Good morning, and welcome to the Archer Daniels Midland Company First Quarter 20 17 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, Scott. Good morning, and welcome to ADM's 1st 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 circumstance.
Industry conditions, company performance and financial results. These statements are based on many assumptions and factors that are subject to risks 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 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. Then, Juan will review the drivers of our performance in the quarter, provide an update 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 and thank you all for joining us today. This morning, we reported 1st quarter adjusted earnings per share of $0.60, up 43% from the prior year quarter. Our adjusted segment operating profit was $678,000,000. Our year over year results improved as a company and in all four of our business segments in the first quarter.
And we continue to be on course for a stronger 2017. Ag Services was up for the quarter with higher results in U. S. Grain and transportation operations. The corn business delivered a good quarter with improved performances across their portfolio.
Oilseeds earnings were up, including solid results in global soft seats, and from our equity investment in Wilmer. WFSI results were higher, led by wild flavors. We are advancing our strategic plan with the pending acquisition of French sweetener company Chamtor. The announcements of expansions to our animal nutrition capabilities in China and a further investment in Wilmer. We also implemented about $50,000,000 in run rate cost savings and in line with our balanced capital allocation framework, we returned more than $400,000,000 to shareholders in dividends and share repurchases during the quarter.
We are continuing to execute the long term strategic plan that we launched in 2012, we're seeing the results. We have strengthened our core, improving our cost positions and implementing measures to be group results were necessary. Our operational excellence initiatives have delivered significant savings and efficiencies And we continue to grow strategically by expanding into new geographies and increasing our capabilities in food, beverages and feed. Those actions contributed to the improved results we saw in the first quarter despite the still muted margin environment in some businesses. And the continued momentum in the execution of our plan gives us confidence that we will deliver sustainable value creation.
I'll provide more detail on our results later in the call. Now, I'll turn the call over to Ray.
Thanks, Juan. Slide 4 provides some financial highlights for the quarter. Adjusted EPS for the quarter was $0.60, up from the $0.42 last year. Excluding specified items adjusted segment operating profit was $678,000,000, up $105,000,000 from the year ago quarter. The effective tax rate for the first quarter was 26% compared to 25% in the first quarter of the prior year.
The slight increase in our tax rate is primarily due to the expiration of U. S. Tax credits including the biodiesel tax credit partially offset by changes in the forecast geographic mix ROIC of 6.4% is unchanged from the end of the first quarter last year. Our ROIC has continued to improve for the 3rd consecutive quarter following the challenging operating conditions that we experienced during the first half of twenty sixteen. For 2017, we have established our annual weighted average cost of capital at 6.0 percent following a detailed review of interest rates, equity risk premiums and betas in our cost of capital model.
Similarly, our long term WACC has been updated to 7.0% based upon our review of assumptions and benchmarks. On Chart 18 in the appendix, you can see the reconciliation of our reported quarterly earnings of $0.59 per share to the adjusted earnings of $0.60 per share. For this quarter, we had and certain discrete tax items of $0.01 per share. Slide 5 provides an offering profit summary in the components of our core line. In Ag Services, we had approximately $7,000,000 in impairment and restructuring charges, primarily related to our restructuring efforts in the global trade In corn and oilseeds, we had small impairments and restructuring charges.
$11,000,000 due to higher short term interest rates and our overall mix of short and long term debt following the issuance of new fixed rate debt in August of last accruals as well as quarter guidance for fiscal year 2017 that we provided at the last earnings call. Minority interest and other charges improved to $20,000,000 primarily due to improved results We generated about $508,000,000 from operations before working capital changes during the period, down slightly from the prior year period. Total capital spending for primarily related to Cross One Industries, a pet treat manufacturer. The other investing activities line of the cash statement includes the incremental investments we made in Wilmar bring our total ownership stake to approximately 24.3%. During the quarter, we spent about $248,000,000 of repurchase shares consistent with our prior guidance of $1,000,000,000 to $1,500,000,000 for the year subject to strategic capital requirements.
Our average share count for the quarter was 579,000,000 diluted shares outstanding, down 18,000,000 from the time 1 year ago. At the end of the quarter, we had 577,000,000 shares outstanding on a fully diluted basis. Our total return of capital to shareholders including dividends was more than $400,000,000 for the quarter. Slide 7 shows the highlights of our balance sheet as of March 31, 20172016. In summary, our balance sheet remains strong.
Our operating working capital of $7,400,000,000 was down $280,000,000 from the year ago period. Total debt was $7,200,000,000, resulting in a net debt balance that is debt less cash of $6,500,000,000. Our leverage position remains comfortable with a net debt to total capital ratio of about 27%. Our shareholders' equity of $17,100,000,000 was slightly down from the 17,900,000,000 level last year due to returns of capital and changes in the cumulative translation account. We had $5,100,000,000 global credit capacity at the end of March.
If you had available cash, we had access to $5,800,000,000 of short term liquidity. Next, Juan will take us through a review of business performance. Juan?
Thank you, Ray. Please turn to Slide 8. In the first quarter, we earned $678,000,000 of operating profit, excluding specified items, up from $573,000,000 in the last year's first quarter. In 2017, we are seeing some improving market conditions as well as benefits from the actions we have taken and continue to take as we execute our strategic plan 1st quarter adjusted segment operating profit was up more than 18% versus the year ago quarter, despite muted margin environments persisting for some of our businesses. Now I'll review the performance of each segment.
So starting on Slide 9, Ag Services results were up year over year. Merchandising and handling results were down versus the prior year quarter. In North America, demand for grain exports remained strong and the business benefited from good execution volumes and improvements in grain caries. The improved results in North American grain operations were offset by lower results in international merchandising. As expected, results from International Merchandise remained muted in the first quarter.
This was substantial global supply of crops continues to limit merchandising opportunities. In addition, the group was impacted by some mark to market timing effects, restructuring charges and low volumes at port facilities which negatively impacted our results and continue to expect that results will improve as we move through the year. Transportation was up substantially. Our North America barge and stupider in operations saw increased loads and our stevidore in operations reported record volumes. Milli and Other had a solid quarter, but will lower sales volumes and product margins.
And finally, just yesterday, we completed the sale of our crop risk services business to value those holdings, which advance our strategy by freeing capital for strategic redeployment while allowing ADM to partner with Validus to offer customers a fuller way of ADMs, grain marketing products and services. Please turn to Slide in sweeteners and starches, strong demand drove sales volume and margin growth. A key component of our plan is a strategic growth and the corn business exemplifies the benefits of executing that strategy. We are continuing to see higher volumes and margins from our European business. The results out of our new sweetener complex in Tianjin, China also improved over the year ago quarter.
Other important driver of success for corn was bioproducts. Export demand for U. S. Ethanol is high. Etanol margins were better than the year ago quarter due to exports as well as solid domestic demand.
Our Lysin business had better margins versus the year ago period, thanks to better pricing and improvements in production costs. Lysine improvements helped animal nutrition overall achieve a better quarter despite warmer weather that limited overall sales volumes. Lastly, the corn business was impacted by about $10,000,000 due to unplanned repairs to a large water pipe indicator complex. Turning to Slide 11, please. Oils sits delivered 1 of its strongest recent quarters with overall results up year over year.
Our crushing and origination results were largely flat. As expected, despite good global demand for protein meal overall, global soybean crush margins remained pressured as alternative protein meals continued to impact clear the market by the end of the second quarter and demand for soybean meal to increase in Europe. Our global softseed processing footprint and flex capacity have continued to be positive factors. Canola and cottonseed results were both significantly higher than the previous year as we capitalized on margin opportunities both in North America and Europe. In Brazil, margins have been compressed as farmer selling hasn't kept pace with export demand due to weak commodity prices and the strong Brazilian real.
Refining, Packaging, biodiesel and other results were down for the quarter. In Europe, food oils were lower as a solid performance from the team was offset by timing effects. North American biodiesel volumes and margins were down. South American package oils and biodiesel were up for the quarter on better volumes and margins. Golden peanut and tree nuts was up on improved margins and a strong plant productivity.
Results in Asia improved significantly over the prior year quarter, reflecting our increased ownership and improved results from Wilmar. Our team in India also delivered higher results as well. On Slide 12, WFSI results were higher for the quarter. The wild flavors team delivered another great quarter. The European, Middle East and Africa, Wildslave was group had a very strong quarter, with good sales volumes in Africa and the Middle East.
In China, wild flavors is aggressively pursuing new business. With good results. And wild flavors in North America continues to be solid and growing. We have seen a consistent pattern of double digit growth in the wildflavor business and remain excited about this continued and expanding contributions. Results from Specialty Ingredients were mixed.
Specialty proteins were up overall with strength in North America offsetting weaker results in other regions. Results in proteins were impacted by startup costs related to the Campo Grande facility, which started to sell soy flower and continues to move towards full commercialization operations later this year. Fibers were down for the quarter due to startup costs in our TMG complex and continued competitive price pressures. Now on Slide 13, I would like to update you on how we continue to demand our strategic plan. Since we launched our plan in 2012, we made some important progress towards becoming a more efficient company.
A more global company and a company that is extending further along the value chain. We still have much to do, but I'm gratified by the commitment to the plan that our team has demonstrated. As you all know, our industry has faced some significant market headwinds over the last 2 years. And I'm really proud that we faced those headwinds and had the discipline to continue to execute our plan. We worked to deliver cost and process efficiencies and we invested to grow through acquisitions and plant expansions and we continue to deliver dividends and share repurchases.
We worked the levers under our control, putting us farther along the path to create in long term value In the area of optimizing the core, we have already discussed how our aggressive actions to improve performance have started to show results. As mentioned earlier, we have completed the sale of our crop risk herbicides which includes a grain marketing agreement with the buyer, validus. We have achieved more than $200,000,000 of monetizations in 17, and we continue to be on track to achieving our $1,000,000,000 monetization target over 2 years. In the area of operational excellence, we implemented about $50,000,000 of new run rate cost savings actions through the first quarter. And are on pace to meet our target of $225,000,000 for the year.
And we continue to advance our 1 ADM business transformation project. In the area of strategic growth, We are planning on adding to our European sweetener and starch footprint with the pending acquisition of Chantor in France. We also acquired a 90% ownership stake in Biopolis, a leading provider of microbial technology, with a strong portfolio of novel food ingredients. We are continually expanding our capabilities throughout the value chain, And with biopolis, we are once again enhancing our ability to meet the needs of health conscious consumers. We announced the construction of a new FEED premix facility in Jantan, China, which will be our 5th in the country.
We also announced our entry into the growing Asian aqua feed market with the construction of an aquaculture production line at our Nanjing complex. We continue to grow our capabilities in the Australian, New Zealand region with the opening of our new flavor creation and customer service center in Sydney. And we once again expanded our equity holding in Wilmar, which continues to help us benefit from Asia's consumer growing and evolving demand for food. These are just a few of the recent highlights and will continue as always to update you on our progress each quarter. So before we take your questions, I wanted to offer some additional perspectives on the next quarter.
And the balance of the year. In Ag Services, we do anticipate a slightly better second quarter than year ago period, with a stronger grain caries, better results in Argentina and continue improvements in global merchandising. In the back half of the year, we'll be watching how the large South American crop impacts North American export competitiveness absent any major dislocation event, we expect it will be a very competitive global environment. We believe global demand will remain strong for the year, and we expect international merchandising to contribute more as we move through the year. Looking at the whole year, we continue to expect performance in Ag Services for calendar year 2017, to be significantly better than 2016.
Although likely weaker than what we have thought at the beginning of this year, and more similar to 2015. In corn, we are expecting a significant improvement in the second quarter versus the prior year. In sweeteners and starches, we believe we'll continue to see a tight North American market with solid demand our international business will continue to grow. We expect to see continued very strong demand for U. S.
Ethanol in the second and third quarters with demand normalizing in the 4th quarter. Looking at the 2nd quarter for oilseeds, we expect flat to lower results compared to the year ago quarter. Soybean crush margins in the 2nd quarter will continue to be challenged in some geographies due to ample global soybean supply and a competitive protein meal environment. The significant increases in crop production in Brazil will lead to better year over year export volumes. However, in the near term, slower producer commercialization could continue to wait on margins.
In refining, packaging and biodiesel, we're expecting a steady to improve results as food and biodiesel demand improves seasonally. In WFSI, we expect that the second quarter of 2017 will show better results than the year ago period. And we believe So our full year outlook for the company has not changed since our last call, although the mix of earnings may be slightly different across our business segments. With Ag Services may be slightly weaker for the year and corn and oil seeds may be slightly stronger. Taken together, as we continue to execute our plan, We remain confident that the actions we are taking will yield a solid year over year increase in profitability and returns for 2017.
With that, Scott, I
The first question comes from the line of David Driscoll with Citi. Line is open.
So I wanted to spend my time on agricultural services. The first quarter results of $88,000,000, there's still well below the five year average for Q1 results, which we calculated around $160,000,000 previously you guys used to give guidance for the whole segment. Something like, Ray, correct me if I'm wrong, what it's like $850,000,000 to $950,000,000. So can you just update us a little bit more here? I mean, Juan, I appreciate your comments you just made on this thing, but I still find this is a very hard segment to model.
So just a little bit more detail on what to expect going forward. And then the longer term, I think, is a fairly critical question that we get from a lot of investors. Thank you.
Yes. Thank you, David. Of course, you have heard us, we're working very hard in Ag Services to continue to improve our operations. We have been seeing or facing a couple of years of very strong headwinds into that business. We are expecting improvements and we've seen in the first quarter.
We still expect an improvement in the second quarter. First quarter was characterized by a strong exports out of the U. S. We significant volumes. The margins were okay.
We're not spectacular, but we're solid margins. And we have some headwinds in international merchandising. There is a very with ample stocks around the world, there is a very subdued environment for us to make a profitable international trades, if you will, in the international merchandising business. So we've been working very hard to reduce our fixed cost, if you will, in that area, whether we shut down our office in South Africa, whether we consolidated offices in Argentina and reduce a little bit that were our month over there. We have made some changes in personnel where we needed to do so.
So, you know, it's been our improvement into that business. We still believe that over time, we're going to continue to grow our earnings. We are very pleased with our destination marketing business. We continue to grow 10% our volume there. Our acquisition and med stuff is doing well.
We have opened several offices around the world. So I would say, We continue to make progress. It's still short of the range we used to hit and we're not going to hit it this year, but this year will be better than last year. And, and we expect, again, our trend to continue in this second quarter. So I hope that satisfies David a little bit the out the outlook for Ag Services.
It does. Thank you. And I know you want only one question, so I'll pass it along. Thank you.
Okay. Thank you, David.
Your next question comes from the line of Sandy Klugman with Vertical Research Partners. Your line is open.
Could you discuss your views on the near term ethanol market outlook? You mentioned that you expect strong demand to emerge in the near term. But margins have compressed pretty meaningfully on lower than anticipated driving demand. You also have emerging risks from Brazil potentially implementing a 16% tariff I was wondering if you could provide some more color on your near term ethanol market outlook and then comment on how some of these uncertainties may have impacted negotiations for the dry mill assets?
Sure, Sandeep. Yes. So the short term, I would say, we're very bullish in terms of ethanol margins. We think we're going to have a very strong Q2 and Q3. We had very strong exports in the first quarter.
We expect Q2 to remain very strong, even without any China in our forecast, we are still expecting the industry to talked about 1,100,000,000 dollars, $1,300,000,000. This is the time of the year in which we're going to see domestic demand accelerate the driving season gets better if it ever stops raining and the weather improves. And we're going to see a drawing inventory by May. So we expect from Q2 and Q3 and volumes more normal into Q4. So all in all, we expect a good year.
Brazil, we think that this is going to put a lot of, a lot of, exporting our books in the industry books by the whole first half. They've been very strong in Q1. We're going to see some of that continue into Q2, but there are other geographies where there is India and can that continue to grow and we continue to develop new export markets. So, we're thinking 14.5 give or take in terms of domestic demand plus 1.11.3 of exports, a 1,000,000,000 gallons, I mean. So, so we think that the be very good balance for the rest of the year.
2nd part of your question was to what extent this impact in our dry mills considerations it hasn't. We continue to have the same, strategic question about what we're going to do with the dry mills, We haven't found any option at this point in time to execute on that was giving us the value creation that we wanted for our shareholders. So we continue to look and we continue to keep an eye on the developments on the tax reform in the U. S. That could impact some of the options or could value some of the options in different ways.
So we continue to, discuss with a couple of interested parties, but probably, as I said, looking with, look inside with a little bit to the tax reform progress that the Trump administration may do this year or in next year.
Okay, great. That's very helpful. Thank you.
You're welcome, sir.
Your next question comes from the line of Farha Islam with Stephens Inc. Your line is open.
Hi, good morning.
Good morning, Cara.
Just some more color on your Oilseeds business. Share with us, kind of color around the Brazilian harvest farmer selling and what we should look for in that oilseed processing earnings year over year for 'seventeen versus 'sixteen?
Yes, sure, Farkha. So as it has been widely publicized, obviously, Brazil will have a very large crop. We expect soybeans to be up in production, maybe 20% versus last year. Corn maybe 40%. So, at this point in time, obviously, the dynamics in Brazil have been about farmer selling, farmer not liking the prices, not liking the currency at this point in time.
So crush margins have been maybe breakeven at best. As everybody fights for soybean Origination, especially difficult maybe the Matogrosso area. With the pool of beans from the north ports and Santos as the industry tried to satisfy export commitments. The crushing environment should improve in July forward that the export program loses competition to the U. S.
And some of export capacity will shift probably to corn to try to deal with this, maybe 93,500,000 tons crop that, Brazil is going to harvest. The oil balance sheet would probably tighten mix year as the biodiesel blend goes to 9% is implemented. And so that's kind of what we see Brazil at the moment. There's a lot of the balance between how much China is going to be importing versus how much the seller the farmer will be selling and to what extent they want to keep some carryover for next year or commercialize it before they get to the corn crops.
And the outlook for your Oilseeds business, how should we think about that year over year?
Yes, I think we'll be better than last year. So we expect biodiesel and others to pick up seasonally. And we expect crush margins to still be a little bit dude because we need to fight with the, ddgs produced from this record ethanol and also some of the still wheat feed that is in the market for Q2. We've seen already encouraging signs in Europe that demand is coming back to soybean meal. So we know that we are going through those inventories of wheat feed.
So overall, we are positive into ending 2017, much better than 2016.
Carl, if you recall, last year 2016, 2 major factors dragged down oilseeds results. 1, the Wilmar equity earnings and 2, the lack of volumes in South America in terms origination. Those two factors as we look into 2017 should not be negative factors. And you're seeing the strength in terms of the Wilmar equity earnings got translating to our results in the first quarter. And then with the large crop in Brazil, particularly to what's expected to be significantly improved corn crop origination volumes in South America should be significantly higher, which will contribute towards an overall positive delta in 'seventeen versus 'sixteen.
So again, we expect 'seventeen to be a lot better than 'sixteen. Again, we don't expect it to approach the 2015 levels, but nevertheless 2017 for oilseeds will be a far better year than 2016.
Very helpful. Thank you.
Your next question comes from the line of Eric Larson with Buckingham Research. Your line is open.
Yes, thanks everyone. Good morning. Thanks for taking my question. One, the interesting question that I have, and this is really, we've had 4 consecutive years of global grain production that really has only had 1 kind of interruption, which was last year in South America. We could potentially produce a normal crop again this year.
I mean, obviously, we got good moisture, good planting. It seems like this malaise could last for a while in a services, yet we know what can change quickly. But the real question I have is, we've had fairly depressed commodity prices now globally for Oh, 18 months, 2 years, yet we still see global production going up, whether it be the Ukraine and Russia and elsewhere. I mean, maybe there's some geopolitical issues there, but where does and it seems like the U. S.
Is losing share, where does all this kind of washout at the end? And does it keep, does it keep the competitiveness in ag services out longer than we might expect?
Yes, thank you, Eric, for the question. I think, listen, I think the world continues to be to have a strong for grains. And I think that as long as we have good weather, we have good inventories, but the usage is very strong. And I think that we need to continue to plant and to create because one of these days, we're going to have a surprise and you will see how the pendulum will swing dramatically. So, but in terms of adjusting for this area of the price prices and ample stocks, if that was to continue, you see what we're doing in Ag Services.
Again, we are reducing our fixed cost in our services to make sure that we keep our returns. That's where you see our in invested capital with the announcement that we did this morning in crop risk, we continue to keep the commercialization, the relationship with the farmer, but we we don't own those assets anymore. We take that invested capital out. So again, we can to keep our share, we continue to expand outside the U. S.
You heard about our investment in the port of Santos. You heard about our investment in the port of Barcarena Northern part of Brazil. We have been invested last year in the port of Constanza in Eastern Europe. So We think that the production will continue to grow. And to the extent that, that we're going to have every now and then a dislocation, while we have this strong demand, I think that the industry will, will be fine and I think Ag Services will come back to the levels we used to see.
Okay. Then just one quick follow-up question. The two things that are in your control in the Ag service this division is number 1, your management and I'd like to I'd like a little update of where you sit with all your your cutting management disruption and egg services, your international your trading desk. But then also a quick update on your destination marketing, which that's something you can control. You can pick up a higher margin as you pick up customers post port.
So can you talk a little bit about those 2 issues?
Sure, Eric. Yes. Listen, in international merchandising, what we've been trying to do is, again, is reduce our cost per ton of uni traded. So we consolidated offices in Argentina. That is something that we needed to do that created some redundancy in personnel and we have some reductions there.
We closed our office in South Africa. That was a strategic decision and we will continue to analyze other offices whether it makes sense. At this point in time, I think that probably most of our restructuring has been done. So we wouldn't expect anything further. In terms of personnel, as you described, some of these things were very well planned, like the head of of, the top 4, the global traders, I'm sorry, the former top 4 unit.
That has been planned for more than a year in which, you know, one very experienced trader was basically grooming his succession and now he's retiring. We have every year for you to have an idea, we get an input of about 250 people in our commercial merchandising system and we continue to develop them and grow them And over time, they all grow into bigger positions and some of our most experienced people retire. So, that was, I think you shouldn't read that much into that. That was a very planned succession and nothing reflects the issues that we have with the performance of the global traders. So again, the global trade desk is just trying to reduce their cost per ton of traded materials since the margins are at a little bit lower than 4.
Do you have a second part of that? I get into the global trade desk. Do you have another one?
Yes. Well, the connection marketing. Yes, sorry. Sorry for that.
So destination marketing has been doing very well. Listen, we are having a dual approach when we can, we go and acquire some vehicles out there to improve our share. MetsoF was part of that. We acquired half of that and it's been growing very nicely and giving us very good profit growth. Volume is growing.
I think it grew 10%. The volume that we have in destination market in this quarter, so we are happy with that. And when we don't find a unit like meds of where we can increase our equity stake or ownership, we go and open offices and we have opening offices in Central America. We have been opening offices in, in Southeast Asia. So, is a lot of work.
It's a slow work at times, but we have been seeing the pickup in in margins and we've seen the increase in share. So we are, we are continuing to relentlessly, implement on that.
All right. Thank you, everyone.
Comes from the line of Brett Wong with Piper Jaffray.
I know it's still early. There's a lot of uncertainty, but we're hearing more and more discussion around that. So recently, specifically last week, wanted to know if you can comment on anything that people are hearing in D. C. And then as we've seen more pressure on relationships, what are you kind of doing looking at the potential risk there?
Sorry, Brad, you mentioned about NAFTA?
Yes.
Yes. Thank you. You came very slow there, very low. So, listen, there are many issues in the news and you can obviously have confidence that our teams are deeply involved both in the U. S.
And in Mexico on these I think we are heading towards a discussion about NAFTA. Enough Tech has been in place for 23 years and whether you discuss with the U. S. Administration or you discuss with the Mexico situation. There are issues on both sides that they would like to update and modernize naphtha on.
NASDAQ has a from our perspective, obviously, it's a very important customer, whether we export to Canada, whether we export to Mexico. And I think the administration understands that. And we have a very balanced sweetener's supply and demand, if you will, that needs open trade. And I think on both sides, whether it's sugar coming this way or high fructose corn syrup going their way. Both industries are very healthy and this is in the best interest of both countries on both industries to continue to negotiate and have discussions.
So, again, we are at the at the table, we are helping with data and with our opinion on both sides. And I think both sides will continue to make progress and I can't disclose anymore at this point in time.
Your next question comes from the line of Rob Moscow with Credit Suisse. Your line is open.
Hi, thank you. Hey, Juan, I was hoping you could help us understand the order of magnitude as to the growth of destination marketing and its contribution to ag services? And maybe offset that with, I suppose, the lower cost per trade that you pointed out in your trading operations because you're restructuring and reducing personnel. It's very hard for me to understand like how much each of these elements contribute to the business number 1. And number 2, like is are you adding costs and destination marketing that are offsetting the savings and that you're getting from the trading?
Yes, let me give you some perspective, Robin. Thank you for the question. On the global trade desk, I wouldn't like to disclose my dollars per ton of fixed costs because that's competitive information and we benchmark that. And I don't want the number out there. I would say, at this point in time, our reductions are in the tens of 1,000,000 of dollars, if you will, in terms of the restructuring of of that.
In terms of, destination marketing, when we put together the plan, as you may recall, we described that about 15% of our global trade were going into destination marketing, we're reaching the final customer. And we were planning to move that over 5 years to 30%. So to kind of to double that the amount we were sending there. That was going to increase, margins from about, let's say, $2 to $4 per ton to maybe something like $8 to $10 per ton. We saw last year the increase in our volume.
What was the increase to volume last year? I don't have it So what am I roughly knowing? I think a 1,000,000 tons. Yes. And we are seeing this year an extra 10% as as of first quarter growing.
So, so that's kind of the pace, if you will, to the extent that is adding cost, is adding costs that this included in this $8 to $10 per ton. So we shouldn't double count that that extra cost, I would say. So I think you should think about adding earnings from the destination market in volume that is growing at hopefully picking up something like $6 per ton versus our original FOB trade. And then you have another source of earnings, which is the slight reduction of a structural cost in the global trade desk as we improve our footprint there. So we optimize our footprint there.
So those will be the 2 basically, the two numbers you're keeping in your head. Okay.
That's very helpful. Thank you.
Welcome, Rob.
Your next question comes from the line of Ann Duignan with JP Morgan. Your line is open.
Yes, hi, good morning.
Good
morning. Rather than we did dead horse on ag services. Maybe I'll ask about the recent weather in the Midwest. There is some discussion out there that we might have lost as much as 20% of our wheat crop We've got parts of Illinois with significant flooding. I know it's only been the past weekend, but Could you comment on what this recent weather might or could do and what kind of conversations you're having with your farmers in the region, any change in planting intentions, what might be the outcome of all of this in your view?
Yes, I was flying yesterday across the area here and you realize how much standing water is there. So there is a 2 rated fields out there. So I guess from a corn perspective, we see we have planted about 34% so far, which is about on top of the average of the last 5 years. And I'm not sure how much progress we'll be able to make this week until the weather improves. But, you know, I think the farmer in the U.
S. Have proven that with new machinery, they can plant pretty much a lot of a lot of crop in a week. In terms of wheat, I think that we received probably some damage over the weekend and I don't know how to quantify it other than there is the annual annual wheat tour underway this week and I think that there people will be assessing damage. Obviously, with this very sturdy crop for drought and dryness, but I'm not sure about the wind and the flood in the or the rain that we have over the last, over the last weekend. In terms of corn planted and soybean planted I told you before, about 34% in terms of corn, maybe 10% in tail of soybeans.
And I think it's too early to determine any change in acres. So at this point in time, we're sticking with the same numbers than before until we get new information from the field, if there are if there is some information, some new information from the field.
Thank you. And no change in planted acres on the decline in soybean prices since the initial planting intentions?
Not from our perspective. I'm not.
Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Wanted to go to something you alluded to in the prepared remarks about lowering the long term WACC to 7 from 8 previously? And maybe does that change the long is the long term target still 200 basis points over WACC? We're now thinking ROIC can get to 9, not the 10 previously. And if so, does that imply kind of, I mean, any change in the longer term kind of implied earnings kind of outlook for the business. And maybe the corollary there is the weakness and we've talked a lot about ag services on this call already, but has the performance in ag services this quarter and through this crop year, made you revisit kind of the embedded ag services earnings that contributes that $2.30 that's in your kind of base or EPS algorithm?
Adam, we, we reviewed basically the underlying cost of capital model over the past several quarters. And so we took a hard look at long term interest rates, equity risk premiums betas in our model. Recall, when we established the 8% long term lag, that was done back in 2012, 2013. And looking back historically over 20 years. And so some of those assumptions frankly were outdated as we kind of look through these assumptions, we did some benchmarking And so once we kind of update our model for like long term interest rates, recent long term interest rates, recent equity risk premiums, we determined that it made sense update the long term WAC to 7% from 8%.
And a big driver of that was really equity risk premiums, which have come down over time. In terms of what it means, our long term objective still remains 200 basis points over long term WACC. So that the spread has not changed in terms of how we're targeting the organization for results. In terms of your comment on ag services, I mean naturally when we set projects, when we look at projects that we're evaluating across all the businesses, there's clearly a spread above even the 200 basis points over long term lag. So our hurdle rates remain significantly higher, in the double digit area.
And we frankly, we're not going to really adjust those hurdle rates because we still believe it makes sense to really drive all the businesses to achieve strong earnings, strong returns. But at least from our perspective, as we kind of think about longer term, what makes sense for our company over cycle. We do believe like some percent plus the 200 basis points spread is it a 9% that over a cycle, we should be achieving about a 9% type of return for this company.
So, but I just wanna clear on that, arithmetically, right, you've taken 100 basis points of ROIC, which on your current invested capital base is like $240,000,000 of notepad, which is like $0.40 of EPS. In theory off the table. I'm trying to understand what's like how that has actually changed, if at all, or it's just a messaging and comparing apples and oranges here?
No, we haven't changed, I mean, our assessment in terms of long term earnings for the company. And so from our perspective, we still believe that it is important for us to kind of drive this 200 basis point spread over our long term cost of capital.
Okay. I'll pass it on. Thanks very much.
Your next question comes from the line of Heather Jones with Vertical Group. Your line is open.
Good morning. Thanks for taking the question. I have a 2 pronged question on farmer selling. So wondering given the recent rally in corn and the devaluation of the real, we've been seeing reports of a meaningful acceleration farm and selling both here and in Brazil. And was just wondering if you could comment on what you've seen in recent days in that area.
Yes. I think, Heather, thanks for the questions. Yes. What we have in both places in South America is this equation. I think that when farmers see a rally or in pharmacy change in the currency, that's what we see in the sale, other than that, they are holding to the products.
Of course, with these, with these big crops, at one point in time, they will have think about how full their their storage bins are. And as we get further into the harvest, they might prompt more farmers But at this point in time, there we get to 1 of the weakest farmer selling rates that we have seen in maybe 6, 7 years. So they are just, sales are picking up at rallies or changing ForEx, yes?
So to be more specific, like in the last week or 2 weeks, we've seen roughly a 2 to 3% increase in corn prices and about a 3% devaluation that real. So, I mean, I know we're still behind a year ago and the five year average, but has there been a meaningful pickup in selling there or just or would you call it a slight increase?
We've seen an increase, but I would not call it meaningful, Heather.
Your next question comes from the line of Michael Piken with Cleveland Research. Your line is open.
Yes, hi. Just wanted to circle back a little bit to the ethanol side of the business and just, you talked about and optimism on exports? And really, do you see that carrying into the outer years? And really, I guess, what is sort of the longer term impact of this Brazilian tariff given that historically it's been a strong market.
So just wanted to circle back there longer term thoughts on ethanol.
Yes, Michael. Well, Brazil has been a strong market at times and a strong exporter to the U. S. At times. So we've seen everything in Brazil.
I would say, from a long term perspective, we continue to see markets that really need ethanol for environmental reasons, whether there are some of the Asian countries. And we still see ethanol more than maybe $0.45 per gallon cheaper than MTBE and other alkylates. So I would say, I think that as long as the U S is perceived as being reliable supplier, we will continue to incorporate new markets. And whether we haven't touched much of Japan yet, we haven't touched much of CECO yet. So I think we still have a long ways to go, and we've seen growth in our existing countries, whether it's Canada, and India, as I said before.
And, Brazil has been a nice counterbalance for China this year. So it's dynamic and every year changes a little bit, but the reality is this is the cheapest oxygen rate in the world, and it will continue to find the place and we've seen that as the U. S. Grows a little bit domestic demand and we've seen that this 1,100,000,000 to 1,300,000,000 gallon type of ratio that we have today is creating good margins and we think as I I said in my previous question that Q2 and Q3 will be very strong. And we do believe that maybe a situation like these with the same seasonality may repeat itself in 2018.
Your next question comes from the line of Ken Zaslow with BMO.
Just a quick question. When you're thinking about high fructose corn syrup and the negotiations, how important is it the export, how much did the exports to Mexico over the last couple of years really tighten up the utilization rates in in the U S? And if that were to slow, how would that impact you guys in negotiations?
Hey, Ken. So think about it. I think that when over the last couple of years, the industry has been, maybe from a demand perspective, Luce 1% per year or sometimes flat. It has been like that. And about 5% of capacity has been taken out of the industry that have tie and up.
The U. S. Stands about 11% of the total volume to Mexico. But it's also true that the U. S.
Gets about a 1,000,000 ton of sugar, which is about 18% of the sugar Mexican market. So At this point in time, it's kind of a very balanced there. And I was mentioning the 1% decline in demand because 5 years ago, we decided that just in case, demand decline will accelerate, we will start with an aggressive program what we call fight for the grind. So finding new uses for the grind. And we have seen growth in our portfolio.
Of other products different than just high fructose corn syrup that has helped also to tighten the market even further because you have given us options. Whether it's product for cardboard or other industries that are different than just sweeteners. So, so I think we feel we feel that we have optionality if some of these will be, will be impacted. We don't believe that the both countries are going into a trade war, if you will. We think that is going to be a negotiation.
And we think, as I said, that, that, that, flow of over the board, there is very balance, again, with £2,000,000,000 of hydroxychloroquine South and 1,100,000 tons of sugar coming north. So It could impact us. We have optionality. We don't think it's very likely. That will be my summary.
Great. Thank you. Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open.
Thanks and good morning guys. I was reading about Chinese soy oil consumption and dynamic that was raised was that consumer concerns over GMO sort of gotten to the point where regular soil oil is starting to decline in terms of supermarket sales and the consumers are moving towards non GMO alternatives, whether it's sunflower peanuts, Sesame or what have you And so I'm just wondering, I guess, 2 things. 1, to what extent is that impacting margins or demand for regular soil there from your perspective. And 2, what opportunities does it provide for you, to service the market with those alternative products, which apparently are selling pretty good premiums?
Yes, Vince, there are 2 dynamics here. One is, maybe the creation of a little bit of a premium market for non GMO products, maybe like it's happening everywhere and that provides an opportunity both for ourselves and maybe for some of our partners in the area. On the other hand, there is a big is in the government to try to educate the people about, about GMO, non being an issue if you are in China and you need to feed the population, you understand that with 6% of the water on 8% of the arable land and 22% of the population, you need all the productivity you can get. And that's one of the reasons that the market, the government is trying to educate the population on the benefits of GMO. So I think that this point in time, it's a little bit of a niche market.
We can take advantage on that. I think that over time, GMO will be pervasive in Asia and in China as they needed to, to feed the population.
Your next question comes from the line of Vincent Anderson with Stifel. Your line is open.
I just wanted to switch gears quickly and ask about the opportunities you see in sort of biomass based substitutes traditional petrochemicals. I know it's not new technology and we have seen some smaller producers stumble recently in trying to get this market off the ground again. But from your perspective, are the major hurdles here more of a scale and reliability of supply issue that somebody of Archer size could address? Or is it feedstock economics relative value with your other corn products? But is this more of a blue sky research effort in terms of your overall portfolio or is there a meaningful contribution that could come from this over the next 3 to 5 years call it?
Yes, thank you for the question, Vincent. I think the biggest factor in this is to get an sponsoring customer on a sponsoring application. I think the technology works. I think the economics could be made to work at this levels of both oil and corn prices. I think that ADM is always in the conversation because of our enormous fermentation available capacity.
So, we can bring things to the market faster than other people So we are engaged with people that are looking for those optionalities that they try to attach their brands to more renewable This is something that, as I said, from a technology perspective, it's not an issue. You get to get the timing right you don't want to be too early into that and we have seen what happened with that. So we've been prudent into that. And we try to align ourselves, as I said, with large accounts, and you heard our relationship with DuPont in that space. And we have others in the fire that if those counts feel that there is a time to launch renewal products into the market, we could do so with our fermentation capacity.
Absolutely. And it's a little bit of, a little bit of what I described before our efforts into fight for the grind. There are things that are more immediate that we're doing right now. There are things like plastics or biomass replacing petroleum plastic that are maybe more hypothetical or in the future, but they are still being looked
Great. Thank you. And just quickly, would there be, as you think about the most immediate opportunity, would there be any kind of significant capital requirements behind that? I know we're talking hypotheticals here.
Yes, there are capital mostly in terms of pilot plans and I think adjusted some things, but we have some units that, that we have for the time from the times of the PHA, original things that that are, that are available if we wanted to bring them into production. And I don't think they will take a massive amount of capital.
Your next question comes from the line of David Driscoll with Citi. Your line is open.
Great. Thank you for taking the follow-up. I have 2 follow ups. The first one is just on Second Quarter Ethanol. One you said several times on the call, your optimism, as I look at spot margins right now, they don't actually look very good.
So I'm curious about your confidence in the second quarter. Is ADM hedged and somehow this is why you've got such good confidence Or is it fundamentally you expect a pickup in the spot ethanol margins from here for the factors that you've previously talked about?
That's the first one or those were the 2?
That's the first question. And then I have a follow-up to Ray.
No worries. No worries. So let me address. A little bit of both. I mean, we hedge a little bit as we always do, but it's in our confidence about the program we have forward in terms of the orders that we see coming.
The export demand that we see And we believe that May, we will see a significant drop in inventories. And so it's a little bit of both, if you will, But we feel that, we see in our forecast that Q2 in ethanol will be significant significantly, sorry, better than last year, the Q2 last year. David, you said you have another one? Please, I will lost David.
Your next question comes from the line of Rob Moskow with Credit Suisse. Your line is open.
I guess I feel like I have to ask this question. Your corporate expense line is now more than double where it was 5 years ago. And I don't think anyone would pay it much attention if it were accompanied with stronger earnings power and a stronger outlook for earnings power going forward based on the environment of the industry and based on the investments you're making in the returns. But today, you're lowering your ROI you're essentially lowering your ROIC numbers. Is going to cause several people to have to lower kind of their long term outlooks.
I know you're saying that yours is the same, but, Can maybe you just give us a sense of to what extent has the doubling up of the headquarters in Chicago and Decatur affected that? To what extent has rising executive comp affected that? And then maybe the more meaningful, positive ROI investments in in IT and capabilities that will improve the business?
Yes, a significant part of the increase in terms unallocated corporate on the management line is related to our investments in IT, the business transformation and if we classify that as expense. But it's a fairly significant investment. I mean, as you can appreciate, one of our priorities is to prove our business processes. And so we launched this program a couple of years ago, and, in fact, the run rate of spending as we head into 2017 is actually a fairly significant run rate right now in terms of investments. And so I think we're up that this is actually a very, very important part, in terms of our commitment, our investments, in terms of making this company better, particularly in the area of processes.
The area innovation, frankly, for our company, our size, we were under spending in terms of R&D And Innovation. And I think what we're doing right now is actually devoting more of our spending in that area. The Wausch Labor's acquisition was actually very, very important because from that acquisition, we actually acquired a lot of innovation centers around the world. And that type of expense actually goes into this line unallocated corporate as well. When you actually take a look at what I call core central staff costs.
And when I say core, maybe if this is excluding IT, excluding business transformation, excluding R and D, our core central staff costs actually are still running at what we call the 2012 levels. I mean, if you call it back in 2012, we went through a ring of our central staffs. And so we've actually set our budgets and our cost plans based upon in ensuring that our, what I call, core central staff do not exceed the 2012 levels. And so I think it's important to kind of understand that in what I call like true corporate central staff costs, like the functions themselves like accounting and HR, etcetera, etcetera, we've actually kept a lid on all those costs, whereas we have actually spent more money in terms of what I call investments, particularly in business transformation, R And D And Innovation. That's where we've seen the increase.
And we think that this is important for this company to make these types investments at this point in time in order to allow us to be a better company
the $50,000,000 in run rate cost savings that you highlight, is that net of this incremental spending in any other in any way or is it just kind of a separate metrics.
That's separate. I mean, that's really related to our operational excellence initiatives there.
There are no further questions at this time. Mr. Luciano, I will turn the call back over to you.
Thank you. Thank you, Scott. Thank you for joining us today. Slide 15 notes some of the upcoming investor events where we will be participating. As always, please feel free to follow-up with Mark if you have any further 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.