Q3 2020 Archer-Daniels-Midland Co Earnings Call
[music].
Good morning, and welcome to the ATM third quarter Twentytwenty earnings Conference call. All lines have been placed on a listen only mode to prevent background noise. As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's call Victoria, Delaware, Gupp, Vice President Investor Relations for ATM, It's Delaware Duff you may begin.
Thank you Amy good morning, and welcome to 80, M. <unk> third quarter earnings webcast, starting tomorrow, a replay of today's webcast will be available at 80 M. dotcom.
For those following the presentation. Please turn to slide two the company's Safe Harbor statement, which says that some of our comments of 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. ATM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation and you should carefully review the assumptions in fact.
As in our SEC reports.
To the extent permitted under applicable law ATM 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 and our outlook.
Vincent Chawki senior Vice President and President of our Nutrition segment will give an update on our nutrition business and its future growth.
Then one will make some final comments after which they will take your questions.
Please turn now turn to slide three I will now turn the call over to Juan.
Thank you Victoria.
Last night, we reported third quarter adjusted earnings per share of 89 cents up from 77 in the prior year quarter.
Adjusted segment operating profit was $849 million.
11% year over year, and our trailing four quarter adjusted otherwise he was 8.3%.
I would have sufficient initiative scope continues to enable our teams around the world to demonstrate their expertise and skills.
Im proud of our colleagues are supporting customers and driving strong results.
The team has done a great job handling the daily sometimes are widely challenges that have come our way in 2020.
The resiliency allows us to deliver outstanding results today, while we simultaneously continue order were still a tissue work to make our company better and advance our growth and transformation.
Let me share with you some of our accomplishments.
You know were to optimize pillar.
I would like services and Oilseeds team continues its work to enhance returns delivered in another $100 million in invested capital reductions in the third quarter.
Since 2017.
Our services and oilseeds helped improve its capital position by excipient from no longer strategic offices.
Including 71 grain origination locations.
Six oilseeds facilities.
14, Golden peanut than three notes locations.
Seven ocean going vessels.
We've also seen the first scan how award improvement initiatives have helped drive business continuity.
In addition to the pandemic in recent months, we've seen multiple head weakens in the U.S. goals under the retro store that swept across the Midwest.
Despite those events thanks to our teams on our operational excellence.
We have continued to serve our customers and fulfill our purpose without significant interruption.
In our drive pillar.
We are continuing to accelerate our were one ATM business transformation expense.
Expanding the deployment of our procurement contract labor and sales and marketing modules.
Which are helping us drive efficiencies and growth I will provide us with a trove of data to support enhanced analytics and decision making.
Our Decatur corn complex ongoing strong performance.
From a grind to Glutenin Gert germ deal to workplace safety continues to demonstrate the benefits of our centralized operations organization.
Our supply chain Center of excellence is delivered in this world.
Using our enhanced processes and tools as well as integrated planning between commercial supply chain and operations.
We've recently piloted changes our demonstration facility that are on track to our local 20 plus percent increase in production capacity at that location I.
I have already resulted in enhancements in customer service without additional capital spending.
We'll be rolling these kinds of improvements out to other locations.
In our expand pillar.
We're continuing to harvest our investments.
For example year to date, our algo, our grow acquisition 'cause tripled year over year operating profit.
In a very short time oliger has grown to be an important component of the South American business.
We have successfully expanded production of high quality USPI grade alcohol in Peoria and clinical to me its high demand for hand sanitizer.
We announced the construction of a new state of the art production facility in Spain that will dramatically expand our ability to meet growing demand for probiotics and other consumer products to support health and wellness.
We also signed a long term agreement with Japanese startups fiber Inc.
This project taps into our innovative spirit and capabilities, creating value from across our supply chain from the corn goodbye to the dextrose, we make to the science on manufacturing technology, we have invested in.
And it meets a critical needs in the marketplace for both consumer and industrial products that come from sustainable sources.
Our transformation and growth and our confidence in the future will not be possible without readiness.
By the end of the third quarter, our team identified and executed on readiness initiatives that are locked almost $1.2 billion in run rate benefits.
And now I'm pleased to announce that we are on track to achieve $1.3 billion by the end of the year.
Readiness encompasses and supports our entire company.
It drives the strategic imperatives that help us fulfill our purpose such as sustainability.
We are advancing our sustainability efforts on many fronts, such as our stripes 35 goals to improve our performance on greenhouse gases energy water and waste.
Readiness creates growth enables.
For example, we're continuing to elevate our commercial excellence with innovative tools like our consumer insight programs from virtual customer technology.
And of course readiness is one of the key elements powering the growth algorithm, we laid out at the beginning of the year.
Because of his success along with tremendous progress in our harvest and improve initiatives. We now expect to meet or exceed the high end of our $500 million to $600 million goal for targeted improvements in 2020.
So before I turn to Ray I'd like to say that this our pleasure to welcome Vince today on this call.
In 2014 were starting a new journey with the acquisition of Wild flavors and the launch of a full service nutrition business offer.
Offering customers, a broader array of products and services.
I could not be more proud of the growth we have seen since then.
The nutrition has delivered its fifth consecutive orders of 20 plus percent year over year opioid growth.
Revenue is up 5.7% on a currency adjusted basis for the first nine months of the year.
And in the years since we acquired while we are nearly tripled opie in the flavors business.
As we've been getting more and more questions about that business and its growth potential we decided that it was the perfect time to update and explain the business for us but.
But before we get to Vince, though I'll turn it over to raise to take us through our business performance right. Thanks Juan.
Please turn to slide number four.
As one mention adjusted EPS for the quarter was 89 cents up from the 77 cents in the prior year quarter.
Excluding specified items adjusted segment operating profit was $849 million up 11%.
And our trailing trailing four quarter average adjusted ROI see was 8.3% 255 basis points higher than our 2020 annual WACC.
Our trailing four quarter adjusted EBITDA was about $3.7 billion.
Our cash flows are strong as we generated about $2.3 billion of cash from operations before working capital for the first nine months the year.
The effective tax rate for the third quarter was a benefit of approximately 13% compared to an expense of 19% in the prior year.
Our Q3 tax rate was impacted by our debt retirement actions as well as the sale of our Walmart shares in higher year over year, Walmart earnings and use tax credits.
Absent the effect of EPS adjusting items, our effective tax rate was approximately 11%.
We expect our adjusted tax rate for Q4 to be similar to this adjusted Q3 effective tax rate.
As we announced at various points. During Q3, we have taken several actions over the last few months to both utilize enhance our strong balance sheet.
These actions were not above cash flow liquidity as we had cash and available credit capacity at the end of the quarter of almost $10 billion.
They were about creating balance sheet optionality for future transactions, while maintaining a strong credit rating profile.
We monetized a portion of our Walmart investment through a block sale of Wal Mart's stock and the issuance of bonds exchangeable for Walmart shares at a future date.
As we have indicated we view our significant remaining Walmart stake as strategic and we do not have any intentions to sell additional shares.
Leveraging our strong cash position, we also we balance our mix between long and short term debt.
Economically retiring higher coupon debt through positive NPV transactions and reducing interest expense.
In the future.
Combined these actions allow us the flexibility to make strategic investments to further bolt on acquisitions or buyback shares when it makes sense to do so all while continuing to make progress in de leveraging our balance sheet and maintaining our single a credit ratings.
These actions were also significant driver of our tax rate.
Return of capital for the first nine months was $724 million, including around $115 million in opportunistic share repurchases. The vast majority of which were executed earlier this year.
We finished the quarter with a net debt to total capital ratio of about 27% down from the 30% a year ago.
Capital spending for the first nine months was about eight $560 million, we expect capital spending for the year to be around $800 million that we previously indicated and well below our depreciation and amortization rate of about $1 billion.
Slide five please.
Other business results were lower than the prior year quarter, driven by lower ATM Investor services earnings and captive insurance underwriting losses, including a $17 million settlement impact for the high water claim with AG services and oilseeds.
In the corporate line unallocated corporate costs of $196 million were higher year over year, due primarily to variable performance related incentive compensation pools, which were low in the prior year.
Corporate results. This quarter also included $396 million related to early debt retirement charges that I referred to earlier, which is an EPS adjustment item.
Net interest expense for the quarter was similar to the prior year period.
Looking forward, we expect unallocated corporate expenses to be in line with our initial $800 million guidance fourth calendar year, and Q4 net interest expense to be slightly lower than Q3.
We also expect a loss of about $50 million in other business in Q4 due to anticipated intercompany insurance claim settlements.
Please turn to slide six.
AG services in Oilseeds results were higher than the third quarter of 2018 in AG services, we saw extremely good execution around the globe the.
The North American team did well to capitalize on strong industry export margins and volumes and a global trade team had another strong quarter as they continued their focus on serving customers.
AG services also benefit from a $54 million settlement related to the 2018 years high water insurance claims, which is partially offset by an expense in captive insurance.
The crushing team also did a great job executing in a solid demand environment.
Both AG services in crushing saw expanding margins during the quarter, resulting in around $155 million in total negative timing effects, which led to lower results.
Those timing impacts are expected to reverse in the coming quarters.
Refined products and other was significantly higher year over year, driven by improved bio diesel margins around the globe.
Equity earnings from Walmart were substantially higher versus the prior year period.
Looking ahead, we expect to see strong North American exports in global crush margins in the fourth quarter combined to contribute to a very strong AG services in oilseeds performance.
With results significantly higher than the third quarter of this year, though lower than Q4 of 2019, which included a $270 million benefit for two years of the retroactive bio diesel tax credit.
Slide seven please.
Carbohydrate solution results were significantly higher year over year. This.
The starches and sweeteners sub segment was substantially higher driven by strong risk management and improved net corn costs as well as a balanced ethanol industry supply and demand environment.
Reduced foodservice demand affected sweetener and flower volumes that we're seeing good demand recovery for starches in North America.
The vantage corn processors team did a good job executing on the wet mill fuel ethanol distribution and capitalizing on higher year over year industry margins, while managing the fixed cost from the two temporarily idled dry mills.
Increased volumes and margins on U.S.P. grade industrial alcohol to support the hand sanitizer market also contributed to higher year over year profits.
Looking ahead, we expect the fourth quarter for carbohydrate solutions to be close to Q3 of this year in substantially higher than the fourth quarter of 2019, driven by improved year over year fuel ethanol margins in higher industrial grade sales.
While sweetener and flower volumes will still be impacted by weaker foodservice demand, we expect the year over year percentage decline to be smaller than it was in Q3.
On slide eight nutrition delivered its fifth consecutive quarter of 20 plus percent year over year profit growth humor.
Human nutrition results were substantially higher versus the prior year quarter with strength across the entire pantry, including flavors plant based proteins and probiotics.
Animal nutrition was also higher year over year, driven by continued delivery of new you'll be on synergies strengthen livestock and year over year improvement in amino acids, partially offset by softer aquaculture feed demand as well as negative foreign currency impacts.
Looking ahead to the fourth quarter, we expect nutrition to deliver another quarter of 20 plus percent year over year or peak growth with a typically seasonally weaker Q4 in human nutrition offset by seasonally stronger animal nutrition.
I'd now like to transition to Vincent Shockey, President of our nutrition business for an update and overview of the business.
Vince Congratulations to you and your team for not just a great quarter for for consistent delivery of strong growth.
Thank you Ray slide nine please I'm proud of the team who delivered in so many ways when I reflect upon the growth. We've made in the journey. We are still taking I keep coming back to our purpose to unlock the power of nature to enrich the quality of life I think its remarkable how these few words some of not just what we do.
But why our work is so important.
Global population is growing and consumer behavior is shifting in ways. We couldn't have predicted only 10 or 15 years ago. The.
The scale of the change in the opportunity for ATM is enormous.
Global sales of specialty ingredients across both human and animal nutrition are as much as 85 billion and growing at a rate of 5% to 7% per year.
These specialty ingredients, which represent the majority of the nutrition portfolio aside from fee go into the full array of consumer nutrition products for humans and animals, many of which are projected to grow significantly in the coming years per.
For example, global market for functional beverages could be as large as 190 billion in 2024, but.
The global dietary supplement market could be worth more than $77 billion in that same timeframe global.
Global retail sales of alternative proteins are already at $25 billion market today with a projected growth rate of 14% per year.
Global retail sales of pet food are projected to grow at 4% per year, reaching 120 billion by 2024.
These are just numbers they are indicators of significant long term trends and how people choose food drink and other products driven by a global population that cares deeply about health and sustainability.
And based upon the portfolio footprint capabilities and talent. We've built no. Other company has positioned to meet these needs and lead in these industries like ATM.
Please please turn to slide 10.
It's been six years since we started on this journey in that time, we filter expanded more than 16 facilities.
From our Pea protein complex in the us through our network of premix plants in China.
Weve enhanced our science and technology capabilities invested in market research and consumer insights and build new interactive ways to engage with customers for more than 50 global customer innovation centers to daily virtual innovation and tasting sessions.
We've made platform acquisitions, and we've added bolt ons all in all we've invested just over 6 billion to build our global leadership position in nutrition.
These investments are delivering results since 2014, we've increased our annual revenue by 3 billion and by the end of this year, we will have grown operating profits by more than $300 million over those six years more than double.
Slide 11 please.
Our human nutrition business can offer customers ingredients flavor systems or turnkey product development solutions supporting them every step of the way to take their ideas from concept to prototype to market in record time.
And animal nutrition, only a year and a half after we completed our new yoga acquisition. We can look back on a successful integration in which we exceeded our synergy goals and built a global business that offers a full portfolio of on trend items from pet treats the enzymes to ingredients for agriculture to meet evolving customer needs.
And our health and wellness business, which is part of our human nutrition sub segment. Our scientists are expanding the universe of pro pre and post biotics and other functional products to meet growing demand from standalone supplements to ingredients that help enhance our array of human and animal solutions.
Taken together are extremely broad portfolio of ingredients and solution can add value for customers across both human and animal nutrition for instance, tasting color just as important for animal nutrition customers today as they are for food and beverage customers functional ingredients matter in both human and animal nutrition and so on across our entire.
Pantry.
Then we have the rest of abiam's capabilities.
And plant based protein for example, we have the unique advantage of ATM broad and integrated value chain.
From sourcing and transporting the soy soybeans NPS to transforming them into high protein ingredients on our own facilities to adding the colors flavors oils and other key elements to create just the right pace appearance Juicy in essence sizzle for delicious finished plant based products.
Please turn to slide 12.
We're proud to have come this far in six short years, but our eyes on the future.
We are confident in continuing our growth story it starts with the global category trends I outlined earlier it continues with our extensive and ongoing research into consumer behavior and gains.
Earlier. This week, we released our latest view of the top the top consumer trends of 2021 based upon research that includes our proprietary outside voice consumer insights program.
Our findings show that the events of the past year are accelerating and deepening fundamental market shifts.
Including consumers, taking a more proactive approach to nursing body in mine.
The microbiome as the gateway to wellness continue.
Continued growing demand for plant based foods.
Sustainability as a key driver of purchasing decisions and transparency as a building block of consumer Trups.
The last piece of the equation is how our team brings it all together for our customers combining unmatched customer support and service with our vast value chains to deliver ingredient systems and solutions that align perfectly with market trends and needs.
These are the reasons, we expect to continue to lead the industry outpacing the market and operating profit growth and.
And we remain confident in reaching $1 billion in LP in the medium term future with that I will turn it back for long.
Thank you Vince and congratulations to you and entire ATM team for another outstanding quarter.
Slide 13 please.
Across the enterprise.
We are continuing to advance our work to enrich the quality of life and meet key needs for consumers around the globe.
At the time of heightened concerns around food security.
EMS Boston.
Global value chain is helping ensure that come through some families can continue to put nutritious delicious food on the table.
As consumers focus more and more on proactive approaches to health.
We are expanding the frontier in groundbreaking functional ingredients on supplement for people with conditions like migraines and atopic dermatitis.
And we are paving the way to a whole new world of precision nutrition personalized for Liberty individually.
And our sustainability becomes a key driver of consumer decision some business success will.
We're playing a leading role in the transition to a low carbon economy for our industry.
We are committed to our purpose.
Our team is continuing to deliver for our customers our shareholders and.
All who depend on us.
And that is why we are confident in the strong finish to 220 20.
On the positive momentum continuing through to any to anyone.
With that Amy Please open the line for questions.
Thank you at this time, we will be conducting a question and answer session Julie.
For many questions as possible we ask that you. Please limit your questions to one question with one related follow up you May then we actually the queue for any additional questions. Your first question comes from the line of Eric Larson with Seaport Global Your line is open.
Yes. Thank you good morning, everyone and congratulations on a really good quarter. Thanks.
Thank you clarity on.
Hi, My first question is really prevent then thank you for that that.
That review of your of your operation.
And I am going back to slide 11, I'm going to your complete pantry of ingredients and solutions from nature. So.
We've seen some pretty massive consolidation in this in this industry now the last several years with IMF, making Nelson.
Some very large acquisition to an extraordinary multiples can you give us just a little flavor for if you look at the various categories, where where you've got your pantry.
What your shares are in those areas roughly I know it's highly fragmented.
Where additional opportunity might be avail.
Available for you outs outside of your normal organic growth I mean would there be some opportunities to two.
To strengthen your portfolio across both various sector Sem and where do you think your biggest strengths are and maybe where you could use some strengthening in those areas.
Thank you there.
I think if you think about our business and maybe I'll start kind of where you finished in terms of some of our greatest strength I think our greatest strength are obviously, the breadth and depth of the pantry, coupled with our technical capabilities and providing solutions backed by science I think you also marry that with the global consumer trends when you weigh youth.
Think about.
So my focus on the microbiome focused on plant based foods sustainability and good for you.
Do you think about clean label moving to clear label, our portfolio is really well positioned when you think about our flavors business in the focus on natural and our continued growth in the mature market and as we expand our footprint into the to the to the emerging markets specialty ingredients. Obviously, we have a dominant share as a key.
Protein.
Protein provider and we're providing soy MP in wheat from a from a plant.