Good morning, and 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.
Sweetscher, you may begin.
Thank you, Stephanie. Good morning, and welcome to ADM's 1st 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 risks and uncertainties.
ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation and you should carefully review 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. Then, Juan will review the drivers of our performance in the quarter and provide an update on our scorecard.
And then they will take your
Thank you, Mark. Good morning, everyone. Thank you all for joining us today. This morning, we reported adjusted earnings per share of $7.7, that's 40% higher than the year ago period. For adjusted segment operating profit was $883,000,000.
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 Allstate's 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, our GPD 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 5 last year.
Together, this performance has helped deliver a good quarter overall, even a slower 3 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.
And the WSSI 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 $200,000,000 in run rate savings opportunities toward our goal of $550,000,000 in 5 year And 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 meals 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 4 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 $883,000,000, up $94,000,000.
The effective tax rate for the For calendar year 2015, we expect our effective tax rate to be in the 28% to 30% range. Our trailing 4 quarter average adjusted ROIC of 9.5% improved from the 9.0% at the end of the 4th quarter and also significantly improved by 250 basis points from the 7.0 percent at the end of the first quarter last year. The 9.5% adjusted ROIC is of our 6.6 percent annual WACC for 2015 as well as our long term WAC of 8.0 percent 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 4 $2,000,000 based upon adjusted earnings and the annual WACC, up $581,000,000 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 $2,000,000 pretax credit or less than $0.01 per share after tax. There are no other adjustments for the quarter. Slide 5 provides an operating profit summary and the components of our corporate line. Before Juan discusses the offering results, I'd like to highlight some of the unique items that impacted our quarterly results.
Corn processing adjusted operating profit of $127,000,000 excludes approximately $14,000,000 hedged in the effectiveness charges for split relatively evenly amongst file products and sweeteners and starches. In oilseeds, adjusted operating profit of 4 $3,000,000 excludes approximately $14,000,000 of cocoa hedge timing effects in this quarter. As a reminder, we will also continue to have our cocoa and chocolate businesses 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 4th business segment, wild flavors and specialty ingredients or Whiskey, for short, is reported as its own segment for the first time this quarter.
The segment includes the 2 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 ADMs, 3 other segments. For purposes of comparison to prior results, the year ago quarters segment offering profit for ag services, corn and oilseeds, removed the earnings of the businesses now reported in the Whiskey segment. To assist with your analysis, we've included a chart in the appendix that recast 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 due to 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 very strategic projects and M and A and divestment activities.
In addition, I want to point out that impact on ADM's overall 1st quarter net earnings. On one hand, the strong U. S. Dollar did have some negative impact on the competitiveness of our U. S.
Export program. And our WICC segment also had some negative impacts in terms of export components and earnings translation from Europe. On the other hand, the weaker euro in PI had a positive impact on our fixed costs around the world relative to the revenue streams where we receive Also, the weak RPI motivated Brazilian farmers to sell thereby benefiting our origination business in Brazil. So on balance with the puts and the takes, the net impact was not material. Going forward, we do not expect the currency impact for the rest of the year.
GAAP net revenues for the quarter were $17,500,000,000 significant reduction was driven by large declines in commodity prices our input costs are lower. So 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 offering 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 cost of Wild And SBI, whose transaction closed in the fourth quarter of last year. Turning to cash flow statement on slide 6, which shows the cash flows with a 3 months ending March 31, 2015 compared to the same year at the prior year.
We generated $577,000,000 from operations before working capital changes in the quarter significantly higher than Q1 last year. Total capital spending for the quarter spending in the range of $1,100,000,000 to 1 $300,000,000. This range is higher than our $900,000,000 spending in 2014 which you may recall, we reduced after the Wilde 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 the ramp up of our specialty protein projects spending in Brazil, our Fibrocell projects in China and the U.
S. Are lessons in projects in Germany and India. During the quarter, we spent 566,000,000 repurchase about 12,000,000 shares towards our 2015 target of $1,500,000,000 to $2,000,000,000 of share repurchases. Subject to strategic capital requirements. Our average share count
was 639,000,000 diluted
shares outstanding, down approximately $24,000,000 from $663,000,000 at the same time 1 year ago. Our total return of capital to shareholders for the quarter including dividends was over $700,000,000. Our first quarter cash flows are consistent with our 2015 calendar year targets of capital allocation namely CapEx of $1,100,000,000 to $1,300,000,000, approximately $700,000,000 of dividends and $1,500,000,000 to $2,000,000,000 in share repurchases. And all this is consistent with the balanced capital allocation framework we set forth at our December day. Slide 7 shows the highlights of our balance sheet as of March 31st for both 20152014.
Which remains very strong. Our goal period. This decrease was comprised of about $1,600,000,000 related to lower inventory prices, including the translation impact, about $1,400,000,000 related to lower inventory quantities and a decrease of about $400,000,000 in other working capital. Primarily related to the reclassification of working capital for global Cocoa and chocolate businesses under the HealthForce Sale Accounting. Total debt was about $6,400,000,000, resulting up from the 2014 net debt level of $4,100,000,000 in part reflecting the 4th quarter cash flows related to our acquisitions of Wild and SDI.
Our shareholders' equity of $18,800,000,000 is $1,300,000,000 lower than the level last year with a cumulative relation account impact of a $1,600,000,000 lower due to the strength of the U. S. Dollar. We had $5,700,000,000 in available global credit capacity at the end of December, if you had available cash, we had access to some $1,000,000,000 of short term liquidity. Next, Juan will take us through a review of our business performance.
Juan? Thanks, Ray. Please turn to slide 8. In the first quarter, we earned $883,000,000 of operating profits excluding specified items. This 12% year over year increase in underlying in 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 continue to advance quarter and with normal seasonality underlying in segment operating profits decrease. Now I will review the performance of each segment. Starting on Slide 9. In the first quarter, Ag Services results improved 37% over the 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 GTV with merchandise volumes increasing. In transportation, we saw an increase in demand for bound U. S. Barge rate, which mostly offset a decrease in southbound demand.
Milline and others results improved due to a strong margins for flower, grain and feed. Please turn to Slide 10. Corn processing results declined in the quarter. In sweeteners and starches, our line in North American business is doing well with higher margins and volumes in Q1. This was offset by lower contributions from co products reduce equity earnings from joint ventures and startup costs related to the Tianjin sweetener facility.
And in Bioproducts, earnings were lower due to lower ethanol production volumes, I mean, weaker industry margins. Supply and demand imbalance is challenged industry ethanol margins most of the quarter, though conditions and margins have been improving since late March. Let me explain our current 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 chain. 8 to 10 months ago, they determined Q1 will see an extended North American export window. They got maintenance out of the way position 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 run the plants hard and crushed a lot of beans. And in South America, the team prepared our network for a large fast harvest. And when the strong dollar drove Brazilian farmers to sell their beans, we were ready to handle the crop a strong margin 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 And in North America, our Stratas Bottler 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. Of customers as they develop products using ingredients from all of ADMs business units. Globally, the Flavors business is off to a strong start for the year. On a constant currency basis, while 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 dollar. This is an exciting business with an energetic team and 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 ARCO's TIBDARING, a wide range of services to our ARCO 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 GTV platform that we developed following the Top 4 acquisition. And today, we are announcing that we have agreed to acquire full ownership of our joint venture port complex as Constanta Romania, a Black Sea port at the mouth of the Daniel. This acquisition builds on the investments we have made in our new river network since 2011 and further strengthens our origination and transportation capabilities in Eastern Europe. In corn, we sold for which we didn't see a path to acceptable returns in a reasonable timeframe.
And we acquired the remainder of the Bulgarian and Turkish wet mills and expanding our stake in the Hungary plant, positioning ourselves well for when EU sugar production quotas are lifted. We continue construction of our feed premixed plant in Nanjing. And this morning, we are announcing plans to build the 4th seed plant in China in Danzhou as well as 1 in Minnesota. In oilseeds, we're working with Cargill and Olam on the divestitures of our chocolate and cocoa businesses. We are targeting close in 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. And 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 relating to the Wilde acquisition, we remain on track to deliver 1,000,000 in synergies over the next 3 years. And we are on track for $0.10 to $0.15 accretion in 2015. Although this will likely be in the lower end of the range, due to the strong dollar.
And we continue to advance our construction project in Brazil, China, Germany, India and the U. S. And in the area of driving operational efficiencies, as I mentioned, we have identified more than $200,000,000 in run rate savings toward our goal of $550,000,000 in 5 years. As part of this effort, we launched a global improvement initiative involving colleagues opportunities. In the first quarter we implemented projects that will achieve about $60,000,000 in annual run rate savings.
Update you on our scorecard each quarter and over time, you should expect to see the results of these actions in improved earnings and returns. So 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 weed could give us opportunities for very good caries 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 to especially as we move through the summer driving season. Demand for sweeteners and flavors will benefit from the seasonal pickup in Northern Hemisphere leverage consumption.
The WFSI team is off to a great start. They will continue to deliver synergies and 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.
And 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 percent this quarter, a plan that will continue to grow our EBA. With that, operator, please
Your first question comes from the
Good morning, everyone.
Hey, good morning, Evan.
Just a first question on ethanol. Just you talked about the margin outlook improving since late March. A lot of the work that we do on it conversations we've had suggest, I guess, if the industry is running it operating profit per gallon in sort of that mid-20s right now and just I guess wanted to get a sense as to what you're seeing. Is that consistent with where ADM is running now? And just sort of your 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 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 2?
Yes. Thank you, Aaron. We're constructive on ethanol margins. If you think about 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. So we've seen margins improving since the late part of March.
We seeded this with optimism. We see demand in the U. S. Growing due to low gasoline prices about 2% to 3% per year. That will put the industry around $138,000,000,000,000 gallons of gasoline.
That and the increased exports we exported very well in Q1. If you look at, January February export estimates, they are annualized around 1,000,000,000 gallon because we exported in those 2 months 152,000,000 gallons. If you take the last week of April, that export annualized was around also in the 1,000,000,000 range. So we see, we see export for the year between 800 and maybe a little north of that for the year plus maybe $13,800,000,000 to $14,000,000,000 of domestic gasoline demand we see very high capacity utilization. So, so we face this, this season with a lot of optimism in regards to ethanol.
Are you is what you're seeing with ethanol margins in the industry right now? It seems to be around that mid-20s. Is that you know, $0.20 per gallon operating profit base. 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. And then 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 looked strong early in the North American plantings to fix another big crop.
So, I mean, I know there's a
lot of things that can change the industry dynamics pretty quickly, but you talked about sort of the positive outlook in the fourth quarter given some of these dynamics versus the 4th quarter given the some of these dynamics, but can 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 you know, do you anticipate this going to be like a much bigger year than last year? Just to I mean, 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? Yes.
Obviously, We started the year strong with Ag Services delivering 37 percent more profit than the same quarter last year. And as we see the good planting, as you describe, and plentiful of crops and the stalks around the world, we see a good transition to the next crop with plentiful of inventories that will provide caries opportunities. And there is a lot of business to do ahead of us So, they all see the Ag Services team, the Grain team is preparing for all that. It's preparing our assets. It's preparing commercially to do this.
And we expect the 2nd half to be very strong for them.
Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Maybe first on Oilseeds, which was truly a tremendous quarter. Can we talk through the forward outlook there? I mean, as we wind down North American crush, how much of that can shift to South America? I mean, presumably there was a, this is a bit of a one time of exceptional beat, but the thoughts about how sustainable the oilseed outlook is as you move through the balance of the year considering kind of where softseed margins are in Europe and your South American exposures?
Yes, I would say, Alan, the oilseed teams, as you described, had an outstanding performance, but not everything was hitting in 8 cylinders. Drive sovsted was kind of, not very profitable. And, biodiesel has some headwinds as well. So 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.
So South America and crushing margins still are good. And we crush a lot of soybeans in Europe, taking advantage of our swing capacity. And we're going to see a little bit of softening of that as as we see every year, which is a normal seasonality of that. But the business is running very, very well. They implement a lot of improvements and we're seeing those improvements coming through in the P and L.
So overall, in the year, we continue to feel very strongly out a year that oilseed is going to have.
And within that specifically, you report your South American Origination business in oilseeds that you talked about a strong March as the way out weekend has since appreciated and all through April. Has farmer selling continued in South America or are you seeing that slow and maybe the same comments on farmer selling in the U. S?
Yes. Slightly different situations. In the U S, the farmer is concentrating planting right now and rightfully slow. So there has been a little of commercialization. In South America, is the dynamic you describe and think Ray explained in his commentary, which is very much depending on the real dollar relationship.
And it's been very volatile. Last couple of weeks. So it just changes as they see as a pharmacy and opportunity to to sell given the real. So I would say it will continue to be volatile at this point.
Great. If I could squeeze 1 more just on biodiesel. U. S. And Europe, any thoughts or signs that that could improve as you go through the balance of the year or expectation for that business moving forward?
Well, I think that in, normally, as we get into the summer, whether we see a little bit more activity obviously. Brazil was good with the B7 that helped our profitability a little bit there And in the U. S, it all will depend on the expectations of June 1st and RBOs and all that announcement. So at this point in time, both businesses are challenged.
Okay. Thank you.
You're welcome.
Your next question comes from the line of Ann Duignan with JPMorgan. Your line is open.
Hi. Good morning. Good morning, Ann. Good morning. Could you dig a little bit deeper into your revenue synergies on the wild flavor side said, the 30 revenue synergy wins in the quarter.
Just give us some examples of what those actually are.
Difficult in this area to provide concrete examples and because obviously with respect to confidentiality of our customers and all these are innovations for them to increase their revenue and differentiate themselves. But we're excited about it because we've got 2 pipelines here going on. 1 is the pipeline that we herited from Wiles themselves that it was very robust that they continue to grow earnings and revenue every year. And then the synergy pipeline that we got by mixing basically the ingredients that ADM provided. Remember, we contributed $1,500,000,000 of revenue worth of ingredients into this new division.
And then the product that SEI brings and also the product worldwide. So we handle we had several, conferences for innovation where we had customer teams working together with their customers and and that's when we generated this pipeline that I described. Again, we measure it in terms of engagements obviously, we measured in terms of potential revenue and margin. This is the first quarter, obviously, of this business running. So the best the first the first order of business obviously is to make sure that we keep our customer momentum.
So all the team is very much divided in 2 sets of people, the people that are working on the cost revenue, both in the cost synergy and the people that are continuing to be engaged with customers. We're 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, very good. People are working together seamlessly and I think customers have seen from this. So we wanted to report on that off to a great start customer seeing the opportunities and we is to bring more of our products to our solution.
Okay. Thank you for the color. And then switching gears a little bit you comment on the Ralph car standards? I know that, you know, your ethanol non jacketed field 1011s 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?
Yes. Obviously, this is a recent proposal, Ann, so we continue to study. At this point, although this did not conform exactly with our public position, we are pleased that we appeared to have a little bit more of a longer time lines 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 will slow down the whole system. So hopefully, we're still going to have some discussions with the government about this you.
Okay. And when would you expect a decision to be made or an outcome from those discussions
I really don't know. And I will be venturing at this point. I don't know.
9. Appreciate it.
Your next question comes from the line of David Driscoll with Citi. Your line is open.
Great. Thank you and good morning, everyone.
Good morning, David.
Wanted to ask about the oilseed crush margins again. Juan, could you right now, we're seeing CBOT crush margins around $0.69 per bushel. That's down from like well over a dollar put into perspective, just how good the Q1 margins were on crush? And then what I'm really trying to get after is, it feels like we should be down on the ADM should be down quite substantially in the second quarter on oilseed processing simply because of the moving from Northern Hemisphere to Southern sphere and just Q1 was just a remarkable result on the crush side. But can you give me your comments?
Yes. I would say, the thing that we noticed, I mean, you noticed the strength of the margins in North America and our team played very well. But I think what also happened is that normally during March, you see a transition already to South America And I think in this case what we have is probably the full March that you see here, in the North American result. So yes, there is a shift that we normally see, and we're going to see a little bit of a slowdown in the earnings of oilseeds in the second quarter as we shift to South America. South America, both Paraguay and Brazil, we don't have crushing in Argentina, but Paraguay and Brazil, continue to be a good crushing margin.
So, and then we're going to have we're going to pick up a little bit of the exports from the grain origination part that we report in oilseeds. So I would say, yes, with the normal seasonality from to Q2, not a significant spectacular decline, I would say.
And then just to follow on that, Q44 last year and Q1 this year were terrific because of how tight the conditions are in oilseed crush. Is there any reason that would it reoccur in the fourth quarter of this year 1st quarter of next year on just the basic presumption that the crops are good. So assuming the crops are good, the crush margin that we saw these last couple orders were terrific, but I would expect those to repeat. Is that a reasonable thought process?
Yes, David. I think that there is a tight capacity. I mean, this industry continues to grow and there hasn't been much capacity added. So you will continue to see those dynamic in which when we get to export a lot and we have a very robust domestic demand, that presents very good very good crush margin. This is a global demand story.
It continues to grow the protein consumption. And also as don't forget that as we were exporting a lot of DDGs to, to China. That basically increased the domestic demand for soybean meal for So crushing went very, very well. And we think that will continue over the year.
On ethanol, can you discuss kind of how how much of your ethanol business has been hedged in the 2nd quarter?
I normally tell you that we hedge as the matter of principle something between 25% and 75% depending on how we in margins and margins have been recovering. So that probably indicate that, as you can understand, we're probably in the soft side of that, but 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 and Q4 on ethanol, do you have much visibility on margins there? Or is it kind of same story? It's a just improving now. So 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 ports are reacting. Ethanol continues to be clearly biased by a big margin, the lowest obtaining cancer around the world. And that continues to to bring export markets to the U. S.
The U S is a reliable supplier. So, so we continue to be optimistic about that. We know that plants run a little bit softer during the summer and the driving system is upon us. So we have several months ahead of us with potentially good margins.
And then one last question. In Ag Services, do you think that we'll see kind of 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, is there a good corn flow expected in the second quarter be kind of a little bit larger than normal?
I don't know if in Q2, but But 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 Mizzou with Stifel. Your line is open.
Hi, good morning. Thanks for taking my question. I was wondering if you 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 a 1,000,000,000 gallons you were talking about flat. Now it seems that you're implying a year over year increase.
I mean, at some point, do you start to see strong U. S. Dollar weak oil pricing having any kind of an impact on U. S. Exports of ethanol?
Well, I described it before, Paul, that ethanol continues to be by a big margin, a big the cheapest oxygen rate out there. If you think of ethanol in the range of dollars $60 to $2.70, the next oxygenate is about $2.50. So there is still a big incentive out there. So we haven't seen, even with all the strength of the dollar, any reduction in our exports of ethanol. So, At this point in time, we continue to look at 800,000,000 gallons this year.
I just was reflecting on the numbers that were posted on the January February exports. And that happens to be annualized to 1,000,000,000. We continue to be somewhere in that range. Obviously, we look at, we continue to look at new markets and there are several mandates around the world that are being implemented and there is like more than 3,000,000,000 gallons of MTBE that needs to be replaced So we are optimistic about that. And that over the last 2 years have been a very strong market for us and we seem to continue to grow.
Q2 exports, they probably going to be larger than Q1.
Color there on on the switching gears, just a little bit over to wild flavors on the €100,000,000 in synergies that you're talking about. I believe you've said in the past you're expecting that over 3 years. And I was just wondering if any of the FX headwinds might delay some of the material results to say years 2 3, or do you still expect to see some accretion or maybe year 1?
Yes, we do expect accretion year 1. The synergies Normally, in this case, if Paul happened that you get the cost synergies upfront because that's when the integration happens. And then 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 testing and all that. So the revenue synergies are more back end loaded and the cost synergies are more front end loaded in these projects.
But at this point, in time, we're probably running at or a little bit ahead of schedule in that sense.
Okay, great. And my last question is just on the Brazilian strike, the transport strike that we saw in the first quarter. I mean, it doesn't look you had any material impacts in your numbers, but were there any effects? And do you see anything lingering into the second quarter from now?
Yes. No, this time, the Brazilian strike happened almost a little bit ahead of the harvest, if you will. So 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 financial matter, but also, but nothing significant that we can report.
So 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 and good morning everyone. Just a question on Argentina, I guess, Brazil as well. My understanding is that there's a at the grain elevator, there's something called point of delivery system whereby Irbage Anderson yourself will test soybeans to see if their biotech And 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. So could you just talk a bit about what those dynamics are? Is it a meaningful amount of earnings for you?
And 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. And this is just a matter of putting the grain industry in a position to have to collect royalties, if you will, or licenses. So it's not it doesn't have a margin impact on asked.
But yeah, it's a little bit of a domestic dispute. And since there are other companies on the other side involving this, I'd rather don't comment and let the guys solve it themselves in Argentina.
Your next question comes from the line of Faiza Long with Stephens. Your line is open.
Hi, good morning. Morning, Mara. 1, could you share with us your global trade desk, how your merchandising volumes differently and how it actually did help you increase volumes? And is that volume increased sustain health?
Yes. I think as you recall, I was and we were, as a team, unhappy with the performance we were having with tougher. And 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 top 4 and ADM. Part of that, it was because of a blow to the structure, if you will, that was our fixed cost.
So what we brought when we bought the 20 percent of Top 4, we brought we brought both companies together and we moved some of the people to roll to Geneva. And that allow us to, 1st of all, have a more concerted view of the market, more coordinated view of the market between the origination and the destination that talked for provided, we had better utilization of our infrastructure at logistics and certainly, reduced the cost of the whole operation So it's a more profitable operation. It doesn't have that many fixed costs. So I think that overall, we improved the volumes because we have better coverage, but we also increase the margins out of that since we have lower costs. So 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 in disease. And you see, this is a very true reflection, act services with North America not being able to export that much because the strong dollar still grew earning 37 percent year over year, which is a significant improvement. And a lot of that is because of this implementation.
And so, mid target, is that kind of the types of projects that will be in that 550 number?
No, 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. So I will say only maybe a tiny bit, maybe in the $550,000,000, but you shouldn't deduct from the $550,000,000.
I think we're going to beat the $550,000,000 without without counting this.
Okay, great. And then you announced several small divestiture 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. They are at times if they become a choking point, they can be they can be a big source of either your earnings or your losses, depending on 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 East Starts, for example, where we have more ownership now of Eastern European Assets. And then we announced this morning also for Constancia 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, saying here all the way from the origination to the processing. So, we control many, many ports around the world. And, as I said before, I think at times, they become the bottleneck and you don't want to be hostage to be held hostage to somebody else owning that and having to pass all the profit that. So to the extent that it makes capital sense, because obviously they are expensive, we try to in places where we have the full supply chain, we try to own them.
So your investment will smooth out your earnings, accelerate earnings. Kind of how should we think about that?
I think you should expand your end, however.
Expand earnings. Great. And final question is on Argentina. There's an election coming up. Do you affect argentine soy milk to start crushing post the election?
And how do you anticipate that impacting global crush
I can?
Yes. The Argentinian teams have been selling a little bit more as well. But yeah, a lot of people expect that, if there is a change in government in Argentina, they may come into valuation and they may 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. So it's hard to speculate on the result on elections, to be honest, Farca, but that will be one of the potential scenarios.
So that would be more a 2016 event?
Yeah. The elections Argentina Parker, I think the company in October, and I think the government changed like in December 10th or something like that. So whether the new government decide to have an evaluation in December or to move it to 16, it's probably more a 16 impact.
Okay, great. Thank you very much.
Your next question comes from the line of Michael Piken with Cleveland Research. Your line is open.
Yeah. Hi. Good morning.
I just wanted to go back to a comment you made about how your speakers and starches results were impacted by running the ethanol at a lower rate during the quarter. And just wondering, in the past, you talked about shifting, grind capacity. Was this the dry mills that were shut down or webino? Thanks.
Yes. We look at the overall pool of facets that we have. So I'm not going to disclose granularity around what assets we take down or not. But I think as I said, I think it's important you to consider that we're always going to look at both to maximize the margin coming out every bushel that we grind. So, sometimes that benefits bioproducts to the detrimental 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. And then kind of within your wet mill operations, like how much flex capacity is there? I recognize you fell 100 products, but I mean, within the wet milling process, like, how much of the grind could be shifted theoretically from methanol toward high just going to share for some other type of product?
That's a very strategic and important number that I rather don't disclose. My We have the ability to produce between 2030 products, but how much can we shift from one extreme to the other? Is a very strategic number. I apologize on this call.
Okay, terrific. All right. Thanks. I'll pass it along.
Okay. Thank you, Michael.
Your next question comes from the line of Tim Kiberia with Miller Tobacco Research. Your line is open.
Good morning, and thanks for taking my question. 1 of your competitors had described the specialty protein market in the U. S. Is a bit more competitive in the first half. Would you agree with that comment and Is this, I think a situation where maybe whey protein prices have come down as dairy production has are you seeing increased price competition, or flexibility in that space?
Yes, Tim. Let me tell you what happened to us. And I don't know what happened to competitors, but what happened to us is that we use a lot of our North American capacity to supply the rest of the world. And because of the dollar strength, and some emerging market weaknesses, if you will, we export it less. That might have prompted that more volume actually stayed domestically, and that might have put some pressure on margins domestically.
But the bigger impact we felt was we didn't have the pull from exports this quarter. We are working on that and we're solving that. And some of that some of that with also customers around the world looking at soybean prices coming down, and decided to go a little bit, come to mouth to see how low can they become. So we're seeing that turning a little bit now, but that's the impact we saw
Okay. That's very helpful. And then my second question with, you know, the buyout of the, the JV with Tate and Lyle, I know they've, you know, talked about, you know, that venture requiring more capital investment over time that they were 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?
Capital investment is a choice if we want to grow that capacity. The reality is the U. S. Uses 2% of high fructose corn syrup versus like 8% of sugar for solars, if you will. Eastern Europe uses 28% of high fructose corn syrup versus 72% of sugar.
So the opportunity to grow that is enormous. So sure, if you want to capital on that, you need capacity, you need capital to expand capacity. But we will only do it on the back of very strong returns that will make that expansion make sense. So 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 1. Day 1 is all going to be about integrating this to our footprint and taking advantages of we managing that those assets and we integrating those assets with our grain and our transportation businesses. Perfect.
Thanks for your time.
Thank you, Tim.
Your next question comes from the line of Ken Zaslow with Bank of Montreal. Your line is open.
Hi. Good morning, everyone. Good morning, Ken.
Just two questions. One is, can you frame this quarter as a quarter in terms of earnings power because there was a lot of puts and takes. Is this something is the return characteristics and the overall performance, is this kind of what you'd be thinking about for a longer term number? Is what would be the major changes to an your earnings from this type of quarterly rate?
Let's say, 1st 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. So 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 are not we don't think that this is tough. We don't think that this is maximized.
Not even for oils, that you could say that have an outstanding quarter. Some of the divisions, as I said, all the softest 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 outward earnings from grain was subdued. Certainly, we didn't have any margins in ethanol. So So I don't think that this was a spectacular quarter from what the market could give us.
That given what the market could give us, the team executed very, very well. And we continue to be excited about the implementation of our strategic blueprint, our strategic plan, that continues to bring strength because it comes from 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. I mean, it's not a significant thing, but it continues to show the commitment of management that there are sacred cows here, everybody needs to forecast needs to present a credible forecast for returns to be part of the integrated business. And I think we continue to be excited about the strength of our plan and the way our company cuteing with a very good consistency, I would say.
So, so I think there is upside from here, Ken. That will be my summary.
Okay. And then my second question is just on more details is can you give us a little bit of outlook on the European crush outlook, what's going well there? What's when the proxy coming in? Just a little bit more because it seems like margins in Europe have been a little softer. And when did they turn?
How do you think of that? Yes.
So, Q1, we shifted as much as we could soybean crushing as margins were so much better. Obviously, now the market gotten a little bit better, but also Argentinian soybean has started to show up. So now it's going to become a little bit tougher. And I think from a soft we probably need to wait until like 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. I'm glad to hear that lactic acid is not a sacred cow. It sounds like a great title for a note. But, I wanted to know, HFCS demand, certainly, I don't think anyone would say it's great domestically, but 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, but how do you think this bodes for future periods? Like do you think this will be a do you think you could do better in future periods, especially when contracts roll over?
Yes, Robert. I think that, and I think I said it in my remarks, we posted an increase in profitability in the underlying business in Sweden as anastasia, 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 decrease earnings from a joint ventures and the one times from the TNG startup costs. Think about the TNG plant. We have a full plant, a full goal scale plant waiting to get approval.
So 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 So that's impacting the business. But I would say from I agree with you, margins for spot business are a little bit tighter and a little bit higher. And we have a combination of contracts, contracts that were done before the announcement of some of the shutdowns that were done at previous years working on some businesses that will perform after that, which are a better number. But we expect the profitability of sweeteners in the start from now on to improve as some of these one offs will be eliminated.
1, I didn't but sweeteners and starches, once you get, Eastern Europe, the full accountability of the profits there in numbers. And then you get China up and running. Can you give us a sense of what those 2 projects would add incrementally to your normal America. And that's it.
Yeah. And 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. And we need to get our hands on the e starts. And we didn't get 100% of e starts.
So some of e starts have gone to take a live on some of us. And some of that will be in sweeteners and start ups and some may not. So we need I'd rather get to closing of those operations before giving you, but you are correct. That should add to our segment sweeteners and started on a global basis.
And it kind of builds to a broader question, Juan, and Ray, is that in your presentation today, you presented a lot of projects And I think it's kind of hard for us in the street to kind of quantify what the incremental benefit of those projects is. So any more clarity you can give in future calls, because, as you increase invested capital base, the earnings power should go up too. So just a comment.
Yes, that's correct. And that's the intention. And at this point in time, were trying to balance both obviously the improving earnings per share with improving ROIC and that's why Gray was describing EVA is that what we're looking at But 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 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 physicians or small acquisitions we never really given that much guidance on. But the pace of this is probably increasing.
So you raised a good point. We may elect to actually bundle them up together and give you some direction. So it'll help you in terms of your
That'd be great. Thank you.
There are no further questions. I turn the call back over to 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 interesting ADM.
This concludes today's conference call. You may now disconnect.