Good morning, and welcome to the Archer Daniels Midland Company Third Quarter 2015 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 Schwitzer, Vice President, Investor Relations for Archer Daniels Midland Company. Mr.
Schwewitzer, you may begin.
Thank you, Stephanie. Good morning, and welcome to ADM's 3rd quarter earnings conference call. Starting tomorrow, a replay of today's call will be available at adm.com. For those following the presentation, please forward looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These statements are based on many assumptions and factors that are subject to risk and uncertain 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, ADA assumes no obligation to update any forward looking statements as a result of new information or future events. On today's call, our Chief Executive Officer, Juan Luciano, will provide an overview of the quarter. Our Chief Financial Officer, Raya Young, will review financial highlights and corporate results. Then Juan will review the drivers of our performance in the quarter, provide an update in Please turn to Slide
Good morning, everyone, and thank you all for joining us today. This morning, we reported adjusted earnings per share of $0.60, Our adjusted segment operating profit was $684,000,000. Adjusted ROIC of 8.3 percent was 170 basis points above our cost of capital. The ADM team executed well in an environment very similar to the second quarter. Ag Services earnings were limited by lower March and volumes of North American exports due to the continued strength of the U.
S. Dollar and ample crop supplies particularly from South America. In corn, we continue to confront very weak industry ethanol margins while sweeteners and starches results remain solid amid tight supplies. In oilseeds, Good global meal demand again supported soy crushing results and solid origination volumes contributed to our South American operation while continued weak oil demand, particularly outside the U S, weighted on our soft seeds business. And in WFSI, the impact of macroeconomic headwinds weaker demand from some emerging economies and the strong U.
S. Dollar was greater than we've expected. We continue to execute our strategic plan Among other actions, we closed on the sale of the global cocoa business, acquired ItEM Foods and closed the Estar transaction. We're also making strong progress in driving operational efficiency which will further approach to capital allocation for our shareholders. I'll provide more detail on our SCORTER activities 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, down 30% from the $0.86 last year. Excluding specified items and also excluding timing effects adjusted segment operating profit was $684,000,000, down $257,000,000. The effective tax rate for 3rd quarter was 31% compared to 28% in the third quarter of the prior year.
Our tax rate was higher this quarter due to some discrete items that in impacted us for the quarter mainly 20 15 estimate for the effective tax rate remains at around 28%. Our trailing 4 quarter average, a adjusted ROIC of 8.3 percent is down by 40 basis points from the 8.7% at the end of the third quarter last year. The 8.3% adjusted ROICs above our 6.6% annual WACC for 2015, as well as long term WACC of 8% as reflected in the graph on Slide 19 in the appendix. Our objective remains to earn 200 basis points over our WACC In the third quarter, our trailing 4 quarter average EVA was $428,000,000 based upon the adjusted earnings you can see the reconciliation share after tax credit, we had gains on the sale of the global chocolate operations net of expenses of $0.04 per share We had a charge related to buying back U. S.
Debt of $0.19 per share as part of a series of transactions to issue lower costs euro denominated debt. With asset impairment charges of $0.06 per share, and we had some restructuring and pension settlement charges of $0.04 per share. Slide 5 provides an offering profit summary and the components of our corporate line. Before one discusses the offering results, I'd like to highlight some of the unique items that impacted our quarterly results. In the corn processing segment, we had $33,000,000 charge related to the partial impairment of our Brazilian sugar processing assets.
In Oilseeds, we recorded a $32,000,000 gain net of expenses related to sale of our global chocolate operations in the third quarter. As a reminder, our in October, and this sale will be recognized and recorded in our 4th quarter results. Our new 4th business segment, while flavors and special ingredients, or WFSI for short, includes the 2 businesses we acquired in 2014, namely WildFavorson Specialty Commodities, Inc. As well as certain specialty ingredients business that were previously reported in ADM's 3 other segments. For purposes of comparison to prior results, the year ago quarter segment offering in the WFSI segment.
To assist you with your analysis, we've included a chart in the appendix that recast the 2014 segment quarterly results to the new segments. In the corporate lines, net interest expense was the $110,000,000 to $120,000,000 guidance that provided to the U last quarter. Our run rate in underlying corporate costs is consistent with the prior year the GAAP net revenues for the quarter were $16,600,000,000, down from last year's $18,100,000,000, The significant reduction was mainly driven by large declines in commodity prices and foreign exchange translation, but these factors also impacted our cost goods sold as our input costs were lower. I also want to highlight that the GAAP statements for this year and last are not entirely comparable due to some significant transactions over the past 12 months, including fertilizer, chocolate, wild, and SCI. Turning to cash flow statement on Slide 6.
Here's the cash flow statement for the 9 month period ending September 30, 20 18 compared to the same period the prior year. We generated $1,500,000,000 from operations before working capital changes in the 1st 9 months of year. Total capital spending for the Our CapEx guidance for the calendar year was $1,100,000,000 to $1,300,000,000. And based upon our run rate of spending, it's likely we'll finish up the year at lower end of the range or below that range. Given the more challenging business conditions we have encountered in 2015, we have been even more cautious in our capital spending.
In port, totaling $83,000,000. In the other investing activities line mainly reflects the proceeds from divestitures, such as our global chocolate business and the sale of our stake in our port in Northern Brazil, less the increased investment in $1,000,000,000 to repurchase about 37,500,000 shares towards our 2015 target of repurchasing 1.5000000 to $2,000,000,000 worth of shares. Subject to strategic capital requirements. To shares outstanding, down $31,000,000 from this time 1 year ago. At the end of the 3rd quarter, we had 607,000,000 shares outstanding on a fully diluted basis.
For the 9 month period, our total return of capital to shareholders, including dividends, was over You should expect that we will complete about $2,000,000,000 of share repurchase by the end of the calendar year and finish up with about 100 moon shares outstanding on a diluted basis. On Slide 7, Shoal highlights of our balance sheet as of September 30th for 2015 2014. Our balance sheet remains very strong. Operating working capital of $7,900,000,000 was down $300,000,000 from a year ago period. Total debt was about 6,800,000,000 resulting in a net debt balance that is debt less cash of 5,600,000,000, up from the 2014 net debt level of 0.7 dollars.
In part, reflecting the 4th quarter cash outflows related to our acquisitions of Wilde And SCI, as well as the issuance this year of euro $1,100,000,000 of debt or roughly $1,200,000,000 in U. S. Dollar terms and a subsequent repurchase of about 0 $900,000,000 of U. S. Debt.
Our shareholders' equity of $17,900,000,000 is 2.4 $1,000,000,000 lower than the level last year due to its share buybacks and with the cumulative translation account down about $1,100,000,000 due to the strength of the of September, if you add the available cash, we had access to over $6,400,000,000 of short term liquidity. Next, Juan will take us through a review of our business performance.
Thanks, Ray. Please turn to Slide 8. In the third quarter, we earned $684,000,000 of operating profit, excluding specified items. Compared to the second quarter, market conditions in the third quarter were fairly similar with weak industry ethanol margins and in competitive U. S.
Exports. So not surprisingly, our operating profits were in line. On a 4th quarter trailing average basis, our OIC of 8.3% was above our annual WACC of 6.6% and our EBA was 480,000,000 Now I'll review the performance of each segment. Starting on Slide 9. In the third quarter, Ag Services results were similar to last years, but reflected a starkly different set of market conditions.
Overall, despite robust global demand, we saw a general lack of merchandising opportunities as the global market was well supplied. Last year's third quarter saw merchandising and handling results driven by the normal July, August decline in exports and the normal uptick with the harvest in September, driving near record volumes out of the Gulf. This year, ample global crop supplies, particularly from South America and the strong dollar kept North American exports, particularly corn and wheat, largely out of the global market for the third quarter. However, we did see some soybeans exports pickup later in the quarter because of weaker global demand for U. S.
Exports due to the strong dollar elevation margins at our export terminals were significantly lower this third quarter compared to last year. You'll also recall that the 2nd quarter global Trade Desk results reflected the late quarter market shift that negatively impacted some merchandising positions, and we were able to recognize the benefits of dispositions in Q3. However, Our global Trade Desk results were slightly down from last year due to lower margins from a more competitive global supply environment and global customer delaying some purchases in a declining price environment. In Transportation, lower U. S.
Exports reduced barge freight rates. Milling and other results, again, increased due to improvements in product margins, mix and strong merchandising results. Please turn to Slide 10. Corn processing results declined from the year ago period. In sweeteners and starches, we continued to see sweetener fixed shipments were flat while exports, particularly co products, were limited due to the low export demand for DDGs in July August.
And the impact of the strong U. S. Dollar on the competitiveness of co products exports. And as our new sweetener plant in Tianjin worked to commercialize its capacity, we had to absorb the fixed cost for that operation. And in bioproducts, ethanol earnings were lower.
Industry ethanol inventories throughout the third quarter were higher than last year, and industry production levels were also higher causing ethanol margins to be considerably weaker than the prior year despite increases in domestic demand. Margins estimated at around Oil seats had yet another solid quarter. In crushing and origination, strong demand for mill in the U. S. And many of our traditional export destinations throughout Latin America helped support good volumes on March in our North American soybean crushing operations.
Likewise, in Europe, good meal demand drove soycrash utilization. Weak global demand for vegetable oil reduced softseed margin some volumes around the world, particularly in Europe, where rates hit crushing results were down significantly. This was another quarter in which our switch capacity paid off. And as the larger Brazilian corn and soybeans crop, combined with the weak Rial to encourage farmers selling. Origination volumes increased significantly on March rose, contributing to stronger year over year South American crushing and origination results.
Refining, packaging, biodiesel and others results declined, mainly on the absence of biodiesel blenders credits, we recorded last year. However, North American refined oils had its best third quarter ever from good domestic demand. And the results were offset by weaker demand for refined oils outside of the U. S. And also weaker overall biodiesel margins.
Results from Asia rose primarily on Wilmar's improved performance. Slide 12, please. In their 3rd reporting quarter, the wild flavors and specialty ingredients business unit earned $70,000,000. It was a tough quarter for the team. As I mentioned, the strong dollar and weakness in some emerging economies affected results across a number of product lines.
And while these factors are largely beyond our control, we're focusing on the levers we can pull to deliver results and strengthen the business. Categories, including, including flavors, polyols and proteins. We are seeing U. S. Domestic business generating good results from solid demand.
Addressing some inventory management issues in our specialty commodities business and this issue should be behind us by the end of the year. And our synergy work is paying off as results are benefiting from margin expansion, cost savings and mix The team remains laser focused on our synergy work. That resulted in a steady customer and pipeline growth. We've delivered 81 new wins and have an active pipeline of more 675 projects. As a result of these efforts, we're seeing many new RFPs for SCI for wild flavors and for ADM.
And as I mentioned, we continue to see strong interest in our offering and lots of product launches. Since the Wild acquisition, the team has implemented about $30,000,000 in annualized run rate cost synergies. And we are on track to reach about 4 $40,000,000 by the end of this calendar year. We remain confident that the team will deliver million of run rate synergies from the Wild acquisition by the end of year 3, which is 2017. And we're still on track towards the lower end of the $0.10 to $0.15 per share 1st year accretion for wild flavors.
Now on Slide 13, I'd like to update you on how we're strengthening and growing our company. This is a scorecard we presented at the Investor Day in December. It lists the actions we are taking to help grow our business our earnings and our returns. We've highlighted some of the areas in which we made significant progress. I'll discuss a few.
In Ag Services, we expanded our destination sales operations opening offices in El Salvador and Guatemala. In corn, in July, we acquired Lyrico Nutrition, an animal feed business that serves primarily the dairy and swine market in Quebec. And yesterday, we closed the East Art acquisition, enabling ADM to better serve growing the European demand as the EU lifts is artificial cap on cereal based sweeteners. In oilseeds, we closed the sale of our global cocoa business to Olam. We closed the acquisition in Ental European Retail And Foodservice Markets and enhancing our ability to export value added products internationally.
And we're adding soy switch capacity to our grape seed processing plant at Stroving Germany. And in WFSI, we acquired ItEM Foods, a leading developer of savory flavors, adding deep expertise in savory flavors and ethnic cuisines and broadening our capabilities in the food service and private brand channels. We announced the construction of the state of the art flavor lab and customer center in Cranbury, New Jersey. We located a new information technology support center in an existing building on the Wild Campus in Erlanger, Kentucky, We remain on track to deliver synergy targets and we continue to advance our construction projects in Brazil, China, Germany, India and the U. S.
And we have made great progress in the area of driving operational efficiencies. A $550,000,000 of run rate savings by the end of year 5. In fact, we have already identified a pipeline of more than $700,000,000. We'll update you on our scorecard each quarter and over time, you should expect to see So before we take your questions, I wanted to offer some additional perspective as we look forward. We have a large U.
S. Harvest in front of us. And the U. S. Crop will eventually move to the world markets, which will benefit our Ag Services business.
In corn, the sweetener balance sheet should remain tight, while ethanol industry margins will move based upon supply and demand dynamics. In oilseeds, global demand for protein remains strong, and we're watching Asia power and soybean oil production. And Brazilian biodiesel legislation, which could improve the global vegetable oil balance sheet. And WFSI continues to capture synergies related to the Wilde acquisition and integrate the recent acquisitions such as Etham Foods. As you saw a moment ago, we continue to make progress advancing our plan.
And as I mentioned earlier, We remain committed to our capital allocation framework that was set out at the end of 2014 in terms a balanced approach for our shareholders.
Certainly. Your first question comes from the line of Robert Moskow with Credit Suisse.
Might have kind of alluded to this in your comments, but I think you said that U. S. Farmers will eventually commercialize their grain. Can you give us kind of a little bit more color on the degree to which unwilling to commercialize at today's prices? And what does that mean for your 4th quarter and kind of end year EPS estimates, guys?
Yes, certainly, U. S. Farmers don't like these prices. And at this point in time, they are, they are holders of grain. We look at the abnormal pattern of commercialization of before the harvest during the harvest and post harvest this year, we've seen that in corn, they probably sold about 30% of the new crop while normal, normally they will be about 45% by this time of the year.
If we look at being they probably sold about 35% of the new crop. And normally, they will have average about 60%. We still believe that But we probably see more commercialization of grain either in rallies that will depend probably on a weather event, whether it's a concern about potentially South America maybe later on in December or something like that or with the regular cash flow needs maybe during 2016.
Okay. That's very helpful. Another question, I've heard rumblings about what the election in Argentina could mean with a new leader coming in it might lead to a reduction in tariffs or export duties. And I want how do you think that might play out and how would it affect your business if Argentina suddenly commercializes a lot of soybean meal Thank you.
Yes, obviously, there's going to be a run off election in November a second. So we're hearing from both candidates on their proposals, and there are rumblings about potential reduction in export restrictions or the licenses that they are applied today or maybe export taxes or potential devaluation. I will qualify the following way, Rob, I think is, as one of the largest exporter of grain in Argentina, reduction in restrictions and licenses will be positive for our Ag Services business. And if you that there's going to be more soybeans coming to market and more crush than in Argentina that may be potential negative for, the competitiveness of U. S.
Mill Exports. Out of the U. S. And it may impact a little bit the situation in Europe. So I would say positive for Ag Services potential negative for oilseeds.
Do you think it's an net positive for ADM overall or is it just kind of neutral?
Well, is interesting because the Ag Services impact is a direct impact. We're going to get to export more and our exports from from Argentina have been subdued over the last couple of years. The impact in oilseeds, it could be a little bit more indirect since it depends on other and this is more substitution. So, I think quantified more than that at this point in time, Rob.
Your next question comes from the line of Kenneth Zaslow with BMO Capital Markets. Your line is open.
Hi, good morning. This is Patrick Chen for Ken.
Hey, Patrick.
Just another question about I guess is the $850,000,000 to $900,000,000 number still at risk? Is it a structural risk given the farmer's ability to grains longer, especially in light of the 3rd consecutive large crop?
Yes, let me give you some perspective. We do believe that the range is relevant for Ag Services. Given the conditions and given where we are in Q4, we know that Q4 will be better than Q3, but will be will fall short of Q4 last year. So probably this year, we may end up lower than that range given the conditions of the U. S.
Dollar and the very strong crops in South America. But let me give you some perspective. If we look at the last 8 years, Ag Services has hit that range in 7 of the last eight. And the only year in which he didn't, it was because of this, 50 year drought that we had. So I would say, at this point in time, continue to maintain the death fair range for Ag Services into the future.
Great. Thanks for the color. Just switching gears a little bit margins, what would get industry margins to recover? Seems like there are a lot of headwinds right now. You have ethanol trading on a premium to gasoline.
Weak real improving Brazil's pricing competitiveness and also China supposedly closing its borders to USDGs I guess, how much cost savings can you realize in your plans to offset some of that? Thank you.
You get it right. The main thing that we can do to help ourselves certainly is continue to work on the cost of the plants and we are evaluating that is a constant process of to see how much can we help ourselves into that. Granted may be dry mills are a little bit more limited our ability to get savings and maybe a larger wet mill, but we continue to work on that. I would say the dynamics at this point in time as we see Patrick are there has been some good news in this quarter about China getting into the into the export destination rooster, if you will.
Some of
the plants have maybe came back a little bit later, from their maintenance, which provided a little bit of tightness. But as you said, medium term, we can you to trade as a premium to gasoline, which will have some impact in certain, export destination That's why we continue to call the next exports about the same, even if China is coming into the destination roaster. So, it will be it will continue to flow depending on how much the industry will produce. We are positive about demand is up in gasoline about 3% this year and maybe it's going to be up 1% to 1.5% for next year. Exports continue to be robust.
Ethanol is growing very, very fast in Brazil. And now with the increase in gasoline prices in Brazil, ethanol has become a little bit more expensive. Petrobras is in a strike today, so they are not producing that much oils. Maybe they need a little bit more ethanol. So I would say, at this point, we can recap it a little bit like the margins we have today going forward.
Work and with hopes into the global domestic demand and keeping those export markets.
Great. Thank you. I'll pass it along.
Thank you, Patrick.
Your next question comes from the line of Ann Duignan with JP Morgan. Your line is open.
Good morning. This is Tom Simonetsch on behalf of Land. Can you talk about your increased stake in Wilmar and the strategic rationale behind that investment?
Sure, yes. Well, we have opportunistically acquired shares of Wilmar in the open market recently. And I say opportunistically because, obviously, they were relatively low with regards to their book value. And certainly, the Singapore dollar or was very convenient for us to make that investment. You heard us before, Wilmar is a strategic partner and one of our largest customers.
And we continue to be very committed to this relationship to grow in this relationship. Wilmar gives us a window and an exposure to, tropical oils, to China oilseed crush, to consumer packaged products in China. So it's a great way for us to participate in that. And we believe in our relationship, and we will continue to grow it in time.
Okay, thank you. And also you mentioned worthwhile flavors facing demand headwinds in Q3. You expand on this, especially in light of the expectation that the world would perhaps be less volatile than other segments?
Yes. I would say, listen, the trends are intact. We continue to see big push pull from customers in terms of the pipeline we have. The pipeline continues to grow. If I quoted 675 projects in the pipeline at the end of October, that number is like 8 5.
So it continues to grow. The segment is composed of many products and some of the of those products as we you heard that we're building a plant in Brazil of specialty proteins. Well, at this point in time, we source everything from the plant in the U. S. Certainly, with the strong U.
S. Dollar, our ability to export to the world has been reduced. There are some countries that have some issues of importing like Venezuela, for example, even if our customers want to get the product. Some key markets, key emerging markets have been soft, whether it's cold, Middle East, whether it's Russia, whether it's China, And, and some of these products like emulsifiers or hydro colloids, are used in oil field drilling. And obviously, you see the rig count going down in the U.
S. With less drilling going on as oil prices have declined. So several factors. I would say none of the fundamentals have changed into this business. We continue to be excited We continue to be building capabilities.
We have bought 3 companies in the last year with WIL SEI and eat them food. They are all on trend. They are all on target. So we continue to feel very strong about it. It's a long term play that we're building a great company for ADM here.
And as long as synergies are on track and products are getting the pull from customers. We don't worry that much about these short term headwinds.
That's very helpful. Thank you. I'll pass it on.
Your next question comes from the line of Farah Islam with Stephens. Your line is open.
Hi, good morning.
Good morning, Carter.
Juan, could you give us some color on soy crush margins kind of around the world and what your outlook is going into the fourth quarter for that crushing and origination division?
Yes, sure. So, crush margins continue to be, very solid and very positive in the U. S. So we're still running hard. Certainly, the U.
S. Has the best crush margin in the world, followed by soy crush margins in Europe. There's still good demand in Europe. And even if some soy milk from South America has started to show up, we still remain more skewed towards, soy crushing and rapeseed crushing in Europe. South America, has recovered a little bit and is doing better is coming 3rd in the pecking order, if you will.
And then probably lagging is China, which still have good demand for, for a meal in China, but is more hovering into the breakeven territory, if you will. So going into Q4 and being halfway through Q4, if you will, as I said, the crush margins remain in decent state and maybe you're going to see a slight decline of Q4 versus Q3 for oilseeds in general, but still very solid.
That's helpful. And then a theme throughout your comments has been the strong U. S. Dollar. Is there opportunities for ADM to re price its products, anything that any actions you can take to make ADM more competitive given that the U S dollar likely will stay strong for somewhat an extended period of time?
Yes, I would say that the big issue is sometimes not that much the U. S. The strong U. S. Dollar that we can, as you said, we can commercially offset some of that.
The issue is whether some currencies are very weak versus the dollar, whether you call it the real or whether it's ruble, and that makes other origins much more competitive. Think about how competitive has been Brazil in the world markets where Paraguay with the same way with the same climate hasn't been. It's not that Brazil has any different competitive advantage than Paraguay. It's just the real has devalued significantly versus what the Paraguayian currency have done. So, so those things, they ebb and flow and we profited from our origination in Brazil.
Our volumes in Brazil are like have exploded versus last year and we see part of that reflected in Ag Services. So, at the end of the day, The good thing is that there are large crops everywhere, and we're going to commercialize those crops. But it certainly affects the timing of all that, Farka, and we're going that period.
Next question comes from the line of Michael Piken with Cleveland Research. Your line is open.
Yes, good morning. Just wanted to dig a little bit deeper into the on all side of the business. And specifically, just wanted to get your sense in terms of what you think total industry capacity is today and out into 2016. It looks like in the last couple of months, total production has gone down a little bit.
Listen, probably total capacity is in the range of 14.8 something in that range. The industry, Michael, has to normally take 2 shutdowns for maintenance, 1 before the driving season, 1 post the driving season to get the plants back in check. Obviously, you have this corn dynamics in which corn is more plentiful or bases are lower in the west than in the east. So some of the east plants might have taken a little bit longer to come back from maintenance just because it was difficult maybe to get corn. And I think at the end of the day, with this low oil prices, domestic demand has been strong.
And what with, with exports net export staying in this range of maybe 750,000,000 gallons. And that's kind of where we are seeing this year and maybe for next year, we see the balance is pretty similar to what we see now. Again, I think the 2 positive side could be if we get another 1, 1.5% domestic demand grows, and then we see ethanol in Brazil, being more requested internally. And China, China went from like 3,000,000 gallons year of imports to maybe 60,000,000 gallons this year. So, well, that's going to go bode well for 20 16, those are probably positive.
On the negative side, capacity capacity utilization in the industry continues to be in maybe 92% and it should go a little bit higher to see margin expansion.
Okay, great. And then shifting over to the other side of corn processing, it looks like there's some favorable news on HFCS pricing into 2016. Maybe you could talk a little bit about when we might start to see some of those assets roll through in any sort of order of magnitude from those favorable contracts?
Yes. Well, we're still finalizing some of those contracts. So I will refrain from making any specific comments about that. Normally, we clarifies what happened at the end of the season in our next call. And I would say from a P and L perspective, we see the impact kind February to February.
So starting in February. So it rolls into our P and L probably at the end of Q1 that's kind of what tends to happen. But we see, the industry being tight. So the industry is running above 90% and our volumes have been strong. Thanks.
Your next question comes from the line of Adam Samuel with Goldman Sachs
question. And want to think about the current environment today relative to the $4 medium term EPS target that you've laid out. The last two quarters have had EPS, but of $0.60. And there's also some blow the line noise in there, but to think about getting to a $4 EPS number from here and understanding seasonality 3Q is usually a seasonally after quarter for you guys. You'd probably need to see something on the order of $175,000,000, maybe $200,000,000 of quarterly operating income improvement here and there's going to be moving pieces within the businesses in terms of performing well, cyclically and not, but help us think about how we can bridge to that kind of level of performance over the term.
Are there particular part of the portfolio that really has to step up its performance whether cyclically or operationally? The future benefits from cost actions, future capital allocation, just help us think about the moving pieces? Thanks.
Yes. Thank you, Adam. Thank you for the question, actually. Listen, I would believe on the medium term earnings range of 4 to 4 50 that we shared with you before has not changed. Although we face certain headwinds, We have looked at these and we have stress tested actually with 2 scenarios recently.
And we still believe that we are on track to deliver that. It may not happen exactly the way we have described it to you before in 4 order lead buckets of $0.30. But let me let me walk you through some of those issues. We certainly had a little bit higher ethanol margins in our original projections. And we have cut those ethanol margins.
And as I said, when we stressed it to more like the levels we have today. We also look at what if, the U. S. Dollar continues to be strong and Ag Services will remain in this kind of range. And then we look at the positives.
And there are some businesses in certain portfolios that we are recovering that we haven't highlighted to you because it was not a need to divest those business from a portfolio management, but those businesses are businesses that are that have specific actions to recover. And we feel strongly about being able to achieve that over the next year, year and a half. Then we have operational excellence and operational efficiencies. And as I described in my remarks, when we started to look at this as a target of $550,000,000 in 5 years and having $0.10 per year. Out of that, we are already after the 1st year, Adam, we have unveiled the pipeline of 7 $1,000,000, and we continue to find more.
So we have programs to accelerate that, to bring them faster into the program. We're also continuing to deploy our cash into these bolt on acquisitions. And as we did eat them, we have more in the pipeline. And when we put all these things together, again, the recovery of some of the units some of the operational efficiencies, some of the M and A, and we also have the ability to maybe even accelerate the buybacks as as Ray mentioned, that we will be in the upper side of our range this year. Again, we have stress tested and we look at 2 different scenarios and we always come back within that range.
So, happy to report that at this point in time, we continue to see ourselves on track for end of 2017 of early 2018. Delivered on that range.
That's very helpful. And then maybe as a shorter term question and an update on your thoughts on the biodiesel market, on both thoughts in Europe? And then the U S, what do you think the likelihood that we actually can get a producer tax credit past year domestically by Congress?
Yes, this is obviously important because we've been carrying the crush based on meal. And I think the creation of an oil or is an important, to bring more, more strength and more, yeah, more strength to the overall crushing area. But I would say we see in both the U. S. Government and the Brazilian government a little bit more proactive to be supportive of biodiesel, whether we're going to have different RBOs here in the U S, which is a guess at this point, but that's kind of seemed to be the rumor.
And whether Brazil is thinking and increasing from MB7 to maybe AB8. So we feel positive at this point into that. My speculation is probably as good as yours at this point. So, we don't have any inside information. But we seem to, we seem to see signs in the market that, that again, both government may be more, positive toward biodiesel and supporting biodiesel programs.
All right. That's very helpful. A lot. Thanks.
Thank you, Anna.
Your next question comes from the line of David Driscoll with Citi Research. Your line is open.
Good morning. This is Cornell on the line of a few questions on behalf of David.
Hi Cornell.
Okay. Going. Just wanted to start off on the Wild Flavors segment. I believe earlier, it was mentioned that the company is still looking for that business to kind of come in line where it previously thought it would for the full year. However, it looks like the results in the quarter really soft.
$70,000,000 or so is down a lot from what you did in the second quarter. And I know that 2Q and 3Qs are supposedly the seasonally strong quarters for that segment. So it seemed like that segment significantly underperformed in the quarter. One is that true? And then if that's the K what would be the offset going forward that would keep the full year guidance intact?
Yes. Thank you, Cornell. Let me clarify to you, and, you know, we're learning of this business is obviously because they're new to us But Q3, we were expecting to be softer than Q2. This business is heavy on the summer season because it's all about beverages and the summer Europe is very important. And so the preparation for that summary is important.
After that, the business has the lower seasonality. So, there was some as you describe of underperformance, but part was the normal seasonality. So the underperformance, as I described before, Specialty proteins is we export everything at this point from the U. S. So we're still building our plant in Brazil and the strong dollar hurt some of the exports.
Some of the destination markets have issues I described before, whether it was Venezuela, whether it was Brazil, whether it was Russia, In the wild flavors, there was some softness in some accounts that are large for due that, that they came a little bit softer in Japan and in China. Nothing that is structural, nothing that we were significantly about. And we saw also in specialty proteins and some of these products that are soy related, customers actually destocked because, they saw the pricing of soybeans and all coming down, there was not a lot of incentive for them to accumulate products or have forward books or any of that. So we saw a little bit of a destocking. So The fundamental indicators about the strength of this business have not changed.
The pull from customers, the number of projects, the excitement about all these solutions have in change. So I would say it's just an adjustment in terms of destocking and an emerging market softness. If you with.
Cornell, just also just, Megan, I think it's fair to say that we're all learning a a seasonal pattern of this business here. And so you should expect that the second quarter will always be the strongest quarter for W FSI. After the second quarter, you will see declines. 3rd quarter will come down because that's the seasonal pattern And in the fourth quarter, in the first quarter, generally would be the lowest quarters, in terms of profitability for WFSI. So I think once you've kind of gone through 1 year, you'll start understanding the seasonal pattern of this business for modeling.
The second point I want to make is as Juan reaffirmed. We are for wild flavors. We're still on track for the 1st year accretion. We provide there'll be $0.10 to $0.15 a share. We're still on track despite the headwinds that we've seen in terms of foreign exchange, in terms of the weakness of certain markets around the world we're still on track to work to lower in that range for a while to flavors.
And then thirdly, if you recall, I did provide some guidance earlier in the year, but hope to entire WFI segment. I said it would be somewhere above $300,000,000 $340,000,000 for the calendar year. We're still on track to what's the lower end of that range. Result. I think it's fair to say the team has done a very good job in terms of confronting the headwinds that we've seen in the business, yet I'm still very, very comfortable that the financial results for this segment as well as for wild flavors are still consistent.
Again, on the lower end, range, but still consistent with what we're tracking in terms of helping this business actually move towards supporting our 4 to 4.50 earnings over the medium term.
Okay. Very good. And if I can switch in and ask one question, if I may, about ethanol, just kind of mentioned earlier, you're looking at New York Harbor ethanol prices at about a $0.35 per gallon premium to gas and seems like a very wide premium and obviously historically constrated at a discount. Going forward, do you believe that there could be some risk there? Just on the pricing front, you get deeper into the fourth quarter and some of those ethanol plants that are down start to come up and so you see production tick up and presumably inventories tick up within the industry?
Cornell, there's always that risk that we face, and that's why ethanol margins have remained at this level. I think that the I think exports have been resilient and that gives me a lot of comfort. If we look at the top 12 export destinations of U. S. Ethanol year to date, even within these dynamic, only 2 are down versus last year.
10 of them are up or 3 of those 10 are actually new destinations. So there is a lot of dynamic into this and as some customers are looking at this and saying, okay, it's more than gasoline. I don't export it anymore, but I don't import from the U. S. Anymore.
We're going to see other customers come into the market. Remember that ethanol continues to be the cheapest oxygenate. And all the other is oxygenates are in the range of $2.50 even at this oil price So there's always going to be an opportunity for ethanol to replace other oxygenate. So but it will all hinge on how much capacity runs and how much capacity runs at full capacity.
Your last question comes from the line of Evan Morris with Bank of America.
Hello? Hello?
No, I'm sorry, something must have been wrong with my phone, Warren.
Just a question for you just on F and all and a lot of the sort of operational question would ask, but just bigger picture, I mean ethanol has clearly been very volatile and and your stock is at times and certainly for the better part of past year has been trading based on oil prices and the ethanol outlook. I mean, internally, I know you can't exit ethanol in its entirety, given sort of the wet mill dry mill balance. But how much thought have you guys put into internally looking at why may the dry mills and why not just sort of shift some of that ethanol production in the wet mill shift away from ethanol in the wet mill side. Just reduce your exposure going forward. What's still the reason to be there in the size and the capacity that you are?
Yes. Thanks for the question. Listen, it's something that obviously we think about very frequently, our focus is to improve the competitiveness of our 2 drive mills. You understand there is very different dynamics between dry mills and wet mills. So, obviously, that's where we're looking at sorry, improving the competitiveness.
Naturally, if we get to a point in which we cannot improve our cost positioned to the point of differentiation, if you will, for whatever reason. And if we believe that they cannot compete in a more challenging U. S. Ethanol environment, we will naturally look at the various alternatives to maximize shareholder value. At this point in time, We haven't found the end of that.
We continue to find opportunities. And we want to see, listen, it could be that the ethanol dry mill cost curve is very flat. And even if we improve, we don't get to a point of differentiation. And in that sense, we will probably need to make a decision. At this point, we are not there yet.
We are still finding opportunities to differentiate our dry mills. But, I'm not surprised with your question or your assessment. We constantly are reviewing that.
Okay. And then just a broader sort of acquisition strategy. Someone asked earlier about the incremental investment in Wilmar and there's been some speculation regarding potential green crop in Australia being able to potentially complete that deal a new prime minister and then others about exiting. If you could just, I think you've talked about having the capacity to do to $6,000,000,000 or so in terms of an acquisition. Can you talk about as you're thinking about it now your acquisition strategy, the strong dollar some of these opportunities may present themselves again sort of bigger versus smaller as you think about the acquisitions?
Yes. So we are very comfortable and confident in our strategy. Our strategy of dusting coal for the large M and A. Our strategy at this point in time includes for certain businesses bolt on M and As. Bolt on M and As that actually what they do is that present opportunities to create platforms for ADM to continue to move its products into more stable and higher earnings.
So, Obviously, if there is an opportunity that, you know, it's too hard to pass, that is somehow inexpensive out there, I mean, we will look at those things, but that's not the main thrust of our story, of our of our, of our strategy here. So I would say, regarding all the other comments, but obviously we don't make comments on speculation and there's been enough speculation. You're going to see more us doing this kind of item or e start in which we continue to strengthen our businesses as they need some platforms to continue to grow. E10 provides an excellent culinary expertise and excellent savory platform that we didn't have before, we will continue to do so. Very large M and A again, it's not something that we are seeking this point in time.
We might stumble into something. It's very convenient and we'll provide big shareholder value creation, but we're not seeking them at this point.
Okay, great. Thank you.
I would
like to turn the call back over to Juan Luciano for closing remarks.
So thank you for joining us today. Slide 15 notes and upcoming investor events. And as always, please feel free follow-up with Mark, if you have any other questions. Have a good day, and thanks for your time and interest in ADM.
This concludes today's conference call. You may now disconnect