Good morning, and welcome to the Archer Daniels Midland Company First Quarter 2018 Earnings Conference Call. All lines have been placed on a listen only mode to prevent background noise. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call Mark Schweiser, Vice President, Investor Relations for Archer Daniels Midland Company. Mr.
Schweiser, you may begin.
Thank you, Lindsey. Good morning, and welcome to ADM's first quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at adm.com. For those following the presentation, please turn to Slide 2. The company's safe harbor statement.
Which says that some of our comments constitute forward looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These statements are based on many assumptions and factors that are subject to risk and uncertainties ADM has provided additional information in its reports on file with the SEC concerning the assumptions and factors that could cause actual results to differ materially from those in this presentation. And you should carefully review the assumptions and factors in our SEC reports. 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 provide an update of the progress of our strategy and discuss Please turn to Slide 3.
Good morning, everyone. Thank you all for joining us today. Quarter adjusted earnings per share of $0.68. Our adjusted segment operating profit was $717,000,000. The team executed exceptionally well in the first quarter, and we harvested the benefits of the strategic actions we took over the last few years delivering strong results.
As you remember, last month, we realigned our business units to further accelerate our growth efforts, and each of those business teams performed well this quarter. In Origination, the global trade business delivered their 4th consecutive profitable quarter, and their best first quarter in 4 years. Our Oilseeds team made the right investments and put the right pieces in place so they could run at record volumes and capture the benefits from margin opportunities. In both of those businesses, certain mark to market timing effects, which should reverse in the coming quarters, masks the underlying strength of the team's performances during the quarter. In carbohydrates solutions, our strategic expands and investments are continuing to deliver results.
And our Nutrition business had another quarter of top line growth including double digit year over year growth are focusing our growth efforts on 5 key platforms: animal nutrition, bioactives, carbohydrates, human nutrition and taste, as well as geographic regions that are seeing increasing consumer demand. And through Readiness, we continue to reduce costs. We are enhancing our agility, streamlining and standardizing our processes, and implementing innovative technologies for our businesses and our customers. Continued execution of our strategic plan combined with our first quarter results, improving market conditions, and the benefits of U. S.
Tax reform lead us to be even more confident about 2018. Later on this call, I'll discuss further the outlook for our business. Now, I'll turn the call over to Ray.
Okay, thanks Juan. Slide 4 provides some financial highlights for the quarter. Adjusted EPS for the quarter was $0.68, up from the $0.60 in the prior year quarter. Excluding specified items, adjusted segment operating profit was $117,000,000, up 39,000,000 from the year ago quarter. We had some unique factors impacting both our reported and adjusted results for the quarter.
We recorded a positive net operational impact related to the retroactive application of the 2017 biodiesel tax credit, which was worth about $120,000,000. Both seats, which were worth about $150,000,000 in aggregate. So these 2 impacts more or less offset each other in the quarter particularly on an after tax basis. I will be further elaborating on these impacts later. The effective tax rate the first quarter was approximately 15% and was favorably impacted by U.
S. Tax Reform, the 2017 biodiesel tax credit, geographic mix and several favorable discrete tax items, including a $14,000,000 adjustment to the transition tax recorded in the fourth quarter. If the biodiesel tax credit and the favorable adjustment to the transition tax were excluded the effective tax rate would be about 19%. After considering our first quarter results, we expect our 2018 calendar effective tax rate to be between 16% 18%. Looking ahead, as an ongoing run rate after 2018, we expect the effective tax rate to be between 17% 20%.
This is below the 20% to 23% guidance we provided to you at the end of the 4th quarter as we have further refined Our trailing 4 quarter average adjusted ROIC of 6.4 percent is 15 basis points above our 2018 annual WAC of 6.25 percent, thus again, generating positive EBA. On Chart 19 in the appendix, you can see the reconciliation of a reported quarterly earnings of $0.70 per share to the adjusted earnings of $0.68 per share. For the quarter, we had $0.01 per share credit related to LIFO a $0.02 per share charge related to impairments and restructurings and a $0.03 per share benefit related to the favorable adjustment to the transition tax booked in the 4th quarter which I referred to earlier. Slide 5 provides an offering profit summary in the components of our corporate line In the other segment, we had unfavorable results compared to the prior year due to lower underwriting results at our captive insurance operations, and customer loss provisions at our Futures Commission merchant business. We expect a one time variance of approximately $20,000,000 will impact our 2018 calendar year results by a similar magnitude.
In the corporate lines, net interest expense for the quarter was up slightly due to funding higher working capital levels. Looking ahead, we're projecting net interest expense for 2018 to be slightly higher by with expectations of higher inventory ownership positions. Unallocated corporate costs of $146,000,000 the prior year due to a corporate initiative that will have an offsetting benefit in tax expense. For the rest of 2018, we're expecting unallocated corporate costs in the range of $140,000,000 per quarter in line with the guidance that we provide to you for the 2018 calendar year with the company accelerating its investments in R&D, Innovation And Business Transformation. Turning to our cash flow statement for before working capital changes, slightly higher and the willingness of growers to sell their crops presented opportunities for us to take on a greater ownership position.
In addition, typically from a seasonal perspective, the first quarter sees a net outflow of cash due to the cycle of counts payable to U. S. Farmers, which is further impacted by U. S. Tax reform.
Total capital spending was $196,000,000, in line with our expectation for the year. We returned approximately $190,000,000 of capital to shareholders through dividends. Therefore, we had a balanced approach towards capital CapEx spending and return of capital to shareholders during the quarter. Our average share count for the quarter was 565,000,000 Slide 7 shows the highlights of our balance sheet as of March 31, 20182017. Our balance sheet remains solid.
Our offering working capital of $9,200,000,000 was up $1,800,000,000 versus the year ago period, primarily due to higher inventory ownership positions. We also had certain higher receivables, which will unwind over the next quarter. Total debt was about $9,000,000,000, resulting in a net debt balance that is debt less cash of $8,200,000,000. We finished the quarter with a net debt to total capital ratio of about 30%, up from the year end 2017 level 27% due to higher working capital and the normal seasonality of working capital in the first quarter. Our shareholders' equity of $18,700,000,000 was up from the $17,100,000,000 last year, primarily due to changes in the currency translation count as the U.
S. Dollar weak end. We had $5,100,000,000 in available global credit capacity end of the March. If you add to available cash, we had access to almost $6,000,000,000 In the first quarter, we earned $717,000,000 of offering profit, excluding specified items, up from the $678,000,000 in last year's quarter. Our results included negative mark to market timing effects, which were largely offset by income from the 2017 biodiesel tax credit.
Most of these timing effects are expected to reverse in the coming quarters. Now I'll review the performance of each segment. Starting on Slide 9, origination results were in line with the prior year. Merchandising and handling was up significantly year over year. The global trade team continued their turnaround, delivering their 4th profitable quarter in a row and their best first quarter in 4 years.
Substantially higher margins and increased volumes including from our investments in destination marketing contributed to their performance. North American grain was down compared to the first quarter of 2017. A lack of U. S. Export competitiveness the beginning of the quarter led to volumes and margins that were lower than the prior year.
In addition, increasing Ford export margins, and barge freight rates in the first quarter resulted in approximately $40,000,000 of negative mark to market impacts on existing contracts. Those impacts are expected to reverse in the future quarters as contracts are executed. Stitution gains in weak partially offsetfuls effects. Transportation was down as high river levels limited operations resulting in increased costs and lower volumes for our ARPU. Please turn to Slide 10.
Oilseeds was up over the first quarter of 2017 continue to push soybean crush margins higher and the business set record soy crush volumes. Improving crush margins resulted in negative timing effects of more than $100,000,000. In fact, more like $110,000,000, on forward hedges, which led to crushing and origination results that were lower than the year ago period. The vast majority of those impacts are expected reverse over the course of Soft seats were down on lower margins and some negative timing impacts. Refining Packaging biodiesel and other results were substantially higher on the retroactive passage of the 2017 biodiesel tax credit, which accounted for approximately $120,000,000.
And increased volumes in North And South America. Europe was pressured by imports of Argentine Biomediesel. Asia was lower on Wilmar results as Wilmar recognized deferred tax benefits to their earnings in the year ago quarter. On the crushing origination side, our Oilseeds group managed the business extremely well through a complex quarter. Our investments and enhancements in costs, flexibility and productivity at some of our facilities contribute to our ability to crush at a record level and capitalize on the strong market environment.
In RPBO, it's important to remember that we made a choice in how we managed risks in 2017 related to the biodiesel tax credit in 2017, and that execution has now paid off. Slide 11, please. Carbohydrate Solutions results were in line with the year ago quarter as we saw continued strength in starches and sweeteners, up set by a weak ethanol industry margin environment. Starches and sweeteners was up over the prior year. The North American business delivered another strong quarter joint ventures, Almex and Redstar contributing positively to results.
Chamtor increasingly contributed in Europe, while sales in Asia were slightly lower. Wheat milling was up, benefiting from strong margins. Filed Products results were down versus the year ago quarter due to pressured industry ethanol margins and lower volumes in industrial and beverage alcohol. On Slide 12, nutrition was up versus the prior year a gold period. WFSI results were in line with the first quarter of 2017.
In wild flavors, a good sales mix with a higher share of flavors, colors, and systems supported solid margins another quarter of double digit profit increases versus the prior year period. Specialty Ingredients results were lower on inventory adjustments and an unplanned production outage. Sales volumes were up for specialty ingredients for the quarter as both Compagrande Special Protein's team and the Tianjin Fibersdale team drive towards full utilization. Animal Nutrition results were up significantly over the first quarter of 2017 with strong trade sales a good sales mix. The team's strong inventory position helped us capitalize on higher sales prices.
On the specialty animal feed side, improvements in the lysine business continued to contribute to results. Now, I'd like to turn the call back over to Juan. Juan? Thank you, Ray.
Please turn to Slide 13. Before we talk about our strategic accomplishments in and changes and focus. First, we announced in the first quarter realignment of our business segments, to reflect company's new operating structure and our continuing evolution. Given our strategies and priorities, Our realigned business units will allow for better synergies and utilization of resources and better reflect how we're running now our businesses. For example, moving with milling into our new carbohydrate solutions business, means our 2 start processing operations now can work more closely together to develop and sell products.
And it offered cost and efficiency synergies as well, but the corn business impressive operational excellence expertise can benefit our milling operations. Moving animal nutrition into the nutrition business unit means that our pet tree team which grew significantly with last year's addition of Crosswind Industries will have the opportunity to work more closely with our flavor and color experts at Wilde to create products for these fast growing markets. Bioactives and nutrition will also be from being in the same business as the continued move toward personalized nutrition is closely related to increasing health consciousness among food and beverage consumers. Therefore, the time was right to make the changes in the first quarter and our first quarter reporting reflects the realignment. To assist you with comparisons, we have included a recasting of last year's core in the appendix.
Looking forward, are going to continue to drive growth by focusing our efforts on 5 key platforms that we believe can lead to stronger earnings and returns. They are animal nutrition, bioactives, carbohydrates, human nutrition, and taste. While ADM will always play a political role in feeding a protein hungry world whose population will surpass $9,500,000,000 by the middle of this century. Our mission has also evolved to include providing better nutrition for consumers worldwide, which has a positive impact on people's quality of life. Our focus on the 5 key platforms will help us fulfill that mission.
And finally, all of our efforts will be informed and improved by readiness, which will drive efficiencies and improve the customer experience in our existing businesses through a combination of lean manufacturing, process standardization, and digital design. And will also support execution of our growth strategies in our key growth platforms. I will further elaborate on Readiness on the next slide. Slide 14, please, and a review of some of our accomplishments in the first quarter. In our first strategic pillar, we are seeing the results of the actions we have taken to enhance the core.
Last quarter, we talked about fixing leakages, specific limited areas where our execution wasn't as a strong have been. We saw significant improvements throughout 2017. And in the first quarter of 2018, we have had a great start strong turnaround in 1st quarter results and continued its run of strong quarters. Our Oilseeds business delivered important cost savings and margin recovery in South America. And our yield and productivity self help led to a turnaround of our lysine business.
We're also enhancing our core in origination with our continued expansion of destination market Actually, earlier this month, we signed a deal with Peel Port's group to utilize its classical port facilities, allowing us to expand our destination marketing capabilities in Northern England and Scotland. Our second pillar enhancing Readiness is an area of intense focus. Readiness is an evolution reduce costs, drive growth, enhance the customer experience, and build our competitive advantage. All while preserving the positive aspects of our culture. Today, we require more speed and agility than ever That's why we have decided to expand our Readiness efforts to include performance excellence spanning our entire business model.
We'll be integrating prioritizing and resourcing key existing projects under 1 umbrella, while significantly broadening and accelerating the higher effort, not just on costs, but also on revenues. As a signs of the importance of these expanded efforts, we have asked Joe Titz, one of our most senior and respected executives to lead the new Readiness efforts going forward. Joe will be focused on helping the organization drive additional efficiencies more quickly and on improving the customer experience. Our 1 ADM business transformation remains a key part of Readiness. During the first quarter, we expanded 1 ADM to our ocean freight and European corporate finance operations.
Under Readiness, will be further expanding 1 ADM to cover savings of $70,000,000 on a run rate basis at around pace to exceed our 2018 target of $200,000,000. In our 3rd pillar, strategic growth, we are supporting our new growth platform with the opening of our and in particular, will advance our animal health and sign partnership with VLAN Biotech. We're also continuing our geographic growth with the formation of a joint venture with Targill will further produce and supply soybean meal and oil for customers in the fast growing Egyptian market. As well as an expansion into the Russian starches and sweeteners market via a joint venture with Afton Foods. Please highlight several of the actions we took in the quarter.
We'll continue to update you on our progress regularly. If you could please turn to Slide 15 for a look forward. In Origination, for the 2nd quarter, are expecting a small portion of High river conditions have continued to impact ARCO operations. ADM is one of the largest exporters of U. S.
Sorghum to China. And we do expect a negative impact of about $30,000,000 in the second quarter related to the Chinese deposits being imposed on that trade. Other than the negative impact on the sorghum issue, we expect originations 2nd quarter performance to be more or less in line with the the second half of the year as U. S. Export dynamics improved due to the reduced Argentina soy and corn crops and Brazil corn crop.
And as negative timing impacts for the first quarter continued to reverse. For the calendar year, we expect solid fundamental improvements in origination results compared to 2017. Oilsys will continue to capitalize on improving market conditions in the second quarter and will additionally benefit from the reversal of some significant timing effects to deliver significantly improved results in Q2 versus the prior year quarter. For the calendar year, with improved soybean crush volumes and margins, a better origination margin environment in Brazil and the expected launch of our Egypt joint venture and completion of our Bolivia divestiture, we expect oilseeds to substantially improve results over 2017, even absent the Q1 income derived from the retroactive twenty 17 biodiesel tax credit. We expect carbohydrate solutions to continue to be impacted by weak ethanol margins, leading to results in the second quarter that will be lower than the equivalent period last year.
As the rest of the year unfolds, We are expecting starches and sweeteners to continue to see good demand in an environment of tight industry utilization. We should also see some additional contributions when our new Russian joint venture is launched. All told, We think carbohydrates solutions result for the full year would be roughly similar to 2017, but with a big variable will be how ethanol margins evolve throughout the rest of the year. In Nutrition, we expect continued sales growth to help deliver improved performance in the second quarter. From a seasonal perspective, the 2nd quarter should be the strongest quarter of the year.
For the full year, growing sales continued strong performance from wild, plus increasing contributions from both improvements in animal nutrition and new facilities, are expected to result in a solid 20 percent plus growth in operating profit versus full year 2017. Altogether, we are well positioned to capitalize on improving market conditions for the balance of 2018. We continue to closely monitor trade developments, both in terms of NAFTA as well as U. S.-China developments that seem to evolve almost on a daily basis. So overall, we are pleased with where we are.
We've built up our earnings power through the actions we have taken over the past few years, and we're seeing the results in our bottom line as headwinds turn to tail wins. Looking forward, with our new business structure, the sharper focus on key growth areas, new accelerating Readiness efforts and a lower effective tax rate were even more ident about delivering significantly improved results in 2018 and excited about our future in the years to come. With that,
Our first question comes from the line of Heather Jones with Vertical Group. Your line is open.
Good morning.
Good morning,
Heather. Good morning, Heather.
I had a quick clarification question. Did you say in oil seeds that you expect Q2 to be substantially better than last year, but only a portion of the Q1 mark to market to reverse?
That's correct.
Okay.
Well, actually, actually, we actually expect roughly half of the mark to market to reverse in Q2 related to oilseeds. In the case of ag origination, that's going to be more of a Q3 impact. But with respect to the timing of impacts of oilseeds, roughly half will reverse in Q2.
And when I'm thinking about the year on year swing for Q1 in oil season mark to market, so it's about $110,000,000 this year. But wasn't it a help in Q1 of 2017? So the year on year swing was even bigger than 110?
Yes, it was a favorable impact year, we didn't outline it because it's less than normally a $50,000,000 impact we would outline, but it was a small favorable impact last year.
Okay. I wanted to talk to you about the sustainability of the soy crush margin. There's some there seems to be some belief out there that this is just a function of Argentine weather and that next year we could see a return to more depressed environment like 2017. I was wondering if you could speak to what you think the drivers are of this improved environment and your view of the staying power?
Yes, Heather. The drought in Argentina certainly contributed to the increase in soy crush margins, but We foresaw these crush margins expanding even before the extent of the Argentine drought was known. And it wasn't a several several factors. First of all, there has been not only a drought issue in Argentina, but a little bit of a structural change with the monthly reduction in the soybean export tax that had effectively created the recovery in the market. And that began in 2018.
And also, the U. S. Tariff stake has been placed on Argentine Biodiesel, effectively stopping the flow of Argentine by recently to the U. S. Has changed a little bit the dynamics internally.
So the Argentine crusher has become more discipline And I think we see less of meal being subsidized by biodiesel from Argentina, if you So that's one factor, the Argentine dynamic outside the drought, and that's a more permanent dynamic that will stay with us. I think also the Brazilian Origination industry has become more rational following an exceptional challenge in 2007 seen. I think we all learn about that year and we all reduce our take or pay commitments and we are not facing the same mismatch between farmer selling and customer buying that we faced. Demand continues to be strong around the world. We think in this year about 4% increase.
And we don't see in the first quarter, the same impact we saw last year of having to absorb DDGs or the fit width that we have we have last year. So in that sense, the power of substitutes to hurt this year has been reduced and will be into the future. We also we have seen that with all these changes, the global buyer has become less hand to mouth. Over the last few years, there has been a big destocking and that situation forced us to be more on the spot, if you will, when we cannot buy a book, Now with the little bit more of scarcity value returning to the market, the global buyer wants to lock in their cost And that's resulting in better operating environment for us because we can position better. We can work our optionality better.
When you add all these plus, everything that we have been doing in terms of cost control and swing capacity in our facilities, We feel very strongly about not only the sustainability of this margin, but the sustainability and improvement of our performance in the years to come.
Awesome. Thank you so much.
Thank you, Heather.
Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Yes, thank you. Good morning, everyone. So maybe continuing on oilseeds. And I don't want you to just lose some of the confidence in some of the drivers there. And I think your exact phrasing was significantly ahead of 2017.
And I guess I'm trying to frame it given board crush margins today and even forward crush marks say that sit near multiyear highs and thinking about kind of banding kind of how much improvement you could actually realize in your base results, especially given some of the weakness in you experienced last year that seems to be reversing?
Yes. As I described before, I think we're not only gonna see an improvement in origination in South America. Part of the market part is we have improved on our team. But also in all seats and listen, we have confidence that we could see all seats achieve about $1,000,000,000 or north of a $1,000,000,000 of operating profit in 2018, even after excluding the credit of the retroactive application of the 20 17 biodiesel tax credit. So that's a significant increase over the about 800 and $50,000,000 of adjusted OP that we achieved last year.
So, we feel very good about it.
Okay. And just to be clear on that, I mean, ADM crushes ADM crushes 30 or so 1,000,000 tons a year of soybeans $150,000,000 increase in profit, even exclusive of the tax, biodeal tax credit, I mean, the board crush margins have expanded significantly more than that. I'm just trying to make sure I'm not thinking about that wrong or where the deltas are on the negative side that would be tempering some of that year on year improvement.
Yes, don't forget the South American or Brazil origination. It's a significant turnaround versus last year. So when you look at the oil seats segment, you're not looking solely at the crush margin. You also need to look at the South America, particularly the Brazil origination And in the first quarter, I mean, it is a significant turnaround, and we expect that to continue over the rest of the year as well.
Okay. And then just a quick question on ethanol. And I think, Juan, you had some pretty tempered comments on the second quarter. And maybe for the balance of the year, I mean, the margin environment has, I mean, it's not great, but it seems like it's actually modestly better than it was a year ago. The inventory picture and production numbers have been reasonably constructive for the industry in the last few weeks.
Can you talk about how you think about ethanol over the balance of the year and some of the puts and takes against that outlook?
Sure, yes. Of course, on the positive side, Adam, we see favorable blending economics, both domestically and globally. And that will lead to a strong exports At the beginning of the year, we were probably thinking about 1.8000000000 gallons of exports now with China we're probably thinking more in the range of $1,600,000,000. So, you are right. We are entering the driving season with inventories that are lower than last year.
So that is on the positive. But we will see, we will have to see the strength of domestic, domestic gasoline in this driving system, given prices, prices are kind of creeping up for gasoline. So we'll see how that impact demand. And, we continue to see exports go into Brazil. And as I said, with the exception of China, we export, I think, the industry like about the 100,000,000 gallons in the first quarter to China, but we're probably estimating 200 less for the rest of the year.
So a lot of volatility, and I would say there has been some increase in in margins over the recent, over the recent weeks and that everything will be determined how do we go through the driving season and the rest of the year? And as I said, there is some optimism in the fact that we're entering the season with a little bit lower inventory on last year.
Okay. That's helpful color. I'll pass it on.
Okay. Thanks.
Our next question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Hi, thank you for the question. You certainly talked about some of the structural improvements going on in Argentina to make the crushing market, more favorable going forward. And also the reduced take or pay, kind of activity. Can you speak also about farmer selling in Latin America or in Brazil in particular? And is there something structurally improving there as well?
Would seem to me that they would the farmers there would continue to have, pretty good negotiating power and the Argentinean farmers would as well, regardless of what's going on with the weather in Argentina, are these things related to the crushing discipline or is it something separate?
I would say in Argentina, farmers selling remain historically slow. And And I think at this point in time, it will continue to do so. We see, the market the farmer has sold mean, it has price about 20 percent of the crop, which is about 8,000,000 tons. Obviously it's a smaller crop and prices have come up because the crusher needs to entice the farmer sale in Argentina at this point in time. But I would say, in Argentina, it's going to be a little bit about interest rates, inflation, devaluation of the peso and the farmer will be playing with that.
So we expect that this carry that a certain degree the government has put into the market will continue to make the Argentine seller a slow seller. In Brazil, we have seen farmer selling, at this point in time, they price probably about 56% to 60% of the crop versus about 44% a year ago. So we've seen good farmers selling in Q1 and during the 1st weeks of Q2. Rallies in the market and obviously, the Vale of the real has brought the farmer to market. So we will have to evaluate how it goes, but so far the start of the year have, have played that way.
But do you see any structural changes in the Brazilian farmer's ability to delay selling or
not?
Not any significant change versus last year. No, I would say.
Okay. Can I ask a last question? Do you have a rough estimate for what animal nutrition's profits are on an annual basis?
Yes, I think that when you looked at the pro form a, we kind of showed you kind of what last year's number was which I think was about roughly about $20,000,000, $20,000,000. I think you should expect that's going to improve because of the improvements that we made in the, particularly the lysine business as we kind of continue to grow that particular business.
Okay. Because you have $23,000,000 in first quarter alone. So
that's why I'm saying we should actually expect a pretty strong growth in the animal nutrition on a calendar year basis compared to 2017.
Got it.
The improvement that we've been talking on life in all this for the last year has been significant, has been significant. And you will see a big acceleration in any monetization results over time.
Great. Thank you.
Our next question comes from the line of David Driscoll with Citi. Your line is now open.
Great, thanks and good morning.
Good morning, Luke.
Wanted to follow-up on the oil feed crush questions and it just maybe because we've had such a substantial spike in margins, can you guys just talk a little bit about the hedging philosophy on how this works? Like we're already here into the second quarter. What kind of business is done at these really terrific spot margins versus maybe the team hedged it many months ago for the second quarter at lower margins. I think we're all maybe very interested in that particular point, because I think it starts to give us an information as to how we think about the profit potential of these businesses as time progresses. I'd also be curious about how you think about hedging Q3 and Q4 can you even do it?
Is there enough liquidity in the market to hedge at this time?
Yes, David. Normally, in our old crush operation, we do run hedges. We do actually try to lock in margins in the future. Of our outlook, our perceptions in terms of supply demand and how margins move. I mentioned to you that a lot of the timing effects will reverse in the second quarter.
So that actually gives you an indication that we back in the fourth quarter, we did lock into quite a bit of margins related to the second quarter and that will unwind. The rest, the rest of the 25 the other 50% that will unwind, that will unwind over the course of quarter fourth quarter and a little bit in 2019. So it gives you a sense that we're always going to be hedging more than nearby and then less on the the further out. But as we pointed out, I mean, the thing of the mark to market, this is actually a very good news. I mean, tells you that the forward margins look very, very healthy.
So the fact that we have a lot of that unhedged we will be able to benefit from that type of margin in the future when we actually execute. Naturally, with the higher margins, we are continuing to hedge. So we are putting on more hedges as we kind of go through every quarter.
Do you have good visibility into the back half of the year then because of the margins sorry, because of the hedging program, is that fair to say? I mean, would it be north of 50% of the volumes? Is there any kind of ballpark? I mean, I know I understand it's proprietary, but we're all struggling here with how we think about the model in Q3, Q4 and a lot of this will relate to just your strategies on the hedge?
Yes. I mean, we're not going to stick on both of the specifics in terms of how much we're going to hedge, but do I mean, just the fact I pointed out that we do have some mark to market timing effects in Q3, Q4 indicates that we do have hedges out there.
Okay. I'll leave it there on the oilseed 1. Just to follow-up on ethanol, we do calculate margins here that are that are actually reasonable. And just one, can you explain again why I didn't understand why you're so don't want to say, I don't know the right word concerned is, but it's year on year negative comparison versus the year ago. And the environment here, it feels good.
Did ADM maybe it's a hedging question again. Did you guys lock in ethanol business some time ago before we saw the margin structure here lift up?
No, no, David, maybe the commentary is relative to the other segment when we were talking about 2018 and how confident we feel about the results being much better than 2017, we see, we see very strong origination comp versus the previous year, and we're going to go up in every segment in origination year over year. We see the strength on oilseeds and not only crushing, but also origination in South America versus the previous year. We see we're going to double digit growth in nutrition. And we continue to see very strong sweeteners and starches. Business.
So, my point is, the only, the only question mark, if you're willing, the environment is the ethanol, and especially given that the duties that China put will reduce the volume on that. So, Coming into the year, we thought very strong export will keep off, if you will, and make the margins expand into ethanol now we're going to have to deal with 200,000,000 gallon less of that. And that's why I've been a little bit more cautious. But probably is relative to how optimistic we are for the rest of our business, if you will.
Okay. I'll pass it along. Thank you.
Okay.
Our next question comes from the line of Ann Duignan with JP Morgan. Your line is open.
Yes. Hi, good morning. Yes. Good morning. Good morning.
Back to Oilseeds. Are you running at capacity or do you have room to increase volumes going forward?
We were running at capacity, I would say, March, all the way to March. And then April, we started a little bit with the maintenance, with the seasonal maintenance and this time of the year. So that's the dynamic. But before that, we were probably running north of 85%.
Okay. And that's global or U. S?
No, that was the U. S.
U S. Okay. And then can you talk a little bit about Wilmar? Wilmar is one of the largest crusher is in China and imports most of its beans. I presume that that's through your joint venture.
Can you talk about the dynamics and how that relationship might change should the Chinese put a tariff on imported soybeans?
Yes. So, 1st of all, Wilmar is a very diversified company. It's certainly has a big pile model and tropical operations and has developed over the last few years a big consumer products business in China. So, it is less exposed to soybean crushing than maybe people give them credit for I would say if all these U. S.-China trade dispute end up not being resolved and in June, we see 25% duties on beans, I think you will see probably an impact on the volumes of Wilmar crushing because basically, China will be buying more expensive beans and soybean meal will become a little bit more expensive and it will be some impact on demand.
So I expect capacity utilization to be reduced a little bit. I don't know to what extent. Of course, we know that Brazil export about, give or take, 70,000,000 tons of beans and China imports about 100,000,000. So, there is a gap there. And, but at the end of the day, that's the impact we're seeing.
That potentially we will have reduced capacity utilization a little bit in Wilmar.
But it's also important to note that Wilmar probably one of the most efficient crushers in China. And so whenever there's going to be more input price pressure, they will on a relative basis do better, just due to the fact that they have a very, very efficient cost structure.
Okay. I appreciate the color. And if I could just ask one quick follow-up, philosophical one. You noted one that Part of ADM's vision is to provide better nutrition for consumers. Where does sweeteners and star just fit into that vision or technician?
Yes, we have a business that has some components of healthy nutrition and we have some parts that are more related to indulgence and fun. So there are some products that like high fructose corn syrup that, goes into products that, like carbonated soft drinks that they have a place in nutrition and with moderation, they can be consumed as part of our diet. The business, as you heard us saying, for many, many years, has been working on what we call the fight for the grind. Is continue to bring other things to do in, to be produced out of corn. And that's why the start piece of the business continue to grow.
So, it's part of our portfolio. It may not grow as fast as other parts of the portfolio, but it's part of our portfolio and it's a healthy part of it. Thank you, Ann.
Our next question comes from the line of Michael Piken with Cleveland Research. Your line is open.
Yes, hi. I just wanted to circle back to your operational synergies target and you guys said you might be able to do an excess $200,000,000. Could you provide a breakdown a little bit by segment and how much you might be able to exceed that number?
Listen, I don't have a breakdown of the whole synergies per the 4 segment, but in general, they are very much allocated, if you will, or they come from the size of the asset. So normally in every year, corn tends to take about half of everything we save because they have the biggest facilities I think oilseeds has done very well this year and you're going to see maybe 25% from oilseeds and then if you will the rest of the 25 percent, a split between nutrition and act services give or take.
Okay. That's helpful. And how much in excess of $200,000,000 do you think you said you guys are running ahead of $200,000,000? I mean, how much upside is there?
You know, it probably maybe a 10%, 20% upside, to that. We were very pleased because, as you know, some of these projects are, CapEx related And, we reduced the amount of CapEx for this year. So we were thinking maybe $200,000,000 will become a difficult target without the ability to do CapEx. But you know, kudos to our operation teams, because they look at the pipeline and they found $70,000,000 on run rate with, some capital restrictions. So we are very pleased about the the start of the year.
And that gives us hope and confidence that, we will exceed the 200 we have developed, this has become part of the culture. We've been doing this for the last 5 years. And, over the last 4 or 5 years, we have saved about $1,000,000,000 run rate in this operational excellence. And when we think about going forward, Michael, on Readiness, in which we are not only looking at performance excellence for our plans, but also for the whole company. We think that the readiness programs, and that's why we're putting so much emphasis on it, has probably another $1,000,000,000 of savings ahead of us.
And so over several years, but we see that that $1,000,000,000 that we achieved over the last 4 years, we have another $1,000,000,000 ahead of us. And this start of the year with 70,000,000 run rate in the first quarter give us even more evidence that that is highly achievable.
Okay, great. That was really helpful color. I'm just shifting gears. Maybe you could talk a little bit in terms of wild flavors. And I know 2Q is seasonally the strongest period of the year.
But as you sort of look out maybe even a little bit more longer term, I mean, what type of revenue and EBIT growth rates should we be thinking about over the next couple of years for wild flavors?
One of our main tenants in wild flavors is that, we are providing natural flavors And second, that we are focusing on providing total ingredient solutions. So that value proposition is resonating very well with customer. And you see that wild flavors continue to grow earnings of double digit. Actually, at the moment, I would say in places like Asia Pacific, we are capacity limited. If not, we will be growing revenue faster.
And we are expanding, we're doubling that facility as fast as we can. So I would say, we have still, we have untapped potential because we haven't even started playing the land matching flavor in South America. Are at capacity in Asia Pacific. We are growing about 30% per year from a small base in Africa So, we think again that this transition from just individual flavors or individual products to more solutions is right in our alley and resonating with customers and we see the potential of double digit growth for several years ahead of us. We bring more capacity.
Great. Is that double digit revenue growth or double digit percentage?
No, I
would say double digit operating profit growth. Revenue growth should be something between 4% 7% or 8% depending on the area depending on when do we bring the next capacity. As I said, right now, we're a little bit constrained in capacity. So, you see us shifting the mix to more profitable things. That's why you see OP growing faster than revenue.
But as soon as we bring some extra capacity, you will see us growing more like in the 7% to 8% revenue.
Thank you very much. That was very helpful.
Welcome, Michael.
Our next question comes from the line of Tenzaslow with Bank of Montreal.
As you're going through this better upswing in the commodity cycle and is helping your oil season and other parts of your businesses, can you talk about your efforts of how much your earnings power should be higher relative to where it would have been just in an upswing? Because As a point of reference, again, I think it was pointed out earlier, if you just take the crush margin and times it by your capacity, they didn't seem that as much upside to your operational efficiencies and all the actions that you've taken. So we're just trying to figure out what the implications are on your earnings power of all the stuff that you've done? And if you could put in some sort of context, given the higher commodity cycle?
Yes. I mean, Ken, I mean, we've talked in the past about how we've been driving earnings improvements over the years. And we've been talking about how we've been, 1, driving operational excellence. And so we've seen a lot of benefits from operational excellence. As you know, not all but flows to the bottom line because we've actually reinvested some of these savings in different initiatives.
And secondly, we've talked about growth initiatives accretion from recent investments and we're getting a lot of that accretion now with these things starting up like Campo Grande in Tianjin. Thirdly, the wild flavors was an important part of our accretion story and you're starting to see the traction from wild flavors in terms of double digit growth. And then lastly, we did do a quite a few share buybacks over the past couple of years. And that's also contributed towards our earnings power. And so I think what we've indicated that over the past couple of years, some of the headwinds that kind of masked these improvements.
And one, you've been trying to figure out how much these headwinds cost us. I mean, it could easily, we've talked about the fact that these headwinds could be more than $0.50 a share, right, in terms of the impact on us. And so as these headwinds kind of subside and become tailwinds, more like tailwinds, you're going to see strong recoveries, particularly in the oilseed segment. We're actually very optimistic about oilseeds in terms of what it can deliver, as protein demand continues to be strong, as our U. S.
Operations continue to drive efficiencies. And so we're probably most optimistic in terms of recovery of the base in the oilseeds business. In origination, you're seeing good recoveries right now. As I indicate, we're talking about fundamental improvements in terms of recovery of origination. But there has been some structural changes.
We've talked about some of the structural changes that have impacted origination. And so we're probably never going to get back to the historical ranges in origination. And then in carbohydrates or the former corn processes segment, we've talked about the fact that we're growing the geographic footprint of that. And so that's how we're going to be driving earnings power into carbohydrate segment as we continue to expand that footprint. And then under the new nutrition segment, we're very optimistic about that one.
We've talked about 20% plus offering profit growth in 2018, this really is one of our key growth segments going forward.
So net net with you, if you take all the investments that you've made in and then x out some of the structural, are you Is it a net positive to your earnings power when we see the cycle completely turn or is it a net neutral? How do you think about that? I guess it's just philosophically, it doesn't mean if you put numbers to it, that would be all the better, but doesn't
No, I mean, philosophically, Ken, it's a net positive. There's no doubt it in. And I think that as we kind of go through this year, I think you're going to start seeing how these earnings power translates into stronger earnings
for our company.
And that's the reason why we're so confident about this particular year.
Ken, I think if you think about, how we navigated the down cycle. I think we navigated the down cycle, very well and mostly through good execution and great cost position. I do believe that we have the leading cost position in the industry, and we will continue to enhance that that advantage. What you haven't seen much of it has been the rewards from all the results on all the growth investments. Just because in order to build the plant, it takes you 18 to 24 months and then it takes you another 12 to 18 months to start making money after you fill it up.
So, we have a lot of latent earnings power there coming on stream. And you're going to see that in 2019 2020. So, and, you know, and we don't, we don't stay still. Look at our operational excellence now turn into Readiness. And Readiness is going to drive not only maybe an extra $1,000,000,000 of cost, but also revenue growth.
And we feel very good how we continue to get better at how do we execute our strategy. I think we learn it ourselves and our team are getting better on that. And then I think it's paying off to sticking to the strategy, because we becoming better. And every one of these improvements or 2 weeks that you make, whether it's a small realignment or readiness, it another page of the strategy that we are unveiling, but it's because we're getting more comfortable and we become better. And I think you're going to see that coming into the P and L now that maybe the down cycle subsided a little bit.
Great. I appreciate it.
Our next question comes from the line of Farah Ozlem with Stephens. Your line is now open.
Hi, good morning.
Good morning, Parja.
Question on Ag Services, you guys highlighted that you have a good export program out of the U. S. Going into the 2nd half. Some color on the elevation margins on that export program. And, kind of what degree you think we could see growth in that segment this year?
Yes, Elevation margins have moved up. I mean, that's part of the reason why we took the negative timing effect related to origination. Beginning of the year, we had about maybe $0.10 forward elevation margins. They've moved up to about $0.20 to $0.30 right now. So that's a positive.
We are seeing demand out of the United States. As we indicated, we had river condition issues at the beginning of the quarter. So it was tough to actually get product down to the Gulf. And secondly, with some challenges down in South America, we're seeing customers actually come to us right now in order to source their product. And so overall, we expect the elevation margins to remain robust as we kind of move through the year.
So in terms of earnings for that segment, versus last year or versus historical levels, I mean, you earned $900,000,000 in that segment in 2014. Is that a number that's just too big to repeat given the strong export program. Just kind of in last year, you earned a low of around $585,000,000. How should we think that kind of the earnings power of that segment is today?
Yes, I think if we've maybe recast it into pro form a in terms of our new segment called origination, right? Maybe that's a better way to think through it, because that, that excludes milling. I think how you want to be able to think about is last year, we finished up origination roughly $400,000,000 But we also had some favorable benefits in the fourth quarter related to settlements. And so you take out some of the favorable settlement impacts, you're probably in the low 300s, like 320,000,000 dollars or so. That we don't expect we're going to have these favorable settlements this year.
And so the way we kind of look at it is 2018 origination, we're going to have strong improvements off that $320,000,000 base. Now as Juan indicated, we will take about a $30,000,000 provision in the second quarter related to sorghum, okay? And I kind of view that as a kind of one off contained in the second quarter. Gotta get that behind us. So after you take that into account, then, we do expect that origination will register strong profit improvements versus where we where we delivered last year.
Your last question comes from the line of Eric Larson from Buckingham Research. Your line is now open.
Okay. Thanks guys. I know we're running really late.
I have just a couple of really quick questions.
This morning, the focus has really been on your on your forward book of business for 2018, but and there's questions about sustainability, but I've started to see some positive bookings. Your buyers seem to be willing to go out as far as second quarter next year. Is that what you're seeing as well in the market? It seems like we're starting to get even further up building of a book of business.
Yes, Eric. Good morning. Yes, you're right. And you heard me saying it before in my comments. So we see that as a big difference versus last year and the previous year.
Prices were coming down, everybody was destocking, and that was an impact on demand that we couldn't see And then it limits our ability and our optionality to position ourselves better. Now that the market, the farmer the buyers, I'm sorry, are building a book that allows us to, excel into using all the ADM optionality that we have based on our assets and where we're different locations. So, yeah, we see that and that's a big positive for us.
Yes, I certainly see that too. So then the final question is, we've had a meaningful change in the grain markets. And I'm just going to use corn as an example where your forward curve on corn is quite positive you're at 4 16 on the harvest contract. Farmers for the first time in quite some time, can sell forward 2018 production above their cost of production. And I suspect that this is meaningfully changing how farmers will go to market, the speed of which they'll go to market, I would assume that this is going to encourage faster and more selling.
What are you hearing from your farmer customers regarding kind of the the new pricing environment for grain?
We haven't heard the significant change at this point in time. Hopefully, this is going to come back to more normal commercialization of the crop during the crop year. But at this point in time, we haven't seen a significant shift.
Okay. Thank you, everyone.
Yes, Lindsey. So I just want to finish saying thank you for joining us today. Slide 16 knows some of the upcoming investor events where we will be participating So as always, please feel free to follow-up with Mark if you have any other questions. And have a good day, and thanks for your time and interest in ADM.
This concludes today's conference call. You may now disconnect.