Q3 2024 Archer-Daniels-Midland Co Earnings Call
Juan Luciano, Sara Abashami, Denisus Baldea Ferrara Megan Britt, Juan Luciano, Megan Britt, and Jonathan Black Justin Huntley, Laura's Bikini
Speaker Change: Good morning and welcome to the ADM third quarter 2024 earnings conference call. All lines being placed on a listen-only mode to prevent background noise.
As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's call, Megan Britt, Vice President, Investor Relations for ADM. Ms. Britt, you may begin.
Speaker Change: Hello and welcome to the third quarter earnings call for ADM. Our prepared remarks today will be led by Juan Luciano, Chair of the Board and Chief Executive Officer, and Monish Patilawala, our EVP and Chief Financial Officer.
Speaker Change: We have prepared presentation slides to supplement our remarks on the call today, which are posted on the Investor Relations section of the ADM website and through the link to our webcast.
Speaker Change: Some of our comments and materials may constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results.
Speaker Change: These statements and materials are based on many assumptions and factors that are subject to numerous risks and uncertainties.
Speaker Change: ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation and the materials.
Speaker Change: To the extent permitted by law, ADM assumes no obligation to update any forward-looking statements due to new information or future events.
Speaker Change: In addition, during today's call, we will refer to certain non-GAAP or adjusted financial measures.
Speaker Change: Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are available on our earnings press release and presentation slides, which can be found in the investor relations section of the ADM website.
Speaker Change: Please turn to slide four. I'll now turn the call over to Juan. Thank you, Megan.
Juan Luciano: Hello and welcome to all who have joined the call. We sincerely appreciate your patience as we work expeditiously to amend the company's fiscal year 2023 Form 10-K and Form 10-Qs for the first and second quarters of 2024.
Juan Luciano: We are pleased to now be able to share more context about our 2024 year-to-date financial results and our outlook.
Juan Luciano: Given that we're holding this call later than usual, we're also in a position to provide qualitative color on how the fourth quarter is progressing.
To start, let's recap our financial results for the company.
Juan Luciano: ADM reported third quarter adjusted earnings per share of $1.09 and a total segment operating profit of $1 billion.
Juan Luciano: This brings adjusted earnings per share to $3.61 and our total segment operating profit to $3.2 billion year-to-date for 2024.
Our trailing for quarter adjusted ROIC was 8.8%.
I'm going to be a little bit more nervous.
Juan Luciano: Although we made progress on several important initiatives in 2024, these results are not consistent with the high bar that we have set for our team.
Juan Luciano: While we have seen a decline in our total segment operating profit and a decline in operating cash flow before working capital changes due to lower net earnings relative to the prior year period, disciplined management of our balance sheet continues to allow us to invest in our business and return cash to shareholders.
Juan Luciano: In total, we have returned $3.1 billion to our shareholders, with $744 million in the form of dividends and $2.3 billion in share repurchases year-to-date in 2024.
Next slide, please.
Juan Luciano: Entering 2024, we laid out key priorities for value creation based on the year we saw ahead of us.
Juan Luciano: And as we moved into the fourth quarter, it's clear that certain expectations have not all played out as anticipated.
The global commodity landscape has continued to shift.
Stronger-than-expected supply has driven commodity prices down further than anticipated.
Juan Luciano: Canola crash margins have been negatively impacted by regulatory uncertainty and higher seed prices.
Juan Luciano: In addition, China has begun to increase local commodity production and has had slower pace of demand recovery, negatively impacting the trade of certain commodities and uptake of animal nutrition solutions.
Juan Luciano: We're also seeing the trailing effects of inflation in part of our business.
Juan Luciano: Some new nutrition projects have been delayed as some customers look for opportunities to manage costs by simplifying their consumer offerings.
Juan Luciano: We have also seen some softness in demand in other end markets, such as pet treats and energy drinks, where consumers are prioritizing their discretionary spending.
The global regulatory environment has led to additional uncertainties.
Juan Luciano: Programs such as EUDR and the U.S. Producers Tax Credit are still not fully in place, which has left various stakeholders in the ag supply chain without the confidence of a clear path forward.
Juan Luciano: Beyond these external factors creating downward pressure, we are also managing through a balance of both positive and challenging results across our own operational environment.
Juan Luciano: In carbohydrate solutions, we've been able to improve production throughout the network in part due to advancement in automation and digitization at the plant level, as well as by finding synergies across our milling network.
Juan Luciano: We've seen similar improvements in our crash facilities in LATAM and EMEA, but this has been offset today by the fact that opportunities previously identified in some of our U.S. plants have been taking longer than expected to be completed.
Juan Luciano: However, in October, we began to see improvements in unplanned downtime in our U.S. facilities.
Juan Luciano: Nutrition has continued to manage through the downtime of our Decatur East facility, where our expected ramp-up has been delayed from the end of 2024 to the first quarter of 2025, as safe restoration of operations is a top priority.
Juan Luciano: And while the integration of our most recent flavor acquisitions has driven positive results, we have experienced demand fulfillment issues due to the complexity of other integration efforts.
Juan Luciano: We believe that our business is well-positioned to grow alongside enduring global trends, such as the expansion of functional food and beverage alternatives.
Juan Luciano: As we look at the near term in 2025, however, we anticipate that we could still be managing through a challenging cycle, and we have already begun taking necessary productivity actions with a clear focus on cost and cash management.
Juan Luciano: This slide highlights several of the areas we have already taken action on in 2024, along with additional actions we are aggressively driving at the end of the year.
Juan Luciano: As we manage through the current cycle, we've seen success in delivering expansion across strategic initiatives such as Regen Ag, BioSolutions, and Destination Marketing, which achieved record volume handled in October.
Juan Luciano: supporting supply and demand needs through increasing capacity. This is example in our Spirit Wood facility which has achieved near full run rates in the month of October.
Juan Luciano: and in ramping up the Drive for Execution Excellence program, which has already begun to deliver toward our cost-saving goals.
Juan Luciano: Moving forward, as we expand our focus on procurement and execution excellence, we believe that we can double this program's target cost savings over the next few years.
Juan Luciano: In addition, the automation and digitization efforts that have already achieved millions in cost savings are being scoped and accelerated across the other plants in our footprint.
Turning to nutrition recovery efforts.
Juan Luciano: To date, we have strengthened our operational leadership, driven simplification and optimization opportunities, and continued to expand our pipeline and win rates in part of the portfolio, such as flavors.
Juan Luciano: These efforts are now being supplemented to increase the pace of recovery. We have placed additional focus on demand generation, supply chain improvement, and right size in our production to better flex to the needs of a dynamic demand environment.
And finally, from a strategic capital allocation perspective.
Juan Luciano: We have already accelerated our return of cash to shareholders this year in the form of share repurchases and dividends.
Juan Luciano: Going forward, we're being extremely prudent and focusing our attention on cash generation opportunities while considering specific portfolio optimization efforts to simplify operations, enhance our focus, and drive an improvement in ROIC.
Juan Luciano: Along with all these actions, Monish joining us, CFO, has already brought new perspectives to the team.
Juan Luciano: We are using his experience to help identify and accelerate paths for continuous recovery.
Speaker Change: With this, let me pass to Monish for a more detailed financial review. Monish?
Monish Patilawala: Thank you Juan. First, I would like to take a moment to say how excited I am to be joining the ADM team at such an important point in the company's trajectory.
Monish Patilawala: While I've only been on the job for a few months, I have enjoyed the opportunity to personally engage with our team and learn the company.
Monish Patilawala: I want to thank all my ADM colleagues for their warm welcome.
Turning to slide 6.
Monish Patilawala: On a year-to-date basis, AS&O's segment operating profit of $1.8 billion was 42% lower versus the prior year period, as ample supplies out of South America have driven lower commodity prices and margins across the segment.
Monish Patilawala: Ag services sub-segment operating profit of $461 was 52% lower versus the prior year driven by lower South American origination margins and volumes, in part due to industry take-or-pay contracts.
Monish Patilawala: The stabilization of trade flows has also led to fewer opportunities in our global trade business, leading to lower results.
Monish Patilawala: Crushing subsegment operating profit of $632 million was 30% lower versus the prior period.
Monish Patilawala: Slower farmer selling and lower crush rates in Argentina, coupled with solid demand, has supported soy crush margins, leading to a year-to-date executed soy crush margin of approximately $50 per metric ton, which is lower compared to the prior year.
Monish Patilawala: While year-to-date executed canola crush margins are lower by approximately $15 per ton compared to the prior year, margins have moderated significantly in the second half of the year so far, as higher seed prices and regulatory uncertainty drove lower margins.
Monish Patilawala: There were net negative timing impacts of approximately 120 million year-over-year.
in the refined products and other sub-segments.
increased pretreatment capacity at renewable diesel facilities.
Monish Patilawala: and higher imports of used cooking oil has negatively impacted both refining and biodiesel margins.
Monish Patilawala: leading to sub-segment operating profit that was 58% lower versus the prior year.
Monish Patilawala: There were net negative timing impacts of approximately 360 million year-over-year.
Monish Patilawala: As we look forward, we anticipate ASNO fourth quarter results to be lower than the prior quarter.
Monish Patilawala: The seasonal shift to our North American weighted footprint and strong North American crop should be supportive of volume.
Monish Patilawala: But recent elevation margins are below the levels we expected when we put our guidance in place in November.
Monish Patilawala: In crushing, the ramp-up of our spirit wood facility is expected to support high single-digit volume improvement. However, we expect lower results due to lower soya and canola crush margins versus the prior year.
Monish Patilawala: The addition of new pretreatment capacity has continued to weigh on margins within the RPO business, and on the food oil side, margins for free-to-sell opportunities have been under pressure due to increased competition.
Monish Patilawala: Based on the information available today, we also anticipate 100% reinsurance proceeds of approximately $50 million in the fourth quarter related to both Decatur West and East.
Monish Patilawala: We continue to monitor the impact of uncertainty related to regulation and trade flows on the operating environment as we look forward to the end of the year.
Year-to-date carbohydrate solution segment operating profits.
of $1.1 billion in the year-to-date period.
Monish Patilawala: was roughly in line with the prior year, as lower margins in the EMEA region and ethanol were mostly offset by strong volumes and improved manufacturing costs.
Monish Patilawala: As we look forward, a strong North American corn supply and robust export demand is expected to be supportive of VCP.
Monish Patilawala: However, North American ethanol production continues to outpace demand, driving lower margins.
Monish Patilawala: We expect to see solid demand and margins in North American starches and sweeteners as we finish the year.
Monish Patilawala: Wheat milling margins are expected to moderate from elevated prior level.
Monish Patilawala: Based on information available today, we also anticipate 100% reinsured insurance proceeds in the fourth quarter related to both the Decatur East and West incident of approximately $35 million.
Monish Patilawala: Taken together, we anticipate the Carbohydrate Solutions fourth quarter results to be in line with the prior year period.
Monish Patilawala: Year-to-date revenues for nutrition were $5.6 billion, up 2% compared to the prior year.
On an organic basis, segment revenue was down 3%.
Monish Patilawala: Human nutrition was flat organically as headwinds related to decadal yeast and texturants pricing offset growth in flavors and health and wellness.
Monish Patilawala: Animal nutrition revenue declined 5% driven by unfavorable mix, negative currency impacts in Brazil, and low volumes due to demand fulfillment challenges.
Monish Patilawala: Year-to-date, nutrition subsegment operating profit of $298 million was 32% lower versus the prior year.
Monish Patilawala: Human nutrition results of 265 million were 40% lower compared to the prior year period primarily driven by unplanned downtime at Decatur East.
Monish Patilawala: Animal nutrition results of 33 million were slightly higher compared to the prior year due to an improvement in margins.
Monish Patilawala: As we finish the year, we expect continued weak consumer demand, lower tax returns prices, and ongoing operational challenges to be a headwind.
Speaker Change: And as Juan previously mentioned, we now anticipate the startup of our Decatur East facility to be delayed until the first quarter of 2025.
Speaker Change: We expect the impact of prolonged downtime at Decatur East to be partially offset by 100% reinsurance proceeds in the fourth quarter of approximately $50 million, based on the information available today.
Speaker Change: We expect animal nutrition results in the fourth quarter to be better than the prior year with tailwinds from our turnaround efforts and as we continue to work through operational challenges in pet solutions.
Speaker Change: Taken together, we expect nutrition results for the fourth quarter likely lower than the third quarter of 2024, but to be higher than the prior year, which had negative impact of approximately $64 million in non-recurring items.
Please turn to slide 7.
Speaker Change: Year-to-date in 2024, the company has generated cash flow from operations before working capital of approximately $2.3 billion, down relative to the same period last year due to lower segment operating profits.
Speaker Change: Despite the decline, solid cash generation has supported our ability to invest in our business and return excess cash to shareholders.
Speaker Change: Year to date, the company has returned $3.1 billion in cash in the form of dividends and share repurchases.
Speaker Change: allocated 1.1 billion dollars to capital expenditures and nearly 1 billion to M&A announcement 2023 and completed in January 2024.
Speaker Change: Our capital structure continues to provide the financial flexibility to invest in our business and return capital to shareholders.
Speaker Change: We continue to see opportunities to drive enhanced cash generation through operating improvements both in our facilities and through better management of working capital.
Speaker Change: We believe investing in organic opportunities gives us the best return.
Speaker Change: While we will always look at opportunistic M&A as a way to enhance returns, it is essential that we prioritize maximizing returns from the assets that we have already acquired and also ensuring that we are the best owners of all our assets.
Speaker Change: Now let's transition to a discussion of guidance for 2024 on slide 8.
Speaker Change: In early November, we announced that we lowered our full year 2024 adjusted earnings per share guidance to the range of $4.50 per share to $5 per share.
Speaker Change: The lowering of our guide takes into account our year-to-date results and headwinds from slow market demand and internal operational challenges.
a $1.7 billion to $1.8 billion
Speaker Change: primarily due to lower incentive compensation and our corporate net interest expense to be in the range of $475 million to $525 million.
We now expect capital expenditures to be approximately $1.5 billion.
Speaker Change: We are also increasing our effective tax rate guidance to the range of 20 to 22 percent due to the non-deductible impairment of Wilmar taken in the third quarter.
Our expectations for our leverage ratio and DNA are unchanged.
Speaker Change: Let's turn to slide nine to close the call with a reflection on the key priorities that we are driving with our team to deliver improvement and enhance return.
Speaker Change: First, my top priority is ensuring integrity and accuracy in our internal controls and financial reporting.
Speaker Change: We are continuing to focus on implementing enhancements to our internal controls to remediate the previously identified material weakness.
Speaker Change: and are taking action to enhance the integrity and accuracy within internal controls and financial reporting related to inter-segment sales.
among other things.
Speaker Change: The Design and Documentation of the Execution of Pricing and Measurement
Speaker Change: and reporting controls for segment disclosure purposes and projected financial information used in impairment analysis have been enhanced, and the testing of these controls will continue throughout the balance of the year.
Speaker Change: Further, training for relevant personnel on the measurement of inter-segment sales and application of relevant accounting guidance to inter-segment sales has been provided and remains ongoing.
in the broader category of improving focus and execution.
Speaker Change: The team will remain adaptable and focus on items within our control.
Speaker Change: On the cost side, we are optimizing our cost structure and enhancing operational resilience initiatives.
Speaker Change: In this vein, we have the opportunity to create a more cohesive digital strategy.
Speaker Change: Today, we have invested in numerous efforts to improve our systems and enable a more digital footing for our business.
Speaker Change: However, we have the opportunity to connect these efforts to accelerate outcomes around how we serve our customers.
Speaker Change: operate our assets and run the enterprise while also delivering structural cost improvement.
Speaker Change: Similarly, we have room in our portfolio and broader asset network to optimize through targeted divestitures or rationalization, and we are evaluating numerous actions that we could take to improve our footprint performance and generate cash.
Speaker Change: We will also maintain a sharp focus on working capital management to further strengthen our cash position.
Speaker Change: Lastly, we'll remain disciplined in capital allocation, seeking opportunities to drive ROIC and enhance returns.
Speaker Change: I see maintaining a capital discipline as essential to value creation.
Speaker Change: We will work to ensure that we maintain a healthy balance sheet that continues to create strong cash flow and that we rigor investment opportunities appropriately by applying a stage-gated model to ensure that we are achieving key milestones and meeting our return objectives to continue to invest.
Speaker Change: In closing, I want to take a moment to thank our ADM colleagues for their hard work and dedication this quarter.
Speaker Change: I am optimistic that today we can successfully tackle the challenges and seize the opportunities as we continue to execute our strategy and focus on delivering value for our shareholders.
With that, we look forward to taking your questions.
Operator, please open the line for our first question.
Thank you for tuning in. I'm Ismael Roig.
Speaker Change: Thank you. If you would like to ask a question please press star followed by one on your telephone keypad. If you would like to withdraw your question please press star followed by two. When preparing to ask your question please ensure your device is unmuted locally and today we ask you limit yourself to one question and one follow-up.
Speaker Change: First question comes from Andrew Strelzik with BMO. Your line is open, please go ahead.
Andrew Strelzik: Hey, good morning. Thanks for taking the questions, and I appreciate all the color you gave on the outlook and the strategy. I was hoping that you could help reconcile the decline in U.S. crush margins over the last several weeks.
Speaker Change: You have now a U.S. crush margin curve that's much lower in the nearby than in the spring, which is abnormal. You know, soybean meal delivery certificates issued last week by some of the commercials, which I also believe...
Speaker Change: is abnormal. So I guess the question is, you know, what does all this tell us about where crush margins are headed? And how much visibility do you have on crushing the next year compared to what you would typically have for this time of year?
Thanks.
Yeah, thank you, Andrew. As you said,
Speaker Change: A board crash rallied steadily from the lows in Q3, but has come under pressure in November. It's basically a combination of things. First of all, demand for the products has been very good. Demand for meal is good, demand for oil around the world is good. But you see, during November, we have the Argentine farmers started to sell again, so we've seen higher crash rates in Argentina.
Speaker Change: There are high crash rates in Brazil, and NOPA here in North America, all our plants have been running well, so we have high crash in October.
Speaker Change: That has created the problems that we have. The U.S. is exporting oil. The U.S. is exporting milk.
Speaker Change: But there is more pressure in the system, with more crash being put, and less regulatory
Clarity.
Speaker Change: So that's why overall message, Andrew, is as we look forward here
Speaker Change: We think that given the soft markets and the regulatory uncertainty...
Speaker Change: Our focus in ADM is on the things that we can control, on the double down on productivity, looking at all our efforts in trying to control cost and cash.
Speaker Change: and certainly portfolio management. So that's kind of our priority for the year.
Speaker Change: for human consumption. So I think that when we clear the regulatory environment, the regulatory uncertainty, if you will, I think you're going to see things normalizing a bit.
Speaker Change: Okay, and so if I could just quickly follow up, you know, given all of the internal actions that you guys are focused on as you kind of navigate the cycle, and if I were to kind of exclude some of the insurance dynamics, you know, from this year and maybe from next year as well,
Speaker Change: Do you think that this is kind of an earnings phase from which you would expect those actions to drive earnings growth in 2025 or do you think about it?
Speaker Change: as still kind of navigating through kind of a muddled environment as we get through the regulatory dynamics. How do you think about kind of this year and the actions that you're taking and the ability to grow in 25? Thanks.
Speaker Change: Yeah, I think it's important never to lose an opportunity to get yourself extra feet, you know. So, we're taking this decline in margins as an opportunity to review everything from ADM and accelerate.
all the decisions that were already ongoing.
Speaker Change: So I would, you know, it's too early in the year. There are too many unknowns, Andrew, to, especially on the regulatory front, to make a forecast for the year. But we know that focusing on the things we can control, continue to drive cash flows, that's an important thing for our shareholders, and that will improve returns.
Speaker Change: Andrew, I echo what Juan just said. It's back to the basics of cash, cost, and capital, and that's what we are focused on right now. A lot of opportunities, head down, get 2024 closed, and we'll come back when we're ready to discuss 2025.
Speaker Change: Our next question comes from Tom Palmer with City. Your line is open, please go ahead.
Good morning. Thanks for the question.
Speaker Change: I just wanted to inquire on the nutrition side of the business. We've seen some changes in terms of the animal nutrition business, I think, from a cost-saving standpoint. It's driven some improved profitability.
Speaker Change: What about on the human nutrition side? Is there, just given some of the end markets maybe haven't progressed the way you once anticipated, thought to kind of resizing that business? And maybe how much of an opportunity might that be as we think about the coming year? Thanks.
Thank you.
Speaker Change: Yeah, thank you Tom for the question. Listen, I think I will take it by pieces. If you take human nutrition, you have to separate. We have a big issue with the plant that is down.
Speaker Change: That plant is a significant cost, it was down for a full year, now it's going to be down for the first quarter. So, that's an issue that is a little bit of extraordinary that we're fixing, and we thank all the engineers and everybody working expeditiously to bring it back safe.
Speaker Change: On the rest of the business, the flavors business and the health and wellness business, we continue to see opportunities.
Speaker Change: In the positive side, if you will, we've seen growth of flavors, revenue flavors, in Europe of about 7% like for like, so organic growth.
year to date. We have seen 5% in North America.
These are not...
Speaker Change: the growth rate that we were expecting when we started the year because there have been some categories like energy drinks that were, although still growing.
is growing at less...
Speaker Change: at lower rates than we expected at the beginning of the year and our customers are excited.
have expected at the beginning of the year.
Speaker Change: Some launches have been postponed, but it still is a robust category and we still see growth. But as you said, we are adjusting a little bit our supply chain to make sure we match the new realities.
Speaker Change: When you look at the other piece of human nutrition, which is health and wellness,
Speaker Change: The probiotics part, which is the part there that is the future, that is the growth part, has grown so far 14% year-over-year on a revenue side, and even higher than that in operating profit side. So I think that there are good signs, but we continue to flex this. This is a year in which, as you understand, nutrition is not where we want them to be.
Speaker Change: And we are working hard to fix it. But there are, on the customer side, there are positive signs that make us believe that when we put some of these supply issues behind, we're going to see the results coming to the P&L in a bigger way.
Okay, thank you
And just on the
Speaker Change: capital allocation. Sounded like there was some mention in the prepared remarks of maybe.
Speaker Change: some focus on discipline, but there was also some commentary maybe on the CRUSH side about some
Speaker Change: unexpected downtime. Is there maybe an elevated maintenance CapEx cycle needed in the in the crush operation to kind of get it to the operational levels that you desire and if so you know might we expect maybe less of a step down in CapEx next year just given that or maybe I'm overstating it.
No, listen, uh...
Speaker Change: CAPEX for next year will be will be solid CAPEX. If you will, we have many plans, we have grown the company and we need to make sure those plans stay in good shape, but also there are opportunities for automation and digitization that we are adding to that.
If you look at the oil seeds plants...
Speaker Change: Europe and Latin America have been operating very, very well. We have a handful of plants in North America that have given us problems over the summer.
Speaker Change: And I'm happy to report that they are doing better in October. They are doing better in November. But we have some issues that took a little bit longer to fix than we thought. And we put the resources to do so.
Speaker Change: Our next question comes from Ben Thura with Barclays. Your line is open, please go ahead.
Yeah, good morning, and thanks for taking questions.
Speaker Change: Morning. So, I just wanted to, like, kind of get a little bit, maybe, your sensitivities around the implied guidance for the fourth quarter and taking a little bit of an advantage that we're early in December and already two months have gone past.
Speaker Change: Clearly, if we look at it, implied low-end versus high-end, it's a very wide spread.
Speaker Change: So, maybe help us understand and frame a little bit what are the risks getting closer to the lower end, which would be implied a little less than a dollar, versus the higher piece closer to $140, just to kind of understand where we're shaking out and where you think things are going out, considering that two months are in.
Speaker Change: You can build it from there. I think if you think about the grain business, ag services, of course, this is the quarter in which the volumes come to North America for exports.
Speaker Change: And we see good volumes. China is buying for Q4 beans.
Speaker Change: is buying corn for Q1, but although we have good volumes, we have not seen the margin expansion that maybe we have forecasted a couple of quarters or a couple of months ago. River Logistics.
Speaker Change: are good for December. We will have to monitor the weather for Q1, but so far so good. And currency in the market should help our interior assets.
Speaker Change: On a global trade perspective, volumes are strong and lower commodity prices are supporting feeding animals globally, so destination marketing margins are holding.
Speaker Change: On a crash side, I described before the decline in crash
Speaker Change: You know, a lot of uncertainty about biofuels policy, of course. This margin compression could create timing, depending on where prices are at the end of the year. We could see positive timing, so we will not be able to call that until we see the end of December.
We have been selling our biodiesel book.
Speaker Change: But of course, it goes on to December. Unfortunately, with the lack of clarity over next year, you know, you could think that if we continue to crash at these levels, maybe oil inventories will climb.
and something we'll have to give for the first quarter.
Speaker Change: At this point, there is not a lot of margin for independent, non-integrated plans to run in the first quarter.
Speaker Change: So, you know, we may see a spike of rains later in the quarter and we might have to maybe the industry slow down crash in the quarter.
Speaker Change: In the first quarter, on a curve solutions perspective, it's kind of steady, if you will, margins are good, volumes are good, manufacturing is operating well, so we get
Speaker Change: We are cranking on all the cost savings. We have implemented some of the automation projects as given us.
Speaker Change: And then on the nutrition side, we certainly, as Monish was saying in the outlook, we've seen improvements in animal nutrition.
We've seen...
Speaker Change: a balance of some revenue growth, but also some one-offs that we needed to address in the human side.
So I would say better than last year.
Speaker Change: slightly lower than maybe the previous quarter and we're putting all our efforts in finishing that plan so we can have a 2025 cleaner of all those extra costs.
and Catherine Longley, Ben Isbarn
Speaker Change: Ben, can I just add a couple more? The insurance proceed that is a partial settlement right now, if you add the three segments I gave you...
Speaker Change: in the fourth quarter as an assumption that we will get 100% re-insurance proceeds of
Speaker Change: $135 million, so that's the other variable. And then back on nutrition, what Juan said, just for disclosure, currently, based on where the team is seeing, we think with M&A, it's low single-digit growth in the fourth quarter, and on an organic basis, it's low single-digit negative growth. And so that's the other piece I just wanted to add to what Juan said.
Speaker Change: And to clarify, those insurance just similar as in the third quarter that will basically then be deducted in over, correct?
Speaker Change: and the National Geographic Observatory. For more information, visit www.nasa.gov. NASA Jet Propulsion Laboratory, California Institute of Technology California Institute of Technology
Speaker Change: No, these are all 100% re-insurance proceeds, Ben, so our captive insurance has re-insurance cover, and so we expect to get $135 million as a partial settlement for the Decatur easement.
Speaker Change: And this will continue into 2025 and 2026 as we... Yeah, it's different than 3Q where the captive was paying for it, now we are expecting reinsurance.
Thank you very much.
Okay, perfect. That explains a lot. Thank you.
Speaker Change: We now turn to Heather Jones with Heather Jones Research. Your line is open, please go ahead.
Good morning. Thanks for the question.
Good morning, Heather.
So you guys talked this morning.
Speaker Change: Y'all have talked a lot about the challenging cycle we're in and as far as looking to 25, but I wanted to get a sense of, I mean, what are some things that
Speaker Change: could be givebacks in 25. So I was just wondering if you could quantify how much take or pay hit you guys in 24. And then the cost impact of all the unplanned downtimes that presumably, as you've gotten these plants running better,
Speaker Change: you should get back that's, you know, separate from the crush curve. So I was just wondering if you could first quantify those couple of things for me.
Yeah, I would say...
Thank you.
Speaker Change: I'm not sure I have all of them top of my head for the full year, Heather, but let me say the following. I agree with you. I think I'm on the take or pay. First of all, we learn our lesson.
Speaker Change: So, we can act differently, I think, as ourselves and, you know, maybe even the whole industry.
Speaker Change: I think also the weather in Brazil is very good, so we expect to have probably a 170 million tons type of crop next year that will avoid these issues.
Speaker Change: I would say all these resets in 2025, so we still have very little exposure of our take of pay, but I don't have top of my head what was.
the whole thing.
Speaker Change: And then, on the manufacturing side, we have issues mostly in the Q3, I would say.
Speaker Change: Some of the plans, when we look at our capacity, when we were down...
Speaker Change: Sometimes it was things like Paraguay because we didn't have margins, so we shut it down ourselves.
Speaker Change: And then sometimes it was Ukraine or other plants like that. We have a plant in Des Moines, Iowa, that we were a little bit waiting for a permit, so we couldn't bring it back. So there are improvements there. I don't know if, Monish, you have some numbers in your head. I will hesitate to quantify them myself.
Monish Patilawala: Yeah, so I would just on take or pay, Heather, it's year to date it's approximately $40 million of impact. We'll have to see what 2025 brings and what the volume and what the revised take or pay contracts look like.
Monish Patilawala: And then on the downtime, again, it comes down to the teams are focused on trying to get that up.
Monish Patilawala: The cost has gone up per cost per ton, but I would not quantify that right now. I would just wait through as we get to it. There should be upside as these plants start running, but I would not quantify it because it's not like a systemic down of X over months, it's puts and takes of downtime.
Monish Patilawala: One thing that you need to consider in the manufacturing is
Monish Patilawala: We implemented our automation projects in the carb solutions business first, because we ran a pilot and it was a good return, so we extended that. Now we have finished our first pilot in the oil seeds plant, in one plant in Brazil, and the results are very encouraging. Based on those results, we might do the same thing now that we did in automation, in carb solutions, into the oil seeds plant.
Monish Patilawala: that had given us improvements in not only yields but also energy savings and you know
Thank you.
Speaker Change: I think we have 15 projects going into 2025 for this, so I think that you should see that as a positive for us.
Speaker Change: And Heather, I would add to Juan's piece on this is, you know, everyone looks at downtime and says cycle up or cycle down.
Speaker Change: What the team is actually doing is a very good lean-based approach. So they're actually going into deep root cause, looking at what equipment caused the failure, why did it cause the failure, is there a way to automate, is there a way to digitize. So in the long run, I put this under the pillar of operational excellence.
Speaker Change: Our factory should continue to run better in the longer term and we'll put in the right appropriate of CapEx needed to make sure that we can over the long term have sustained operating leverage from our factories.
Speaker Change: Okay, thank you. My follow-up is just, do you have an estimate of how much reinsurance proceeds will be at 25 and 26? I think you said it would continue to 26, so just give us a sense of what those, just rough numbers, what those numbers will look like.
Speaker Change: We've got $95 million in Q3. We expect to get $135 million, give or take, in Q4. We expect that in 2025, we should be somewhere in that $50 to $100 million range, and the rest will work over the next...
Speaker Change: Now, all of this is based on information we have right now, all of this is based on still working through with the actuaries, with the insurance companies, etc. And our goal is to continue working it, and we'll keep you posted as we get to know more. But this is truly based on what we know as of right now.
Speaker Change: We now turn to Manav Gupta with UBS. Your line is open, please go ahead.
Manav Gupta: Yeah, first Manav, I'll just say, yeah, I've been here slightly over 90 days and it's been a blast to be here, it's a fantastic team, I've got a chance to go see some farms, I've got a chance to go see our operations, I've got a chance to go meet the teams in the field and it's a very exciting time to be here.
Manav Gupta: I would tell you on my priorities as I think about it as I said in my prepared remarks My first priority is the integrity and of our financial statements and remediating the material weakness
Manav Gupta: The team's already done a lot of work, but there's a lot more we can do in improving our processes, our internal controls, and our systems.
Manav Gupta: And that's what I'm focused in with the IT team and the finance teams to make sure that we have systems that can support all the reporting and all the revised pricing, etc., for intersegment sales. So that's one item.
Speaker Change: Then I come to the second piece, which is driving cash, cost, and capital. As Juan mentioned and I have said, there is a lot of opportunity here to control what we control.
Speaker Change: and therefore we're doubling down on our productivity efforts and I'm working with the teams on multiple areas that we can simplify our business, reduce our cost, take advantage of our procurement savings as we should be getting into a slightly deep stationary environment.
Speaker Change: While at the same time making sure that we are having functional excellence, which is we are delivering from the center what really the businesses need. So we are following a zero-based approach in certain of our functions, we are looking at all the costs and saying what are we doing, do we get the value for it or not.
Speaker Change: Similarly, when it thinks about capital, you've heard about capital allocation. When you think about CapEx, it's a stage gate model. So making sure that we are investing in areas because there are tremendous opportunities.
Speaker Change: for investment available to us but at the same time making sure that we're getting a return and we're going to follow a state gate approach which means we'll fund you a little bit we'll see what the return looks like at that point in time if you hit the milestones you get the next funding
Speaker Change: Otherwise, the money goes to somebody else. So create some internal tension to make sure that everyone's fighting for the last dollar of CapEx that's available.
Speaker Change: Then I go into digital, and I think there's tremendous opportunity for you. You know, the Christie and team, who's our CIO, has done a really nice job. The company has done a nice job of improving the infrastructure.
Speaker Change: We still have a long way to go in that, but I feel there's also a chance here to accelerate some of the ability to use data and data analytics to drive business outcomes.
So that's another priority of mine.
Speaker Change: And then I would tell you back to portfolio. The company has always said they will look at portfolio. I've said that, too, in my prepared remarks. In my three-month-plus year, I've seen there are opportunities here that we are working on to make sure we simplify our portfolio. And I look at it from a simple lens of, do I have a market and do I have a right to win?
first and if I do
Speaker Change: Am I the rightful owner of that asset and what return are we getting?
Speaker Change: And Juan and I have spent quite some time together on talking about this.
Speaker Change: He's always been open to portfolio and we are going to continue working on that.
Speaker Change: Manav, I don't know if I answered your question, long answer to your short question, but a lot of priorities, and then I'll end with what I started, which is back to the basics. You've got to drive cost, cash, and capital in this environment where we know that the commodity cycle may not be our best friend, so self-help is truly our best friend, and that's what the teams are working on. So hopefully I answered your question.
Speaker Change: No, you absolutely did. My very quick follow-up and this is more on the policy side
Speaker Change: We saw some news that there are some, you know, changes to China export taxes as it relates to Yuko and maybe Chinese Yuko will make its way less to the global markets. There's a little bit of possibility that President Trump might impose some tariffs on any U.S. Yuko coming into the U.S. So I'm just trying to understand from the perspective of ADM, if China exports less Yuko to the global markets, how can that help ADM?
Speaker Change: You see, Manav, what happened when the flood of Yuko came into the U.S.
So
Speaker Change: then basically soybean oil or canola oil lost a percentage, lost share as a percentage of feedstocks, if you will. And there were a lot of concerns on the origin of some of these Yuko and there have been...
Speaker Change: A lot of questions by people about making sure we verify that origin, especially when you start seeing big palm oil producing countries.
Speaker Change: being big exporters of yuko also. So I think part of that is to make sure that whoever is playing here, is playing with the right rules. So I don't know about the regulation. There are a lot of speculation at this point in time about regulations.
Speaker Change: We just want a level playing field. We just want to work on products that are real, what they say they are. And I think that's what we aim for, is transparency in the rules. Then we play by the rules.
Speaker Change: Our next question comes from Stephen Haynes with Morgan Stanley. Your line is open, please go ahead.
Good morning. Thanks for taking my question.
Speaker Change: Maybe just coming back to the cost side of things, I think your SG&A is up quite a bit this year, you know, and accelerating a bit, maybe more than...
Speaker Change: Kind of what would be implied by normal inflation. So, I guess when we're thinking about that kind of ramp up this year, what are some of the key drivers there? And then, you know, how are we supposed to think about that going into next year, pairing with, you know, your comments about, you know, more focus on controlling costs? Thank you.
Speaker Change: So I'll just start with answering the question on what's driving the increase in SG&A, there are a couple of drivers here. One is the higher litigation costs that we have in defending or
Speaker Change: Sorry, the higher litigation cost that we have with the material weakness that we have, so that's number one.
Speaker Change: Number two is the company has invested in digital transformation over the last few years and that's the cost that is increasing there to support the transformation of our ERPs.
Number three is we got higher interest costs.
Speaker Change: that we have, which is also reported. Sorry, you were just asking SG&A, not corporate. So those are my two big drivers that drive it, which is GT and then some litigation costs. We also have normal merit increase that goes into that, but that's partially offset by the lower incentive compensation that as we see the results of the company right now, you're gonna see lower.
Speaker Change: So when you look at all of that, back to your question also, what are we going to do about all of this? As I said, a couple of things is we need to continue investing in digital transformation.
As we go through that...
Speaker Change: Secondly, I would tell you that as we work through some of the zero-based budgeting exercises that we have here, we need to make sure that where there is opportunities, there is value being added for those activities, that's what we are working on. And then the third piece that is an add to the cost, which is M&A, so as we have bought
Speaker Change: four companies that closed in 2024, you get added cost that of course comes through into SG&A But that's also where we have to keep looking at and saying making sure the synergies
Speaker Change: for those MNAs are coming through too. So I would say in the long run when I look at this, this is where we clearly have an opportunity to continue driving.
Speaker Change: focus on cost and I would do cost in two places. One is cost in SG&A, the second cost is our manufacturing cost which Juan has already talked about and I've talked about where we should be able to keep driving efficiencies which should help us reduce costs.
Speaker Change: We now turn to Tammy Zakaria with J.P. Morgan. Your line is open, please go ahead.
Tammy Zakaria: Hi, good morning. Thank you so much. My question is on crushed volumes. I think I saw on your slide you expect high single digit percent type volume growth in the fourth quarter. So I'm just curious, is that a good starting point for next year barring any policy developments? Can you share any initial thoughts on how you're thinking about volumes?
Speaker Change: Yeah, I would say, as you said, if you take the regulatory uncertainty out and what's going to happen with people adjusting their crash...
Speaker Change: because of the lender's tax credit to producer's tax credit issue, whenever that's going to be solved. I think that that level that we are disclosing is probably a reasonable level on normal conditions, if you will.
Speaker Change: And that basically is just the addition of spirit wood, is the addition of spirit wood that is running at full capacity basically, almost full capacity.
and the other one.
Speaker Change: Understood, that's helpful. And then just following up on that tariff question from earlier, are you preparing for any either positive or negative impacts should the incoming new administration slap tariffs on foreign imports maybe starting in January? Do you see any immediate opportunities or even risks to your business when initial tariffs go into
Speaker Change: Yeah, of course our business is running a lot of scenario planning for what could happen. Normally what we see in these circumstances is the trade flows are just, you know.
Speaker Change: It's just satisfied in a different way. So that's where, in those situations, it's where the footprint, the global footprint and the team of ADM normally shines because it allows us with a lot of agility to repurpose those trade flows to take advantage of the conditions. So we are remaining agile and, again, doing a lot of scenario planning to be ready.
Understood, thank you.
You're welcome.
Speaker Change: We now turn to Salvatore Tiano with Bank of America. Your line is open, please go ahead.
Thank you.
Speaker Change: Yes, thank you very much. You did make a comment early in the call about China increasing production of certain commodities that is impacting trade, and I was just wondering if you can talk a little bit more about that, what are these commodities you're talking about, and whether this is something that's more...
Speaker Change: cyclical like higher crop production because of you know favorable weather or something more structural, certainly more policy I guess driven that could impact global trade in the longer term.
Speaker Change: Yeah, no, I think that China has shown this year that they wanted to encourage or incentivize the local corn production, and as such...
Speaker Change: They have reduced their imports of corn. I think that's probably what I was referring to. Their imports of corn this year are going to be lower. I think in terms of soybeans, the situation is slightly different. I think they are preparing for the eventuality of having to...
Speaker Change: of having to have, you know, tariffs or whatever. So, they've been buying and they've been refreshing their reserves. So, I think that in that sense, the amount that they imported has been about the same. I would say it was more a corn commodity.
Speaker Change: I just want to follow up a little bit to ask about the depreciation of the Brazilian RAI recently and I'm just wondering what impact could this have mostly to your bottom line in Q4 but especially in 2025 given that it's now over 6?
Speaker Change: I think, Salvador, that the biggest impact that happened with devaluations in Latin America is how they impact farmer selling.
Speaker Change: You see it in Argentina now that the currency or the spread with, you know, the two
exchange rates is just 10% the farmer is...
Speaker Change: It's a more normal seller, if you will, when they need cash and a more steady seller. In Brazil, now with the devaluation, the farmer has been a more reluctant seller, if you will. So I would say, when you look at Latin America, that's probably what impacts us the most, is the ability of the farmer to be a commercializer of grain.
Speaker Change: We have no further questions, so I'll now hand back to Megan Britt for any final remarks.
Megan Britt: Thank you so much for joining the call today and for your interest in ADM. Please feel free to follow up directly with me if you have any additional questions.
Reporting live in the Philadelphia area, I'm Ismael Roig.
Speaker Change: Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.