Good morning, welcome to the Archer Daniels Midland Company first 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 Schweitzer, Vice President, Investor Relations for Archer Daniels Midland Company. Mr. Schweitzer, you may begin.
Thank you, Stephanie. Good morning, welcome to ADM's first quarter earnings conference call. Starting tomorrow, a replay of today's call 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 looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. These statements are based on many assumptions and factors that are subject to risk and uncertainties. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation. You should carefully review these 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 call, 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. Juan will review the drivers of our performance in the quarter and provide an update on our scorecard. They will take your questions. Please turn to Slide 3. I'll now turn the call over to Juan.
Thank you, Mark. Good morning, everyone. Thank you all for joining us today. This morning, we reported adjusted earnings per share of $0.77. That's 40% higher than the year ago period, where adjusted segment operating profit was $883 million. Adjusted ROIC of 9.5% was 290 basis points above our cost of capital. In the first quarter, the ADM team demonstrated their ability to leverage the strength of our diversified business model. The oilseeds team capitalized on favorable market conditions and delivered outstanding results with strong performances in each region. In Ag Services, our recently created Global Trade Desk, or GTD platform, drove higher merchandise volumes. Our new WILD Flavors and Specialty Ingredients business got off to a great start towards achieving the cost and revenue synergies we identified last year.
Together, these performances helped deliver a good quarter overall, even as lower industry ethanol margins limited earnings in corn and the strong dollar limited U.S. grain exports. We have continued to advance the strategic plan we shared at our December Investor Day. In the area of optimizing the core, we announced the acquisition of a Belgian oil bottling business, helping us reach a wider customer base and creating a new output for our European crushing assets. The WFSI team has been working with customers as they develop and launch new products using SCI, WILD, and ADM ingredients. We had more than 200 joint customer engagements, building a pipeline of more than 400 projects, resulting already in more than 30 revenue synergy wins across a number of regions and businesses units in Q1 alone.
In the area of driving operational efficiencies, we have already identified more than $200 million in run rate savings opportunities towards our goal of $550 million in five years. In the area of strategic expansion, the corn processing business expanded in high growth geographies with the acquisition of the remaining stake of corn wet mills in Bulgaria and Turkey and an increased stake in a facility in Hungary. I'll provide more detail on our scorecard progress later in the call. Now, I'll turn the call over to Ray.
Okay, thanks, Juan, and good morning, everyone. Slide four provides some financial highlights for the quarter. Adjusted EPS for the quarter was $0.77, up 40% from the $0.55 last year. Excluding specified items and also excluding net timing effects, adjusted segment operating profit was $883 million, up $94 million. The effective tax rate for the first quarter was 29%, compared to 27% in the first quarter of the prior year. For calendar year 2015, we expect our effective tax rate to be in the 28%-30% range. Our trailing four-quarter average adjusted ROIC of 9.5% improved from the 9.0% at the end of the fourth quarter and also significantly improved by 250 basis points from the 7.0% at the end of the first quarter last year.
The 9.5% adjusted ROIC is above our 6.6% annual WACC for 2015, as well as our long-term WACC of 8.0%, as reflected in the graph on Slide 19 in the appendix. Our objective remains to earn 200 basis points over our WACC. In the first quarter, our trailing four-quarter average economic value added, or EVA, was $742 million based upon adjusted earnings and the annual WACC, up $581 million from 2014.
On chart 18 in the appendix, you can see the reconciliation of our reported quarterly earnings of $0.77 per share to the adjusted earnings of $0.77 per share. For this quarter, LIFO represented a $2 million pre-tax credit or less than $0.01 per share after tax. There are no other adjustments for the quarter. Slide five provides an operating profit summary and the components of our corporate line. Before Juan discusses the operating results, I'd like to highlight some of the unique items that impacted our quarterly results. Corn processing adjusted operating profit of $127 million excludes approximately $14 million hedge ineffectiveness charges, split relatively evenly amongst bio products and sweeteners and starches. In oilseeds, adjusted operating profit of $483 million excludes approximately $14 million of cocoa hedge timing effects in this quarter.
As a reminder, we will also continue to have our cocoa and chocolate businesses as part of our segment reporting results in oilseeds until we have closed on the sales, sometime later in 2015. They are not treated as discontinued operations in our financial statements due to the lack of materiality of the operations to our overall results. Our new fourth business segment, WILD Flavors and Specialty Ingredients, or WFSI for short, is reported as its own segment for the first time this quarter. The segment includes the two businesses we acquired in 2014, WILD Flavors and Specialty Commodities Inc., or SCI, as well as certain specialty ingredients businesses that were previously reported in ADM's three other segments. For purposes of comparison to prior results, the year-ago quarter's segment operating profit for Ag Services, corn, and oilseeds removed the earnings of the businesses now reported in the WFSI segment.
To assist with your analysis, we've included a chart in the appendix that recasts 2014 segment quarterly results to the new segments. In the corporate lines, net interest expense was down due to lower interest rates. Unallocated corporate costs were higher due to increased GAAP pension expenses relating to changes in discount rates and mortality tables, and increased investments in our ERP program, as well as various strategic projects and M&A and divestment activities. In addition, I want to point out that the strong U.S. dollar and weakness in other currencies, such as the EUR and the Brazilian real, did not have a material impact on ADM's overall first quarter net earnings.
On one hand, the strong U.S. dollar did have some negative impact on the competitiveness of our U.S. export programs, and our WFSI segment also had some negative impacts in terms of export competitiveness and earnings translation from Europe. On the other hand, the weaker EUR and Brazilian real had a positive impact on our fixed costs around the world relative to the revenue streams we were receiving. Also, the weaker Brazilian real motivated Brazilian farmers to sell, thereby benefiting our origination business in Brazil. On balance, with the puts and the takes, the net impact was not material. Going forward, we do not expect the currency impacts to have a material impact on our overall results for the rest of the year. I would also like to comment on our GAAP net revenue number that can be found in the appendix.
GAAP net revenues for the quarter were $17.5 billion, down from last year's $20.7 billion. This significant reduction was driven by large declines in commodity prices that impact our revenues. This decline also impacts our cost of goods sold, as our input costs are lower. The key for us is managing the spread between the revenues and cost of goods sold, which is a core competency of our teams. This dynamic makes operating profit much more relevant when analyzing ADM. I also want to highlight that the GAAP statements in the prior year do not include the revenues and the costs of WILD and SCI, whose transaction closed in the fourth quarter of last year. Turning to the cash flow statement on slide six, which shows the cash flows for the three months ending March 31st, 2015, compared to the same period the prior year.
We generated $577 million from operations before working capital changes in the quarter, significantly higher than Q1 last year. Total capital spending for the quarter was $244 million, up from the prior year. For 2015, we are estimating capital spending in the range of $1.1 billion-$1.3 billion. This range is higher than our $0.9 billion spending in 2014, which you may recall we reduced after the WILD acquisition to assess capital spend avoidance opportunities. As a result, some 2014 spending shifted into 2015. We also have some additional spending for our ERP program and cost reduction projects, as well as our ramp-up of our specialty protein project spending in Brazil, our Fibersol projects in China and the U.S., our lecithin projects in Germany and India.
During the quarter, we spent $566 million to repurchase about 12 million shares towards our 2015 target of $1.5 billion-$2 billion of share repurchases, subject to strategic capital requirements. Our average share count was 639 million diluted shares outstanding, down approximately 24 million from 663 million at the same time one year ago. Our total return of capital to shareholders fourth quarter, including dividends, was over $700 million. Our first quarter cash flows are consistent with our 2015 calendar year targets of capital allocations, namely CapEx of $1.1 billion-$1.3 billion, approximately $700 million of dividends, and $1.5 billion-$2 billion in share repurchases. All this is consistent with the balanced capital allocation framework we set forth at our December investor day. Slide seven shows the highlights of our balance sheet as of March 31st for both 2015 and 2014, which remains very strong.
Our operating working capital of $8.1 billion was down $3.4 billion from the year-ago period. This decrease was comprised of about $1.6 billion related to lower inventory prices, including the translation impact, about $1.4 billion related to lower inventory quantities, and a decrease of about $0.4 billion in other working capital, primarily related to the reclassification of working capital for our global cocoa and chocolate businesses under the held-for-sale accounting. Total debt was about $6.4 billion, resulting in net debt balance that is debt less cash of $5.1 billion, up from the 2014 net debt level of $4.1 billion, in part reflecting the fourth quarter cash flows related to our acquisitions of WILD and SCI. Our shareholders' equity of $18.8 billion is $1.3 billion lower than the level last year, with a cumulative translation account impact about $1.6 billion lower due to the strength of the U.S. dollar.
We had $5.7 billion in available global credit capacity at the end of December. If you add available cash, we had access to some billion dollars of short-term liquidity. Next, Juan will take us through a review of our business performance. Juan?
Thanks, Ray. Please turn to slide eight. In the first quarter, we earned $883 million of operating profits excluding specified items. This 12% year-over-year increase in underlying segment operating profit demonstrates the strength of our diversified business model and the team's ability to leverage that model. In the first quarter, the team capitalized on great opportunities while they continued to advance our strategic plan. Sequentially, of course, the quarter follows a very strong fourth quarter, and with normal seasonality, underlying segment operating profits decreased. I will review the performance of each segment. Starting on slide nine. In the first quarter, Ag Services results improved 37% over last year. Merchandising and handling saw limited U.S. export competitiveness more than offset by continued improvement in international merchandising, where we saw the benefit of our GTD with merchandise volumes increasing.
In transportation, we saw an increase in demand for northbound U.S. barge rate, which mostly offset a decrease in southbound demand. Milling and others results improved due to strong margins for flour, grain, and feed. Please turn to slide 10. Corn processing results declined in the quarter. In sweeteners and starches, our underlying North American business is doing well, with higher margins and volumes in Q1. This was offset by lower contributions from co-products, reduced equity earnings from joint ventures, and start-up costs related to the Tianjin sweetener facility. In bioproducts, earnings were lower due to lower ethanol production volumes amid weaker industry margins. Supply and demand imbalances challenged industry ethanol margins most of the quarter, though conditions and margins have been improving since late March. Let me explain our corn results a bit further.
We said before that we make decisions that will achieve the best overall results for ADM. This quarter, with low industry margins, we made the decision to run our ethanol operations for margins rather than volumes. That helped our earnings in bioproducts. It also had the effect of reducing our production of co-products, which limited our earnings in sweeteners and starches. Bottom line, the impact to our overall corn business was positive. Slide 11, please. The Oilseeds team delivered an outstanding quarter. Crushing and origination had great performances in each region. In North America, the team demonstrated the value of our strong footprint and our effective destination supply chains. 8 to 10 months ago, they determined Q1 would see an extended North American export window.
They got maintenance out of the way and positioned soybean supplies, so when the margins arrived, they were able to run hard until the seasonal shift to South America came. In Europe, the team demonstrated the value of the swing capacity at our crush plants. When soybean crush margins were more than double canola crush margins, we ran the plants hard and crushed a lot of beans. In South America, the team prepared our network for a large, fast harvest. When the strong dollar drove Brazilian farmers to sell their beans, we were ready to handle the crop at strong margins. In refining, packaging, biodiesel, and other, lower biodiesel margins in North America and weaker European demand limited results. South American biodiesel results improved with B7 implementation. In North America, our Stratas bottle oil joint venture generated strong results with good volumes.
Results from Asia rose primarily on Wilmar's improved performance. Slide 12, please. In their first reporting quarter, the WILD Flavors and Specialty Ingredients business unit delivered a great start. As I mentioned earlier, the team has been working with a wide range of customers as they develop products using ingredients from all of ADM's business units. Globally, the flavors business is off to a strong start for the year. On a constant currency basis, WILD EMEA business performed particularly well. This is a quarter in which demand is seasonally slower and results were limited by Forex headwinds. We also had mark-to-market losses on currency hedges for future capital purchases for the specialty protein plant in Brazil. The project itself is benefiting from the weakened real versus the U.S. dollar. This is an exciting business with an energetic team, they are off to an absolutely great start.
Now on slide 13, I'd like to update you on how we're strengthening and growing our company. This is the 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 highlighted some of the areas in which we made significant progress in the quarter. I'll discuss a few. In Ag Services, we launched ARTCO Stevedoring, adding a wide range of services to our ARTCO barge operation. With ADM's logistical expertise and global reach, we provide customers along the Lower Mississippi a range of services that nobody else offers. As I mentioned, we saw the benefit of our GTD platform that we developed following the Toepfer acquisition.
Today, we are announcing that we have agreed to acquire full ownership of our joint venture port complexes at Constanta, Romania, a Black Sea port at the mouth of the Danube. This acquisition builds on the investment we have made in our Danube River network since 2011 and further strengthens our origination and transportation capabilities in Eastern Europe. In Corn, we sold our lactic acid business, exiting a business for which we didn't see a path to acceptable returns in a reasonable timeframe. We acquired the remainder of the Bulgarian and Turkish wet mills and expanded our stake in the Hungary plant, positioning ourselves well for when EU sugar production quotas are lifted. We continue construction of our feed premix plant in Nanjing. This morning, we are announcing plans to build a fourth feed plant in China, in Lanzhou, as well as one in Minnesota.
In Oilseeds, we're working with Cargill and Olam on the divestitures of our chocolate and cocoa businesses. We are targeting closing both in Q3, subject to final approvals and completion of transitional activities. We agreed to acquire an oil bottling business in Belgium. This acquisition will provide another demand stream for our oilseed processing operations, reducing our reliance on biodiesel and growing our packaged oil business. As we mentioned on the last call, we're creating a joint venture to quadruple the size of our port in Northern Brazil, improving our ability to export from this increasingly productive region. In WFSI, relating to the WILD acquisition, we remain on track to deliver EUR 100 million in synergies over the next three years.
We are on track for $0.10-$0.15 accretion in 2015, although this will likely be in the lower end of the range due to the strong dollar. We continue to advance our construction project in Brazil, China, Germany, India, and the U.S. In the area of driving operational efficiencies, as I mentioned, we have identified more than $200 million in run rate savings towards our goal of $550 million in five years. As part of this effort, we launched a global improvement initiative involving colleagues across all regions and businesses in evaluating every aspect of our business for improvement opportunities. In the first quarter, we implemented projects that will achieve about $60 million in annual run rate savings. We'll update you on our scorecard each quarter. Over time, you should expect to see the results of these actions in improved earnings and returns.
Before we take your questions, I wanted to offer some additional perspective as we look forward. We continue to be excited about 2015. We came into the year with a lot of positive momentum, which we expect to continue through the year. Good early planting progress and long-term weather forecasts suggest a good likelihood for excellent U.S. crops. A large harvest, combined with big carryouts of corn, soybeans, and wheat, could give us opportunities for very good carryovers at the end of the year. Those, combined with expected solid global demand, point to very high utilization of our storage, transportation, and processing assets in North America and Europe later this year. U.S. gasoline consumption continues to improve. That will translate into stronger domestic demand for ethanol. This, combined with strong exports, will keep our assets running hard, especially as we move through the summer driving season.
Demand for sweeteners and flavors will benefit from the seasonal pickup in Northern Hemisphere beverage consumption. The WFSI team is off to a great start. They will continue to deliver synergies. We are confident they will meet the 2015 accretion goals. We're also excited by our customer engagements. Every business unit has been working with existing customers as well as new customers. We are collaborating across the organization more than ever before, working on new types of projects, delivering wins, improving margins. The team will continue to deliver our clear and aggressive strategic plan. The plan that is already contributing to our bottom line, a plan that returned 9.5% this quarter, a plan that will continue to grow our EVA. With that, operator, please open the line for questions.
Certainly. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Evan Morris with Bank of America. Your line is open.
Good morning, everyone.
Hey, good morning, Evan.
Just a first question on ethanol. You talked about the margin outlook improving, since late March. A lot of the work that we do on it, the conversations that we've had suggest, I guess, that the industry's running at operating profit per gallon or in sort of that mid-20s right now. Just, I guess, wanted to get a sense as to what you're seeing. Is that consistent with where ADM is running now? Just based on the information that you have and your outlook, where do you see margins tracking and sort of maybe for the full year on average or exiting the year? Just a little bit more context about where you are now, and where you see it going over the next quarter or two.
Yeah, thank you, Evan. We're constructive on ethanol margins. If you think about it, April has been a relatively big month for shutdowns as people saw some of the margins were relatively low in March. Some people anticipated some of the seasonal shutdowns. We've seen margins improving since the late part of March. We see this with optimism. We see demand in the U.S. growing due to low gasoline prices about 2%-3% per year. That will put the industry around 138 billion-140 billion gallons of gasoline. That and the increased exports, we exported very well in Q1. If you look at the January and February export estimate, they are annualized at around 1 billion gallons because we exported in those two months, 152 million gallons. If you take the last week of April, that export annualized was also around the 1 billion range.
We see exports for the year between 800 and maybe a little bit north of that for the year, plus maybe 13.8 billion-14 billion gallons of domestic gasoline demand. We see very high capacity utilization. We face this season with a lot of optimism in regards to ethanol.
Is what you're seeing with ethanol margins in the industry right now, it seems to be around that mid-20s. Is that $0.20 per gallon on an operating profit basis? Is that pretty consistent with what you're seeing right now within ADM?
It's in the ballpark. It's moving, but it's in the ballpark, yes.
Okay. Second, you kind of touched on it a little bit, but just wonder if you could put just a little bit more context around, you had the record crop in North America last year. South America looks strong. Early commentary on the North American planting suggests another big crop. I know there's a lot of things that can change the industry dynamics pretty quickly. You talked about sort of the positive outlook in the fourth quarter given some of these dynamics, or through the fourth quarter, given some of these dynamics. Can you put some context on, as you sit here today and you take a look at how the rest of the year shapes up, can you give us some context as to, do you anticipate this going to be like a much bigger year than last year?
I know things are headed in the right direction, but if you can put some context about the sort of the magnitude and how strong this year could be.
Yeah, obviously, we started the year strong with Ag Services delivering 37% more profit than the same quarter last year. As we see the good planting, as you described, and plentiful of crops and the stocks around the world, we see a good transition to the next crop with plentiful of inventories that will provide carriers opportunities. There is a lot of business to do ahead of us. The Ag Services team, the grain team, is preparing for all that, is preparing our assets, is preparing commercially to do this. We expect the second half to be very strong for them.
Okay. All right. Thank you.
You're welcome.
Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Yes, thanks. Good morning, everyone.
Hey, good morning, Adam.
Maybe first, on oil seeds, which was truly a tremendous quarter. Can we talk through the forward outlook there? As we wind down the North American crush, how much of that can shift to South America? Presumably, this is a bit of a one-time kind of exceptional beat, but thoughts about how sustainable the oil seed outlook is as you move through the balance of the year, considering where soft seed margins are in Europe and your South American exposures.
Yeah, I would say, Adam, the oil seed teams, as you described, had an outstanding performance, but not everything was hitting in eight cylinders. As you described, soft seed was not very profitable, biodiesel had some headwinds as well. Most of the profits were concentrated in soybean. That has very high capacity utilization around the world. As you described, the shift start from North America to South America. South America and crushing margins still are good. We crush a lot of soybeans in Europe, taking advantage of our swing capacity. We're going to see a little bit of a softening of that as we see every year, which is a normal seasonality of that. The business is running very well. They implemented a lot of improvements, we're seeing those improvements coming through in the P&L.
Overall, in the year, we continue to feel very strongly about the year that oil seed is going to have.
Within that, specifically, you report your South American origination business-
Yes
in oil seeds that you talked about a strong March as the real weakened. It since appreciated through April. Has farmer selling continued in South America, or are you seeing that slowing? Maybe the same comments on farmer selling in the U.S.
Yes. Slightly different situations. In the U.S., the farmer is concentrating in planting right now, and rightfully so. There has been little commercialization. In South America, is the dynamic you described, and I think Ray explained in his commentary, which is very much depending on the real dollar relationship. It's been very volatile these last couple of weeks. It just changes as the farmers see an opportunity to sell, given the real. I would say it will continue to be volatile at this point.
Great. If I could squeeze one more just on biodiesel, U.S. and Europe. Any thoughts or signs that could improve as you go through the balance of the year or expectations for that business moving forward?
Well, I think that normally as we get into the summer weather, we see a little bit more activity, obviously. Brazil was good with the B7. That helped our profitability a little bit there. In the U.S., it all will depend on the expectations of June 1st and RVOs and all that announcement. At this point in time, both businesses are challenged.
Okay, thank you.
You're welcome.
Your next question comes on the line of Ann Duignan with JPMorgan. Your line is open.
Hi, good morning.
Morning, Ann.
Morning. Could you dig a little bit deeper into your revenue synergies on the WILD Flavors side? You said 30 revenue synergy wins in the quarter. Just give us some examples of what those actually are.
Yeah. It's difficult in this area to provide concrete examples, Ann, because obviously we respect the confidentiality of our customers, and all these are innovations for them to increase their revenue and differentiate themselves. We're excited about it because we got two pipelines here going on. One is the pipeline that we inherited from WILD themselves, that it was very robust, that they continue to grow earnings and revenue every year. The synergy pipeline that we got by mixing basically the ingredients that ADM provided. Remember, we contributed $1.5 billion of revenue worth of ingredients into this new division. The product that SCI brings and also the product of WILD. We had several conferences for innovation where we had customer teams working together with their customers, and that's when we generated this pipeline that I described.
Again, we measured it in terms of engagements, and obviously we measured in terms of potential revenue and margin. This is the first quarter, obviously, of this business running. The first order of business obviously is to make sure that we keep our customer momentum. All the team is very much divided in two sets of people, the people that are working on the cost revenue or the cost synergy, and the people that are continuing to be engaged with customers. We are very happy with our engagement with the customers, our combined culture, if you will, the combination of SCI and WILD and ADM has been very good. People are working together seamlessly, and I think customers have seen only benefits from this. We wanted to report on that.
Off to a great start, customers seeing the opportunities, and we're seeing the opportunities to bring more of our products to our solutions.
Okay. Thank you for the color. Then switching gears a little bit, could you comment on the rail car standards? I know that your ethanol non-jacketed DOT-111s probably don't need to be retrofitted till 2023, but does the slowdown on the speed or any of the other rules have any impact on your ethanol business in the near term?
Yeah. Obviously, this is a recent proposal, Ann, we continue to study. At this point, although this did not conform exactly with our public position, we are pleased that we appear to have a little bit more of a longer timeline than maybe crude oil. We are a little bit concerned about this reduction in speed, because not only will speed just transportation of oil and ethanol, but will slow down the whole system. Hopefully, we're still going to have some discussions with the government about this area.
Okay. When would you expect a decision to be made or an outcome from those discussions?
I really don't know. I will be venturing at this point, I don't know.
Okay. Thank you for the color. I'll get back in line. Appreciate it.
Thanks. You're welcome.
Your next question comes from the line of David Driscoll with Citi. Your line is open.
Great. Thank you. Good morning, everyone.
Morning, David.
Wanted to ask about the oil seed crush margins again. Juan, right now we're seeing CBOT crush margins around $0.69 per bushel. That's down from well over $1. Put into perspective just how good the Q1 margins were on crush, what I'm really trying to get after is, it feels like ADM should be down quite substantially in the second quarter on oil seed processing, simply because of the moving from Northern Hemisphere to Southern Hemisphere, Q1 was just a remarkable result on the crush side. Can you give me your comments?
Yes. I would say, the thing that we noticed, you noticed the strength of the crush margins in North America, our team played very well. I think what also happened is that normally during March, you see a transition already to South America. I think in this case, what we have is probably the full March that you see here, in the North American result. Yes, there is a shift that we normally see. We're going to see a little bit of a slowdown in the earnings of oil seeds in the second quarter as we shift to South America. South America, both Paraguay and Brazil, we don't have crushing in Argentina, Paraguay and Brazil continue to be a good crushing margin.
We're going to pick up a little bit of the exports from the grain origination part that we report in oilseeds. I would say yes, with the normal seasonality from Q1 to Q2, but not a significant or spectacular decline, I would say.
Just to follow on that, Q4 last year and Q1 this year were terrific because of how tight the conditions are in oilseed crush. Is there any reason that wouldn't reoccur in the fourth quarter of this year and first quarter of next year on just the basic presumption that the crops are good? Assuming the crops are good, the crush margins that we saw these last couple of quarters were terrific, but I would expect those to repeat. Is that a reasonable thought process?
Yes, David, I think that there is tight capacity. This industry continues to grow, and there hasn't been much capacity added. You will continue to see those dynamics in which, when we get to export a lot and we have a very robust domestic demand, that presents very good crush margin. This is a global demand story. It continues to grow the protein consumption. Also, don't forget that as we were exporting a lot of DDGs to China, that basically increased the domestic demand for soybean meal. Crushing went very well, and we think that will continue over the year.
On ethanol, can you discuss?
Yeah
How much of your ethanol business has been hedged in the 2Q?
I normally tell you that, we hedge as a matter of principle, something between 25% and 75%, depending on how we see the conditions. I would say that we are constructive in margins, and margins have been recovering. That probably indicate that, as you can understand, we're probably in the soft side of that. I don't want to disclose that much our tactics going into Q2.
Well, that's very helpful. Kind of same question, though, related to Q3 and Q4 on ethanol. Do you have much visibility on margins there, or is it kind of same story? It's only just improving now, you would be on kind of the lower side of normal hedge patterns.
I would say, we like the prospects through the summer. We like the way exports are reacting. Ethanol continues to be clearly, by a big margin, the lowest octane enhancer around the world, and that continues to bring export markets to the U.S. The U.S. is a reliable supplier. We continue to be optimistic about that. We know that plants run a little bit softer during the summer, and the driving season is upon us. We have several months ahead of us with potentially good margins.
One last question. In Ag Services, do you think that we'll see better North American flow? Because farmers have been, I think, a little bit reluctant to sell some of their crop, particularly corn. Bottom line is there a good corn flow expected in the second quarter that would be a little bit larger than normal?
I don't know if in Q2, we are optimistic about the second half. We believe that we have a lot of business ahead of us, both in South America and in North America.
Okay, great. I'll pass it along. Thank you for the color.
Thank you, David.
Your next question comes from the line of Paul Massoud with Stifel. Your line is open.
Hi, good morning. Thanks for taking my question.
Good morning.
I was wondering if you'd talk a little bit more about the ethanol exports. You had mentioned that FX gave you some trouble as far as the grain exports out of the U.S., but the number that you gave annualized was close to 1 billion gallons. Before you were talking about flat, now it seems that you're implying a year-over-year increase. At some point, do you start to see a strong U.S. dollar, weak oil pricing, having any kind of an impact on U.S. exports of ethanol?
I described it before, Paul, that ethanol continues to be by a big margin, the cheapest oxygenate out there. If you think of ethanol in the range of $1.60-$1.70, the next oxygenate is about $2.50. There is still a big incentive out there. We haven't seen, even with all the strength of the dollar, any reduction in our exports of ethanol. At this point in time, we continue to look at 800 million gallons this year. I just was reflecting on the numbers that were posted on the January and February exports, and that happens to be annualized to 1 billion. We continue to be somewhere in that range. We continue to look at new markets, and there are several mandates around the world that are being implemented, and there is more than 3 billion gallons of MTBE that needs to be replaced.
We are optimistic about that, and that, over the last 2 years, has been a very strong market for us, and it seems to continue to grow. Q2 exports, they're probably going to be larger than Q1.
Thanks for the color there. Switching gears just a little bit over to WILD Flavors on the EUR 100 million and synergies that you're talking about. I believe you said in the past you're expecting that over 3 years. I was just wondering if any of the FX headwinds might delay some of the material results to, say, years 2 and 3. Do you still expect to see some accretion in maybe year 1?
We do expect accretion year 1. The synergies, normally in these cases, Paul, happen that you get the cost synergies upfront because that's when the integration happens. At the same time, you start working with customers in qualifying products and developing new products, and then they go to shelf life testing and tech testing and all that. The revenue synergies are more back-end loaded, and the cost synergies are more frontal loaded in these projects. At this point in time, we're probably running at or a little bit ahead of schedule in that sense.
Okay, great. My last question is just on the Brazilian strike, the transport strike that we saw in the first quarter. It didn't look like you had any material impacts in your numbers, but were there any effects, and do you see anything lingering into the second quarter from that? Thanks.
Yeah. No, this time, the Brazilian strike happened almost a little bit ahead of the harvest, if you will. It didn't have a material impact to us. We had a little bit of an attempt last week again that brought a little bit of an issue in Mato Grosso, but nothing significant that we can report. No impact, I would say.
Thanks a lot.
You're welcome.
Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open.
Thank you. Good morning, everyone. Just a question on Argentina, and I guess Brazil as well. My understanding is that at the grain elevator, there's a thing called the point of delivery system, whereby originators such as yourself will test soybeans to see if they're biotech. If they are, you collect a royalty fee that then is shared with the biotech seed manufacturer. I think there have been problems with this in Brazil in the past, but I've been reading that there are issues with it in Argentina. Could you just talk a bit about what those dynamics are? Is it a meaningful amount of earnings for you? Are you having any discussions with the Argentine government about this or just sort of what the state of play is?
Yeah. No, Vince. I'm aware of the issue. This is just a matter of putting the grain industry in a position to have to collect royalties, if you will, or licenses. It doesn't have a margin impact on us. Yeah, it's a little bit of a domestic dispute. Since there are other companies on the other side involved in this, I'd rather don't comment and let the guys solve it themselves in Argentina.
Okay. Fair enough. That answers my questions. Thanks. I'll pass it along.
Thank you.
Your next question comes from the line of Farha Aslam with Stephens. Your line is open.
Hi, good morning.
Good morning, Farha.
Could you share with us your Global Trade Desk, how you're merchandising volumes differently, and how it actually did help you increase volumes? Is that volume increase sustainable?
Yes. I think that, as you recall, I was, and we were as a team, unhappy with the performance we were having with Toepfer. We needed to fix that. That was not only providing low returns, but a lot of volatility to our earnings the way we were running it. Part of that was created by inefficiencies between the interface between Toepfer and ADM. Part of that was because of a bloated structure, if you will, that was increasing our fixed cost. When we bought the 20% of Toepfer, we brought both companies together, and we moved some of the people to a role to Geneva. That allow us to, first of all, have a more concerted view of the market, more coordinated view of the market between the origination and the destination that Toepfer provided.
We had better utilization of our infrastructure, our logistics, and certainly reduced the cost of the whole operation. It's a more profitable operation, doesn't have that many fixed costs. I think that overall, we improved the volumes because we have better coverage, but we also increased the margins out of that since we have lower costs. I think the overall end-to-end supply chain that you hear me talking from origination to the destination market, that's what the GTD has brought to us, and we should continue to see improvements into this. You see, this is a very true reflection. Our Ag Services with North America not being able to export that much because of the strong dollar, still grew earnings 37% year-over-year, which is a significant improvement. A lot of that is because of this implementation.
Is this improvement captured in that $550 million improvement target? Is that kind of the types of projects that'll be in that $550 number?
I would say, that's probably a different bucket. The $550 are more operational improvements. This is more like a strategic portfolio management. We will count it on another bucket. I would say only maybe a tiny bit, maybe in the $550. You shouldn't deduct from the $550 this. I think we're going to beat the $550 without counting this.
Okay, great. You announced several small divestitures and acquisitions, and notably, many of them were either greater ownerships of ports or expansion of ports. Could you help us frame kind of what earnings you derive from ports and how we should think about your investments in ports?
Yes. Ports are strategic points. At times, if they become a choking point, they can be a big source of either your earnings or your losses, depending if you own it or you don't. What we're trying to do, if you think some of the announcement we made, we made the announcement of Eaststarch, for example, where we have more ownership now of Eastern European assets. We announced this morning also the Port of Constanta, where we take full ownership of that. This is to continue to complement our value chain and be in charge of all those different parts in the value chain that allow us to make small margins in many, many points as we touch the grain here, all the way from the origination to the processing. We control many, many ports around the world.
As I said before, I think at times they become the bottleneck, and you don't want to be held hostage to somebody else owning that and having to pass all the profits to that. To the extent that it makes capital sense, because obviously they are expensive, in places where we have the full supply chain, we try to own them.
Your investment will smooth out your earnings, accelerate earnings? Kind of how should we think about that?
I think it should expand our earnings.
Expand earnings.
Yeah.
Great. Final question is on Argentina, there's an election coming up. Do you expect Argentine soy mills to start crushing post the election? How do you anticipate that impacting global crush margins?
The Argentinians have been selling a little bit more as well. Yeah, a lot of people expect that if there is a change in government in Argentina, there may come a devaluation and that may prompt a little bit more aggressive farmer selling. At one point in time, we will feel the soybean meal from Argentina, obviously, more probably in Europe than otherwise for us. It's hard to speculate on the result on an election, to be honest, Farha, but that will be one of the potential scenarios.
That would be more a 2016 event?
The elections in Argentina, Farha, I think they happen in October, I think the government changed, like, in December the 10th or something like that. Whether the new government decides to have a devaluation in December or to move it to 2016, it's probably more a 2016 impact.
Great. Thank you very much.
You're welcome.
Your next question comes from the line of Michael Piken with Cleveland Research. Your line is open.
Yeah. Good morning. Just wondering, in the past, you talked about shifting grind capacity. Was this the dry mills that were shut down or the wet mills? Thanks.
Yeah, we look at the overall pool of assets that we have, and so I'm not going to disclose granularity around what assets we take down or not. I think, as I said, I think it's important for you to consider that we're always going to look at both to maximize the margin coming out of every bushel that we grind. Sometimes that benefits bioproducts to the detriment of sweeteners and starches, like in this case. It doesn't happen that often, but in this case, we thought it was material enough that we should mention it.
Okay, great. Then, kind of within your wet mill operations, how much flex capacity is there? I recognize you sell hundreds of products, but I mean, within the wet milling process, how much of the grind could be shifted theoretically from ethanol toward high fructose corn syrup or some other type of product?
That's a very strategic and important number that I'd rather not disclose, Michael. We have the ability to produce between 20 and 30 products, but how much can we shift from one extreme to the other is a very strategic number I'd rather not disclose.
Okay. Terrific. All right, thanks. I'll pass it along.
Okay. Thank you, Michael.
Your next question comes from the line of Tim Tiberio with Miller Tabak Research. Your line is open.
Hi. Good morning, thanks for taking my question. One of your competitors had described the specialty protein market in the U.S. as a bit more competitive in the first half. Would you agree with that comment? Is this, I think a situation where maybe whey protein prices have come down as dairy production has increased? Are you seeing increased price competition or flexibility in that space?
Yeah, Tim, let me tell you what happened to us. I don't know what happened to competitors. What happened to us is that we use a lot of our North American capacity to supply the rest of the world. Because of the dollar strength and some emerging market weaknesses, if you will, we exported less. That might have prompted that more volume actually stay domestically, and that might have put some pressure on margins domestically. The biggest impact we felt, it was we didn't have the pool from exports this quarter. We are working on that. We're solving that. Some of that with also customers around the world looking at soybean prices coming down and decided to go a little bit hand to mouth to see how low can they become. We're seeing that turning a little bit now.
That's the impact we saw, Tim.
Okay, that's very helpful. My second question, with the buyout of the JV with Tate & Lyle, I know they've talked about that venture requiring more capital investment over time than they were comfortable with. Can you kind of frame up what the additional CapEx requirements may be over the next couple of years after you've consolidated that?
Yeah, Tim, the issue is it doesn't require capital investments. Capital investments is a choice if we want to grow that capacity. The reality is the U.S. uses 92% of high fructose corn syrup versus like 8% of sugar for sodas, if you will. Eastern Europe uses 28% of high fructose corn syrup versus 72% of sugar. The opportunity to grow that is enormous. Sure, if you want to capitalize on that, you need capital to expand capacity. We will only do it on the back of very strong returns that will make that expansion make sense. We don't have a must. We can run this for cash flow or for cash as long as we want until we decide that we want to expand. We're not going to expand day one.
Day one is all going to be about integrating this to our footprint and taking advantages of we managing those assets and we integrating those assets with our grain and our transportation business.
Perfect. Thanks for your time.
Thank you, Tim.
Your next question comes from the line of Ken Zaslow with BMO Capital Markets. Your line is open.
Hey, good morning, everyone.
Morning, Ken.
Morning, Ken.
Just two questions. One is, can you frame this quarter as a quarter in terms of earnings power? There was a lot of puts and takes. The return characteristics and the overall performance, is this kind of what you'd be thinking about for a longer-term number? What would be the major changes to enhance your earnings from this type of quarterly rate?
Let's say, first quarter is not traditionally a very strong quarter for us, especially from an ethanol perspective. It's a low-demand quarter. Certainly, biodiesel didn't run as expected. I would say we still believe that there is a strong ability for ADM to improve returns and results from this kind of level. We don't think that this is top. We don't think that this is maximized. Not even for oilseeds that you could say that have an outstanding quarter. Some of their divisions, as I said, all the soft seed side, all Europe didn't quite perform that well. Biodiesel is not performing great. We couldn't export a lot from North America from a grain perspective, so our earnings from grain were subdued. Certainly, we didn't have any margins in ethanol. I don't think that this was a spectacular quarter from what the market could give us.
I think that given what the market could give us, the team executed very well. We continue to be excited about the implementation of our strategic blueprint, our strategic plan. That continues to bring strength because it comes from improving our operations, from having better facilities, from divesting things that we don't like. I announced today we divested the lactic acid business. It's not a significant thing, but it continues to show the commitment of management that there are no sacred cows here. Everybody needs to present a credible forecast for returns to be part of the integrated business. I think we continue to be excited about the strength of our plan and the way our company is executing with a very good consistency, I would say. I think there is upside from here at Ken. That will be my summary.
Okay. My second question is, just on more detail, can you give a little bit of an outlook on the European crush outlook? What's going well there? When the crop's coming in just a little bit more, it seems like margins in Europe have been a little softer and when do they turn? How do you think of that?
Yeah. Q1, we shifted as much as we could to soybean crushing as margins were so much better. Obviously, now the market has gotten a little bit better, Argentinian soybean has started to show up, now it's going to become a little bit tougher. I think from a soft seed perspective, we probably need to wait until July or sometime later on for us to see an improvement there.
Great. Thank you very much.
Thank you, Ken.
Your next question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Hi. Thank you. Glad to hear that lactic acid is not a sacred cow. It sounds like a great title for a note. I wanted to know, HFCS demand, certainly I don't think anyone would say it's great domestically, I think supply has been cut back, and my understanding is that that has tightened up the spot markets quite a bit. You didn't report very strong results profit-wise in the quarter, how do you think this bodes for future periods? Do you think you could do better in future periods, especially when contracts roll over?
Yeah, Robert. I think that, I think I said it in my remarks, we posted an increase in profitability in the underlying business in sweeteners and starch, driven by good volumes and product margins. It was offset by part of this lack of co-product credits because of the decisions we made to run ethanol for margins, and also decreased earnings from the joint ventures and the one times from the Tianjin and the startup costs. Think about the Tianjin plant. We have a full plant, a full wall scale plant waiting to get approval. You have all the fixed costs and some of the variable costs that we're making progress with no revenue, no cash flow from that plant. That's impacting the business. I would say from, I agree with you, margins for spot business are a little bit tighter and a little bit higher.
We have a combination of contracts. Contract that were done before the announcement of some of the shutdowns that were done at previous years' margin and some businesses that were performed after that, which are a better number. We expect the profitability of sweeteners and starches from now on to improve as some of these one-off will be eliminated.
Juan, I didn't. Sweeteners and Starches, once you get Eastern Europe, the full accountability of the profits there in your numbers.
Yes
Then you get China up and running, can you give us a sense of what those two projects would add incrementally to your normal kind of run rate? Because I think I and others always think of this division as just being kind of North America, and that's it.
Yeah. I would rather maybe give you some perspective on that maybe on the next call.
We still want to get the feeling of getting all the approvals in China, we need to get our hands on the starch. We didn't get 100% of the starch, some of the starch has gone to Tate & Lyle and some of to us, some of that will be in Sweeteners and Starches, some may not. I'd rather get to closing of those operations before giving you are correct. That should add to our segment Sweeteners and Starches on a global basis.
It kind of builds to a broader question, Juan and Ray, is that, in your presentation today, you presented a lot of projects. I think it's kind of hard for us in the street to kind of quantify what the incremental benefit of those projects is.
Sure.
Any more clarity you can give in future calls, because as you increase in invested capital base, the earnings power should go up, too. Just a comment.
Yes. That's correct. That's the intention. At this point in time, we were trying to balance both, obviously, the improving earnings per share with improving ROIC, and that's why Ray was describing EVA, is that what we're looking at. That's the intention. They are all investments to improve EPS, and you should see that reflected in the bottom line as we go forward.
I think it's fair to say for major transactions, we are going to be very open with you, just like the WILD transaction. We were very open with you in terms of returns and accretion. I think you've raised a good point. We got a lot of smaller bolt-on acquisitions, which traditionally on these bolt-on acquisitions or small acquisitions, we never really given that much guidance on. The pace of this is probably increasing, you raise a good point. We may elect to actually bundle them up together and give you some direction, it'll help you in terms of your modeling.
That'd be great. Thank you.
There are no further questions. I turn the call back over to Juan Luciano for closing remarks.
Well, thank you all for joining us today. Slide 15 notes our upcoming investor events where we will see each other. As always, please feel free to follow up with Mark if you have any other questions. Have a good day, and thanks for your time and interest in ADM.