Good morning, and welcome to the Archer Daniels Midland Company First Quarter 20 16 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, kindly, Stephanie. Good morning, and welcome to ADM's first quarter earnings webcast. Starting tomorrow, a replay of webcast will be available at adm.com. For those following the presentation, please turn to Slide 2. The company's Safe Harbor statement, which says that some of our comments constitute forward looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results.
These statements are based on many assumptions and factors that are subject to 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 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 on our scorecard and discuss our forward 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 1st quarter adjusted earnings per share of $0.42. Our adjusted segment operating profit was 5.70 $1,000,000.
Global Dynamics reduced margins across the U. S. Agricultural export sector, the U. S. Ethanol Industry and in the soybean crushing industry worldwide.
Challenging market conditions continued in the first quarter, particularly affecting our services. Low U. S. Export volumes and weak margins continued in the quarter, poor results from the global trade desk impacted results for Ag Services. Results for corn improved compared to the first quarter 1 year ago led by strong performance in sweeteners and starches.
For oilseeds, Global protein demand remained solid. However, first quarter results were impacted by weak global crush margins. WFSI results were in line with expectations. So while adjusted ROIC was below WACC on a 4 quarter trailing average basis, we expect to be above work for the full year. We continue to take out to mitigate the impact of near term market conditions.
During the quarter, we continued to advance our strategic plan We acquired a controlling stake in Harvest Innovations, enhancing ABMs, plant protein, gluten free ingredients portfolio. We announced the purchase of a corn wet mill in Morocco that will further expand our global sweeteners footprint. We opened our new state of the art flavor creation application and customer innovation center in Cranbury, New Jersey. And as part of our ongoing portfolio management efforts, we reached an agreement to sell our Brazilian sugarcane ethanol operations. In addition we achieved almost $50,000,000 of run rate savings in the quarter and remain on track to meet our $275,000,000 target by the end of the calendar year.
With repurchase about $300,000,000 of shares in the quarter and paid dividends of about $200,000,000 as we continue to execute challenging environment. However, we are cautiously optimistic that reduced South American soybean and corn production could bring improved soybean gross margins and merchandising opportunities in the second half of the year. I'll provide more detail on our scorecard progress 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 $0.42, down from the $0.78 in the year ago quarter. Excluding specified items, adjusted segment operating profit was $573,000,000, down $319,000,000. The effective tax rate for the first quarter largely due tax rate will largely depend upon a number of factors going forward.
At this point, I would expect our tax rate to be at the lower end or below the 28% to 30% range, I mentioned, in the 4th quarter earnings call. Our trailing 4 quarter average Adjusted ROIC of 6.3 percent is 30 basis points below our 2016 annual WACC of 6.6 percent. Our objective for the full year 2016 is to earn an ROIC in excess of our cost of capital, despite the challenging offering environment that's likely to persist for the majority of the year. Of $0.39 per share to the adjusted earnings of $0.42 per share. For this quarter, we had asset impairment and restructuring charges of approximately $0.01 per share and LIFO charges of approximately $0.02 per share.
Slide 5 provides an offering profit summary and the components of our corporate line. Before one discusses the operating results, I'd like to highlight some of the unique items impacting our quarterly results. There was nothing extraordinary in terms of unique accounting or special items in the operating lines to note this quarter. In the corporate lines, net interest expense was down due to lower interest rates and the favorable effects of the debt restructuring from last year. Unallocated corporate costs of $116,000,000 were slightly higher than the year ago quarter due to asset impairment charges of approximately $11,000,000 primarily from some software impairment.
Going forward, unallocated corporate costs should be in the area of $120,000,000 per quarter as I have outlined in prior earnings calls. A minority interest and other was significantly unfavorable to the prior year after absorbing $50,000,000 of equity and which was included in both reported EPS and adjusted EPS related to updated portfolio investment valuations in CIP. Investment joint venture that we've held since the late 1980s and in which ADM currently has a 43.7 percent equity interest. Turning to the cash flow statement on Slide 6. Here's the cash flow statement for a 3 month period ending March 31, 20 18 compared to the same period the prior year.
We generated $557,000,000 from operations before working capital changes in the quarter. Slightly lower than the first quarter prior year's $244,000,000. Included in the other investing activities line is our increased investment in Wilmar to a 20% level. During the quarter, we spent about $300,000,000 to repurchase approximately 9,000,000 shares Our objective remains to repurchase $1,000,000,000 to $1,500,000,000 of our own stock in calendar year 2016. Our average share count for the quarter was 597,000,000 diluted shares outstanding, down $42,000,000 from the same period 1 year ago.
Our total return of capital shareholders, including dividends, was about $500,000,000 for the quarter. We can see that there was a balanced use of cash between CapEx M and A and capital return to shareholders in the quarter. Slide 7 shows the highlights of our balance sheet as of March 31st. Our operating working capital of $7,700,000,000 was down $500,000,000 from the year ago period. Total debt was approximately $6,600,000,000, resulting in net debt balance of $5,400,000,000, up slightly from the 2015 net debt level of 5.1 In part, reflecting the issuance in June 2015 of the 1,100,000,000 of euro debt, a subsequent repurchase of $900,000,000 of U.
S. Debt. Our leverage position remains healthy with a net debt to total capital ratio of about 22%. Our shareholders' equity of $17,900,000,000 was down from the $18,800,000,000 level last year due to shareholders' returns in excess of net income by approximately $170,000,000 and a cumulative translation account also down about $80,000,000, due to the strength of the U. S.
Dollar. We had $5,900,000,000 in available global credit capacity at the end of March. If you had available cash, we had access to over $7,000,000,000 through a review of the business performance. Juan?
In the first quarter, we earned $573,000,000 of operating profit, excluding specified items, down from the $882,000,000 from last year's first quarter. Ag Services results were challenged by lower U. S. Export volume, significantly lower margins and unfavorable merchandising positions from the global trade desk. Results from corn improved in the quarter compared to the first quarter last year, led by strong performance in sweeteners and starches.
For oil states, results were impacted by lower global crush margins compared to an exceptional strong year ago quarter. WFSI was in line with expectations, up from the prior year with solid performance from wild flavors and higher results from the specialty proteins. As a result, segment operating was down 36% versus the year ago quarter. Now I will review the performance of each segment and provide additional details. Starting on Slide 9.
In the first quarter, Ag Services results were down significantly compared to last year's first quarter. In merchandising and handling, we continue to see a challenging merchandising environment for our Ag Services North American footprint. We saw weak U. S. Export competitiveness, lower North American volumes and significantly reduced margins.
In addition, we had a quarterly loss for the global trade desk compared to positive results last year. Losses from the global dray desk were caused in part by unfavorable merchandising positions. This were unrealized losses generated in part by the significant movements in prices results declined due to low U. S. Exports and high water conditions on the Mississippi River system that drove lower barge volumes and higher operating costs.
Milli and others had a solid quarter but results were down due to lower grain and feed margins. Please turn to Slide 10. Corne processing results were up slightly, led by results in sweeteners and starches, which performed well with an improved cost environment and strong capacity utilization. In addition, these start results were up in part due to the consolidation of the results of the acquired operations in November 2015. Our Olmex joint venture also had a stronger results in the quarter with solid sweetener demand in Mexico.
Bioproducts results were down in the quarter due to tough lives in and ethanol margins. Ethanol margins continue to be driven by high industry production levels that cost inventories to build throughout the and export demand remains solid and production levels slowed. This is due in part to seasonal maintenance programs of many plants in our industry In addition, the continued overcapacity of the global light in market negatively impacted results. While we expect this to continue through the second quarter, We are taking actions to further improve our licensing operations and are looking to stabilize the business in the second half of the year. Slide 11 please.
Oilseeds results were down in the quarter versus an exceptionally strong quarter 1 year ago. Crushing and origination declined from last year's high levels. While global protein demand remains solid, Global soybean pressure origination results were down significantly due to lower global margins resulting from increased Argentinean soil milk exports. U. S.
Crush volumes were down primarily due to reduced U. S. Mill exports. In addition, lower softseed crush volumes and weaker Brazilian commercialization that the slow throughout the quarter negatively affected results. Refined oils, packaged oils and biodiesel was down with stronger results from America and Europe, partially offset by weaker results in South America.
North American biodiesel demand was strong with the extension of the biodiesel credit to the end of the year. With the sale of the cocoa business in October 20 16, results decreased $24,000,000 compared to last year. Oil sales results in Asia for the quarter Klein due primarily to Wilmar's lower 4th quarter earnings. In April, we started to see improvements in in the second quarter. This improved crush margins if sustained should translate to better results in the second half of the year compared to the first half.
From last year and in line with our expectations for the quarter. We saw solid performance from wild flavors and higher results from specialty ingredients including specialty proteins, polyols and natural health and nutrition products. We saw included more than $3,000,000 in operational startup costs for the Tianjin fiber sold facility in China and the Campo Grande Specialty Protein Complex in Brazil. With more than 900 revenue synergy projects identified, WFSI remains on track to achieve its 2016 targets. Only 2 months in We're excited about what we see for harvest innovations.
It's a great example of how you can plug the right bolt on and drive results. We can leverage our internal origination strengths, originate all the soybeans and contract the acres, yet benefit from the Specialty Ingredients component of WFSI. Harvest is a nice business, a quality facility and provides a great complement to our existing commodity network, yet allows us to feed our specialty business while building out our portfolio. We remain on track to achieve our worth 15 percent to 20 percent operating profit growth target for 2016. In the second quarter, we expect some modest underlying growth on a year over year basis and we'll continue to see some additional startup costs.
Our growth will be more concentrated in the second half based upon the pattern of new business and synergy realizations, the startup of Campo Grande as well as the avoidance of some unique one time costs incurred last year. Now on Slide 13, I'd like to update you on how we're strengthening and growing our company. We highlighted some of the areas in which we made significant progress recently. I'll discuss a few. In Ag Services, we continue to grow our destination marketing capabilities as we recently closed in April, our MedSoft's joint venture in Egypt.
In corn, we announced plans to acquire a Casablanca Morocco based corn with meal produces glucose and native starch. The facility is the leading sweeteners and the starch supplier in the country that should see substantial demand growth in the coming years. In the quarter, we also announced the agreement sell our sugarcane ethanol operations in Brazil. And we are making good progress with the strategic review our ethanol dry mill operations, which we announced in February. In oil We began a significant expansion and modernization of the Santos port in Brazil, expanding annual storage and grain handling capacity from 6,000,000 to 8,000,000 metric tons.
And in WFSI, we acquired Harvest Innovations a leading producer of non GMO, organic and gluten free ingredients that consumers are demanding in increasing numbers. We also expect our Campo Grande Soy protein complex in Brazil to begin ramping up production during the second half of the year. We have targeted plans to expand our business with existing customers and gain new customer business in this important region. In March, we opened our new WFSI state of the art flavor creation application and customer innovation center in Cranberry, New Jersey. Also just two weeks ago, ADM celebrated the grand opening of the new headquarters of National Works Services, a food innovation center indicator, Illinois.
And we announced the launch of the food innovation challenge, designed to inspire more entrepreneurs to develop and commercialize their food innovations in the Midwest. Together, these initiatives leverage the broad strengths of ADM and the food ingredient strengths of our WFSI business unit. So these are just a few of the highlights from the quarter. We'll continue to update you on our scorecard progress each quarter. And over time, you should expect to see the results of all this.
So before we take your questions, I wanted to offer also some additional and And our performance in the first quarter reinforces that we have more work to do to focus on actions that we can control and which will make the company better in the long run. These actions include our ongoing focus on costs, lightinging up the amount of capital in our business, additional geographic diversification, our continued efforts to move further downstream in the value chain. Separately, there are some new global developments that make us optimistic as we look at the second half of the year. 1st, the heavy rain in Argentina is reducing the size of the Argentine soybean crop. Creating a tighter soybean balance sheet that supports higher global crush margins 2nd, Dry weather in Brazil is also reducing the size of the soybean crop and the Safrinia corn crop.
3rd, the U. S. Dollar has stabilized against the currencies of other crop growing regions. And finally, the tighter soybean balance sheet is further supported by strong global protein demand. For Ag Services, the 2nd quarter is a seasonal low volume quarter.
However, we are seen a large North American corn crop get planted in ideal conditions, which supports larger production. With the reduced South American crop, this could bring added export volumes and merchandising opportunities in the later part of the third quarter 4th quarter. For corn, sweeteners and starches continues to benefit from the flexibility at our wet mills and demand at low costs. The integration of the East Arch acquisition is going better than expected and will continue to expand our global product portfolio and customer reach. The ethanol industry margins remain challenged.
Although domestic and export demand remains strong and inventories have started to come down recently. The second half of twenty sixteen currently has the potential for a better pricing environment with tighter supply demand. But the key driver will be future production versus demand. For oilseeds in the 2nd quarter, South America will continue to have more favorable supply economics. South America conditions are reducing global supplies creating a tighter global stocks to usage scenario.
This, along with solid growth in protein demand, is creating a better margin
things.
For WFSI, on trend items like clean label, GMO free, organic and natural all fit well within the ADM strategy and leverage the WFSI portfolio. With a diverse product portfolio, turnkey system solutions and more than 900 revenue synergy projects identified we continue to build this team's profit targets. So, thank you for joining us today. Slide 15 notes some of the upcoming investor events where we'll be participating. Now we would like to open for Q and
Your first question comes from the line of Evan Morris with Bank of America. Your line is open.
Good morning everyone. Hello, Ivan. Good morning, Evan.
Hi. Thank you for that outlook here. I guess if just still struggling a little bit. There's been a lot of things that have changed over the past few weeks. And I guess just starting with your cautiously optimistic about the 2nd half.
I guess, is that a little bit more optimistic than you were, a little less optimistic same? I guess, Again, there's a lot of moving pieces. What's more positive, what's more negative? I guess at the end of the day, when you kind of add this all up, does it put you in a results going to be worse than expected for 2Q, but maybe better for the back half. If you can kind of just help frame some of that, again, given all the things that have changed over the past couple of
weeks, Yeah, if you recall, Evan, last earnings call, we provide a scenario for the year. And if I compare that scenario, versus what we see today. I would say that in Ag Services, given the tough start of the year and probably, you know, a similar Q2, to the Q1, we are less optimistic about Ag Services overall results for 2016. In corn, what we said that we would see improvements in 2016 over 2015, we are even more confident about that given the strength of our sweeteners and starches and how the year is evolving. If you look at the oilseeds, we said that all seats, we were expecting a down year versus 2000 and that's the strong 2015 and we still expect that, but as you described, we are more optimistic about the second half of the year given some of the tightness in South America.
In WFSI, we continue to be excited about the future of that business, and we continue to be in line with our previous forecast of growing 15% to 20 year over year. So I would say in general, we see the year similar to the last time, maybe a little bit better with giving this puts and takes.
Okay. No, that's really helpful. And then just a couple, I guess, more housekeeping kind of questions. On that global trade desk, loss, I mean, how much was that? Does that reverse in coming quarters, if you can just help us understand that, Rick?
Yeah, I would say, maybe I'll start and then I'll let Ray do. Our positions didn't were not immune to the end of the quarter movements, significant volatility that we have. So, we saw some of that. Some of that are open positions. Some was mark to market.
So, part of that, it will come back maybe, Ray, you want to provide a little bit more color to that?
Yes. I mean, I think that, as we kind of closed up the quarter, I think we indicated that ag services should probably be in the lower end of the 3 digit range. And I think that really what happened was with the movement in prices at the end of March, a lot of our positions kind of went negative. Most of it is unrealized in nature. We think some of these are timing effects.
When you think about where we ended up like $76,000,000 versus, let's say, in the low 100s, maybe $30,000,000 off. Some of it's timing related, maybe a third of it's probably timing related. Some of it's unrealized positions, unrealized losses. We'll have to figure out where where these contracts actually settle, where the prices will end up. And there were some other unique items in that variance, which are really one timers that don't spec to repeat itself.
So I think Evan, it's a mixture of a combination of various factors that kind of caused this variance here.
Okay. All right. Thanks. I'll pass it on.
Thank you, Alex.
Your next question comes from the line of Ann Duignan with JPMorgan Stanley. Your line is open.
Well, it's JPMorgan. Let me leave it there. Good morning, everyone. Hi. Can you talk a little bit about what's happened in the last few weeks again, not to harper on that, but seen a lot of farmer selling when prices rose.
We're seeing exports pick up a little bit. Can you talk about why Q2 wouldn't shape up to be better than Q1 in Ag Services, just given where we are today?
Yes, I would say, couple of reasons. You are correct. We have a couple of days of very strong farmer selling as the board rallied. We've seen that and we've seen with the dollar, stabilizing or weakening a little bit with regards to the other currencies U. S.
Becoming a little bit more competitive. When our cautious look to Q2 and is mostly on Ag Services because when we think about it, Part of that is 2nd quarter is traditionally our lower export volume. South America becomes more competitive with the harvest and in general, our exports, even in good times, they tend to drop about 20% from Q1 to Q2. So they become, Q2 is the low margin. But also even if exports will increase a little bit, there is still ample capacity and we don't foresee a big pickup in margins even if export climbed from this depressed level.
So, we want to be mindful that it may look a little bit better volume into Q2. It may not be reflected completely in a significant pickup in margins for us. That's our view at the moment.
Okay. I appreciate the color. And then just a little bit of in terms of what your team is thinking for planted acres in the U. S, given the recent pricing movements. Are you, as your team thinking perhaps more soybeans, more corn at what where do you stand if prices remain as is?
Yes, at this point in time, we're thinking a little bit more soybeans maybe.
Okay. I will leave it there and get back in line. Thank you.
Your next question comes from the line of Osbaum with Stephens Inc. Your line is open.
Hi, good morning.
Hey, Fara. Good morning, Fara.
First question is for Ray. Ray, you have highlighted $0.08 per share charge related to a JV. Do you view that as one time in item so we should exclude it or is that part of a regular kind of mark to market that we should include in results?
Yes, it means CIP is an investment that we've had since the late 1980s. Generally, it's actually a fairly stable equity earnings that they contribute to our results. And that's the reason why we never really highlighted in any of our quarterly earnings call. It just happens like this time around, they actually had a significant reevaluation of some of the private equity investments which resulted in really a valuation reduction that when translated to ADM equity earnings, results in the $50,000,000 negative impact I view it as a unique item, because normally it is not a factor in our earnings. And so while we did not excluded from adjusted EPS.
So therefore, our adjusted EPS number includes the $0.08 loss. I do view it as kind of a unique factor. So when I think about run rate of earnings, for this company, I, you know, I would think about in the context of Excluding the $0.08 share.
And in terms of run rate earnings, could you just review any updates you have? Because I think that in the last call, you were talking about 2.30 in earnings plus another $0.30 benefit from kind of your repurchase of shares and your cost savings program. So kind of normal run rate earnings we should expect from ADM is around the $2.60 level. Is that still the right way to think about it in context of the improvement in market conditions we've seen?
The way I kind of think about it, if you recall in the the 4th quarter earnings call, we indicated that the base, the base earnings of the company had been negatively acted by the headwinds that we've seen. So I think we outlined that probably our base with the current headwinds probably in the neighborhood of $2.30 to $2.40 a share. I mean, I think that given what we've seen in the ag services start for the first quarter of the year and likely a continuation in the second quarter maybe some additional pressures on this base, although as Juan indicated, there could be some upside, as it relates to where ag services and where oilseeds may end up in the fourth quarter with the impact of the South American harvests. And so I guess from my perspective, Farrah, I think we're in the same ballpark at this point in time. I am encouraged that in terms of the improvements, the dollar to dollar 50 of earnings improvements that we're driving over the medium term.
I am encouraged that we believe we're still on track for those dollar to dollar 50. So namely, the work that we're doing in terms of, getting the accretion from our recent investments, getting the accretion from wild and the synergies related to wild, and getting the benefits of the operational excellence initiatives And as you saw, to reduce share count from our capital allocation framework, which includes buying back shares. So I'm encouraged that we're on track on the $1.50 of earnings improvements over the medium term.
That's helpful. And my final question, Juan, you had mentioned in your prepared commentary that you've made good progress on your review of the ethanol assets. Any timeline that you're willing to place or any more color you can provide on that review?
Yes, the team continues to forget to analyze that. I mean, we made progress in terms of also carving out financials getting an advisor and so they are working on that. We're obviously going to manage the timing of that to maximize value for ADM on all these So at this point, we have nothing else to announce other than we continue to make good progress. We're getting closer to make a decision on that. You're welcome, Perfect.
Your next question comes from the line of David Driscoll with Citigroup. Your line is open.
Great. Thank you and good morning.
Good morning, David.
I wanted to ask a few questions. On ethanol, is the business expected to be profitable in the 2nd quarter given what you're seeing on margins?
Margins, as I said before, I think margins have inventories have been reduced over the quarter and margins have improved a little bit. So we will expect it to be profitable, yes, at this point, David.
And then, Juan, could you frame up kind of your bigger picture assessment of the ethanol, S and D right now? I mean, I think you made some comments about exports and so forth that were good, demand was good. How tight do you envision the S and D in totality in 2016?
Yeah, we look at, export markets continue to be strong. We've seen exports to China continues to be strong other than the traditional destination. There has been a significant growth versus last year of of China. And domestic demand is probably up in the range of maybe 2% to 3% for the year. When you take domestic demand plus the strong exports, we're thinking something in the range of 15,000,000,000 gallons and maybe we think that the capacity is slightly above 15,000,000,000 gallons.
So, I think a lot will be determined by the strengths of this driving season. We're going to be heading into now with the summer. And how the some of the producers react. I think that, you have seen some of the shutdowns mostly due to planned maintenance in anticipation of the driving season that has a cleanup part of the inventory backlog that we have built over this year but we're still above 4% higher than inventories of last year. So although we are getting better at that, there is still a significant amount of product that there, and that's why we've been a little bit more cautious.
We continue to run for margins and trying to optimize our operations and we will continue to do so. So So, but we saw the development of 2nd quarter as a positive one versus how we started the year.
Okay. That's helpful. On the crush margins, in January, we saw crush margins that were down in the low $0.30 per bushel. Recent margins are like in the $0.70 per bushel. So it's like a big rally.
However, on your comments, I take away on crush margins in the second quarter and that it was only this movement on the board crush that gives you optimism on the 3rd fourth quarter If I've said that all correctly, maybe could you just say why don't the improvement in crush margins filter into 2Q?
No, David, I just mentioned that normally when these crush margins expand like the way they did, we normally take a negative mark to market in that quarter. So, I would just say from your modeling purposes, if you will, it is a positive development for us for the rest of the year, so we feel good that maybe I didn't express myself with the right amount of enthusiasm about it. It's obviously a positive for us. It's just in the short term, I want to make sure you remember that we normally take a negative mark to market to that and we still don't know the magnitude of that, that is obviously evolving. But I would say, as I said in my initial remarks, we are more optimistic now that we were at the beginning of the year about the 4 as for oilseeds for the rest of the year.
That's super helpful. And just one last one, Ray, on the cost savings, you give this run rate number. Can you say what the realized savings were in the first quarter and what the realized savings will be at 2016 as opposed to run rates if they're different?
Yes, I mean, just because of the timing issue, right? So roughly half we would say that it's being realized. But the reason why we give run rate, David, is just to, I mean, that's how we kind of evaluate ourselves in terms of getting towards a, how much earnings power operational excellence is contributing towards the company. And so as you know, we set the objective at $275,000,000. And so we track it in order to determine based upon all of the initiatives that we've actually got accrued in the first quarter, what does that translate on an annualized basis?
So that's the reason why we provide that number to you. David, to give you some reference,
when we said in the strategy that we count on $0.10 of accretion every year. So last year, when the run rate savings were about the $220,000,000, $250,000,000 the actual savings for the year were about $90,000,000. So if you think that this year, we're planning $2.75, depending on how these projects are implemented, but you think about half of that or something in the range to 100 to 120, that's where they should land for this year.
Terrific guys. Thank you so much.
You're welcome. Your next question comes from the line of Lula Mascow with Credit Suisse. Your line is open.
Hi. I guess these questions will be around the edges, but I don't know if you mentioned, the reason for the the financial results being so much higher than a year ago. Is there something happening in terms of your relationships with farmers that's giving you strong results there and how sustainable. And then also on on lysine, do you expect those losses to persist for the rest of the year? And are they significant enough, I guess, to kind of offset the or fully offset the modest margin positive you expect in ethanol?
So I'll take the first one Rob. So on other financial, it was stronger than usual. A couple of reasons, I mean, we we actually had some strong results from our ADM investor services. I mean, it's just like a higher volatility in markets translates into higher volumes. And so that's been a benefit.
The big one is there was another investment that we've had over in Asia that actually had a distribution of earnings. And so we were able to capture that in this quarter. That's kind of a, again, I would view that as kind of a positive would it be reoccurring in the future? Probably not, but it's been it was a positive result for us in the first quarter.
Got it.
Yes, Rob, on the lysine front, there are market conditions that there is overcapacity in that industry. But then the results were also aggravated, but some problems that we had in our own operations, we have addressed those through a project that we're implementing. That project will be on a stream by late Q3. So we're going to see from our own self help better, better forecast for results for lysine in the second half. And then we were encouraged by some of the price increases we have seen.
So we think that the impact of a negative life in economics in the second half will be less than in the first half. I can't quantify whether it's going to be positive at this point in time. It depends on the project we're implementing, but significantly better than what the first half will be.
Okay. And just a quick follow-up. When I'm looking at the USDA's estimates on on grain exports. It seems like there's more good news lately after a very slow start to the year. Is what you're saying that you might participate in that good news, some increased volume, but maybe you've bought the grain itself at higher levels.
And therefore, your cost basis is just not is too high in order to make a good margin on that export volume. Is that another way of saying it?
No, no, what I was referring Rob was that, the elevation margins, the export margins are are a function of the capacity utilization of the export terminals, if you will. And there is still export capacity available in the U. S. So, what I was cautioning is that a small increase in, a small increase in export volumes may not create an exponential increase in the margins. So I just wanted to cautious on that that it will not be a big multiplier effect.
First of all, you need to fill the capacity. And since we're coming from very depressed levels, it will take a while. So we are encouraged by the more competitiveness of UX exports And we expect that that will flow through our normal market share of that. We just don't expect a significant improvement in Q2 we expect Ag Services probably to have a better scenario after Q3 after we have the strong potential U. S.
Harvest.
Okay. Thank you.
You're welcome.
Your next question comes from the line of Michael Piken with Cleveland Research. Your line is open.
Yeah, good morning. Thanks for the color. Could you walk us through a little bit more about the statements, you know, quarterly of some of your cost savings programs and which segments or sub segments we might expect them to show up in future quarters?
Yes, Michael, sure. Traditionally, this Given the corn business is the business with the biggest plants and the biggest units, that's where most of the work tend to happen. So, I will normally think that between 50% 60% of all our savings should show in the in the corn segment. You have to understand though that part of these savings are related to energy savings and obviously with low energy prices, some of that shifted a little bit versus maybe what they used to be a couple of years ago. There is a lot going on also in terms of optimization of logistics.
There is better software now that we can use to to reduce shipments, to reduce storage. So, and then there is the issue, the contribution of purchasing And I would say the contribution of purchasing in, reduce raw material cost and consolidation of supplier and SKUs that normally shows in oilseeds and in corn where they both buy chemicals. So I would say the operational 50, 60% in corn. The rest is probably a split between corn and oilseeds with the smallest part going to, going to to Ag Services, which is mostly a storage business, have less opportunities to improve cost of operations.
Okay, great. And from a timing perspective, I mean, is it going to be more back half weighted most of these cost savings?
Yes, because they are all related to projects that, some of them imply some spending. So yes, normally, they ramp up over the year. So it's more second half loaded. Also, in the first half, we normally take in the first half, we normally take most of the non discretionary investments. So the maintenance, we're doing our plants in the first half.
So a lot of the activity of operations and engineering in the first half is mostly to maintain the plants. So the projects to improve they tend to happen later in
network for wild flavors? And specifically, when you think you might be able to hit your return targets and what would be a good revenue run rate growth to use for '16 'seventeen. That'd be great.
Yes, Michael. We're very proud of our acquisition of Wildflavor. Think about this. I think A lot of people have doubts how a specialty company like wildflavors will be handled by a perceived commodity company like ADM. And we're very proud to say that in the 1st year of operation, WildSlab was actually had all time record profits.
So, I mean, we think that the integration went very, very well. We provided a great home and we assimilated all that talent. And we're very happy working together. You have to realize that that unit that end up being WFSI went through a lot last year. It was their 1st year of operations, and they not only had to integrate with specialty ingredients, but also they need to integrate SCI.
They need to integrate eat them foods, and now they are integrating harvest innovation. So So we are creating something for the future, a long term powerhouse in terms of ingredients for food and beverage But in the meantime, we are delivering on the quarterly results on our goals. So if you think about cost synergies, when we thought at the beginning, they were going to be around $40,000,000. We're talking now about $70,000,000. And revenue synergies are also going very well.
So we really feel very good. We still believe we're going to hit our 3 year target for ROIC for the business and the business should grow, you know, revenue in the range of about 5% to 6% per year. You know, we're thinking growing profits in 15, 20 percent for WFSI. So, we feel very good about that. But again, I just want to sure people remind people are reminded.
We're building this for the future. There are a lot of things that we're bringing on a stream. We're bringing a fiber sort of plant on a string right now. We're bringing a huge vegetable protein complex in Brazil, you know, more than $200,000,000 of expense, many units of operation. So all that bring a lot of noise to the P and Ls because we have commissioning costs.
We have all those things. So, but we're just very happy the way the team is delivering and the way the customers are reacting to that.
Thank you very much. You're welcome.
Your next question comes from the line of Ken Zaslow with Bank of America. Your line is open.
Hey, good morning everyone.
Good morning, Ken. Good morning, Ken.
Just a couple of questions. One is in this kind of unusual environment, how come it doesn't net net get you back to your normal level? And what would it take in this environment for you to go back to that three fifty-three fifty level to grow off? Because it seems like it kind of we establishes the global picture. It gives you a little bit more dislocation opportunities.
So what do you that doesn't get you to that $3,350 or what do you need to have happened to get you to that $3,350 number?
Yes. As you described, we had probably over the last, I don't know, month, a little bit of a better news that may potentially impact oil and potentially Ag Services in that sense. And probably, maybe the thing that has happened recently, but I'm less sure the sustainability of it is maybe the ethanol margin improvement because it was really an event in which a lot of the industry plans took maintenance shutdowns in preparation for the driving season. Are we going to go back to the previous practices in producing more than we need difficult for us to predict. So I would say, from a macro perspective, that's probably can the where I'm more cautious about.
The other things I think that we're going in the right direction and with these dislocations over time, all seats and ag services come back to the normal levels.
Okay. And then the one thing we said about Ag Services, which caught my attention was the Ag Services going forward, was there a capacity addition or something like that in the industry that you're that has created the overcapacity, because it seems like over the last couple of years, you guys have been saying there hasn't been much growing seemed like your language might have changed a little bit?
It was not from our side, but there is a little bit more capacity in the Gulf Coast. And that plus the fact that we've been exporting less. And I think the issue sometimes, Ken, is how those export come, whether they come at the same time, and we can expand the elevation margins or whether they come over time, and then capacity or margins don't decline that much. And we had a couple of years in which we had that event and we had very big expansions from margins and we haven't seen that recently. And again, we don't expect to see it in Q2.
And my very last question is on the high fructose corn syrup, in your commentary, you referenced low cost environment then capacity utilization rate. With corn prices going up, does that change the back half of the year at all? Or do you still feel comfortable just because the wording just seemed like it was more lower cost environment rather than the higher high fructose
Conancy group and the whole sweeteners and starches portfolio for the rest of the year and probably I will say even for the 2017 as well. So No issues.
Perfect. Thank you.
Thank you.
Your next question comes from the line of Eric Larson with Buckingham Group. Your line is open.
A couple of questions. I'd just like to drill down a little bit on your ag services, your global desk trading losses in the quarter. They were unrealized. Are those mark to market losses that will reverse in the second half?
Yes, I think Eric, some of it are mark to market and will reverse. Some of it will be a function of where price are when those contracts settle.
Okay. So it's a combination of the 2 of those. And then getting back to your second quarter, the outlook for your, your oilseed business. And And I know that Juan cautioned on the size of the mark to market loss. But as far as I'm concerned, the bigger the loss, the better, that's just an accounting function noncash charge that the larger the larger your mark to market loss in Q2 or your accounting change in Q2 would just mean that reverses off in the second half at a larger profit rate.
Is that an accurate statement?
Well, it just means, I mean, as you know, Eric, we typically kind of lock in certain amount of margins, and we use the board in order to lock that in. And so, we believe we lock in attractive rates to the extent that margins actually improve over the quarter. It just means that we have to mark that contract to market. And that's the reason why, as Juan indicated, we'll take an, we'll take effectively a mark to market loss at the end of the second quarter related to our board crush hedges there. But you're right, fundamentally, with an improving margin environment, it means for us.
And that's the reason why we're a lot more positive for the 3rd fourth quarter, assuming the cash margins converts to the board margins there.
Right. Because, I mean, you've had a real nice appreciation in your basis. You got your July contracts is at $3.50 a ton, and your cash prices haven't appreciated at that rate. So you've got a positive spread in your basis, which improves your outlook. So the final question that I have Can you talk a little bit again about your lower tax rate guidance for the year?
You had been at I think 28% to 30% is coming in lower. It sounds like it's more of a geographic mix, as to where you're sourcing your earnings. Is there anything more to it than that?
No, it's primarily geographic mix. I mean, as you know, Eric, the United States is one of the highest tax Countries in the world. And so, unfortunately with weakness in terms of U. S. Ethanol margins and weakness in terms of U.
S. Ag Services exports, the amount of U. S. Earnings relative to our total earnings has come down and that actually results in a lower tax rate. Now to the extent that in the back half, U.
S. Exports pick up dramatically beyond what we're expecting and to the extent that U. S. Ethanol margins improve dramatically relative to what we expect. And that could actually drive our tax rate, a little bit higher.
But I guess what I'm saying right now is I think that we're going to be at lower end of the 28% to 30% range and maybe even slightly below that range.
Okay. And then the final question on your return on invested capital. Obviously, you had a bit of shortfall below WACC this last quarter. Obviously, because probably some of the more difficult conditions we've had in the eggs in the egg business in some time, is there any sort of range of where that spread could be. You probably fall short of your 200 basis point goal for the year, but Can you give us a little bit of flavor where you think your ROIC could potentially be for the full year given all the other things you're doing with your cost saving programs and other things such as that?
Yes, just a reminder, I mean, this is a 4 quarter trailing average calculation. So if you recall, Eric, we had a very weak Q3, very weak Q4, very weak Q1. So it all kind of accumulates together here. Our expectation is by the end time we get to the end of the calendar year, we should be above our annual WACC again, because our earnings will be back half towards the second half of this year based upon our views in terms of how ag services, how well seats and how how Ethanol will perform for the rest of the year.
Your next question comes from the line of Sandy Quigman with Vertical Research Partners. Your line is open.
Good morning. So the outlook for US Cornett ports has obviously improved given the depreciation of the dollar and the weather issues in Brazil. But are you seeing any potential offsets from China's decision to end its corn stockpiling program?
Yes, Sandy. Of course, China is speculation about how much product do they have, but and when they're going to start. But certainly, we feel that, over the next year, they're going to start having these options and bringing some of that product to the market. So it certainly could impact barrels, sorghum, ddgs, some of those, and as well as corn, yes. Okay, great.
It's difficult to gauge how much, to be honest, point in time.
Okay. That's fair.
Just a follow-up question on storage capacity. So there's been a lot of bins built in the last 5 to 8 years. On farm and at commercial elevators. What are your thoughts as to whether we will see additional storage capacity coming online And then to what extent are growers getting creative in terms of storing corn when these bins are full?
Yes, we don't foresee at this point any more storage capacity being built. I think also, the economy is the farming. I mean, we'll not allow for that to happen. We don't believe that a lot of the off farm story have created or on the farm story, they created a problem for us. I think that the issue is that, over time, especially with development of the ethanol industry, the industry maybe, didn't need as much storage because a lot of the corn was locally consumed, if you will, by some of the ethanol plants.
The environment in the agro industry and Ag Services changes every year. And with that, our business continue to adapt. And sometimes we shift storage capacity. Sometimes we shut down storage capacity or we move it around in the U. S.
I don't think that there has been anything unusual to that to be.
Your next question comes from the line of Vincent Andrews from Morgan Stanley.
Assets on the potential large U. S. Crop that we might have based on planted acreage. I just want to understand why you think that would be helpful, just given that there's ample stocks around today and we've had a couple of large crops in a row. So what's going to be different this year?
Yes. Well, you are correct in the sense that we're still going to need some dislocations into that. My point is that we have better opportunity when the U. S. Has to be a larger crop because we have our footprint.
This is skewed more to our U. S. Assets and North American assets. So hopefully, if the U. S.
Get, get the dislocations and get the opportunity to export that and we get to handle a big crop if the crop is large and it comes early, maybe we get dry income and all that. So, I was just talking from the perspective that a bigger crop is probably better for us given the skewed nature of our footprint towards North American assets.
Okay. Thanks very much. Appreciate it.
Your next question comes from the line of Paul Matteo with Stifel. Your line is open.
Hi, good morning. I
just wanted to
dig in a little bit more on the second quarter. I mean, and get a sense of what it is that you're expecting for the second quarter specifically for Ag Services. You've got, I mean, you mentioned the potential for some volume increase, but We have seen crop prices rally. We have seen some marketing and farmer selling crops. I mean, is there still a significant amount of crops still left in the bin?
And if you in on farm storage. And if we keep seeing the dollar weaken or even just sort of stay at these levels, I mean, is there potential for both volumes and margins to surprise and Ag Services in the 2nd quarter?
Paul, I guess, the main driver is going to be kind of volume. Traditionally for ag services, the Q2 is a lower volume quarter compared to Q1. And that's just simply because of for Ag Services, the more U. S. Centric nature of the footprint.
And so, as Juan indicated, export generally are 20% to 30% lower from a volume perspective, Q2 versus Q1. So even though, I mean, there's some macro variables out there, which would suggest the global environment may be improving, all we're saying is for ag services specifically, our expectation is the earnings for Q2 will be actually fairly similar to where we ended up in Q1.
It makes sense. I guess what I'm having trouble reconciling is that part of the reason, at least I've always thought that Q2 was lower. It was because pharmacy did all their selling in the fourth quarter and into the first quarter in this year or in this season, we didn't see that. So there's a lot more sitting on the sidelines that never got moved. Or is it more of a demand issue in your mind where the demand is just not there and so you have to wait until the second half to see the volumes move?
I think with the recent, rise on the board, you've seen some of the farmers actually being more aggressive in terms of selling. The issues in terms of our movement entire system, particularly our export system, that is going to remain very weak in Q2.
And then maybe a little bit on some of the global competitors. And I think you said specifically with Argentina, they've got a lot of soybeans that could last throughout the year, but corn and wheat, as far as exports go, they may very well run out of some of that excess supply. Mid year. Is that still the view, I mean?
Yes. Generally, the Argentine farmer has been selling their corn and their wheat. And that's again a function of the fact that the export taxes had been reduced down to 0.
Okay. And then I guess just I think we saw some news reports come out recently that some industry groups based in D. C. Representing some of the grain handlers were pushing back on on some of the new soybean scenes that were being sold. You have any comments on that?
I mean, could you maybe add a little bit of color from experience when last time there was a seed that was approved domestically, but not approved by a buyer? I think this time we're talking about Europe not having accepted a new soybean seed. I mean, can you talk a little bit about what's going on there? Maybe add some color for that.
Yes, Paul. I mean, you mentioned it. We've seen this before and we've seen the impact that that cost is to ask grain handlers and also to the farmers. And, because of the importance of export to American Agriculture And American farmers, our policy is not to accept any commodity that contains a trade that is approved here, but not in the major markets. And we continue to do so.
And I think that you heard that the industry is very aligned in that and it's just to protect the competitiveness of U. S. Exports.
All right. Well, I
appreciate all the color guys. Thanks a lot.
Thank you, Paul.
There are no further questions. I would like to turn the call back over to Juan Luchiano for closing remarks.
Okay. Thank you very much. So thank you everybody for joining us today. Again, slide 15 notes some of the upcoming investor events where we'll be participating soon. As always, please feel free to follow-up with Mark if you have any other questions and have a good day and thank you for your interest in ADM.
Thank you for your time and participation today. This concludes today's conference call. You may now disconnect.