset by higher spending in IT as part of our business process transformation investment and by Readiness-related costs. As a result, we're expecting full year unallocated corporate costs to be in a range of $625 million to $650 million, significantly below the $700 million initial guidance we previously communicated. Net interest expense for the quarter was similar to last year's quarter. We continue to expect full year interest expense on a segment presentation basis to be in the range of $350 million to $375 million, down from our initial guidance of $400 million. Corporate results also include non-cash early retirement charges and global workforce restructuring charges of $47 million or $0.07 per share in the LIFO credit of $16 million or $0.02 per share. Next, I'll discuss our business segment performance for the quarter. Please turn to Slide number 7. Our newly combined Ag Services and Oilseeds business reported results that were lower than the third quarter of 2018 but up over the second quarter of this year. Ag Services results were in line with the prior year quarter. In North America, improved merchandising results, particularly from ownership positions in corn and soybeans, helped to offset a weak U.S. export environment. South American results were higher as we captured better origination margin opportunities in Brazil compared to the previous year and export volumes from Argentina increased. Crush results were down year-over-year. Global crush margins have come down from the record high levels of last year, but our teams nevertheless delivered solid margins in North America and EMEA in the third quarter. In South America, margins were pressured by higher input costs caused by continued Chinese demand for Brazilian soybeans. Overall, our global crush margins benefited from positive net timing effects of approximately $50 million during the third quarter. Refined products and other results were significantly higher than the third quarter of 2018, largely driven by significant improvements in our golden peanut and tree nuts business. Wilmar results were lower year-over-year. Now looking ahead to the fourth quarter, we expect Ag Services and Oilseeds results to be substantially lower year-over-year, though performance should be stronger than the third quarter of this year, with Ag Services expected to be sequentially better and crushing expected to be sequentially down. Slide 8 please. Carbohydrate Solutions results were substantially lower than the year-ago period. Starches and Sweetener results were down versus the third quarter of 2018. In North America, higher net corn costs pressured margins, partially offset by lower manufacturing costs, including the benefits of our work to improve the reliability of our Decatur corn complex. Starch volumes remained steady. In EMEA, continued challenging market conditions including pressure from Turkish sweetener quotas and lower liquid sweetener prices impacting Central and Eastern European operations led to low results for the year. In wheat milling, an increase in sales volume was more than offset by lower margins due to limited opportunities in wheat procurement. Bioproducts results were significantly lower driven by high industry inventories and higher net corn costs in North America, leading to a challenged industry margin environment. Ethanol margin conditions remain negatively impacted by the lack of Chinese purchases from the U.S. and by the small refinery exemptions. Looking ahead, with typical seasonal reductions in sales volumes for sweeteners and for ethanol, as well as the continued difficult conditions for the ethanol business, we expect fourth quarter results in Carbohydrate Solutions to remain challenged, but with the continued benefits of our improvements at the Decatur complex, we expect fourth quarter results to be sequentially similar to the quarter just ended. On to Slide number 9. Nutrition results were substantially higher, with operating profits approaching double the year-ago quarter. WFSI results were significantly higher than prior-year quarter, with growth across the portfolio. Wild Flavors delivered its strongest quarterly profit ever. Sales were up 16% year-over-year on a constant currency basis; organic sales, excluding acquisitions, were up 7%. In Specialty Ingredients, the protein business continues to expand, powered by our leadership position in supplying solutions to meet growing customer demand for alternative proteins. Continued contributions from our growth investments in bioactives and fibers support higher results in the Health & Wellness business. Animal nutrition results were up substantially year-over-year as our Neovia acquisition continues to contribute. Vitamin additives were another strong performer, particularly coming off the year-ago period when margins were significantly compressed. Lysine production is showing improvement, though market pricing has been negatively impacted by the lower global demand due to the effects of African swine fever in Asia. With a robust pipeline of new opportunities and continued benefits from investments, we expect nutrition's growth story to continue in the fourth quarter, with results once again approaching double the prior year fourth quarter profit of $62 million. WFSI should continue to benefit from increasing sales in flavors and alternative protein solutions. Neovia will contribute to improve animal nutrition results. The results will be impacted by the lysine production in the world markets. Juan?

Thank you, Ray. Please turn to Slide 10. As Ray explained, market conditions in the third quarter remained challenging. Yet we delivered what we said we would three months ago. We pulled the levers that were under our control to turn in a solid performance, and I appreciate the team's good work. We also continue to focus on the three key areas of our growth and returns algorithm. First, we improved underperforming businesses. Golden peanuts and tree nuts, our Decatur complex, and lysine production are all showing improved results, and we are now targeting December 1st for the launch of Vantage Corn Processors, our stand-alone ethanol subsidiary. This is an important step as we continue to evaluate the strategic alternatives for our dry mills. Second, Readiness continues to spur our efforts to make ADM a more efficient, more innovative, and more customer-focused company. We are seeing some truly exciting Readiness initiatives advance in the back half of this year. For example, we've completed the pilot program in one of our Oilseeds processing facilities that utilize advanced analytics to deliver real-time analysis of production data, significantly increasing efficiency and quality. We're now rolling this technology out to more plants, leveraging the center of excellence structure we put into place for our global operations. We've also piloted and are rolling out an innovative data mining and analytics package that will provide our merchandising and sales teams with an important new tool set to better capture market opportunities. We're also seeing good progress and results from the third pillar of our algorithm, harvesting our growth investments. Back at the beginning of the year, we said we expected 2019 to be a breakout year for Nutrition. For the first three quarters of 2019, our Nutrition business has delivered $316 million in adjusted operating profit, just shy of the total for all of 2018. Additionally, we are delivering on our synergy targets for our Neovia integration, and that business is strongly contributing to our results. We're also seeing the benefits of growth in our core businesses, from our expanding stevedoring and destination marketing businesses to the development of new applications from our full portfolio of vegetable oils to our increasing capabilities in food grade and industrial starches. We are making good progress; however, while we believe our results this quarter were solid in the context of the external headwinds we face, our team nevertheless is not satisfied. There is still more we can and will do to reach our returns objectives. Looking ahead, we expect some external headwinds to continue in the foreseeable future. Conditions are fluid; however, external conditions—good or bad—do not change our fundamental plan. We will remain focused on taking actions under our control to improve our near-term results. We will continue to advance our strategic objectives including driving growth from the major global trends I discussed earlier. We remain confident that our strategy, combined with our continued disciplined capital allocation, positions us well for stronger results in 2020 and beyond. With that, Jack, please open the line for questions.

So, my first question is Ray's comments on fourth quarter Ag Services. It's—obviously we don't know your ownership position, and net debt segment was actually quite a bit stronger than I had thought for the quarter. So when you look at kind of the difficult harvest maybe farmers holding pretty tight to new crop, if you're limiting some of your merchandising opportunities, how does the fourth quarter—how does all that play into your outlook for the fourth quarter?

Yes, I mean, I think you're right. I mean, the general export environment remains somewhat challenging for the entire U.S. agricultural industry, but sequentially we're having a later harvest this year. So we will be procuring. I mean, we have procured a lot. We will continue to procure. We will be exporting to all of the two markets outside of China. The other thing to note is that, with the wet harvest that we're having, we are anticipating to gain some significant drawing revenue as well within our business. And then I also just want to remind people that our Ag Services division really has diversified significantly. And so when you take a look at some of the other businesses such as the stevedoring business, such as the global trade business, such as the destination marketing business, every year those businesses represent a greater contribution to our overall results within Ag Services. So, as I indicated in the call, I mean, we do believe on a sequential basis, Ag Services will be stronger in the fourth quarter compared to the third quarter.

Okay. On a year-over-year—on a year-over-year basis, will you expect it to be flat, down, up sequentially, obviously a little bit better than Q3, but how might that compare with Q4, a year ago?

Yes. Versus last year, it will probably be similar to slightly better directionally in that area, just speaking of what we're seeing here.

Okay. So, and then the combination of crush, your crushing results and Wilmar, I would assume that Wilmar is facing some pretty tough comps in Q4. So, I would assume that, that was probably going to be down year-over-year as well, would that be a fair observation?

Well, we said on crush again—so crush will be—compared to the third quarter, crush, we expect to be sequentially down in the fourth quarter compared to the third quarter. Again, a lot of it will be a function of how crush margins kind of evolve in the fourth quarter. On the case of Wilmar, I mean, Wilmar will announce its earnings in a couple of weeks. So I think you'll have a better perspective in terms of what it means for our fourth quarter after Wilmar announces its results there.

I wanted to ask a question as it relates to Argentina, given the political change there and the prospect for a potential return to elevated export taxes. Is it possible that dynamic would constrict the exports of Oilseeds derivative products out of Argentina? So that could be a net positive for your overall crushing margins operations? I know you don't have Argentina exposure, but just curious to hear your thoughts there. And then also kind of just opposing that with potentially weaker meal demand at Philippines and Vietnam as a result of the ASF in the near term would be helpful. Thanks.

Yes, Ben, so Argentina changed governments, and of course part of these government in their previous experience has had some export taxes for the country. The country faces significant pace of their debt going forward. So, of course, the economic situation is to be consolidated. And obviously the Ag industry is one of the biggest revenue producers of Argentina. So the possibilities there, we don't know yet; December 10th is when they take power. I will say at this point in time, what's happening in Argentina is crush is down, because basically the farmer, given the results of the elections, are holding to their grain. So in that sense, we see lower crush which is always helpful for profitability in Europe; I will say when crush from Argentina is low. So whether that's going to happen next year or not, and to what degree I think we will have to wait until December 10th. Your second question was on soybean meal demand. We actually continued to see strength outside China; our forecast outside China soybean meal growth is about 3%. And although there are a lot of headlines about ASF possibly expanding into Southeast Asia, we need to be mindful of the relative size of the market, like Vietnam, versus a market like China. So I think that still the discussion is about China—that is what the gap in protein is. And I will say, if you look at China and with the information we can get, it feels to me that the decline in the herd has peaked or bottomed, whatever your perspective is on that. And I think that the incentives at high prices are given, and the producers are having record profits right now in China. They are starting to think about how to rebuild the herd. A lot of them have shifted. About a third of them have shifted into poultry production. That has softened a little bit the decline in soybean meal because obviously you need to feed them. And a lot of people are looking at more sophisticated meals because the whole production is being more professionalized and standards are rising. So I think that people are looking for higher quality feed producers and high-quality feed of which soybean meal is inclusive in that. There is also these big prices that we have for pork; big pork inflation has created the incentives to increase weight before slaughtering. So we're seeing higher feed on animals as well. So I think in general, we continue to be positive about soybean meal demand going forward. We don't see a significant decline. Of course, I would say we will have the balance that rebuild of the herd in China and all these things in China are going to be positive to demand; expansion in Southeast Asia is negative to demand. But I think given the magnitude of those, we are not that concerned about the expansion in Southeast Asia.

Okay, very helpful. My second question relates to the ethanol business. You mentioned the formation of the subsidiary; curious around current improvement that we've seen in stocks. Production levels kind of dipped in mid-September, they've been steadily climbing back. We have a lot of idled capacity in the U.S. I'm just curious to hear your thoughts around what you think about sustainability of improved performance in the near term and then just your outlook to the extent that you can offer one in the intermediate term.

Yes, I think a couple of things. As Juan indicated, we are setting up the stand-alone ethanol subsidiary as of December 1. Just for context, starting January 1, we will report Vantage Corn Processors as a separate sub-segment within carbohydrate solution. So clearly we're in the process of making sure transactions are occurring between the new subsidiary and ADM. And the good news is we've got quite a few interested parties that we're talking to right now at the initial stages about some form of sale, joint venture, or other type of structure transactions. So we're well on our way there in terms of our strategic alternatives. You’re correct. There has been idling of facilities, idling of production in the United States with respect to ethanol. I think the ethanol margin environment this year clearly has been extremely challenging and there's real production levels have come down. And that's frankly resulted in ethanol margins in the industry improving in the month of September, after Labor Day—which, by the way, is unusual because normally after Labor Day, you actually see ethanol margins deteriorate. And so there has been some rebalancing of supply and demand. You point out there has probably been an increase, a little bit of an increase in terms of production recently. We have to watch that carefully. I think what we've learned here, frankly, is that when you get supply and demand a little bit more balanced, margins do improve in our industry here. And so we're looking at that very, very carefully. I think it is also important to note here in getting back to ethanol in terms of what ultimately will drive the ethanol margins higher is that we do need to drive incremental demand here. And I think the discussions right now in the U.S. trying to trade regarding ethanol are important as an additional catalyst in terms of driving incremental demand for ethanol, which by the way, when we buy ethanol, we've actually been buying corn from the United States. And so that's—for the U.S. agricultural industry, this is actually a very important part of the discussions here. We also have the special refinery exemptions. We've had—clearly, have had some negative impacts in 2019, but again, there are further discussions in terms of that as we go forward. So I think that when you take a look at 2020—you asked the question, can it get worse than what we've seen in 2019? It's actually very difficult to see a scenario where the industry ethanol margins in 2020 being worse than 2019 because it's been tough in 2019. I'm somewhat encouraged to see idling of a facility. So there seems to be a little bit more discipline within the industry right now in terms of just trying to better match supply and demand. But again, I do believe that it is important that the U.S. ethanol industry is strong because that results in basically the U.S. agricultural industry being strong. And so therefore, we remain optimistic that we'll get toward some solution that will drive incremental demand and hence stronger ethanol margins in the future for our industry here.

So, just following up on ethanol, could you give us your expectations for U.S. ethanol exports in 2020 with and without China?

Yes, I mean, I think that the 2020 scenario excluding China will be very similar to this year, which is approximately 1.5 billion gallons. I think if you include China, again, a lot of it is to be a function of when you get toward a trade deal and how that is phased in. We've always talked about the fact that if China moves toward an E10 national villain for the country, based upon our calculations, they could easily buy 1 billion gallons from the United States. I mean, because the deficit is fairly significant in terms of China production relative to their overall demand. Now what number ultimately we'll get toward in terms of a trade negotiation that's to be determined, based upon—I suspect a phase in terms of a gallonage over time here. So again, we've always thought that the potential could be up to 1 billion gallons down the road here.

Okay. And on U.S. corn exports, volumes are down 60% in 2019-2020 marketing year-to-date. When do you expect competition to ease at current exchange rates? In the USDA projections, U.S. corn exports down 8% in this marketing year and clearly there is still a long way to go, but how realistic is that projection?

Well, I think that is true. Right now, U.S. corn is not that competitive relative to say, South America. I mean, we do expect that eventually U.S. corn will become competitive. Our thinking is when we get into the first quarter, it's probably a good period whereby at that juncture U.S. farmers will be looking probably to sell more of the corn, because as they start thinking about freeing up space for next year. So I think our assumptions right now in the fourth quarter, U.S. exports in general will be all the challenge, and that's reflected in my guidance commentary here. Getting the first quarter, you believe U.S. corn will become more competitive, so that'll probably lead to more movements of U.S. corn. I think the fact that you're not seeing that much pool of U.S. corn in the fourth quarter actually is a benefit for the processors like us because there is frankly a plentiful supply of U.S. corn for us to actually pull in order to put into our corn processing plants. And so, from a processing business that's a benefit for us.

Then also—Tom, also don't forget with this competitiveness over Brazil, we are exhausting the inventories in Brazil, and due to the dryness, soybean was a little bit late in being planted; that may make—soybean a little bit late as well. That may extend the window for the U.S. to be competitive when Ray mentioned in Q1. So that's another possibility there.

Good morning, Heather.

Good morning, Heather.

Hi. Sorry about that, I had to go back and forth between two calls at a time.

No problem.

I know we're near the end, so I'll try to make this quick and I apologize if somebody has already asked you this. But you mentioned higher corn costs for the starches and sweeteners business, but was just wondering if you could give us any early color you have about how you think basis is going to be trending for next year, given the late harvest and continued weather issues and all, like what are your thoughts on basis for next year?

Yes, I mean, basis, as Juan commented, is actually fairly high. I mean, particularly on the East Coast, the eastern part of the United States, the western side has come off a little bit, but again on a—when you look at it from a seasonal perspective, we've got extremely high basis compared to historical norms. Our—I mentioned that part of the reason why our third quarter and North American sweetener results were slightly down versus last year is just due to the fact that we had higher net corn costs. We normally hedge a lot of it, but there is a certain portion we don't hedge. And so for the unhedged portion we incurred some higher costs. As we kind of look forward, we do believe at some juncture, corn will get commercialized. I mean, the crop is out there, it's a late harvest. I mean remember only 41% of the U.S. corn has been harvested right now versus five-year average of 60%. So it is the late harvest, but at some juncture that the harvest will occur, there will be accumulation. And at some juncture there will be commercialization, especially as U.S. corn becomes more competitive in the world markets. And so the timing of when basis will break—is it going to be the latter part of the fourth quarter? Is it going to be the first quarter? To be determined, at some juncture we do believe that there will be a break in the basis here, and that will benefit the originators like us.

And my final question is just ASF and one of the times when I was on the call, I heard Juan mentioning that there, given the margins in China and all there are some producers that are trying to expand. And I was just wondering if you could add further color on that. Because like Vietnam continues to have recurrent breaks, and China is having recurrent breaks. So it's like wondering if you could qualify the magnitude you're seeing there. And then secondly, if you could give further color on when you expect the benefit to show in 2020 because of the trade issues; the impact on U.S. producers has been delayed and like do you expect that expansion start in early '20 or do you think that's going to happen more in late '20, and just if you could give us some more details on that.

So, difficult to speculate on all these—but I would say, given the information we have on the ground in China, we do know that producers are increasing the weight of the pigs before slaughtering. We do know that—we certainly know we have data from our team that about one-third of the producers have shifted to poultry production, given the opportunity there. And we do know that the incentive, that price is providing to some of these producers, especially for the more industrial ones, they are starting to rebuild the herd. Those were the ones that were preserved the most, if you will, and less impacted, and they have better sanitary conditions. Very difficult for me to put any numbers beyond these Heather in terms of what we know because it's a large country with many operations like this. In terms of the impact to us, I would say we're going to see the impact in 2020. We're starting to see the impact in Brazil or in Europe. I think the impact on the U.S. I mean, you see our customers getting ready—whether is getting rid of—I mean, or getting ready to export, it will depend on what's happened with the 62% tariff that China is imposing; if they want to get rid of that, if they want to issue a tariff exemption or if this is part of the Phase 1 deal; we will have to see, it's difficult to handicap. I would say we will see it in Europe and South America certainly starting in the first half, whether we see in North America will depend on the geopolitics of all this which I won't handicap at this point.

Good morning. I know there's been a lot of questions asked about this, but just, is there a way to just frame how much the delayed harvest has actually impeded your profit in 2019?

I guess that's a complicated—complicated question.

I know, and someone have.

There are just other factors, right. Impact as a whole, it's not just a supply issue in terms of us procuring the crop. It is also demand since China is not really aggressively in the market here. So it's a complicated issue to say that just because of a delayed harvest it has this much impact. I do think that, Ken, the way we kind of think about it is that eventually the harvest will occur, eventually we're going to be procuring all the products, and eventually the United States is going to be competitive in corn and soybeans. Therefore, eventually we will be moving the crop out to the world markets here.

I think, Ken, the way I tend to think about it is sometimes is not that much the volume or the delay in the harvest is, what that does to the farmers' market and beef pattern, if you will. And I think what it does today, since they don't know the size, they're holding onto the grain. And that's where the impact comes; that's where we're having high basis today when we should—basis should break more at the harvest, but the farmer doesn't know with 40% and at this time of the year being late, what kind of crop he has. So I think, as Ray said at the end, we're going to have a big crop. There are big inventories; all that will be moved to the market. We will move that. We will try a lot of that because it's going to be with an early, but I think the main issue is how all these things, whether it is China trade or whether it is the delay impacts farmer commercialization. That's probably the biggest disrupt for us. And today you see it in our—some of the impact we are getting in basis in the U.S.

Okay, but do you think that over time, I mean it is profit but between the China trade deal as well as delayed harvest that you will regain somewhere in 2020 or 2021 that will come fully back to you that 2019 will be kind of aberrational in terms of the profit level? Is that a fair assessment?

It depends some—so some will come back, because we will commercialize that and we have the assets to do that. So we will go through our assets. Some also will depend on the timing, because part of our previous years, Ag Services, great Q4s, remember counted on both having an export, simultaneous strong soy and corn export programs out of the goal. That's what made elevation margins pulse. So part of that will depend on that dynamic and we will have to see it in Q4 of 2020 if you will. But in the meantime, I think that our team has done well—look at this quarter. This quarter's results from services given the lack of export volumes for corn are very significant. So I'm proud of how the team has been playing it. And I think the river getting back into navigation and normal rates has helped a lot that at the beginning of the year for the first half was almost impossible demand. So I think the team has done an outstanding job and ensure they will do the same in 2020.

Thank you for joining us today. Slide 11 notes upcoming investor events in which we will be participating. As always, please feel free to follow up with me if you have any questions. Have a good day, and thanks for your time and interest in ADM.