Good morning, and welcome to the Archer Daniels Midland Company Second Quarter 2018 Earnings Conference Call. All lines have been
recorded. I would now like to introduce your host for today's call, Victoria Delhoeka, Vice President, Investor Relations for Archer Daniels Midland Company. Ms. Delauega, you may begin. Thank you, Jack.
Good morning, and welcome ADMs' 2nd quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at adm. Dotcom.
For those following the presentation, please turn to Slide 2, the company's Safe Harbor Statement, which says that some of our comments constitute forward looking statements that reflect management's circumstances, industry conditions, company performance and financial results. These statements are based on many assumptions and factors that are subject ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could results to differ materially from those in this presentation, and you should carefully review the assumptions and factors in our SEC report. To the extent permitted under applicable law, ADM assumes no obligation to update any forward looking statements as a result of new information or future events. On today's webcast, our Chairman and Chief Executive Officer, Juan Luciano, will provide an overview of the quarter. Our Chief Financial Officer Ray Young will review financial highlights and corporate results, as well as the drivers of our performance in the quarter.
Then, Juan will call over to Juan.
Thank you, Victoria. Good morning, everyone. Thank you all for joining us today. This morning, we reported 2nd quarter adjusted earnings per share of $1.02, up 79% from the year ago period Our adjusted segment operating profit was $924,000,000, up 40% from the second quarter of 20 17, and we generated positive EVA with a return on invested capital, well above our work. Our team performed exceptionally well, meeting our customers' needs and showing the strength of an increasingly efficient balanced and global portfolio.
We continue to accelerate the execution of our strategic plan optimizing our core driving efficiencies and expanding strategically and delivered the series of important accomplishments in the quarter and first half of the year. In the first six months of 2018, among the businesses we've targeted for improvements, profitability has gone up $1,000,000, representing about half of our operating profit improvement over the first half of twenty seventeen. With global trade, lysine and South American Origination all contribute into our improved profitability. And we now have completed the divestiture of our Bolivian Oilseeds business. Over the first six months of the year, our operational excellence initiatives have delivered cost savings of more than $150,000,000 on a run rate basis, and are on pace to exceed our 2018 target of $200,000,000.
We also continue to execute carbohydrates, human nutrition, and taste. In animal nutrition, we announced the proposed acquisition of Neovia last month which when completed will give us a leading global animal nutrition business and a strong platform for future growth. We also opened 2 new state of the art animal nutrition facilities in the U S. In the quarter. In Health And Wellness, we are adding a strong customer channel to our existing R and D capabilities with the announced addition of leading probiotics protecting.
In taste, we announced the acquisition of Rodel, adding a sustainable supply of vanilla products our industry leading portfolio of natural flavor solutions. We also continue to expand our geographic reach in markets that are seeing increasing consumer demand, launching our starches and sweeteners joint venture with Astrung Foods in Russia, and our all sits joint venture with Cargill in Egypt. Another key to our future success will be advancing our Readiness effort which we spoke about last efforts within individual businesses and units and functions to make sure they set the competitive standard in their field. But there are out, driving standardization and the sharing and leveraging of best practices across ADM to build the very best company. Readiness will help the company in 2 fundamental ways.
First, it will boost our ongoing operational excellence and efficiency efforts. And second, it will liberate resources to focus on growth. We are moving very quickly on this efforts. We completed our assessment phase, and we're now into implementation. More and more colleagues around the globe are engaged in the effort.
Our teams are already identifying individual initiatives that will help drive improvement, and we have is the governance structure to ensure that the changes we make lead to sustainable lasting impacts. And we see great potential to drive future earnings power and build a great and enduring company. Later on this call, I will discuss the outlook for our business. And now, I'll turn the call over to Ray.
Yes. Thanks, Juan. Slide 4 provides some financial highlights for the quarter. Adjusted EPS for the quarter was $1.02,
significantly from the $0.57
up $266,000,000 down from approximately 28% in the prior year due mainly to U. S. Tax reform, which reduced the federal income tax rate from 35% to 21% for 2017 biodiesel tax credit reported in the first quarter that impacts our overall calendar year rate and certain favorable 2nd quarter discrete tax items. We expect our effective tax rate for an ongoing effective tax rate to be between 17% 20%. Our trailing 4 quarter average adjusted ROIC of 7.3% is more than 100 basis points above our 2018 annual WACC of 6.25%, thus generating positive EVA of approximately $275,000,000.
On Chart 16 in the appendix, you can see the reconciliation of our quarterly earnings of $1 per share to adjusted earnings of $1.02 per share. For this quarter, we had $0.02 per share credit related to LIFO, a $0.03 per share charge related to impairments and restructurings and a $0.01 per share charge related to discrete tax items. Slide 5 provides an offering profit summary in the components of our on stronger ADM investor services earnings due to higher short term interest rates. In the corporate lines, net interest expense for costs of $180,000,000 were up
look
for the calendar year. Turning to our cash flow statement on Slide 6. We generated $1,100,000,000 from operations before working
the
earlier in the year. Total capital spending we returned approximately $379,000,000 of capital to shareholders through dividends. Therefore, we again had a balanced approach towards capital spend return of capital to shareholders. Slide 7 shows the highlights of our balance sheet of June 30, 2018 2017. Our balance sheet remains solid.
Our operating working capital of $7,700,000,000 was up approximately $700,000,000 versus the year ago period, with about 1 half related to prepayments to South American farmers for spot green purchases stemming from the recent Brazilian trucker strike, which delayed our ability to take fiscal delivery immediately. Total debt was about $7,600,000,000, resulting in a net debt balance of $6,800,000,000. Finished the quarter with a net debt to total capital ratio of about 27%, in line with the year ago quarter. Our shareholders' equity of 18 $700,000,000 dollars in available global credit capacity at the end of June. If you add the available cash, we had access to $7,000,000,000 of short term liquidity.
Next I
will discuss our business segment performance for the quarter on Slide 8. In the second quarter, we earned $924,000,000 of operating profit excluding specified items, up from the $658,000,000 in last year's second quarter. Looking at the first half of the year, adjusted operating the the second quarter of 2017. Merchandising and handling was up substantially year over year. The short crops in South America as well as increased purchases from that region by China in anticipation of tariffs offered motivation for other buyers to exports.
The team also managed risks extremely well, resulting in solid basis gains during the quarter. Accelerated as its execution and diversified earnings base favorably contributed results. The team executed particularly well during the China orgum situation, making swift and smart decisions to mitigate some of the negative impacts, which as a result, turnout to be a bit continue to grow. Volumes should be more than 19,000,000 metric tons this year, nearly double the 10,000,000 metric tons in 2014. Transportation was significantly higher, driven by increased volumes as U.
S. Waterways returned to more normal conditions Transportation also benefit from ATCO's grown business in backhaul freight and stevidore, the latter of which has become a profits for a second quarter. These are examples of the great job. The origination team is doing to invest in changes that are structural in nature and help to diversify and provide more stable earnings for the origination business. Results were also significantly higher versus the second quarter of 2017.
The pressuring origination business did a great job, delivering on continued strong global demand for soybean meal. Around the globe, the team ran our assets higher setting a second quarter record in crush volumes amid a very favorable soy crush margin environment. In South America, up high Brazilian origination volumes and improved margins, largely driven by a more aggressive farmer selling and robust demand from China contribute to strong results. And the team managed well through the Brazilian trucker strike, limiting its impact on results. The expected reversal of timing impacts from the first quarter and new negative timing effects at the end of the second quarter resulted in a net positive.
Execution was also strong in RPDO, which was higher year over year as our value added businesses to continue their growth. We saw solid margins and strong volumes in our refined and specialty oils businesses with North American refined oils delivering a great offset by weaker earnings in Golden Peanut and tree nuts. Asia was lower on Walmart results. On Slide 11, carbohydrate solutions results were down modestly versus the second quarter of 20 17. There's another important execution story to tell here.
In the second quarter, we identified some important upgrades we need to make at our Decatur Corn complex to ensure it continues to set the competitive standard for wet mills. We had some downtime, which resulted in higher manufacturing costs which will again in the second half of this year as we advance this work. Our teams have managed exceptionally well those upgrades. Helping to partially offset the cost of the downtime. Starches and sweeteners was down versus the prior year period fundamentally, the underlying starches and sweeteners business is solid.
North American liquid sweeteners were in line with the year goal period with volumes comparable to last year. Absent the downtime, our North American starches and sweetener results would have leading to the lifting of the quotas in Turkey negatively impacted results in European Liquids Weakeners, partially offset by contribution from our Chantor acquisition. Flower milling was impacted by some negative timing effects that will versus in the coming quarters and lower volumes in our Caribbean operations. BIO products results were down primarily on lower ethanol production volumes and for ethanol 7% revenue growth on a constant currency basis and more than 20% offering profit growth over the year ago period. WFSI earnings up substantially versus the second quarter of 2017 with all three businesses, especially ingredients, wild flavors and health and wellness, delivering improved sales and results year over year.
Especially in Greens benefit from improved volumes and margins in proteins, higher margins and multi buyers, and increased contributions from fibers. New customer business and an improved portfolio mix boosted sales and margins in well flavors. And Health And Wellness group delivered good results led by margin improvements in Bioactis. Animal Nutrition results were higher year over year, driven by stronger position is resonating well with our customers
Thank you, Ray. Businesses. In origination, we expect higher results for the third quarter versus the same period in 20 17, despite the faster reverse of the timing impacts. For the year, the continued impact of the short crops in South America and growing contributions from performance. We expect origination to have a very strong calendar year 2018, well above our expectation at the beginning of the year.
In Oilseeds, we expect 3rd quarter results to be substantially higher than the 3rd quarter 2017, as the team continues to deliver strong crush volumes in a robust soybean crush margin environment. For the full year, We should continue to see the benefits of good execution amid underlying global demand growth and a strong soybean crush margins, along with continued higher volumes and steady results from our PBO. In summary, we expect our expectations at the beginning of the year. In Carbohydrates Solutions, the team has done a good job managing through the upgrade indicator. Fundamentally, the North American starches and sweeteners business is solid.
Remain depressed in some of our European markets, our new Russian joint venture will begin contributing to results. F and oil industry inventories could build if China does not re enter the market, putting some margins. To favorable product mixes in WFSI to contribute to good results. As we our integration planning. And while our 4th quarter timeline foreclosing means we don't expect Neovia to significant the full year, we continue to expect nutrition revenue and results to be significantly higher than last year with a 20% plus growth in fee for the full year.
So when you look at the totality of our actions and our results, our team is executing well we continue to make our businesses stronger. We're excited about the promise of readiness as those efforts accelerate. We're investing in our growth platforms, our risk management is strong and global demand remains robust. Naturally, we're monitoring the U. S.-China trade situation closely and are prepared for various potential outcomes We believe the situation and strong results.
Sitting where we are today, our outlook for profitability and turns for the 2018 calendar year is more favorable than it was when we spoke on our first call. And I remain confident in our ability to continue to grow earnings and create shareholder value in 2019 and beyond. With that, operator,
you. Your first question comes from the line of David Driscoll with Citi Research. Your line is open.
Thank you and good morning. Good morning, David. Congratulations on the very strong results. I wanted just to ask, it's a couple of and oilseeds. First, the mark to market that you mentioned, the net effect, Ray, could you give us a little bit of detail there?
And what I'm really trying to understand is how we're supposed to model this kind of in the back half bucket on June 30, but I think as you mentioned in the script, you netted against the piece that reverses that was marked on the first and you got a net positive. But can you give us some guidance here on how to think about this in Q3, Q4?
Yes, sure thing, David. So we did indicate that at the first quarter call, we had about $110,000,000 of negative mark to market that would reverse. And approximately half would reverse in the second quarter and the other half would be in the back half of the year and a little bit in 2019. So what we did realize was the benefit of the reversal in the second quarter. We did have, as a result, the board price moving up at the end of the quarter, we did have some additional the negative mark to market.
So roughly about $40,000,000 in net, because we had some higher negative mark to markets on soy, but we had some positive to markets on Canola. So when you net it all together, it's roughly $40,000,000 there. So how you may want to think about is when you think about the amount that's still to be reversed from the first quarter and additional 40, there's a little over $90,000,000 to reverse over the rest of the year. And that's going to be primarily over 3rd and 4th quarters, a little bit in early 2019 as well. So that's how you should be thinking about that.
David.
And then staying on oil feeds, industry margins, crush margins are great. And certainly, the profitability here in the quarter was very good, but it's still quite substantially away from previous records that we've seen in oil feeds on a quarterly base from prior years. With that kind of setup, can you guys give us your expectations of how sustainable the results to seeing in oilseeds are at these types of levels on a go forward basis. What visibility do you have?
David, I think we are, as I said in my comments, very optimistic and very confident about the sustainability of the results and the strength of the business. Not only crush margins are very strong, but demand is very strong. We're seeing demand needing to be we see the supply needed to be maybe 10,000,000 tons higher year over year just to cover demand. And we've seen buyers coming back to the market and building a forward book, which is increasing our confidence that we can see, we can visibility in the forward book going forward. So resiliency in demand growth and buyers coming back to build a book gives us a lot of confidence moving forward.
And, Rick, can you kind of chime in and talk to us about earnings power? So just kind of tie everything together with Juan's comments about visibility and sustainability and how it results then in earnings power for ADM. And that's it for me guys.
Me and David, as Juan indicated in his comments, we believe that the improvements that we're demonstrating in 2018 represent really a culmination of a lot of the efforts that we've been driving over the past couple of years. So the improvements that we're making across all of our businesses is going to continue to drive significant earnings in the future. You layer on top of that, the fact that the environment that we're experiencing right now with, particularly, you know, short crops around the world, stocks of use ratios coming down and global demand for pro team, continues to be strong. In our businesses are returning back to a more normal level, which is important as we think about future earning And then lastly, Ed, on top of that, the investments that we've made, both on an organic basis, whether like Confil Grande, Tianjin, or the P protein plant that we're actually constructing right now and finishing off. And the investments in acquisitions that we've recently announced in the second quarter, that's also going to add towards the earnings power of this company.
So When you actually take a look at all three aspects of, the significant work that we've done to improve the company, the work that, the environment, the business environment returning back to a more normal level. And then the investments that we've made, we feel very confident that earnings, going forward over the medium term are going to continue to grow. And more importantly, we're going to be driving returns.
Your next question comes from the line of Heather Jones with Vertical Group.
Good morning. Nice quarter.
So I just have one question related to resilient freight issue, but it has 3 parts. I just wonder if you could give us a sense of how this is currently impacting your entire business there. If you have any sense of when this is going to be resolved and how you're positioning ADM to minimize any potential impact minimize any potential impact or, actually maybe benefit from that disruption.
Yes, I think a couple of comments. We indicated that the impact to date has been minimal. In fact, the way you want to think about like a single digit negative impact. So in the whole scheme of our oilseeds operations, it was not material. And that's the reason why we're not calling it out.
Currently, how we're managing it is because of the uncertainty on the tariffs, we're actually negotiating in the short term. It really is we're negotiating freight rates with the truckers based upon our current needs. And that's how we're bring right now. Now, when this is going to get resolved, as you know, as you probably appreciate, I mean, there's going to be a judge who's going to be looking at the potential in terms of what the tariffs are. Expectations sometime in August.
I think leading up to that, I think everyone in the industry is going to remain fairly, negotiating freight rates in the short term. I don't think anyone's going to go long term in terms of the freight rates. And they're just due to the expose measures. But we're actually pretty confident that, the final resolution would be something that will result in effectively a tariff structure. It's very similar to, like, what, what, what the market was before.
And so, so, at this point in time, we're monitoring, we're managing the situation carefully. And again, up to now, we've been managing this situation, quite well.
And I think, Heather, if I may add, at the beginning, when this hit us, certainly, freights in, freight to Barcarena were higher than the table. So we continue do business there. And of course, Barcarena, being our newest sport, takes a lot of our volume. And also Parana as well, the the freight in the south, we're so higher than the table. So we managed to do those, but it's true that in the rest for the rest of the operations, it puts some caution in the activities.
Of course, because, you can only go with 3rd parties that you've been working for many, many years and we negotiate these one on one deals. So.
Okay. My follow-up is on China U S. I appreciate y'all's comments that you provided just to date based upon our incomings, the conventional wisdom seems that this is negative for U. S. Elevation.
But to your point about tightening on balance sheets around the world for weed and corn, etcetera, is there any way that that wisdom could be incorrect and global flows shift and move to the U. S. And margins actually come in stronger because of the dislocations against the backdrop of tighter, stocks?
Yes. Of course, we're looking at that whether around the world has turned drier and, production at the moment is being adjusted down. So that will bring demand for corn and wheat certainly into the U. S. And, all the way to July, we have still seen good, soybean demand come into the U.
S, given the prices we have. So, you could construct the scenario in which maybe there is the overlap of wheat, corn and maybe some soybean and tightening up elevation margins in the U. S.
Yes. Thank you so much.
You're welcome, Heather. Your next question comes from the line of Robert Moskow with Credit Suisse. Your
Hi, thank you. I guess this is kind of a follow-up to Heather's question. When you look at the disruption that this tariff environment has caused, I think just net net, it's a surprise to see U. S. Forward so strong in a quarter like this.
And I and I know it's also related to, drought in Argentina. Is there any way to kind of separate these two factors out and give us a little more help on the benefits that you received just from, from, from the drought in, in South America. But also, there must have been some benefits from satisfying China's demand that might have, I guess, build over into other countries, were you were you satisfying, the demand from other countries that were then satisfying China? And if that that the nature of some of these dislocations? Thanks.
Yes. Good morning, Rob. Of course, we reported higher volume in origination in this quarter. And listen, I think, I think, is difficult to chop all those results into pieces, to be honest. I think it's a combination of, higher volumes, lower costs.
The business has been driving efficiencies for the, for the last few years, a more efficient global trade operations with trading activities that leverage supply chain. And something that has been very important when we look at this discontinuities has been boots on the ground, the ability that we have to read markets and adjust quickly now with our destination marketing efforts with more people around the world with better coordination That's got all resulted into this. Ray, in his remarks, also mentioned about the impact that destination market in stevidorin and other new businesses than origination have happened on our results. This has moved these results from about representing 5% of our profits a few years ago. To now representing about 30% of our profits.
So I would say it's a combination of, taking advantage good, cyclical conditions, but also a structural improvement that we have made in the business that make us confidence about calling, 2018 a very strong year, compared to 'seventeen for origination business.
Okay. Can you give us a little more help on the back half for the origination division? I mean, you've had you've had years where, I guess, the back half could be $400,000,000 in profit. It could be it could be even more, like, is this setting up to be an outstanding back half for origination, like, over $400,000,000? Is there any way to contextualize that?
Yes. It's a little bit of continuation of what I explained to Heather. So as I said in my remarks, we expect Q3 to be much higher than last year, Q3. Regarding Q4, we will have to see how basically soybean demand into the U. S.
We know the U. S. Will be competitive in wheat and corn, even the short crop in the rest the world. The issue will be how much of the soybean volume continues to come into the U. S.
As I said to what we have today, July was still strong in demand, you know, we will have to see for the rest of the year. But that will basically, that will depend on the soybean demand into the U. S. Will depend how much elevation margins pop in Q4. So we could have either a good Q4 or spectacular Q4, depending on that happening, too early to call, to be honest, Rob, at this point.
Great. Thank you.
You're welcome.
Your next question comes from the line of Farah Afzal with Stephens Incorporated. Your line is open. Good
morning. Good
morning. Can you, Farha?
If we talk about 20 19 a bit. Juan, you sounded very confident about your ability to grow earnings in 20 19. Could you highlight kind of key businesses that you expect to deliver growth into Nick year?
Yes. Thank you, Farja. Think about our strategy and how we been continuing to deliver on that. And we think about optimizing the core and, Despite the progress we've made in what we call the improvement businesses, we still have opportunities there us, there are some businesses that they're still not realizing that potential. So, we still see improvements in our businesses our ability to execute.
We are very happy the way the business execute, but there's always more that we can do. So we feel good about that. The efficiencies, when we think about the program, we have put over all these years to improve the cost of the company. Now we are evolving into Readiness. And, we feel very, very good.
We are in the first stages of Readiness. We are 10 weeks into, 10 days into phase too, if you will. But everything we look, it makes us even more comfortable that there are more savings that we had that we have said before. And then we have all the expansions that we have done, Farika. If you think about, we are building we have built five plants between what we have in China P protein, specialty proteins in South America, color in Berlin.
So we have five plants that we have built or we we have profit nothing so far that will all hit the P and L in 2019. And then we have all these acquisitions that we made all the way from biopolis and crosswind and Neovia and Provexin and Rodel that they were all with the accretive part of them in 2018, but fully in 2019. So when I when we see the business is having a solid prospect, all of them into 20 2019, plus the Readiness efforts plus our improvement efforts plus these 5 new plants, plus 5 acquisition coming to the P and L, I cannot feel anything but optimistic about 2019, to be honest.
That's very helpful. And any kind of additional color you can give us on the Readiness program. I don't think we've had really a good understanding of the on that that Readiness program has delivered for ADM, near trip and long term?
Yes. I would say, We haven't told you yet about the details of Readiness. And mostly because we've been in the, as testment phase, if you will, of it. So, we estimated, I said it in the previous quarter. It could be in the $1,000,000,000 range of over a number of years, we will come with more precision in the next earnings call because we are, as I said, in the, in the 10 days into the second phase, which is more the quantification of all these.
So we have put, fundamentally, if you think about what it is, is I always focused the business on to setting the competitive standard by business. So looking at each business individually, basically and making them the best they can be. Now we're taking a more horizontal look at the company, if you will. And we're looking at what are those activities that are best in class in ADM that we can leverage a close. If we can share that knowledge and share that and leverage that best in ADM across the company.
So we have more than 500 people engaged in this and being trained. Those peoples are starting to generate initiatives we have more than 1000 initiatives identified. And now we're putting numbers to those initiatives. So we'll be able to have, for you in the next earnings a description of what we expect from a cash impact on cost, from a cash impact also on revenue, and even on CapEx efficiencies as we move forward. So we should be able to, to share with you in the next quarter, all that.
And as I said, all that is being prepared as we speak in the company.
Your next question comes from the line Hann Dignan with JP Morgan. Your line is open.
Good fundamentals in
the Oilseeds industries. And if we look at, the fall in hog prices in the last couple of weeks, it suggests that, you know, there may be trouble growing ahead domestically. And then if you could address the crush margins in China currently and the impact that might have on your own business and will mark?
Yes. And the first part, we didn't hear you. You were talking about China specifically in the Sparta in the hog industry?
No, and hog prices in the U. S. Have collapsed in the last couple of weeks. So just wondering if that industry of meal demand isn't peaking in the U. S?
Sure. Yes. So let me start with the China thing, and and and then we go back to the U. S. So we've seen recently, we've seen recently demand for for for in the COG industry or profitability in the COG industry recovered a little bit in China.
There is a still below cost, but better than before, mostly due to the lack of imports. So, that's helping a little bit. In terms of, in terms of, crush margins in China, Of course, they've been subdued, although they remain healthy, but in the range to 10% to $15 per ton, something like, something like that. So mill base is still in a calorie in China and demand as such is a little bit sluggish at this point in time. In terms of Wilmer, being a board member, I shouldn't predict anything about their results, of course.
But let me remind you that Wilmar is a very diversified company into not only palm oil and sugar, but also consumer products. So, not only they are very astute of how to play the China crushing margins in in terms of risk management, but also, a very diversified company. So, that's probably to the extent that I should speak about, Wilmar margins. And in terms of protein in the U. S.
Yes.
I mean, I think, Anne, a couple of observations. I mean, demand for protein States remains strong. And actually globally remains strong for animal protein. And so we're seeing solid growth, in 'eighteen, part of it is actually due to prices. The fact that prices have come down is actually stimulate demand.
We're seeing, like, in 2019, our forecast for animal protein, is going to
go up
roughly 2% for poultry, pork, and beef. From ADMs perspective, this is good since demand for is going to continue to be strong. And our estimate for global soybean meal growth right now in 2019 ex China is about 4% to 5% growth. So in that solid growth, we recognize that in United States that there is some adjustments in terms some prices. We've also redeveloped maybe some some increases in terms of frozen frozen meat stocks.
But when we actually look at the the numbers, the increases are not that dramatic relative to what we've seen in the history, especially when you look at it as a percentage of consumption or a percentage of export. So from our perspective, given strong global economies, strong demand, we're seeing that our outlook in the medium return for soybean meal demand remains very solid, especially given the fact that it is one of the most competitive rations for feed, because if it's protein content, there.
Okay. Thank you. And are you seeing any changes or hearing any changes from farmers and farmers' willingness to sell right now are going into fall when they harvest, given all of the uncertainty around China trade tariffs and NAFTA, etcetera. Is there any change to the way that, farmers are behaving yet, or is it too early to tell?
Not a good point. I mean, probably they are all looking at labor day to try to get more clarity about the pro the support program that the, Agnes secretary has, established. So I think that that probably define a little bit their pattern going forward.
Your next question comes from the line of Adam Sandlinson with Goldman Sachs.
Good morning, everyone. Good morning. Maybe, ground me having covered, in Carbohydrate Solutions and a little bit color around some of the moving pieces in the quarter and then the outlook. Maybe first, may probably need a little comment on the upgrades you're making at Decatur, both for, as it relates to sweetener and starch products, as well as on the NML side, kind of how big the impact was in the quarter and what that looks like, for the balance of the year? And then I have a follow-up on the sweet outlook.
Quarter, the approximately impact on our results was about $15,000,000, of which about 2 thirds of the impact was on bioproducts and a third of the impact on the starches and sweetener side. As we indicated, these are upgrades to both electrical and mechanical infrastructures in the complex. It's going to require us probably through the second half of this year to complete it. Our estimation in terms of potential impact on the second half could be in the neighborhood of, about 20 $25,000,000 in terms of the impact relative to last year. And again, similarly, about 2 thirds of it will be impacting the Bioproducts segment third will be the, the starches and sweetener segment.
So that's our best guess. This point. And actually, as we kind of go through the upgrades, if we discover something else, then, you know, we'll have to address it at that point in time.
Okay. And then just on the on the sweeteners outlook broadly. I mean, are you seeing have you seen any change in trend on the volume side for for for many for major customers but you commented that the U. S. Business was still on track.
Is there any concern rising about 2019 at point? Or do you think that some of the capacity rationalization that has been announced in the industry could save off any pricing or margin pressure there?
No, we're not seeing any, any change. In fact, what's interesting is when we actually look at, total demand for non sucral sweeteners. So we're looking at dextrose, fructose, and glucose. When you look at the trend lines here in United States since 2010, it's actually stabilized. Had about £25,000,000,000 of consumption.
And we've actually seen growth in, in the, glucose syrups in both, applications and non food applications. And that's kind of offset some of decline in some of the other areas. So what's really encouraging is that the demand profile in the U. S. Industry for our non sucral sweeteners is actually very stable.
And with the, you know, with supply demand balance, has remained tight. We remain pretty optimistic over the medium term for this business here.
Okay. And then just the issue that you highlighted in Europe, I mean, is that something that you see pressure continuing into the balance of the year or is it fairly contained in the quarter?
I think we may still see some pressure as we kind of move through the year. And we'll just have to work with the associations in the government in order to kind of get the, the coal that's lifted.
Okay. I appreciate the color. I'll pass it on. Thanks.
Your next question comes from the line Vincent Andrews with Morgan Stanley.
Ray, just to follow-up on sort of
the conversation on 'nineteen, you obviously sound very confident and a lot of it is attributed to a number of items, 5 or 6 different items that are within your control, the acquisitions and the cost work you're doing. But I just want to make sure I understand, are you you're talking about full year 'nineteen in your segments, you expect to have growth in all segments. And I guess as I sort of am doing the math on what it sounds like you're saying the back half of the year is going to look like. Are we talking about a 2019 from an EPS perspective that's going to be north of $3.50 and potentially approaching $4? And I know you don't wanna guidance, but can you just kind of talk us out of some things, if possible?
You're right. I'm not going to give any guidance in terms of 2019. What we're saying is that when we look at the, the overall drivers of our business in terms of things that we can control, the actions that we're taking, the general business environment that we're seeing across many of our industries, both origination side crush side, the, you know, the nutrition side. And then the investments that we put in, we, we feel good about 2019 because all, when you think about the algorithm for earnings growth in 2019, it will include improvements, actions that we've taken. It will include the fact that the general business environment remains solid, and it will include the accretion and earnings related to investments.
And then you layer on top of that, which one has indicated the readiness initiative which will quantify as we, get towards the next earnings call. When you add all together in terms of this algorithm, it points towards solid earnings
in the future. So is that another way of saying then that as you look at your results and how the business has performed year to date and what you expect balance of the year that what you're attributing to the disruption from the South American drought and whatever's happened from a tariff perspective, which, and correct me if I'm wrong, but I sort of think this tariff is good for you, that those impacts are not actually as large as maybe they appear, so therefore, there isn't as much of
a lapping issue next year as one might think? I think the underlying business fundamentals and the actions we're taking are actually pretty significant in terms of the contributions to our overall results here.
Your next question comes from the line of Ken Zaslow with Bank of Montreal.
Hey, good morning, everyone. I just want to circle back on 2 issues. One is, can you discuss the pricing opportunities and market share gains that you might be able to generate from the plant closure in high fructose corn syrup from a competitor?
Well, I guess, Ken, I mean, from our perspective, it's all about supply and demand balances. And so as I indicate, the, the general environment for demand for nonstrual sweeteners is solid here in in North America. And we've seen that over the since 2010, and with supply demand balances remained tight, I guess what we've what we've indicated this year is we should be able to maintain the type of margins that we've had in the past.
So you would to be fair, you would expect pricing to be higher next year and be able to maintain your margins on the corn side as well.
That fair?
I'll almost say, Ken, just like we provided guidance for 2018, we're seeing that our we should be able to maintain margins in this business.
Did you expect to see some market share gains?
Well, I mean, it's I
mean, we'll have to determine, how the bond gets spread out, right? And with the closure of one of the plants in history of the determinant of how that volume gets spread out.
And then the main other question is, look, the everybody is talking about the tops of different markets here, but ethanol is kind of at the bottom and kind of that horrible level of profitability. Can you talk about how the industry kind of evolves over the next call it 12 to 24 months? What are the key factors that you see and have we reached the leveling up on the bottom and is there a potential for 2019 to actually actually show some reasonable return on capital?
What's interesting is on the demand side for domestic ethanol, we're going to have some marginal improvements just due to the fact that gas consumption go
up a little,
but U. S. Economy is strong. So you're going to see some marginal growth in domestic demand. On the export side, we all know that China stopped buying ethanol after the first quarter.
Nevertheless, we think exports will still be around 1,600,000,000 calendar year. As we move forward,
I mean, on the assumption that
the U. S.-China trade situation will get resolved. And I think most of us believe at some juncture that will get resolved. There is a strong probability that China will come in to buy US ethanol as part their E10 mandate for or the E10 policy for 2020. So when you look over the medium term, we are constructive that incremental demand from China will tighten up supply demand balances in the U.
S. Ethanol industry and that should allow us to expand margins as an industry towards more normal levels.
So the crux of the outlook for ethanol, you think cages on China, not on any other key components? And then I'll leave it there.
I mean, China is going
to be an important fact in the overall evolution of the, the ethanol margins in the industry here.
Your next question comes from the line of Michael Piken with Cleveland Research.
Michael? Okay, Michael. Hi.
Can you hear me? I
just wanted to dive a little deeper into nutrition.
I wanted to see this year I think you said that you're looking for about 20% operating income growth this year and that's even before the impact of some of these recent acquisitions. We look into 'nineteen, is that kind of a sustainable growth rate or what are some of the factors we should be considering there?
Yes. Thank you, Michael. The performance of the Nutrition platform continues to be strong across all the businesses, to be honest. Flavors was very strong this quarter, and we continue to, make inroads in that area. Specialty proteins is coming back, which, it was a little bit down the last couple of years.
And we're bringing Campo Grande, one of the largest plants in the world in into operations. And multi fire has been showing growth. Fibers have been showing growth as we all need to consume a little bit more of that. Health and wellness has been growing spectacularly, although from a relatively small base right now. And animal nutrition has been showing also lot of strength out of some, strength in lighting, but also some new products into the portfolio.
So, when you add all these, on a platform that is basically in its formation at this point in time. When you add the power of Neovia bringing global distribution channel to these when you add the power of, Rodel giving us back integration into Vanilla and more access to growing our vanilla business. And when you look at protecting, giving us a commercial channel and an ability to produce more probiotics that are so much in demand, we feel very strong that this kind of rates will continue into the future. So, I think we're just seeing the beginning of this platform. And to be honest with you, Michael, I'm also excited about the future promise that advances in biology and genomics will bring to the nutrition and health industry.
So health and wellness is still the smallest of our in nutrition. But I think the promise of all the disruption technologies that we're seeing there, bodes very well for this, for this platform for the to come. So, and as I think, as Ray said in his remarks, we've seen the power of our value proposition 18 and our customers. So we've seen also in the EBITDA margin on sales that we have in this product, but also in the revenue growth in Prollers. So, we feel very good about it.
Okay, terrific. And then if we could just turn back to origination here, in terms of the destination, marketing. I think you said you're on pace to potentially double your volumes up to 19,000,000 metric tons. Can you give us some sort of long term growth rate there, in terms of what, you know, either for 2019 or longer term, how big you think that market can get from a volume perspective? And how do those margins compare to, kind of your historical margins here in the U.
S?
Yes. When we started with this, if you recall, we said that we were taking products to customers in about 15% of our portfolio, when we started, like, in 2014, and we said that our goal was going to double that percentage, if you will, So, so the beginning efforts were basically buying companies like MedSoft or in 3 centers or building our own capabilities on the ground. We did that. And with that, the volume grew. That's where the volume grew from 10,000,000 tons to, right, 19,000,000 tons that we are right now.
The margins have been growing. The margins has basically double to versus when we started. So versus maybe $2 per ton, we might be in $5 or something in that We're still short of the 8 that we wanted because basically in some of these places we were buying share or we were building the positions. So I would say you're probably going to see a slight maybe deceleration of the volume growth and more concentration in picking up the margins now, the margin part of that. So, but profitability has improved significantly in that business and the contribution of that business plus TIB Doring plus fertilizer plus other businesses to, to the overall origination business, as I said before, has moved from about 5% of the total to 30% of the total, which make us feel very good about the prospects of the business.
Okay, terrific. That was really helpful. I'll pass it on.
Your next question comes from the line of Eric Larson with Buckingham Research. Your line is open.
Yes, thank you everybody. Good morning. A very nice quarter, guys. Thank you, Eddie. Good morning.
Yes, so my first question, it comes down to the that we've got some grain price volatility back in the market, Juan and Raya, you know, we've kind of talked about trading profits being one of the things in origination that is probably structurally going to be lower over time given the the fluidity of information that everybody has access to these days. Is that proving to be the case here. And then will your, destination margins be able to replace, maybe more than fully replace that sort of actual dislocation in, in trading profitability? Yes,
thank you for the question, Eric. We've been adjusting to these new realities, if you will, over the last 3 or 4 years. And it's been a job that started with Joseph administration has transpired now into, into Stefano's administration. The global trade desk example, the global trade operations has focused basically our activities now more on chain. Think about this, for example, in 2014 or 2015, about 5% of the volume was ADN volume for the global rate.
Today, that represents about 65%. So it took some restructuring. It took some, changes of people, changes of facility, changes of incentives. But now we are much more integrated in moving and labor in ADM footprint. So I think that that's where you're seeing more consistency of results.
That's what you're going to see better results from these business. Think about, again, we faced a quarter with the prospect of already $30,000,000 losses in the sorghum side, which turned out to be a little bit lower because team executed very well, but still the business managed to be, relatively comparable to last years, even despite taking that headwind gives you an idea how well they perform. And it's not just on the positions they take, but it's also the rationalization of some of the assets they make, the increased efficiency, think about that they cut SG and A by metric ton, per metric ton by half, basically, since 2013. So I think the business have done a lot of improvements that, make us more comfortable not only we're going to be able to jump with the same agility we had before into discontinuities, but also the results will be more robust and hopefully more consistent than we've been in the past. So we feel very good about that business.
Okay, good. And then my final question, a lot of my questions have been answered. Translating all of your comments here this morning, you you've taken 100 of 1,000,000 of dollars of cost out of your business, the last several years and arguably a bunch of that money never really showed up to the bottom line because the business was facing a lot of headwinds we all know about those headwinds, which are reversing pretty nicely right now. So when I look at your return on invested capital, I think now you're rolling 12 is, 7.3. If you look at the current quarter and maybe Ray, you can help me with this number.
I think you're well above that, that 200 basis point, now this is just the current quarter, that 200 basis point spread that you want to achieve over WACC, which I believe is still 6%. And when I look at the structural changes in your company and look at your potential for return of to capital, I can only think that there's upside to that. And is there a reason why we shouldn't be even more encouraged with maybe 8% or greater ROIC in the next 1 to 2 to 3 years, how should we look at your returns?
Eric, we will continue to be focused on returns. And we will continue to be driving. That's the sole focus of our our strategy is to grow returns, to grow EBA. So, as we beat targets, we will continue to drive forward.
Your final question comes from the line of David Catter with Your line is open.
I'll keep it quick. Just on, optimizing the core, I know you guys completed the Bolivian divestiture this quarter. How should we think about other areas where you might see, divestitures or opportunity to rationalize your portfolio?
Yes, David, I think that, we're getting to the end of the sizable pieces, they're always going to be optimization because we're always looking at elevator here and other small plant there. But I would say from a divestiture perspective, we probably, at the end of, the big announcements, if you will.
Understood. And maybe along the same lines in the nutrition business, I know you guys have a lot of M and A to digest, how should we think about your capacity and or willingness to, make more bolt ons moving forward? And what does the acquisition environment look like there?
Yes. And I think we've been disciplined in the medium sized ones that we, we always take some time to digest. Remember, we made Wild Slabaugh's acquisition in October 2014, and we have Neovia now in mid-twenty 18. So we give ourselves sometimes. In terms of bolt ons, we have capacity to incorporate them.
So in that sense, we will continue to active. You heard us saying that we felt the environment was relatively expensive to some properties, and that we've been prudent. And we've been relatively subdued in this space. To the extent that we find opportunities that strategically match what we need to do and the that we need to fill and they match our return criteria. We will continue to execute, and we feel good about our ability to, plug immune into the business models.
Excellent. Thank you, and congrats on the quarter.
David. Thank you very much. There are no further questions
at this time. I would now like to turn call back over to Juan Luciano for closing remarks.
Okay. Thank you, Jack, and thank you everybody for joining us today. Slide 13 notes some of the upcoming investor events that we will be participating. So as always, feel, please feel free to follow-up with Victoria if you have any other and have a good day, and thanks for your time and interest in ADM.
This concludes today's conference call. We