Good morning, and welcome to the Archer Daniels Midland Company 4th Quarter 2017 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 Schweitzer, Vice President, Investor Relations for Archer Daniels Midland Company.
Mr. Schweitzer, you may begin.
Thank you, Jack. Good morning, and welcome to ADM's 4th quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at adm.com. For those following this 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 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 a any forward looking statements as a result of new information or future events. On today's webcast, our 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 our 2017 calendar year results, the progress of our strategy, and discuss our forward look. And finally, they will take your questions. Please turn to Slide 3. I will now turn the call over to Juan
Thank you, Mark. Good morning everyone. Thank you all for joining us today. This morning, We reported 4th quarter adjusted earnings per share of $0.82. Our adjusted segment operating profit was 7 $3,000,000.
First, I want to report that in the fourth quarter of 20 17, we delivered the best quarterly employee safety record in our company's history. And in 2017, we had 3 separate months in which we achieved employee safety records. These are not minor or ancillary achievements. We of course value safety for its own sake and we see that going hand in hand with overall performance. We ended 2017 with a solid 4th quarter We pulled the levers that were under control, including cost and capital initiatives and interventions throughout the year, to help us deliver value We delivered double digit adjusted earnings growth, improved returns on invested capital and generated positive EBA.
And given our solid cash flows earlier this morning, we announced a dividend increase of $0.125 or 4.7%. Looking forward, we continue to focus on our own actions to be the drivers of our success. Our increasing international presence and expanding capabilities in areas such as destination marketing, food and beverage innovations and health and wellness all help to position ADM for continued growth and value creation. As we implement our strategy. All of these factors lead us to be optimistic about 2018.
When I look at ADM today, I see a company that is poised to capitalize on macro trends, harvest our recent investments, and reap even more benefits from our actions. Later on this call I'll discuss further the outlook for our businesses. Now, I'll turn the call over to Ray.
Thanks, Juan, and good morning, everyone. Slide 4 provides some financial highlights for the quarter. Adjusted EPS for segment operating profit was $793,000,000, down $34,000,000 from the year ago quarter. Excluding the effects of U. S.
Tax reform, the effective tax rate was 24% for the quarter and year. Below our forecast and annual tax rate of approximately 28 percent due to favorable discrete tax items. The effective tax rate for the 4th quarter from US tax reform of $379,000,000. This benefit is comprised of a $528,000,000 benefit from rerating of deferred tax assets and liabilities to 21% and a $369,000,000 repatriation tax partially offset by $220,000,000 benefit from releasing previously recorded deferred tax liabilities. Looking forward into 2018, we expect the effective tax rate for ADM before discrete tax items to be in the range of as our historical effective point 4 percent is 40 basis points above our 2017 annual whack of 6.0 percent thus generating positive EVA of almost $100,000,000 on a 4 quarter trailing average basis.
On Chart to earnings of $0.82 per share. For this quarter, we had an $0.08 per share charge related to asset impairments restructuring activities and settlements and a net positive benefit of $0.65 per share related to U. S. Tax reform. Slide 5 provides an offering profit summary in the components of our corporate line.
Before discussing the offering results, I'd like to highlight some of the corporate items affecting our core results. In the corporate lines, net interest expense for the quarter was relatively flat at $78,000,000. Looking ahead, we're projecting net interest expense for calendar year 2018 to be relatively similar we recorded in 2017. Unallocated corporate costs of $94,000,000 were down versus the prior year largely due to lower spending an investment in the corporate initiative. For 2018, we're expecting unallocated corporate costs in the range of the $140,000,000 per quarter guidance that we provided to you for 2017 calendar year with the company reinvesting in R&D Innovation And Readiness And Business Transformation Activities that we deferred from 2017.
Minority interest and other charges increased by $50,000,000 primarily due to the lack of curtailment gain related to changes to benefit plans. Turning to the cash flow statement on Slide 6. We generate $1,900,000,000 from operations before working capital changes, just down slightly versus the prior year. We had favorable changes in working capital of about $300,000,000 compared to a large use of working capital last year. So our operating cash flows, including working capital, were much higher than the prior year period.
Total capital spending was approximately in line with in 2018 to approximately $800,000,000 as we expect to start harvesting the benefits of our recent investments. We invested in various $5,000,000,000 shares less than the beginning of the year guidance as our leverage and credit metrics approach our desired ranges. For 2018, we do expect to repurchase shares at least at the level to offset dilution from benefit plans, and potentially more subject to framework. Our average down approximately 16,000,000 shares from the beginning of this year. Slide 7 shows the highlights of our balance sheet as of December 31, 2017, 2016.
Our balance sheet remains strong. Our operating working capital of some $400,000,000 is basically in line with the year ago period. Total debt was about resulting in a net debt balance that is debt less cash of $6,700,000,000. We finished the year with a net debt to total capital ratio of about 27%, a comfortable solid ratio for an investment grade company in this industry. Our shareholders' equity of $18,300,000,000 was up from the $17,200,000,000 level last year, primarily due to changes in the currency translation count as non U.
S. Currency strengthened against the U. S. Dollar. We had $5,500,000,000 in available global credit capacity at the end of December If you add the available cash, we had access to $6,300,000,000 of short term liquidity.
Next, I'll discuss our business performance for the quarter on Slide 8. In the 4th quarter, we earned $793,000,000 of operating profit, excluding specified items, down from the $827,000,000 in last year's fourth quarter. For 2017 calendar year, despite some difficult offering conditions, our calendar year adjusted segment operating profit of $2,700,000,000 slightly higher than 2016. Starting on Slide 9, ag services results were up over the prior year period. Merchandising and handling was up year over year.
Our global trade team executed well, delivering positive results for the 3rd consecutive quarter, and we are continuing to see good contributions from our investments in destination marketing, including in Egypt, and Israel, where we have expanded our capabilities in recent years. Merchandising and handling results were also positively impacted by insurance claim settlements with our captive insurance operations and other income in the quarter. In North America, we continued to see a lack of competitiveness for US grain exports, which negatively impacted both volumes and margins. Transportation results decreased from their prior year period due to lower barge loadings and freight values. IT conditions towards the end of the quarter also impacted river traffic.
Milling and other earnings were down year over year due to lower volumes end margins. Now turning to Slide 10. Corn processing had a solid quarter with higher results over the prior year period. Sweetener and starches delivered another strong performance in the quarter with good sales growth and solid margins particularly in our North American liquid sweeteners business. Our European operations, which we expanded significantly in recent years, including with the recent acquisitions of Chantor continued to deliver good results.
Product results were down compared to the prior year period. Ethanol Industry margins were lower as production pushed stocks higher. However, the team's strong risk management execution offset a significant portion of these negative impacts. Animal Nutrition was significantly higher than the year ago quarter as ongoing efforts to improve our cost positions in the specialty feeds ingredients business continued to bear fruit. Turning to Slide down compared to the fourth quarter of last year.
Crushing and Origination was down versus the fourth quarter of 2016. Crush volumes were strong, although margins were weak globally. Throughout the quarter, we continue to see the indicator of improving global demand for soybean meal as the effects of alternate proteins diminish and livestock numbers continue to increase. Therefore, we saw margins trend up late in the fourth quarter. Weakness in South American origination margins and volumes negatively impacted results.
Refining Packaging biodiesel and other results were lower versus the fourth quarter of 2016 due primarily to the lack of the biodiesel tax credit in this year's results. Refined in packaged oils delivered a solid quarter, benefiting from improved volumes in all regions slightly over the prior The WFSI team turned a solid quarter with results up over the year ago period. Wild flavors delivered double digit operating growth driven by sales increases across all regions, versus a difficult year ago period. Year including improved inventory management and innovation finding new uses for products. We saw margin improvement in several businesses in the quarter, particularly natural health and nutrition, and the benefits from improved cost positioning in proteins.
Now, I'd like to turn the call back over to Juan. Juan? Thank you, Ray. Please turn to Slide 13.
I'd like to take a moment to reflect a little bit about 2017 as a whole, how we advance our strategy, how we took important measures to improve execution and control costs and capital and how all of our actions helped contribute to our results for the year. We finished 2017 with adjusted EPS 12.5 percent higher than 2016 with higher adjusted operating profits for the full year than 2016, with solid operating cash flows and with returns on our invested capital well above WACC resulting in positive EBA shareholder value creation. All told, our team achieved almost $400,000,000 of monetizations in 20 17. Grew sales in targeted areas by more than $500,000,000 generated $285,000,000 run rate cost savings and returned $1,500,000,000 of capital to shareholders. As I mentioned earlier, we had our best quarterly employee safety record ever.
In addition, December was the safest month we've ever recorded and 2 other months in 2017, Grand Kamon, our very safest. And we did this all while still remaining true to the value creation strategy we set out in 2014 by enhancing our core, advancing Readiness and growing strategically particularly in the parts of our value chain are closer to the end customer. I'm proud of our team for continuing to focus on our strategy even while managing the day to day execution that is so critical for our success. We've been consistent in running our business today and positioning our business for tomorrow and beyond. For example, in our first strategic pillar, enhancing the core.
Each business contributed making sure they were investing time and money as efficiently and affects early as possible to deliver value day in and day out. Ag Services divested our crop risk service business and took aggressive actions to strengthen execution corn team has delivered important yield and productivity improvements in lysine, resulting in the turnaround of that business. Oil Seeds announced the sale of our Bolivian Oilseeds operations and worked hard to diversify our oil stream into a wider variety of products to deliver sales synergies throughout 2017 with a pipeline of more than 2000 individual projects. Now our second pillar enhancing Readiness is one that is a little bit more behind the scenes, but is critical to our success. We had some important Readiness accomplishments in 2017.
We have rolled out our transformation project across several of our business and regions as we continue to standardize our business processes around the globe. We are pleased with the results we're seeing with 1 ADM and looking forward to contribute continuing rollouts throughout 2018. Our operational excellence efforts have yielded important improvements as we leverage technology and best practices to reduce energy intensity, improve yields and streamline processes. Each piece contributed to the impressive run rate cost savings we delivered in 2017. Our core team is advanced their performance excellence initiative, a rigorous program that is empowering, engaging and enabling frontline colleagues to help improve and standardize processes across the business.
2 plants have completed the 1st year of this program, and we plan to launch it in several other locations this year. In our 3rd pillar, strategic growth, we have continued you to enhance its ability to offer end to end solutions for customers with investments in destination marketing, particularly our new ADM Israel joint venture. For the year, the team delivered 20% growth in destination marketing volumes. The quarantine continued to expand this global sweeteners and starches footprint with the acquisition of Cham Tort in France, and enhancements at our former East Targe facilities in Turkey and Bulgaria. We're also continuing to build our animal nutrition capabilities including new feed premix facilities in China, and we entered the Pet treats business with the acquisition of Crosswind Industries.
WFSI opened innovation centers in China, Australia, and just a couple of weeks ago, Singapore. This state of the art research and development facilities allow ADM Scientists to work hand in hand with food and beverage customers to meet all of their needs for taste, nutrition, function and texture. We acquired Biopolis and entered into a research agreement with Mayo Clinic, both of which expanded our capability in the important and growing area of personalized nutrition, probiotics and antibiotics that may improve digestive health. And we are expanding our bioactives capabilities in the animal health and nutrition markets as well by entering into a joint development agreement with Vland Biotech in China to develop and commercialize enzymes for animal feed. In the coming months, we'll be opening up a new research lab in California to support that work.
Our team has delivered substantial achievements in advancing our strategy, while balancing the pace of our disciplined approach to returns and delivering current value
for shareholders.
We generated almost $2,000,000,000 of operating cash flows in a period when margin conditions in many of our businesses were at the lower end of their historic ranges. That is why we are confident about increasing our quarterly dividend by almost 5%. We are proud to have increased dividends for and issued more than 86 years of uninterrupted dividends. Allocation framework, we are delivering value today, even while we're building for a bigger, even better tomorrow. Before we take your questions, I would like to offer our outlook We're looking to take the momentum that we have generated throughout the actions we implemented in 2017 and continue strong in 2018.
Between our strategy, our execution in all three of our pillars and the benefits of tax reform We are looking forward to a good year as our strategy continues to unfold throughout the next several quarters. Let me talk for a moment about the first quarter. In Ag Services, we are planning for continued opportunities in global trade and destination marketing. The South American crop will be moving into global markets, which will impact the competitiveness of U. S.
Agricultural exports. We expect Ag Services Q1 performance to be largely in line with the prior year period. In corn, margins in the sweeteners and starches business as well as in ethanol, ethanol will experience normal seasonal patterns during the quarter. Animal Nutrition should see stronger results, thanks to revenue growth and improved cost positions. Altogether, we think we are likely to see a first quarter for corn that is in line with the prior year quarter.
In oilseeds, we're optimistic about the recent movements in crush as the margin outlook is positive due to increasing demand and improved trade flows. We are planning for continued strong results from our RPPO businesses. Although the status of the U. S. Biodiesel blenders credit creates uncertainty in biodiesel margins.
We expect Q1 in oilseeds to be lower than the first quarter of last year. In WFSI, we are planning for Q1 results similar to the strong first quarter of 2017. As Campo Grande ramps up, and we continue to see solid sales and earnings growth from wide. Looking to the full year, although we continue to see certain green shoots, we are planning conservative hence we continue to focus on the levers we can control. We have a good base from this quarter and this year and we to build and we are looking for a year of solid earnings and EPS growth.
Here is how I think about growth from the perspective of 4 components. First, as you might recall, we took actions earlier in 2017 to fix what we call leakages. Since we did not do as well as we should. We are seeing the results of our initiatives to end those leakages. And this will benefit our earnings in 2018.
There are probably about $100,000,000 of leakages that impacted 2017 results that should be mitigated in 2018. 2nd, we will continue to reduce costs. We'll see the results from the run rate cost savings we achieved last year. And will take additional Readiness actions. We have set the target for $200,000,000 in new run rate savings by the end of We'll see the full year results in new growth both organically and through M And A, particularly on the right hand side of the value chain.
And finally, we will see the benefits of lower tax expense from US tax reform. That is why I feel optimistic about 2018. We're going to continue to execute and we're going to continue to grow earnings improve returns and generate value for our shareholders. And I also feel good about our future beyond 2018. Whether we think about feeding a growing population or the clean labels and natural solutions that they're in high demand today For consumers looking for proactive approaches to health and nutrition, we are very well positioned to deliver and create value.
So before we open up the call for questions about our results, I want to make one final comment. Obviously, we are well aware of the recent stories in the press about ADM and Bunge. As we move to Q And A, I'm sure you understand that we're taking your questions about our earnings and the forward outlook. So Jack, please open the line for questions.
Thank and one follow-up question Your first question comes from the line of Ken Zaslow with Bank of Montreal. Your line is open.
Good morning, Ken. How are you?
Good. A couple of questions. One is when you talk about the outlook of your businesses, the first quarter seems to be a little bit lighter than last year, but yet you're talking about growth where do you see which divisions do you expect to see the greatest degree of growth from to be able to offset some of the weakness in the first quarter? How is that going to develop through the year?
And then I have a follow-up. I think we see WFSI should have a very good year. At the last earnings call, if you recall, we talked a little bit about $30,000,000 of P and L impact in the 2017 results due to some of the investments and startups that we were making during both 2016 2017. We should not have in 2018, and we're going to start seeing the benefits of those operations coming of those plants coming into operations. So we feel very strongly about will have a much better year than 2017.
We see corn continues to grow sweeteners and starches the business internationally. And the North American business should be able to maintain the margins that we achieved in 2017. We see, of course, some uncertainty for the calendar year with overall industry ethanol margins, but we are particularly encouraged about the demand side ethanol, especially from exports where we think that they're going to grow into China and Brazil this year, having been major contributors For oilseeds, we are very encouraged how the supply demand appears to be getting tighter for mill. An oil and we're seeing that a little bit through this quarter and we're seeing that in Q1. So our plans are are running hard and we see a lot of a lot of the headwinds that we had last year subsiding this year, whether it was the competing alternative proteins or a lot of crush from Argentina or some issues in terms of AB and flu and all that that have subsided for the most part.
For Ag Services, I think you saw a little bit of quarter. I think there was a very effective management of the business in 2017, we reduced and we optimized some of the operation in global trade and we expanded destination marketing, and we're going to see better results from that. Mostly self help improvements as the year go by. So we still feel very strongly, as I said, about 2018 in the different businesses. When you put on top of that, our cost improvements that we continue to we continue to execute on and the benefit of lower tax rate, we see a very, very strong 'eighteen and another year of growth earnings for us.
Just second question is, When I think about your strategic initiatives over the long term, has anything changed in terms of how you look at where you will need to be in a couple of years. It seems like over the last couple of years, you really did focus on value added products and kind of minimizing or trying to reduce the expansion into oilseeds. Has that changed? Will that change? What do you think about that going forward for the next 2 to 3 years?
Yeah, Ken, we have a growth strategy and our growth strategy, our growth part of it has 3 pillars fundamentally that we've been implemented. And I think we've been consistent over the last few years. 1, with the geographic expansion, we continue to make ADM more better balanced geographically. And we've done a good job of completing the value chain in Europe. If you think about 6, 7 years ago, Europe was mostly oilseeds business.
Now we have our Ag Services as we bought top 4. Now we have also milling in the UK. We also bought e starts and we expanded corn also with Chantor and now we have WFSI. So Europe has been built to the expanded the U. S.
Is built and now it's a matter of driving returns. We've done the same in South America, but we South America is trailing Europe in that regard. And the same is happening with Southeast Asia. So, so that will continue, but it's very selectively and we say this strategically invest because we don't want to just best to be big. We just want to invest to black holes in our value chain.
So that's one aspect. The second aspect was getting to the 25% Wilmar that we have gotten, and we implemented that last year. And the 3rd aspect of growth was to continue to drive the market facing units the growth in it, whether it's food and beverages, whether it's personalized nutrition, whether it's animal nutrition, and we'll continue to do so. So those are the 3, allocations of capital, if you will, and the 3 strategic thrust from a growth perspective, and we have from that, we opportunistically do 1 or the other, depending to achieving the best returns, but strategically that continues to be the focus.
Great. Thank you very much.
You're welcome.
Your next question comes from the line of David Driscoll with Citi Research. Your line is open.
Great. Thank you and good morning.
Hi, David. Good morning, David.
Ray, could you just go back over the tax or form benefits think you gave a range of 20 percent to 23 percent and the 2017 tax rate was 24%. So it sounds like at the top end, it's only 100 basis point benefit, but just give us some understanding as to how big a benefit the tax reform was. And then I'm the range has something to do with the geographic mix, but I'd just like to hear your thoughts on tax.
Yes, for 2017, David, the rate was 24% it was 28% if you exclude some of the discrete items. So we did have some favorable tax items in 2018. Normally, these discrete items could be plus or minus. Last year 2016, it was a minus this year as a plus. How I would like to think about it is like 28% is kind of like our normalized rate.
So therefore, with U. S. Tax reform, we'll go from a 28% type of rate to a 21% to 23% rate. That's how I kind of think about it, David. So in the context, I mean, just to give you context, so For 2017, you take the midpoint of the range, say, 20% to 23% but it's 21.5%.
Relative 28 percent on our $1,600,000,000 of pretax profit. It's about $100,000,000 of benefit. If you were to apply that into our 20 17 results.
And then because of these tax benefits, was there any change to kind of your investment strategy? Did you reinvest some of this money that you otherwise wouldn't have?
The way to think about it, David, is the additional cash And in my example, the $100,000,000 benefit in 2017, if we had tax reform, I would view it in the context of our capital allocation framework. So therefore, our operating cash flows will actually go up by $100,000,000. And then we will actually invest that in the context of our allocation framework, which is, as you know, the 3 pillars, meaning there's a capital investments, there's return of capital to shareholders and there's M and A. So that's how I would be thinking about it. There's nothing specifically targeted towards the $100,000,000, but it goes into the context of our allocation framework.
In terms of how we're going to maximize shareholder value.
Juan, just one question for you, and I'll pass it along here. But on Ag Services, this business has been kind of all over the map in terms of quarterly profitability. This quarter looks like a nice quarter. Can you talk about the investment strategy in agricultural services? Can you distinguish between CapEx versus acquisitions within the segment?
And then just how high on the priority list is any kind of investments or or building up sales within Ag Services? How high on the priority list is this versus all your other priorities?
Yes, David. So Ag Services is a very important part of our business. The reason what we said before that we were going and I think we said it in the last quarter earnings where we're going to deemphasize maybe the capital into that area is because as we look at the world going forward the increase in production will come mostly from yield. So for more intensity, more precision agriculture, but about the same area, So, we didn't feel that from an ARC services perspective to keep our share of origination, we needed actually to go geographically to add to our food print. So, we continue to add to make more efficient that chain to make that seamless integration between the grain business and the processing businesses.
And in places where we feel underrepresented, we or we need some assets, we've been putting the assets. So the investments in El transito in Argentina, we made year in the port. The investment in the port of Santos, the investment in the port of the northern part of Brazil So, so I think we've been doing that. We continue to improve our bark line in the, in the maneuver So, I think it's just a matter of where do we see the need. And at this point in time, we felt the need to build capabilities was higher in the right side of the value chain versus in the left side given what we see going forward.
Your next question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Hi, thank you. Juan, I wanted to focus specifically on your comments 3 months ago about pulling back on capital spending in oilseeds, can you just remind us what that was in reaction to? Was it in reaction to your view of global supply and demand balance, being out of balance? And what is your view now? Is it has, do you think it's a more attractive balance today than it was 3 months ago?
And then secondly, how much leverage would you be willing to take on to do the right type of acquisition? You've obviously become more M and A focused. Most of us thought that single A rating was kind of sacrosanct at ADM. And I wanted to know your thoughts on that. Thanks.
So, let's take the question 2 parts. So, the first one is, what is a little bit of continuation of the question from David in terms of our allocation of capital in through the value chain. What we felt as we look at our business is, as I was saying before, that the left side if you will, have been more developed over time in ADN. That's why we went geographically everywhere with our services and all it's actually was oilseeds first and then we back integrated into grain. So naturally, Ag Services and Oilseeds has been earlier into Europe, earlier into South America and with Wilmar earlier into Asia.
So what we were planning to do with the value chain is actually beef up the right side of Vivi Wilcorn and WFSI, just because of our lack of volume or lack of critical mass in different geographies, we are not in in South America, we were not in corn in Europe. And then we needed to build the value chain to make ingredients with our complete footprint. So that was a little bit the discussion about we didn't need that much on the left side versus the right side. In terms of our expectation for oilseeds is we are running today basically as hard as we can. And we are maximizing every shift that we can to soy in our footprint as long as it makes sense.
So we are very bullish about that market in particularly. The issue is the business has many opportunities to apply operational excellence and continue to extract more from those plants. And before building new investments, we'd rather the bottleneck and make and continue to build those plants into very integrated facilities. Our facilities are very well integrated with refineries, with switch capacity, And I think the end game here is can you grow having your assets more efficient more than just having diverse assets, isolated assets out there. So, we will continue to build that footprint, but that footprint as you build in existing footprint makes capital investments more efficient, if you will, than in other places where we need to build a new capacity.
So in terms of the availability of capital, it's naturally shift it to the right, not because of any lack of demand on the left side. It's more like what we're trying to build and the footprints we started from. So So strategically, not much have changed in that sense. Maybe on the other one, I mean, I let Ray It
was about So, Rob, on the question, we view our balance sheet at EM as being a competitive strength. And that's the reason why we have maintained a very strong balance sheet. Over time, you've seen us increase our leverage. And as I indicated in the call, we're around the 27 percent net debt to total capital ratio in terms of a leverage position, which I view is actually a very comfortable position for our where we are right now. It is important to maintain a strong balance sheet in order to weather volatility in the market we saw what happened in the equity markets just today.
I mean, these things can happen in the ag commodity markets as well. We've seen in the past whereby commodity price spike could cause $4,000,000,000 to $5,000,000,000 increases in working capital. So therefore, it is important for us to maintain a solid balance sheet with a solid investment grade credit rating. You asked the question, would we ever divert from our single A rating? Well, from my perspective, you never can say never, but from my perspective, we've got so many avenues in order to raise capital for our company, whether it be through some of the monetizations that we've done, we've done partnerships with people.
We've got equity. So therefore, from my perspective, maintaining a solid investment grade credit rating, a solid balance is paramount for us to allow for flexibility in terms of handling working capital spikes, as well as maintaining flexibility in terms of managing our portfolio.
So Ray, is that what factored into your decision to stop the share repurchase at $750,000,000 this year? And not extend further because you thought that the balance sheet was where you wanted to be?
Yes, as I kind of look at the metrics in terms of debt total capital as well as debt to EBITDA. We felt that that those ratios were approaching levels whereby we felt comfortable. And frankly, I do feel comfortable where we are right now. Now going forward, as I indicated, in 2018, our plans for share repurchase is reduced more or less to offset dilution. But again, this is all in the context of like what kind of additional cash flows we can generate we have additional monetizations that we were going to do, that could open up some more flexibility to do additional share repurchases as well.
So therefore, again, everything's in the context of our capital allocation framework that we announced back in 2014.
Okay. Thank you very much.
Your next question comes from the line of Ann Duignan with JP Morgan. Your line is open.
Hi, good morning.
Good morning.
Good morning.
Maybe this question is for Ray on the back of the lower rate. Can you talk about what that does to your weighted average cost of capital for 2018 or long term? I mean, your cost of debts probably gone up how should we think about that? And then given that you have a lower normalized tax rate going forward, should we anticipate that your hurdle rate for 200 basis points above the cost of capital is now obsolete and it should be 300 basis points or something different? Could you just talk about that?
Sure. In terms of our annual WACC for 20 we did go through the analysis in terms of adjusting for tax rates, interest rates, risk premiums as well as beta. So we actually went through the full exercise in the month of January. And where we ended up after going through all those numbers is that we'll be increasing it in 2018 to 6 2 5% to factor in all those various components. With respect to our hurdle rates, as you know, said our hurdle rates very, very high.
I mean, well above cost of capital. And in addition, as you know, our long term return objectives remain at 10%. So when we went through the analysis, even in our long term WAC, factoring in all the updated analysis, our long term WAC numbers, some is still consistent with what it should be based upon the calculations. But we agreed that the short term whack or the annual whack number based on the revisions of interest rate and tax rates is going to move up to 6.25%.
Okay. And your target then for your own returns for 2018? Have gone up correspondingly. Is that the way we should think about it?
Yes. I mean, as you know, Ann, we always want to strive to get returns well above our annual WACC. So that will be our objective here.
Color. And then, more strategically, we've heard a lot about Section 199A in the law of unforeseen consequences as a result of the tax bill. There's a lot of talk out there that it will get revised. How would it impact your business, both Ag Services and perhaps the ethanol business if it does not get revised? And what are you guys hearing?
What what's happening around that?
Yes. Thank you, Ann. So it is clear that it wasn't the intent the revised 199A provision to make this change in the industry, if you will. And so our team has been engaging in Washington on that. And we have received assurances from senior members of both the Senate and the House that they recognize that Section 189a has significant unintended consequence, and it will be fixed, logistically legislatively, certainly in the near future.
So I would say at this point in time, very minor impact that we have felt commercially. And when you heard yesterday, Chairman Brady making a expressions about that this will be technically revised. I think that have, accounting effects on markets and whether it's coming now or coming in the next month is coming in the near future. So, as I said, we have received assurances of that and we believe that will happen.
And if it drags on 1, is there a point in time as we go into spring or summer, is there a point in time where you'll get where you'll be incrementally negatively impacted potentially?
If we did an active will, but of course, the team has been looking at options and we're working on in parallel and potential options to offset that. We don't want to go there. We think that technically will be revised and that's our main thrust, but of course, we're not going to sit idle and see ourselves losing share. No.
Okay. I'll leave it there and get back in line. Thank you. Appreciate the color.
Your next question comes from the line of Heather Jones with Vertical Group. Your line is open.
I wanted to talk about oilseeds. So you're bullish and talk about running your plants as hard as you can. The cash margins that we're looking at in U. S. Are showing significant year on year, very significant year on year improvement.
But I was wondering the wheat protein content that we've, that I've been reading about and beans and all, is that impacting your operating costs? Or do you think trying to figure out how to analyze those margins in light of the lower protein content?
Yes. No, at this point in time, we continue to see the improving margins. Actually, at this point, through all our operations, I would say, whether it's Paraguay, when the lower crash in Argentina, whether it's European soycrush, Brazil, North America. So I think that in general, we have seen this wave of of improvement. I think that part of the issue is wheat is the relationship with corn make them less competitive, if you will, to be in the Russians at this point in time.
That has helped soybean meal. So I would say at this point in time, we continue to see opportunities. I'm very bullish about that business as it develops. We have noticed in some in some parts of the business, a little bit of a lower protein, but we don't see a big impact at this point in time than making change our forecasts.
And so I'm curious as to why y'all think oilseeds will be down in Q1. I mean, there is a difficult comp in the Asia piece, Wilmar. But you definitely sound far more constructive than you did on the Q4 call last year and honestly more construction than you had in a while. So do you just not expect enough improvement in those other businesses to offset that year on year comp for Wilmar?
Couple of things. You know, as our margins expand, sometimes we take negative mark to markets, which will have to be reflected probably in Q1. And also, we still have the uncertainty of the biodiesel tax credit, which is difficult to know. Obviously, last year we had it so far this year, we don't have it. So, as we think about that.
And as you point, the third factor, which is last year, Wilmar has an unusual tax impact that they normally won't get this year. So even if their results were good, it will still be trailing last year. So those are the reasons for comment of being low versus or being under last year's results.
Okay. You said the Blender's tax credit, you you guys recognized the benefit from that in Q1 of 2017? Because I don't think it was think it was in place.
No, there was no benefit there. All we're saying is that we're not counting counting it in 18 first quarter, although there are strong indications that that may get approved sometime in the first quarter, but we're not actually forecast in our plans right now.
Okay, perfect. Thank you so much.
You're welcome. Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Yes, thanks. Good morning, everyone.
Good morning, Ann.
So a lot of ground's been covered. I guess I wanted to think about the things that you can control in 2018. Juan, I think you alluded to $100,000,000,000 of I think you called them leakages, from 2017 results. Maybe just a little bit color of the areas. I'm guessing it's lysine.
Maybe WFSI areas that were a bit more underperforming versus your initial plans in 2017. As well as the cost savings, just the businesses where you actually expect to see those come through? And then I have a follow-up.
Yes. So some of the leakages, and I may get the buckets, right, or 90% of the time, but I would say one important one is what we mentioned in Ag Services, the global trade operations. I think the team has done a tremendous job of closing offices and actually did not perform well historically and we had some of that. We have restructure and combine offices in places where there was an opportunity So, there is a lot of costs that are taken out of there and there are improved operations. We have shut down Bolivia and sold Bolivia.
We have restructured Peoria in terms of taking 100,000,000 gallons of fuel ethanol out of there. You pointed out there were a couple of issues in some small acquisitions in WFSI in the case of SCI. It's a very much on trend. Type of products, the all the ancient grains and seeds, they have a very soft first half of last year from a demand perspective and also we have operations problems. We'll restructure that.
We split those operations and they are very, very much better managed these days. And we have seen demand of that coming back up in the second half. So we to the point that demand was flat, year over year because second half was strong. So I would say if you take those combinations, there are there were leakages in every business, if you will, and we have a portfolio of products that we look at and we assign an improvement forecast for the following year with actions on that. So, it's a very disciplined approach.
And this is one of our pillars of that improvement that package of improvements year over year is about $100,000,000. And we feel comfortable that we have enough actions there to deliver on those.
Okay. And then the cost savings kind of I think it was kind of where we should see those results flow through the results and by business?
Yes, I think that in the cost savings, we have this program. We've been running it for, I don't know, 5 years, 6 years, something like that. I think that Humulated savings have been about $1,000,000,000 already. So this year, we look at that again. It's about $200,000,000 run rate savings.
I would say, normally corn leads these because they had the largest plants, But I would say last year was a strong contribution from also the other 3 businesses, our services, oilseeds, and and WFSI, I think you're going to see a continuation of corn and a pickup in oilseeds in terms of contribution to that. So that will be the $200,000,000 this year. Lisen in all that, you mentioned it before and I I would like to give kudos to the team. They make a significant improvement this year in terms of yields and that we are about half way those improvements. So part of that will also come in 2018.
Adam, Paul,
I would be thinking about this on a year over year basis. The $200,000,000 that Juan talks about is a run rate savings at the end of the year related to our readiness initiatives. We also have some of the benefits from 'seventeen that will flow into 'eighteen. Actually, some of these savings we actually reinvest back into our business as well as there's going to be offsetting inflation. So how I would be thinking about the cost savings, Adam, is year over year from 'seventeen to 'eighteen, the net pickup in terms of cost savings will be about $100,000,000.
That's how I would be thinking about from a modeling perspective.
That's some helpful color. And then just a question on the sweetener side. I think you had some constructive comments on the international components, the expansions that you've done in Europe. And some of the acquisitions. I didn't hear a lot about the North America business.
Maybe just any thoughts on how the liquid sweetener contracting for 2018 has taken place and kind of the competitive changes in the market with the new sugar agreement that's kind of rolling in through, through the balance of
18 from the U. S. And Mexico? Yes. So Sweden as our starches continue to do well in North America.
We look at the combined demand. If I look at the combined demand wet milling products in North America combined domestic and export was up modestly in 2017 versus 2016. So we still see our capacity being pressure there. Total demand actually for liquid sweeteners in North America was also slightly year over year. Overall, I would say we're pleased with the mix of sweetener contracting in North America for 2018.
With pricing that will protect our overall North American margins in line with 2017. So we continue to see positive developments there.
Okay, that's all, that's very helpful. I'll pass it on. Thanks.
Your next question comes from the line of Eric Larson with Buckingham Research. Your line is open.
Yes, good morning, everyone, and thanks for taking my question. First maybe I missed this. This is probably a question for Ray. Did you give us what your CapEx spend is supposed to be for or what you're targeting for CapEx spend 2018?
Yes. It's $800,000,000. We talked about that in the last quarter as well. And as we finalize the plan, we believe $800,000,000 level would be the right level of CapEx for 2018.
Okay. And then when you kind of look at, we haven't had an ethanol question, but one did allude to the fact that they're encouraged with the strong demand function. I think we ended the 2007 18 with about $1,300,000,003 of exports, what give us an idea of what you might think that number could be for 2018?
Yes, Eric. We estimate export last year probably ended a little bit higher maybe than 1.3. Our team would probably put it at one point 4,000,000,000. We saw pickup in the late in the year into exports to China or Brazil. And we see that drive in 2018 to probably a number between 1,600,000,000 dollars, $1,700,000,000 Brazil, China coming back to the, to big, big exporters into a big importers from U.
S. And continue with some of the traditional destinations, Canada, India, Gulf States. So we see, we see strong demand in Brazil and we see China driving into their 10% and not having enough capacity to supply that. So we will have China, Brazil for the next 2 or 3 years being big importers from North America, ethanol.
Okay. And then just kind of a final kind of thirty thousand foot overall question with kind of the Ag Services division. Obviously, we still have a lot of global supply. It looks like we're still going to that's going to be one should be conservative when you look out for the next year as well on that. But it's also interesting that we're seeing some corn production coming out of the Ukraine.
It looks like it looks like China's down a little bit. It looks like Brazil could it looks like we're not it's not real visible, but we might be on a road of path of road to maybe getting some lower carryovers in the corn area. Is there any is there any semblance that that could be an improvement for your overall ag services for next year?
Yes, Eric. I think if we go around the world and you mentioned some of them your comments, we already know enough to probably to conclude that 2018 weather will be less favorable to crops that it has been that weather has been over the last 4 years. So, whether it's Argentine dryness or whether it's the south plain here, whether it's a little bit of Russia or Australia commentary or whether it's South Africa having a drought and impacting corn with these things tightened up a little bit at the time when demand continues to be very strong. So that could bode well for Ag Services business. Yes.
Yes. I think that is something to watch closely. Okay. Thank you, everyone.
Your last question comes from the line of Farah Aslam with Stephens Inc. Your line is open.
Juan, you've talked about Harvest Investments in your Chairman's perspective. Could you share with us what your key investments are and kind of what harvests or benefits we expect in 2018 from those investments?
Yes. Well, there are many. I can go through the different businesses, but, so we're going to have the full year of some of the acquisitions that we made, whether it's Chamtor or crosswinds in pet treats or industry centers in the destination marketing, We're going to have, Campo Grande, the largest specialty protein complex that there is. That we started in South America, those are 6 plants into one complex. And that took us the last 18 months to bring into production and we're going to have a full year of that in 2018.
We will have the benefits of TMG. We're going to have the fiber sold plant having a full year of operation. We have expanded our color plant in Berlin. We are expanding some of our e starts facilities in these Europe. So, there has been many Farca around our business and that's why I always remark that I'm very proud how we manage cash flow and we manage earnings on these 2 years of soft commodity markets, if you will, while we were heavily investing.
We thought that I explained to all of you before that some of the evaluation in the market did not justify us to go into big hunting for M And A and we decided to go organic growth we took a hit in the P and L over the last 2 years in that. And we believe that all that is coming on a stream Of course, you don't make money day 1, the moment you turn up the plant. So our forecast will be more backend loaded as these plants ramp up and they start to be completely sold out. But we believe that all that will tribute in 2018 and that's why our forecast going back to the original question from Ken is our forecast go from a relatively more flattish Q1 to a higher expectation for calendar year 2018 as a whole versus 2017 because of this ramp up of some of these investments.
That's helpful. And just some more detail on ethanol. So you in the fourth quarter were short ethanol and now kind of going forward, could you talk about some of your color on hedges and your outlook and kind of how that market will develop and any color on how you think profitability for
mills. Okay. So let me see if I can count on all that. The team did very well in Q4 managing the end of the year. And, as we look at what happened now, So margins were not very good going into this quarter.
And of course, as always happened during the during this time of the year, plans in the industry don't run that well in the winter. They run at lower capacity and this shows that when the industry have some discipline, if you will, in in productions, margins start to climb up, driven mostly by exports, still, you know, gasoline domestic demand is not something to write home about, but exports continue to be good. So in that sense, we expect a little bit of a better margins now, then we're going to have the normal development every year, which is refineries and everybody goes into maintenance. In preparation for the driving season and hopefully we're going to have a good driving season and we're going to see margins come up into the summer, then we go produce too much in the summer like we do every year and maybe margin tempers towards the end of the year. In terms of our approach progress into, into the ethanol dry mills.
We made the restructuring into Peoria and I would say we will continue to look at opportunities. We are engaged with people, but we're not going to make any decision that is bad for our shareholders. We don't have a rush to do anything here. We make cash flows. So strategically, we're not going to be the one building the next dry mill.
And at the right time, at the right in the right conditions, we are planning to divest or joint venture those dry mills. At this point in time, nothing to update you on.
This concludes the Q And A portion of our earnings call. I would now like turn the call back over to Juan Luciano for closing comments.
Thank you, Jack, and thank you all for joining us today. Slide 15 notes some of the upcoming investor events where we'll be participating. As always, please feel free to follow-up with Mark if you have any other questions. Have a good day and thanks for your time and interest in ADM.
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