Archer Daniels Midland Company (ADM) — Q4 2019 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 2, the Company’s Safe Harbor Statement, which says that some of our comments and materials 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 and materials 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 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 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 fourth quarter adjusted earnings per share of $1.42, up from $0.88 in the prior year quarter. Our adjusted segment operating profit was slightly above $1 billion. Our return on invested capital was 7.5%, above both our 2019 WACC of 6.75% and our long-term WACC of 7%. We are continuing to drive towards our long-term ROIC goal of 10%. The team delivered solid results this quarter and I am proud of how they performed both over the last three months and throughout the year. We managed through a difficult external environment by keeping our focus on strong execution, continued improvement efforts, and by providing winning solutions for our customers. Given our performance, we are today announcing a quarterly dividend increase of $0.01 per share to $0.36 per quarter. This dividend will be our 353rd consecutive quarterly payment, an uninterrupted record of 88 years. I am proud to look back on a year in which we delivered significant advancements in each of our strategic pillars. In our optimized pillar, we advanced key business improvements and have seen the results of our work at the Decatur complex and in our Golden Peanut and Three Nuts business. We have reshaped our North American wheat milling footprint by closing old less efficient mills and opening our brand new, state-of-the-art facility in Mendota. We completed a significant global organization redesign, including offering early retirement for certain North American colleagues and reducing management layers that are helping us enhance productivity and efficiency. Just in the fourth quarter, we entered into an agreement to sell our palm plantation operations in Brazil and sold our investment in CIP, advancing our ongoing efforts to ensure our asset portfolio maximizes returns and aligns with our core competencies. In our drive pillar, we launched the Ag Services and Oilseeds business unit and we are delivering on the synergies created by simplifying the business model, including capital reduction efforts. More widely, as part of our readiness efforts, we introduced a company-wide simplification initiative which is streamlining decision making and processes to drive accountability and realize additional value in the way we work. We continued to drive standardization and efficiency by centralizing critical activities, including our new global operations organization. In our expand pillar, we expanded on our leadership position in the fast growing alternative protein sector through our partnership with Marfrig and by working with many other customers to create systems and solutions to meet their needs. We enhanced our global citrus platform with the addition of Florida Chemical and Ziegler, and we cut the ribbon on our expansion and enhancement of our flavor production capabilities in Beijing. We created an unparalleled global leader in animal nutrition thanks to the addition of Neovia, and I am extremely pleased with the integration, including running ahead of our internal synergy targets. In just the last few months, we further expanded our animal nutrition capabilities with the opening of our state-of-the-art technology center in Decatur and our new feed production facility in Vietnam. We continue to build a leadership position in the key markets of food, beverages, and supplements that enhance health and wellness with the acquisition of Brazil based Yerbalatina phytoactives, a pioneering leader in plant-based extracts. We further enhanced our global destination marketing footprint by expanding into Turkey, capping a year in which our overall destination marketing volumes grew by 10%. Let's turn to Slide 4. A year ago, I called 2019 the year in which readiness would accelerate, moving beyond the introductory phase to become a driver of our culture and how we do our work every day. The enterprise has been laser-focused on readiness, which shows in our execution. By the end of 2019, we completed 435 readiness initiatives that in total will account for $815 million in run rate benefits on an annual basis. We remain on target to reach $1.2 billion in annual run rate benefits by the end of 2020. For 2019 specifically, readiness has contributed approximately $250 million in accrued net benefits, in line with our goal. I'm also proud that we achieved an important internal goal. As of the end of 2019, 31,000 colleagues had completed our comprehensive ability to execute training since the program began. We continue to implement new innovative initiatives as a result of readiness. For example, this quarter we will launch two new technologies. The first will help us interact more efficiently with our customers by providing new tools to our sales team. The second allows us to centralize how we practice touch and tender in North America. What is even more impressive to see, however, is how our team has integrated readiness and its rigor and discipline into their everyday work. Our readiness evaluation and tracking system is now routinely applied to projects large and small alike. The 'what else can we do to be better' mindset is helping guide actions and investments, becoming part of who we are as a company, which was one of our goals from the start. Now Ray will take us through our business performance.

Thanks Juan. Please turn to Slide number 5. As Juan mentioned, adjusted EPS for the quarter was $1.42, up from $0.88 in the prior year quarter. The adjusted EPS number includes a benefit of about $0.61 per share related to the impact of the retroactive biodiesel tax credits, representing an approximately 50:50 split of retroactive benefits for 2018 and 2019. Excluding specified items, adjusted segment operating profit was about $1 billion, up 20%. For the full calendar year, our adjusted segment operating profit was approximately $3.1 billion and adjusted EPS for the full year 2019 was $3.24. Our trailing fourth quarter average adjusted ROIC was 7.5%, higher than our 2019 annual WACC of 6.75%. The effective tax rate for the fourth quarter of 2019 was approximately a positive 1% credit compared to a positive 2% credit in the prior year. The calendar year 2019 effective tax rate was 13% compared to 12% in 2018. The low 2019 tax rate is primarily due to the impact of the U.S. tax credit signed into law at the end of the year. The low 2018 rate is due primarily to the impact of favorable true-ups related to U.S. tax reform. In the absence of the tax credits and specified items, the effective tax rate for calendar year 2019 would have been about 19%. Looking ahead, we're expecting a full year 2020 effective tax rate to be in the range of 16% to 19%. We generated about $2.3 billion of cash from operations before working capital for the year, lower than 2018. Return of capital for the full year was about $940 million, including about $150 million in operating share repurchases. We finished the quarter with a net debt to total capital ratio of about 29%, up from 25% in the year ago quarter, while continuing to improve from the first quarter high related to the acquisition of Neovia. Capital spending for the year was $828 million in line with our guidance and considerably below our depreciation and amortization rate of about $1 billion as we focus on harvesting our prior investments. In 2020, we expect to continue to spend below our depreciation and amortization rate, but higher than 2019 as we make investments in our business transformation program. Next slide please. Our business results were $13 million significantly above the prior year period. Captive insurance results were negative but significantly improved year-over-year. ADM Investor Services results were up versus the prior year period. For 2020, we expect claims and underwriting performance to improve for our captive insurance operations resulting in the expected other segment performance to be above $100 million for the calendar year. In the corporate lines, unallocated cost of $193 million were higher year-over-year principally due to increased spending in IT, business transformation, and higher benefits accrual costs. Other charges increased due to a $50 million railroad maintenance expense that had a corresponding exact benefit in tax expense, partially offset by improved foreign hedging results in our intercompany funding. For 2020, corporate unallocated should be approximately $800 million, with the increase from 2019 due to investments in IT, one ADM business transformation, R&D and innovation, transfers from the business segments into corporate centralized key activities, and a return to normal incentive compensation accruals offset by the full year impact of savings from our workforce restructuring. Net interest expense for the quarter was lower than last year, benefiting from lower short-term interest rates and proactive management of the debt portfolio despite overall higher debt levels to fund the Neovia acquisition. For 2020, we expect net interest expense for the calendar year to be slightly below 2019. Corporate results also include a $0.24 per share loss on the sale of our interest in CIP, comprised of a pre-tax loss of $101 million and a $32 million tax expense. It should be noted that we received pre-tax proceeds of $210 million in December from the sale from an original investment of $38 million made in 1988. You can see more data and background on the transaction in the additional facts and information section of this slide deck. In addition, in corporate, there were non-cash, early retirement, and global workforce restructuring charges about $0.01 a share and a $0.04 per share LIFO charge. Next, I'll discuss our business segment performance for the quarter. Please turn to Slide 7. Ag Services and Oilseeds results were higher versus the fourth quarter of 2018. Ag Services results were slightly lower year-over-year. In North America, the delayed U.S. harvest contributed to lower export volumes, driving lower margins. In South America, results benefited from improved margins driven by good export demand and farmer selling. In crushing, results were lower year-over-year. Overall margins were solid though lower than the extremely high levels in the year ago period when global margins were being supported by the very short soybean crop in Argentina. Strength in the vegetable oil market contributed to a very good canola crush margin environment in North America. Year-over-year results were impacted by negative timing effects this quarter versus positive timing impacts in the prior year quarter. Refined products and other results were substantially higher. The impact of the passage of the retroactive biodiesel tax credit for 2018 and 2019 contributed $270 million net to segment operating profit and was a major driver. However, even absent a tax credit, our P&L delivered its best Q4 and, in fact, its best full year in recent history. We continue to see strong global demand for both biodiesel and food oils. In addition, the Algar Agro acquisition in Brazil contributed positively to results. Wilmar results were slightly higher year-over-year, with its diversified business model performing well even with the backdrop of African Swine Fever impacting feed demand in China. Looking ahead, we expect overall Ag Services and Oilseeds results to be lower in Q1 2020 than Q1 2019. Ag Services results should be in line with the year-over-year period. Crushing will be strong but still lower due to the very high crush margins driven in part by positive timing impacts in the year ago period. Our P&L should be slightly higher on continued good oil demand. We expect the impacts of the biodiesel tax credit to continue to support the biodiesel industry, although the normalized impact for ADM in 2020 will be lower. For preliminary modeling purposes, we assume about one-sixth of the combined 2018 to 2019 impact, but the actual net benefit will be a function of marketing conditions as we move through the year. Additionally, we expect to see the ramp-up of agriculture exports to China in the second half of the year. Slide 8 please. Carbohydrate Solutions results were lower than the fourth quarter of 2018 and similar to the third quarter of 2019. Starches and sweetener results were up year-over-year. Improvements in manufacturing costs, including in the Decatur corn complex, helped support strong results. There is higher income from corn co-products in North America. In EMEA, we began to see some improvements in margin conditions, but results were lower year-over-year. Wheat milling results were up globally. Bio products results were down compared to last year's fourth quarter due to continued unfavorable ethanol conditions and some risk management hedging losses. Looking ahead in Q1, we will begin reporting the Carbohydrate Solutions business in two sub-segments; starches and sweeteners and Vantage Corn Processors or VCP. VCP is our newly created dry mill ethanol subsidiary which will also market ethanol produced at our wet mills. The results of VCP will thus cover the production of the three dry mill ethanol plants and the income from the distribution of wet mill-produced ethanol. The starches and sweeteners sub-segment will include the results of all wet mill operations including ethanol production. For the first quarter of 2020 in starches and sweeteners, we expect to continue to see the benefits of our improved manufacturing costs and anticipate EMEA results to be higher than the first quarter of 2019. We expect VCP to continue to be impacted by challenged industry ethanol margins. Absent any improvement in the ethanol industry margin environment for the rest of the first quarter, we will expect the Carbohydrate Solutions segment results in Q1 to be down versus Q4 2019. On Slide 9, nutrition results were substantially higher year-over-year, capping off a full year of 23% operating profit growth in the business and record results for WILD. For the quarter, WFSI results were significantly higher than the prior year period with sales 8% higher on a constant currency basis and operating profits 40% higher year-over-year. The WILD team delivered another outstanding quarter as strong sales and margins in North America, EMEA, and APAC drove positive results. In specialty ingredients, lower sales and margins in emulsifiers and reduced margins in edible beans are partially offset by continued margin growth in plant-based proteins. Health and wellness results were up, driven largely by a new strategic agreement for fermentation capacity. We believe that our leadership position in fermentation will continue to provide benefits for ADM in the coming years as our expertise and production capability will prove extremely valuable to cutting-edge companies that are looking for new sustainable ways to create a wide variety of consumer and industrial products. Animal nutrition was up substantially versus the prior year period as Neovia continued to contribute positively to results, partially offset by a continued weak pricing environment for lysine globally. 2019 was an impressive year of growth for nutrition and we expect that growth story to continue in 2020. For the first quarter, we anticipate overall nutrition segment results will be substantially higher than the first quarter of 2019 with growth in operating profit at around 20%. WFSI should be up on continued customer demand for our on-trend ingredients and our unparalleled expertise and service. Animal nutrition will continue to benefit from our Neovia acquisition and the execution of the synergies we've identified, though we expect the global lysine pricing environment to remain challenged in the quarter. In addition, year-over-year comparisons will benefit from last year's first quarter Neovia purchase price adjustment on inventory costs which negatively impacted the results one time. Now I'll turn the call back over to Juan.

Thank you Ray. Let's turn to Slide 10. Earlier this month we unveiled a new corporate identity for ADM. The new identity builds on our purpose to unlock the power of nature, to enrich the quality of life, and reflects our evolution as a company. I'm proud of what we have accomplished in the five years since we purchased WILD, both in terms of our nutrition segment results including our 23% year-over-year operating profit growth in 2019, but also in the unparalleled value proposition we offer our customers. Today, our ability to work with our customers, operating an industry-leading array of products along with expertise and innovation to help them deliver unique solutions along with ADM systems sets us apart and puts us in an unequal position to meet global consumer trends. We are building the same capabilities in our animal nutrition business. Only a year in, Neovia is performing above our expectations and we remain far ahead in the timing of achieving our synergy goals. We are going to continue to deliver on that growth story and drive margin growth in that business the same as we have done with WILD. With the momentum we have in the human nutrition business, the accelerating growth of our health and wellness business, and the second year of Neovia as part of our animal nutrition business, we expect another year of 20% plus growth in profitability in our nutrition segment in 2020. At the same time, we are continuing to drive results in the Ag Services and Oilseeds and Carb Solutions businesses which are critical value creation engines for the company. These businesses have leadership positions in their respective markets, but we know we can further improve. We remain focused on capital efficiency, portfolio management, and the use of technology and analytics to help drive cost and margin improvements in those segments. Despite all our accomplishments, it's important to also focus on the things that did not go as planned in our execution in 2019. Our planned improvements in Decatur corn and seeds complexes, although substantially complete, took longer than expected and their overall results in 2019 were well behind their targets. Our new centralized Operations Center of Excellence will help make sure the plant improvements are implemented more effectively going forward. And despite the impressive results we have achieved with some of our recent investments, those growth projects have not reached their full potential. That is why in 2020 we are going to start to pivot our readiness focus initially placed more on efficiencies so we are harvesting our investments and driving commercial improvements and revenue growth. So as I look ahead to 2020 and beyond, I see significant opportunities. We feel that external conditions should improve in the back half of the year, particularly as the impacts from the Phase 1 agreement between the U.S. and China take hold. Nevertheless, we are planning conservatively and focused on driving our own results for the year. We are focused on opportunities for business improvement, including our ongoing strategic review of our dry mills and addressing lysine. We are advancing readiness and there is still more to harvest from our recent growth initiatives. We will be acting on all of these opportunities in 2020 while remaining focused on disciplined capital allocation and M&A as we continue to drive towards our 10% long-term ROIC objective. With all of these factors and without taking into account the benefits of the biodiesel tax credit, we are targeting the delivery of pretax improvements of $500 million to $600 million in 2020 compared to 2019. Looking beyond 2020, as we continue to advance our strategy, I am excited by the growth opportunities offered by evolving consumer trends and by the improvements and efficiencies we are continuing to execute across ADM. With that Jack, please open the line for questions.

Yeah, good morning everyone, thanks for taking my question. So I guess the first question here is when you look at -- obviously you've -- we've had biodiesel tax credits coming back into the market. Would that ultimately help your oil demand in 2020 and be more of a tailwind to your crush margins for the year?

Yeah, we are very positive about the oil demand going into the year. We've seen demand outpacing capacity or production for most of the eight oils. We've seen, Eric, biodiesel not only the support of the tax credit in North America but also biodiesel mandates going up around the world. We are seeing good demand for food oils and we're witnessing a decline in the production of palm oil due to weather and fertilizer applications, which has been tightening the market. So we've seen oil prices coming up. Also remember that we had a small rapeseed crop in Europe, tightening the balances a little bit. I think the oil story will support crush going into 2020 is our view.

Yeah, thank you. And then -- thank you Juan for that. And then just a little more flavor, I've been anticipating with the Phase 1 trade deal that it would be a gradual increase throughout the year but it seems to me that the setup for the fourth quarter when we're in harvest this year and hopefully we have much better conditions and a better environment to operate in, it seems like the fourth quarter setup could really be quite good because that's when we are most competitive on global pricing. Is that thought process in sync with how you would look at that?

Yeah, the way we have estimated it for our sales is back-end loaded. The exports to China are coming in the second half of the year. So yes, we expect at the time that we have all that pressure in the system. This export will come and that could improve margins by that point in the Q4 of 2020.

Okay, thank you. I'll get back in queue.

Thank you Eric.

Thanks. Good morning everyone. I want to ask starting on crush and in Argentina in particular. I know you guys don't have crushing operations there but that's a pretty dynamic market, obviously experiencing significant financial distress and the number of crushers that are experiencing acute financial distress, just be curious to hear how you guys think Argentina is setting up for 2020 and could that ultimately be a market where crush is constricted and helps to support a global crush environment across the other geographies?

Yeah, thank you Ben. Listen, as you said, Argentina starts 2020 with a number of challenges that are historically economic. They need to tackle the $100 billion debt, higher levels of poverty, inflation, and the government has very little room to maneuver, so they have implemented all the export taxes. As such, the farmers are taking a very defensive position. So the farmers at this point in time have sold a lot of grain in anticipation of export taxes. And today, as an Argentine, you cannot buy dollars to hedge against your devaluation. So basically you need to hold on to the grain. The farmer will focus on financial management and cash flow management during the year. So they're going to be a reluctant seller for the rest of the year. So you're going to see, and we're seeing right now, the impact of that in Argentina being less of an exporter in the meal, as we see in the U.S. meal going into Europe recently, whether it is Spain or Germany. Also going to the Philippines, so U.S. meal being the most competitive feed for places where non-traditional and traditional export markets for the U.S. So yes, we see this continuing to be supportive of crush margins in North America and Europe for that matter.

Great, and I'd like to switch gears to the starches and sweeteners business. You talked about some improvement in co-products values that you've seen, I will be curious to hear your outlook in the backdrop of the potential for U.S.-China trade improving, that being supportive of the product values, and then also if you could provide any commentary on how the contracting season fared for 2020 and what our expectations should be looking out to this year for pricing on the sweeteners basket?

Ben, on the co-product value, a lot of this has been driven by the demand for vegetable oils or corn values have gone up and so that's really supported our overall core products from that business. As we consider the rest of the year, we do believe that with the contracts completed we will be able to maintain the margins that we had through the negotiations. Our overall starches and sweetener performance improvements will be directly due to things that we can control. So, the recovery of the Decatur, some of the improvements we are doing in EMEA, there is recovery in sugar prices in Europe as well, so a lot of factors will help drive improvements in our starches and sweetener business in 2020 compared to 2019.

Thanks so much.

Good morning everyone. So you mentioned the benefits of Phase 1 will be back-end loaded this year, but can you just give us some more details on exactly how the agreement has altered your outlook for regional soy crush margins and U.S. exports of soybeans and ethanol? And if you can rely on your latest assumptions around FX, that would be helpful?

When we look at oilseeds, in general crush margins I would say, from an Oilseeds and Ag Services perspective as I explained to Eric before, we think that the exports will be back-end loaded. So from an export elevation margins, if you will, that's where we think it's going to happen. From a crush perspective, we are positive in general on crush. The demand has been very good so far and I would estimate rates for meal had in the range of 3% to 4% for the U.S. So we feel good about that. As I mentioned, we've seen record weekly soybean meal exports recently to Spain, Germany, and the Philippines and that will be supportive of crush margins here in the U.S. So we think that meal bases will remain strong and even if all these China purchases come, we should be able to offset that potential bases gain for soybeans. Europe we have seen soy margins have firmed in recent weeks and they are in the $30 to $40 per metric tons a little bit on the Argentine not being that aggressive into Europe. And of course, grape margins are under pressure since we have a small grape crop there. When we see China margins have been steady, around $30 to $35 per ton. Crush has been robust. Meal demand actually has been surprisingly resilient mostly on more feeding to hogs, but also in poultry and aquaculture that requires a lot of soybean meal. I would say if I go to Brazil, we have pretty good margins in Brazil. These are the best margins we've seen in quite some time in Brazil, mostly due to all the exports that are going to China. With ASF, we've seen all those slaughterhouses exporting a lot to China so that keeps a very robust demand there in Brazil. We have seen margins dropping in Paraguay to maybe -- crush margin to maybe $20, mostly because we've seen Argentine crushers go into Paraguay to procure beans. So that has been the biggest, if you will, a negative impact that this Argentine situation we've had on crush margin. So that's how I see the world right now. With respect to ASF, we think that probably the worst is a little bit behind us in maybe 2019. The scenario developed a little bit as we predicted or as the experts predicted in which we saw that protein gap of maybe 20 million tons being filled mostly with imports. We see Brazil being very aggressive filling up those imports and we see the crush margins impact of that. We've seen also China reacting to that with more chicken and aquaculture and we see the crush margins there as well. We think that we're going to see the impact of U.S. exporting as well now with the Phase 1, because although U.S. exports grew, it was still relatively small given that there were still import tariffs in place. We see a progressive shift in the industry in China towards more professionalized farming in that regard and that uses more soybean meal. So we see that as a positive. But we expect also for imports to continue at more elevated rates than in the past, even on a long term basis. So we expect the recovery over 2021 and 2022 to become normal, but the new normal will be slightly different.

That's very helpful. Thank you. And if we just switch to U.S. corn exports, the USDA is forecasting 2019-2020 exports down 14%, but shipments are running down 53% today. When do you expect the U.S. corn exports to turn a corner and maybe you can just discuss the factors that have contributed to the weakness up to this point, and we're hearing there have been some quality issues with this year's corn crop in the U.S. and if that is true, how is that impacting ADM mobility?

Yeah, I would say with respect to the corn question of when we are becoming more competitive is right now. Right now we’re becoming more competitive and I think that for the next two or three months window, the U.S. corn is the most competitive in the world. So you're going to see those exports pick up right now. With regards to quality, yes, there are quality issues with this late crop and we're working through that. Quality is an issue, not yet a huge issue but it’s an issue that at one point in time we could start driving farmers selling basically to get those products out of the pile.

Thanks very much. I will pass it on.

Hey, good morning guys. I actually want to touch base on the $500 million to $600 million improvement. How much of that improvement actually comes from harvesting investments or savings coming down to the bottom line?

Yeah, I would say that if you remember how we build this kind of algorithm, this kind of math. We were going to have, we had in 2019 about $125 million of very unusual weather events. We normally have weather events, but this was a one-in-40 year kind of event. So we're counting $125 million, and hopefully with more normalized weather we will not have. Then we have all these leakages that we will fix indicator, we will fix lysine, we will fix Golden Peanut and some of those leakages we didn't complete, as I said before, on time. And some of them have an overspill and we have an opportunity to get an extra maybe 50 million or a little bit north of 50 million in terms of leakages. Then we have the interventions that we made last year, the restructuring. There was about $200 million of potential savings but we captured only $80 million last year. So $120 million are coming in full fruition in 2020. Then we have the readiness that's going to contribute give or take another $250 million like they contributed this year. You know something between $200 million and $300 million, just $250 million to make it easy. And then we have the harvesting of some of the investments that we made and that's originally we have said something around the $100 million to $150 million. It is probably going to be a little bit higher than that since we underperformed a little bit on that in 2019. So those kind of kinds of algorithm. So that’s where we feel comfortable Ken because these are things that we have invested already for. We just need to bring them to the P&L. Readiness is a pipeline of projects that we have identified, not that we need to come up with those projects, we just need to execute into that. The interventions, I mean, these are things that we normally transition into. And the leakages are well controlled. The Decatur plant has the highest scoring grind in two years in December. Our wood milling has been yielding great also in Q4. Golden peanuts and Three Nuts is working well. So we feel good about our algorithm I would say.

So you are not really incorporating a material improvement in actual underlying fundamentals. It is more internal of the 500 million to 600 million. The majority of that is still internal operating improvement. And if you were to get improvement in the trade in it exports from China, imports from China, or exports to China for ethanol, or corn or bases all that stuff that’s not as much included in the numbers. Is that a fair assessment?

That is correct. When we plan and when we describe this number, this is all things that we can control. If we have a benefit from the expansion of margins from a Phase 1 deal because of exports or other things, that will be on top of these. We have planned some exports, of course, part of the deal, but we didn't plan a significant expansion of margins. We done the 500 to 600, all of the things that we can control, this scenario wouldn't change.

My last question, if I do the math also and I do it 20% plus on the WFSI and nutrition business growth that's associated with that, obviously it's over indexing the 500 to 600 relative to what the business represents as part of your core, what are the longer-term plans for that business, is that a business that should be part of ADM, is that a business that should be separated, how do you think of that as part of your portfolio, and how does it work within the portfolio or can it be a standalone to extract the incremental valuation, can you talk to that?

Sure, yes. We are very excited, of course, about the nutrition business. If you think about the nutrition business evolution, Ken, and I think that I talked about the evolution because it's important in terms of the linkage with ADM if you will. This is a business that started from having specialty proteins out of oilseeds and lots of fibers and emulsifiers and other products out of corn. So these are businesses that are tied to that and they created the nutrition business. And then, of course, we added WILD flavors for human nutrition and human nutrition is growing nicely. Then we added Neovia to complete our animal nutrition business and that's going very, very well. Now we are very excited about two development areas that we have; one is the health and wellness area with all the microbiome. That’s very synergistic with all the other stuff. That’s very synergistic with human nutrition and that’s very synergistic with animal nutrition as well. But we have a lot of opportunities there and running clinical trials and you saw the acquisition of Biopolis, the acquisition of Protexin, the acquisition now of Yerbalatina Phytoactives in the area of botanicals. So that's an area that is going to receive a lot of attention and a lot of resources to grow. And then we have the insipient area of fermentation that Ray described before, which is all these companies that are looking for sustainable materials. We are a fermentation company. We have a lot of capabilities, not only technical but also asset-wise. That’s an area that continues to grow. If you notice health and working capital is 44% and I think that is still a small base, but you will continue to see. So not only we have a vibrant and growing nutrition business, but we have the roots for perhaps the next nutrition business with that. So at this point in time, we continue to invest in that. We think that they are going to become a higher percentage of ADM operating profit and hopefully valuation will reflect that at the proper time. If we see that, that growth is not reflected in valuation, we will look at how to unlock that value. There are no sacred cows and you know us, Ken, and we're going to be very focused on unleashing that value. But at this point in time, we feel that the integration works well. We feel that the different business models don't conflict with each other. They are very synergistic at this point. So we feel good about it.

I really appreciate it. Thank you.

You're welcome.

Yeah, hi, I just wanted to dig a little bit deeper in terms of the sweetener and starches. I know you said -- you mentioned you were going to hold, hoping to hold the margin, but maybe you could provide us any sort of update on how the high fructose corn syrup negotiations have gone?

Like we mentioned, I mean they're completed. And I think in general we're able to maintain the margins that we had last year from a gross margin perspective, which, by the way, are healthy, right. I mean, we have been able to sustain that over the past couple of years. Really driving the improvements, it really is to the things that we can't control. And as one indicator, we did have leakages in the Decatur complex. It took us a while in order to kind of get the complex to be running at the rate that we want to. We got that done at the end of the year, but frankly, we thought we could get done sooner in the year. So that's going to be a positive delta for us in the starches and sweetener segment. We had weather issues, as you know, earlier in the year. High water conditions shut down some of our corn plants. We're hoping that doesn't repeat itself. That should be a positive delta also in terms of the starches and sweeteners segment. And then we've had some issues over in EMEA, over in Europe, whether it be at their Chamtor facility or over the Central European facilities. We've had an improvement in terms of market conditions as we move to the back part of the year. So hopefully that will continue, that should present a positive delta also in terms of our starches and sweetener segment. So again, on things that we can control, or some of the factors over in Europe, those are all positive tailwinds for our starches and sweetener business in 2020.

Okay, great. And then I know it's a little bit early to tell, but with the Coronavirus spreading throughout China. I mean, what impact or potential impact could that have on your business and I guess more specifically, I guess see if you could figure out a little bit between Ag Services and maybe the potential Wilmar business and whatever. But just trying to understand how this might have any impact on your business would be helpful?

Yeah. So, Mike, of course, I will first go out to those guys who have been impacted by the virus and we are monitoring the situation and the safety of our employees pretty closely. Actually, ADM has donated $150,000 to the China Red Cross to help their efforts to contain the virus. At this point in time, the impact to us in ADM is very difficult to assess so early on. We have about 1,100 employees in China, but our direct profits in China are small. Of course, our exposure is through Wilmar. Wilmar has two locations in Wuhan and of course, they are currently shut down because of Chinese New Year and we will wait for the authorities to see how those operations will come back. Shanghai is shut down until February 9th. We know that no employees from Wilmar have been infected, and of course, since Wilmar was going to shut down for Lunar New Year, they had inventory of products. So for normal demand, they can supply. We don't know exactly what's happening with distribution at this point in time within China, since the information is relatively scarce. So at this point in time, Wilmar issued a press release saying that we don't expect any significant impact on their businesses. So, of course, probably people going out, that type of entertainment and dining will be reduced. Some of the bulk products may be impacted in demand, but people will have to eat inside anyway. So in that sense, more the packaged foods would probably pick up a little bit. So at this point in time, we don't expect a significant impact on our business. How could that impact ADM in general? We are in a very fundamental business, which is the business of food. So I think that we will be impacted to the extent that the global GDP will be impacted and that will depend on the magnitude of that. Hopefully, the very high alert and very high response of the Chinese government will contain this. So again, we are trying to make everything possible, even contributing funds to help with the containment of this virus.

Thank you.

Good morning, thanks for taking the question. My first question is just as a clarification on two points. First, Ray, did you say that ANO operating income is anticipated to be flat for the full year in 2020 versus 2019, or were you referring to some sub-segment of ANO?

Are you referring to Ag Services and Oilseeds?

Yeah.

No, we didn't provide any full-year Ag Services and Oilseeds. We were saying that basically looking at Q1, overall Ag Services and Oilseeds should be lower but Ag Services. So the Ag Services part of Ag Services and Oilseeds should be in line with the year-over-year.

For Q1?

For Q1, all this is Q1.

Yeah, okay. And another clarification, on your 500 million to 600 million for the year, you're not including a benefit from the BTC in that?

No, we're not. That's right. I mean, all that is excluding biodiesel tax credit impacts. So the year-over-year comparison does not have the BTC in any of it and doesn't have the BTC in 2020. Just to make it an easy comparison for you.

Okay, good. And then my other question is in Argentina. So thank you for the new slides and the slide deck. They're very helpful. I was a little confused by the Argentina numbers. You're actually showing them a little lower than they were at the time of your call for Q3 and everything we're seeing and reading and then the dynamics there with this and all. It's all pointing to higher. So I'm just wondering if there's something I'm missing or if you could just help us understand that?

Yes. As you know, we have no crushers there. But everything we see at this point points to those nearby margins of about maybe single-digit margins. If you look at April or when you have the harvest, you're going to see more $10 to $15 maybe per ton, but that's on paper right now because right now the farmer is not selling the new crop. We're seeing some people crushing unpriced beans and as I said, we've seen crushers going all the way to Paraguay to get the beans. That's not a cheap way to supply yourself. So that's what is creating the compression to be honest. But that's all we know at this point in time.

But is it your anticipation that given the export taxes you mentioned earlier, these issues with the Centene, is your full expectation that Argentina will crush less this year or would you expect -- how are you thinking about their full year activity?

I think that Argentina maybe will crush the same amount. But I think it will be difficult to convince the farmer to give away the beans. As I said, as an Argentine, you can, the only way to protect yourself from inflation and devaluation is to be in dollars. And you cannot buy more than $200 today. So if you sell your crop, you cannot buy dollars. So people are holding on to the crop because the crop preserves the value in dollars. So unless the government does something different and changes the conditions that they are today, today the farmer will be a hoarder of their grain for the rest of the year. So my point is you will have to pay up because the farmer will only sell it when the prices are impossible to ignore. So that's kind of my view at this point in time. But things are very dynamic Heather. I mean, it's so difficult to project a year in Argentina. So I would say that's the situation right now. By the end of March, Argentina is supposed to conclude the negotiations with their debt, which will be a very important time to assess the year for Argentina because then you're going to know what could be done from a government perspective. At this point in time, there's very little room to maneuver and it's very difficult to predict in a highly political environment.

Okay, thank you so much for the color.

You're welcome, Heather.

I think. Good morning. Juan, I think you said that China took in about 20 million metric tons of soybean meal. I couldn't tell if that was all from Brazil or a lot from Brazil. As the U.S. becomes a bigger part of the export market after Phase 1, do you think it’s kind of a zero-sum game where Brazil exports less or do you think that overall China is just going to have to export or import more based on the timing of the herd rebuilding? And then I have a follow-up.

Yes. Let me clarify it Rob. I didn't mention that the U.S. and soybean meal to China. I said two things. I said that the U.S. has been exporting meal to nontraditional destinations like Spain and Germany and the Philippines. And then I said that the soybean meal demand in China has been resilient because of feeding more pigs and actually posted growth and aquaculture growth there, so sorry if I confused you with all those things. Regarding shifting between Brazil and Argentina, Brazil and the U.S., listen, I do believe that China intends to comply with the Phase 1 conditions of the deal. So in that sense, that has to come at the expense of Brazilian exports. So I think to a certain degree it is going to be a zero-sum game in which Brazil will export less if the U.S. will export more to China.

Thank you guys. Thanks for taking my question. I think SG&A on a GAAP basis was up close to a $100 million. Are there any kind of one-time items in there or is that just the year-over-year comparison this year with Neovia being in the results now, so how should we be thinking about the SG&A kind of on an underlying basis is what I'm getting at?

Yeah, you're exactly right. When you think about comparison, I'd look at GAAP SG&A on a year-over-year basis. There's been an increase actually due to the acquisitions that we've made Neovia, SCC Ziegler. Basically the SG&A cost actually come into the 2019 GAAP statements. So that accounts for the majority of the increase that we've seen in SG&A which also had some investments in IT and the business transformation and then that's partially offset by the savings that we've had regarding our workforce restructuring. The other thing to note is SG&A when we start bringing in more of the nutrition business into ADM, naturally the SG&A will go up. This is a component associated with nutrition on SG&A. So as our business mix continues to move towards more nutrition, you will see a little bit more on the SG&A line and that's primarily driven by the S part of it.

Hi, good morning. I was hoping Juan and Ray if you could talk a little bit on the corn side, just where we are on the strategic review advantage and just help us think about kind of the process there and what you see as the pathway to maybe separating that business over time and just in time on there?

Yes. So I think the team has done a good job on creating the wholly owned subsidiary, VCP that was launched on December 1st, as a sub-segment of Carbohydrate Solutions. I said it publicly and we're still discussing with a few parties. I can characterize those discussions as being in an advanced stage. So hopefully we will get to a resolution on that. We have a couple of alternatives, different types of deals that we're looking at. In the meantime, we think that some things have clarified itself since the last time we talked or at least presented a little bit of a better medium-term perspective for this business. Of course, ethanol is included in the Phase 1 agreement with China. So that's encouraging news. We have seen recently the courts issue on the SRD waivers. And that’s a positive that spike brings today that that happens is it sets a good precedent. We have seen also sugar prices come up over 20% since September, which is another important thing, as you know, that ethanol competes with sugar in Brazil for the production of that. So I think there are some encouraging signs for the medium term. A lot of despite the short-term difficulties, there seems to be significant interest in various parties to gain economies of scale. You know we have the largest dry mills out there. This is very important for consolidation to take place. So we're still optimistic about getting something done.

Right, that's very helpful. Then just a quick one for Ray on the unallocated corporate expense going up to $800 million, anyway you can kind of just sum up some of the key pieces of that year-on-year increase. I think you noted you're going to take some cost out of segments, specifically, how much is that and where will that be coming out? Just so we're clear on moving this?

Yeah. I mean, basically going up by roughly $150 million but I mean, a lot of it is the business transformation whereby we're making the investments so we are putting in the S for us investment into the company. So that's going to be a chunk of it. R&D ventures, we continue to invest in innovation, which is very important for the company. And then centralization. As we centralize global operations, as we centralized purchasing, as we centralized some of the global business services. That's going to be a shift in costs from the business units over to the central corporate allocated. So those are the main components of why the number will be going up overall.

Alright, super, I'll pass it on. Thanks.

Okay, thank you everyone. Just two really quick follow-ups. One, so funds for one. The nutrition business is really kind of a fall into Ken's question. The nutrition business is really starting to hit full stride here. Consistent with your comments that what happened several years ago, and I think your goal is that or your belief is that this division can be as much as 25% of total corporate profits. So if you look at last year's number of your total segment profits, that's roughly a double from here at some point. Can you share with us your thoughts as to the cadence of how that would come over without obviously giving no guidance per se, but how does that flow of earnings look for you over, let's say, the next two to three years for nutrition?

Yes. The objective is still there to get nutrition to be about 25% of operating profit. Of course, we don't want to do it by reducing the operating profit of other businesses. So that's why we focus on how much nutrition grows year-over-year. You heard Ray saying before we grew operating profits, 68% in the quarter and 23% year-over-year. Every year nutrition is kind of high in the quarter to the year, if you will, which is impressive. We plan to do it as we have done so far. So every now and then, we have a major acquisition that we did with Wild Flavors in 2014, then we did Neovia in 2018. So it was four years apart. In the meantime, in the in between, we did some bolt-on, we did some organic growth and we're going to do the same based on our capital allocation and our returns discipline. We are very, very mindful of that and we want to stick to that. So think about it again, our three main thrusts; human nutrition. That will continue to grow aggressively more than the market. Then we have animal nutrition. That's the same with the Neovia boost and the margin improvement story there. And then we have where we are probably going to be putting more money is the area of health and wellness and fermentation. Those are the areas that are growing very fast. But they are still very tiny today. That’s where you’re going to see the acceleration of growth. But I would say that the strategy will not change significantly in the sense that we’re going to have some transformational deals every now and then. But then bolt-ons and organic growth and that’s the way we build it. We expect to get to 25%, if that’s the question probably within the next three to four years.

Okay, perfect. Thank you for that insight. And then one final question, this is for Ray. Ray, you took a large asset impairment charge in the quarter, where did that charge come in, was it ethanol assets?

No, no, it is mainly Ag Services, Oilseeds assets. As we -- we kind of help, there is a term we use precision EVA, whereby we're looking at all the assets very carefully, determining what makes sense for us to keep, sell or fix or basically dispose of. So we took some charges related to some vessels, oceangoing vessels, we took some charges related to some businesses that we're going to divest. We took some charges related to some operations that we’re going to restructure. So I view it as part of the overall precision EVA that Ag Services and Oilseeds team is working on right now.

Okay, thanks for the clarity. We'll talk soon.

Thank you Eric. And now if you would… Go ahead Jack.

Thank you for joining us today. Slide 11 notes upcoming investor events in which 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.