Q3 2019 Earnings Call

We announced an agreement with LG Chem to develop sustainable souped up sort of and polymers.

Readiness continues to underpin our strategic work I helped drive our results.

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 22 anyway.

As of the end of the third quarter readiness had contributed close to $200 million in 2018 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 or 40000 has now completed our comprehensive ability to execute or eight to eat training 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're entering a new phase of readiness.

We are moving onto a more complex to more complex process that will take longer to complete but we'll deliver more fundamental changes to how would run our company.

And more importantly, they are long lasting.

These changes will make ATM better for the long Brian .

I'll discuss readiness more later now Ray will take us through our business performance rate.

Beginning this quarter, we are simplifying the financial information that always 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.

Turning for the years forecast to be around $850 million inline with our previous guidance of $800 million to $900 million.

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 the 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 seven cents per share in the LIFO credit of $16 million or two cents per share.

Please turn to slide number seven.

Our newly combined AG services in 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 week us export environment.

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.

Walmart results were lower year over year.

Now looking ahead to the fourth quarter, we expect AG services in 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 in crushing expected to be sequentially down.

Slide eight please.

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 starts volumes remain steady.

In wheat milling an increase in sales volume was more than offset by lower margins due to limited opportunities in wheat procurement.

Vial products results were significantly lower driven by high industry inventories and higher net corn costs in North America, leading to a challenged industry margin environment.

From the us and by the small refineries 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 and carbohydrate solutions to remain challenged.

But with a continued benefits of our improvements at the Decatur complex, we expect fourth quarter results to be sequentially similar to the quarter just ended.

Nutrition results were substantially higher with operating profits approaching double the year goal quarter.

W. F S. I 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 continued to expand powered by our leadership position in supplying solutions to meet growing customer demand for alternative proteins.

Continue contributions from our growth investments in bioactive and fibers support at higher results into health and wellness business.

Animal nutrition results were up substantially year over year as our new Olivia acquisition continues to contribute.

Vitamin additives were another strong performer, particularly coming off the year goal period when margins were significantly compressed.

With a robust pipeline of new opportunities and continued benefits from investments, we expect nutrition stools story to continue in the fourth quarter with results once again approaching double the prior year fourth quarter profit of $62 million.

The Olivia will contribute to improve animal nutrition results, though results will be impacted by the excess lysine production in world markets.

One.

Thank you Ray.

As Ray explains market conditions in the third quarter remained challenging.

We're both delivers our with under our control to turning a solid performance.

I appreciate the team would work.

We also continued to focus on the three key areas. So far were to growth on returns Odeon.

First we improved underperforming businesses.

Golden peanut than putting us our would indicate or complex unlicensed production at all showing improved results.

And we're now targeting December 1st.

For the loan charge offs.

Vintage calling processors are were standalone ethanol subsidiary.

This is an important step as we continue to evaluate the strategic alternatives for our dry mills.

Second.

Readiness continues to support our efforts to make ATM and more efficient more innovative on more to customer focused company.

For example, we've completed the pilot program in one of our oilseeds processing facilities that the utilizes advanced analytics to deliver real time analysis on front of production data significantly increasing the efficiency and quality.

We're now rolling this technology out to more plans leveraging the sensoryeffects overland structure, we put into place port our global operations.

We've also filings within our rolling out and innovative data mining and analytics package that will provide our merchandising than sales teams with an important new toolset to better capture market opportunities.

We're also seeing good progress on results from the third pillar of our what algorithm.

Arctic harvesting our growth investments.

But at the beginning of the year, we said, we expected 2019 to be a breakout year for nutrition.

Our nutrition business has delivered $316 million in adjusted operating profit.

Just shy of that postcode for all of 2018.

I would also seeing the benefits of benefits of growth in our core businesses.

From our expanding as PV loading them destination marketing businesses.

Through our we're increasing capabilities in food grade and industrial starches.

We're making good progress. However, when we believe are what results. This quarter were solid in the context of the external headwinds we face.

Our team Nevertheless, it's not satisfied.

Are still more we can I will do to reach our will return so projectors.

Looking ahead.

We expect some external headwinds to continue their foreseeable future.

Conditions are fluid.

However, external conditions growth orbit do not change our fundamental plan.

We will remain focused on taking actions under our control to improve our near term results.

Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad.

Eric Larson with Buckingham Research your line is open.

Yes, good morning, everyone.

Hey, good morning Air ordinary.

So my first my first question is Ray's comments on fourth quarter AG services itself.

Obviously, we don't know your ownership positions and the depth segment was actually quite a bit stronger than I had thought for the quarter. So.

When you look at.

When you look at kind of the difficult harvest, maybe farmers holding pretty tight to new crop.

The limiting some of your merchandising opportunities how that how does the fourth quarter of all that play into your outlook for the fourth quarter.

Yes, I think you're right and indeed general export environment remains somewhat challenge for the entire USL agricultural industry, but sequentially Miramar, we're having a later harvest. This year. So we will be will be procuring I mean, we have procured a lot. We will continue to procure we won't be exporting a lot of the to markets.

Outside of China.

The other thing to note is that with the with the wet harvest that we're having we are anticipating to gain some significant drying revenue as well within our business.

And then also just want to remind people that are AG services Division really has diversified significantly and so when you take a look at some of the other businesses such as to stevedoring business such as the global trade business, such as a destination marketing business every year those businesses and represent a greater contribution to our overall result.

Within AG services, so as I indicated in the call me, we do believe on a sequential bases exit results will be stronger in the fourth quarter compared to third quarter.

Okay, but.

On a year over year on year over year basis would you expect to to be flat down up sequentially, obviously, a little bit better than Q3, but.

How might that compared with Q4.

Yes, one year ago versus versus last year, it, but probably be similar to slightly better are directionally in that area is based on what we're seeing here.

Okay. So and then the combination of crush your crushing results and Walmart I would assume that that will Mars facing some pretty tough comps in Q4 is all that 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 against the Crusher. These.

Compared to the third quarter crush should we expect to be sequentially down in the fourth quarter compared to third quarter again, a lot of it'd be a function great questions can evolve right in the fourth quarter on a case of Walmart I mean, Walmart be announcing earnings in a couple of weeks. So I think you'll you'll have a better perspective in terms of what it means for fourth quarter.

After Walmart announces its results there.

Okay. Thank you I'll I'll pass it on.

You.

And game menu with Stephens Your line is open.

Hey, Thanks, good morning.

Good morning.

Ask a question relates to Argentina, given the political change there and the prospect for a potential return to elevated export taxes is it possible that dynamic at that constricts. The exports of oil fields derivative products out of Argentina that could be.

Net positive for your.

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 juxtaposing that with.

Generally weaker meal demand out of filling Philippines, and Vietnam as far north of the asaph in the near term would be helpful. Thanks.

Yeah, Ben So Argentina change governments and.

Of course parts of these government in their previous experiences skus, some export taxes for for the country.

The country faces significant pays so they are there going forward or so of course, the economic situation is to be consolidates and obviously the and the RV industry is one of the biggest revenue producers of Argentina. So so they're possibilities there we don't know yet December defenses.

When they take forward I would say at this point in time, what's happening in Argentina is crashes down.

Because basically the farmer given the results of the elections are holding through their grain. So in that sense, we see we see lower to crush which is filled with a total for.

Profitability in Europe , I would say when cash from Argentina is low so whether that's going to happen next year or not.

On to what degree I think we will have to wait until December .

Your second question was on soybean meal demand.

We actually continued to see.

The strength outside China were forecasts outside China soybean meal growth is about 30% on although there are lots of headlines about a assaf, maybe 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 this field.

Discussions about China does that these what the gap in propane is and I would say if you look at China and with the information we can get it feels to me that the decline in the hair has peaked or bolt on whatever you are perspective, you summed up and I think that the incentives.

Because prices are at a given on the producers are having record profits right now in China. They are starting to think about how to rebuild the hurt a lot of them have shifted to about a third of the them have shifted into poultry production that has softened a little bit the decline in soybean meal because.

Honestly you need to feed them on a lot of people are looking at more sophisticated meals.

Because.

The whole production is being is being more professionalizing. The standards had rising. So so I think that people are looking for higher quality food producers are high quality feed of which soybean meal is inclusive in Dod. There's also these big prices, Doug we helped support for can play inflation has created that they.

Incentive to to increase wait before slow 30, and so we've seen higher feeds on any Marcellus wells. So so I think in general we continued to be.

To be positive about soybean meal demand going forward, where we don't see a significant decline of course I.

I would say you will have the violence.

Rebuild of the herd of in China, I know all the things in China are going to be positive to demand.

Expansion in southeast Asia is negative to them on but I think given the magnitude of both.

We are not that concern about the expansion in southeast Asia.

Okay very helpful. My second question relates to.

Ethanol business you mentioned the formation of subsidiary.

Curious around current improvement that we've seen in and stocks or production levels kind of dip in mid September they've been steadily climbing back we have a lot of idle 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 or in the intermediate term.

Yeah, I think a couple things as one as one indicate we are seeing update to stand on ethanol subsidiary as of December one I'm just for context, starting January one we will report vantage corn processors as a separate sub segment, but then carbohydrate solutions. So clearly we're in a process of making sure transaction.

These are occurring between the new subsidiary with a with ATM and so were what we're well underway in and the good news is we've got a quite a few interested parties that we're talking to right now at the Nick So stages about some form of up sale joint venture or other type of structure transactions. So we're we're along.

Yeah, well long or away there in terms of our strategic alternatives. You are correct. There has been idling of facilities idling of production in United States with respect to ethanol I think the ethanol margin environment. This year clearly has been extremely challenging and and as a result production level have come down and Thats Frank.

Resulted in ethanol margins in the industry improving.

In the month of September after Labor day.

By the way, it's 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 Theres, probably being an increase a little bit of an increase in terms of production recently well 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 balance 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 and he was trying to trade regarding ethanol are important.

As a additional catalyst in terms of driving incremental demand for ethanol, which by the way. It when you when we buy ethanol relaxing Bryant buying corn.

From United States, and so that's for the U.S. agricultural industry. This is actually a very important part of the of the discussions here. We also at the special refinery exemptions with had clearly has had some negative impact in 2019, but again there is further discussions in terms of that as we go forward. So I think that you know it when you take a look.

Look at 2020, you asked the question can it get worse than what we've seen in 2019. Thank you very difficult to see us to narrow body industry ethanol margins in 2020 being worse than 2019, because it's been tough in 2019, I'm somewhat encouraged to seeing idling. The facility. So there seems to be a little bit more this up.

Alan within the industry right now in terms of just trying to better match supply and demand.

Again, I do believe that it is important that the U.S. ethanol industry is strong because that results in basically to use to agricultural industry being strong.

And so therefore, we remain optimistic that will get towards some solution that will drive incremental demand and hence stronger ethanol margins in the future for industry here.

Okay, great. Thanks for your thoughts.

Tom Salmon attached with Jpmorgan Your line is open.

Good morning don't Hey, Tom Good morning.

I am so just following up on on ethanol.

Could you give us your expectations for U.S. ethanol exports and 2020 with and without China.

Yeah, I mean, I think that 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, but be a functional when do you get towards the trade deal and how that is phased in.

We've always talked about the fact that China, if they move towards them. He can national Glenn for the country based upon our calculations it could easily by 1 billion gallons from United States I mean, because the deficit is fairly significant in terms of China production relative to their overall demand.

Now, let number ultimately will get towards in terms of a trade negotiate thats to be determine based upon I suspect the phase in in terms of gallonage overtime here. So I 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% and the 2019 20 marketing year to date when do you expect competition to ease at current exchange rates and U.S.J. protect us classical was down 8%. This maxing the mix. It is still a long way to guide, but how realistic is that projection.

Well I think that is true right now you us corn is not that competitive relative to say South America.

I mean, we do expect that eventually.