Archer-Daniels-Midland Company (NYSE:ADM) Q4 2023 Earnings Call Transcript
Archer-Daniels-Midland Company (NYSE:ADM) Q4 2023 Earnings Call Transcript March 12, 2024
Archer-Daniels-Midland Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the ADM Fourth Quarter 2023 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'd now like to introduce your host for today's call, Megan Britt, Vice President, Investor Relations for ADM. Ms. Britt, you may begin.
Megan Britt: Hello, and welcome to ADM's fourth quarter and full year 2023 earnings conference call. Our prepared remarks today will be led by Juan Luciano our Board Chair and Chief Executive Officer and Ismael Roig, our Interim Chief Financial Officer. We've prepared presentation slides to supplement our remarks on the call today which are posted on the Investor Relations section of the ADM website and through the link to our webcast. Some of our comments and materials may constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. These statements and materials 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. 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. I'll now turn the call over to Juan.
Juan Luciano: Thank you, Megan, and good morning to all who have joined for today's call. I realize we're holding this call later than we have in the past and we appreciate your patience as we have managed through our internal investigation and worked expeditiously to complete our 10-K filing. Before we start the business update, I want to provide some perspective on the additional release that we issued this morning on the progress we have made in our internal investigation, which is being led by the Audit Committee of the Board of Directors. ADM has historically disclosed in the footnotes to our financial statements that intersegment sales have been recorded at amounts approximating market. In connection with our internal investigation, we've corrected certain intersegment sales that occurred between our Nutrition reporting segment and our Ag Services & Oilseeds and Carbohydrate Solutions reporting segments that were not recorded at amounts approximating market.
The adjustments have no impact on our consolidated balance sheets, statement of earnings, comprehensive income or loss or cash flows. In addition, we determined that the adjustments are not material to our consolidated financial statements taken as a whole for any period. We also confirmed that these adjustments did not change the achievement levels under our incentive plans. Further detail is included in the Form 10-K we filed this morning. Throughout this process, we have continued to operate the business and drive our strategic priorities forward. While our internal investigation is substantially complete, we continue to cooperate with the Securities and Exchange Commission and the Department of Justice, and we hope you understand that we will not be taking questions related to these matters on the call today.
We will provide updates on this matter in the future as appropriate. Please turn to Slide 4 where we have captured our fourth quarter and full year financial highlights. Today, ADM reported fourth quarter adjusted earnings per share of $1.36, and adjusted segment operating profit of $1.4 billion. Our full year adjusted earnings per share were $6.98, the second best EPS in our history, and our adjusted segment operating profit was $6.2 billion. Our trailing fourth quarter adjusted ROIC was 12.2%, making another year of ROIC performance above our 10% target. Our full year operating cash flow before working capital was $4.7 billion. Our strong cash flow and disciplined management of our balance sheet continues to allow us to invest in our business and return cash to shareholders.
In total, we returned $3.7 billion to our shareholders in the forms of dividends and share repurchases in 2023. In January, with the expectation of continued strong cash flows in 2024, we announced an 11% increase in our quarterly dividend, raising our dividend to $0.50 per share, which marks 92 years of uninterrupted dividends and over 51 consecutive years of annual dividend increases. Today, we also announced that our Board has authorized the additional repurchase of up to $2 billion in shares in 2024 under ADM's existing share repurchase program. Our performance for 2023 shows the overall effectiveness of our strategy, where our broad portfolio of business is combined to deliver resilient results for the year. Despite a more challenging operating environment, we maintained strong earnings and ROIC while delivering key strategic accomplishments across the enterprise.
Next slide please. To put our 2023 results into perspective, at the end of 2021, we provided a roadmap to create value and growth returns by getting closer to customers and highlighted where we expected to perform on several important strategic metrics by 2025. As I look at our two-year track record over these 2025 objectives, we have delivered adjusted earnings per share at the top end of our $6 to $7 per share EPs objective. We have also continued to deliver ROIC above our 10% target.
Green Bison: Let's turn to Slide 6, which I summarize our priorities for value creation in 2024. We continue building a stronger company for the future and to support this, we have identified three key priorities for 2024. One, managing the cycle; two, nutrition recovery; and three, enhanced return of cash to shareholders. Let's take a closer look at each of these areas of focus. We know that 2024 will be a more challenging year that we faced in 2022 and 2023. We see tailwinds that supported a portion of our performance over the past few years changing direction, making our continued progress on our strategic metrics more reliant than ever on our productivity and innovation agenda. In 2024, we will continue to focus on those strategic initiatives that provide strong growth prospects.
Our destination marketing efforts continue to bring us closer to our customers and enable us to serve them in a differentiated capacity and we continue to expand. In 2023, we added three new offices across Asia and the Middle East, and in 2024 we plan to add two to four more. Through this ongoing expansion, we expect to achieve 6% growth in our destination market in volumes. Direct farmer buying has been steadily increasing over the past several years and provides ADM an opportunity to maximize value for both sides by creating efficiencies through working directly together. We plan to take this even further in 2024, leveraging our network of more than 200,000 farmer relationships to grow direct origination volumes year-over-year by about 10%.
And as our customers strive to decarbonize their own products and services, we are seeing a steady increase in the financial returns generated by our own decarbonization efforts from Regen Ag partnerships to lowering the carbon footprint of our operations. The pace of this is accelerating as we move into 2024. Tied to these strategic initiatives, we continue to build capacity to serve growing customer demand. I mentioned earlier the opening of our Green Bison soy processing facility as well as the expansion of our Marshall, Minnesota starch facility. These capacity additions support growing demand for a wide variety of sustainable products and solutions, from renewable fuels to industrial products. And connected to our productivity efforts, we have formally launched a 2024 program we call the Drive for Execution Excellence within the organization.
Over the years, we have consistently encouraged our ADM colleagues to identify and execute both cost saving and cash generation ideas. We've developed processes and systems through our prior transformation programs and now those are ramping up for another cycle. As part of this, we have already commissioned more than 300 projects and plan to see $500 million in traceable cost savings over the next two years across all aspects of our enterprise, from operations to supply chain to corporate costs. Now let's discuss our plans within the Nutrition business. We're calling this section, of course, nutrition recovery for a reason. Nutrition had a very difficult year with results well below our expectations, and we have been working aggressively to change this and return to growth.
For Nutrition, 2023 representing a combination of challenging market forces, some specific non-recurring events and some misses on demand fulfillment. And while market forces such as customer destocking as well as softer demand for plant-based proteins are not within our control, we're already taking action on the areas we can improve. Many of the supply issues are the result of the complexity built into the Nutrition business over time. In our zeal to meet our customers' needs, we have created one of the strongest pantries in the industry. This added complexity in our operations and supply chain that at times impacted our ability to efficiently fulfill demand. To address this, we have made important changes to drive simplification across the Nutrition business that will ease the pressure on our overall supply chain and dramatically improve our demand fulfillment performance.
First, we have created a stronger division of duty across operations leadership and added new leaders with a strong expertise in supply chain management. We have also taken steps to build our COE expertise back into the core business, helping make our overall supply chain capabilities more agile and responsive to commercial demand signals. We have also engaged third party experts to help identify further opportunities for operational excellence improvements across our largest facilities. We have also greatly simplified the product and production line landscape to further achieve operational and supply efficiency, reducing the brands we are presenting to customers by two thirds and downsizing about 17% of our SKUs alongside the strategic production line simplification.
A recent example of this is the closure of more than 20 Animal Nutrition production lines in 2023, now better serving the product mix and supply chain efficiency of the business. We're also optimizing our Nutrition business portfolio, leveraging our experience in both large scale and bolt-on acquisitions. We have enhanced our approach to M&A integration to increase value creation as we focus more on the integration of recent acquisitions than new targets. We continue to assess our portfolio for a strategic fit, making surgical decisions to achieve the returns targets we expect. For example, during Q4, we took action on two JVs that were not expected to meet our returns criteria. We're proud to see how the team with new leadership has rallied around this recovery plan, which is already showing signs of improvement as we move through the first quarter of the year.
Recent trends suggest that destocking impacts in beverages are subsiding and we are well positioned to capture recovering demand in 2024 as evidenced by the strong demand we are seeing in flavors. After heightening our operational efficiency, we've seen steady increases in shipping volumes and productions throughout the course of the last month. And in Animal Nutrition, we have seen another quarter of sequential improvement in the base of the business, which excludes amino acids and pet solutions and early indications in the first quarter of 2024 suggest that this will continue. Importantly, our nutrition value proposition continues to be well received by customers as evidenced by our robust opportunity pipeline and industry leading win rates across key categories like flavors, dietary supplements and pep.
ADM's customer centricity and agile innovation capabilities, supported through our creation, design and development expertise, differentiates us. We continue to believe that Nutrition has an important role in ADM's integrated business model. Beyond adding value to the ingredients produced by our AS&O and carbohydrate solution businesses, Nutrition is innovating to address evolving consumer needs and is connecting us more closely with a growing customer base. Finally, I'll turn attention to the capital allocation strategy that continues to guide our strategic cash deployment decisions. As noted, we announced today that the Board has authorized the repurchase of up to an additional $2 billion in shares through the remainder of the year, including $1 billion in shares to be executed through an accelerated share repurchase program as soon as practical.
This will total $6.4 billion in repurchases executed since 2022 and coupled with the already announced 11% dividend growth, this is aligned with our commitment to a balanced capital allocation approach. So, combined, we believe these three areas of focus set ADM to perform well in a challenging external operating environment in 2024. I would now like to turn the call over to Ismael for more detail on the results of the operations. Ishmael?
Ismael Roig: Thank you, Juan. Let's start on Slide 7 which provides overall segment operating income and EPS for 2023. Overall, we delivered the second highest earnings in company history, overcoming a challenging operating environment. Adjusted segment operating profit was $6.2 billion for the full year, a 6% decrease versus the prior year. At a high level, operating profit was primarily down year-over-year in Ag Services & Oilseeds and Nutrition. In the other segment, which includes ADMIS and Captive Insurance, we had a significant increase in operating profit. Adjusted earnings per share were $6.98 for the year. Improved pricing in Carbohydrate Solutions and Nutrition, as well as positive impacts from mark to market timing in AS&O more than offset the impact of lower crush margins, leading to a $0.70 per share improvement versus the prior year.
Volume improvement in AS&O was more than offset by volume declines in Carbohydrate Solutions and Nutrition, resulting in a $0.29 per share reduction in EPS versus the prior year. Higher manufacturing costs partially related to unplanned downtime at the Decatur complex led to a $0.41 per share decrease versus the prior year. And lower equity earnings primarily related to Wilmar attributed a $0.46 per share decrease versus the prior year. Increased corporate costs related to higher interest rates and the 1ADM implementation partially offset by higher ADMIS results drove a $0.30 per share versus the prior year. For other, benefits from share repurchases were more than offset by negative impacts related to a higher adjusted income tax rate and cycling one-time benefits from the Legal Recovery and Biofuel Producer Recovery program, leading to a $0.18 per share decrease versus the prior year.
Moving to Slide 8, let's look at our segment performance for AS&O. For the full year, AS&O delivered $4.1 billion in segment operating profit, 8% lower than the record level in 2022. Ag Services segment operating profit was 15% lower versus the prior year as reduced origination volume and margins in North America were partially offset by record South American origination volumes. In global trade, destabilization of trade flows led to lower results compared to an exceptional 2022. Crushing segment operating profit for the full year was $346 million lower versus the prior year as improved process volumes were more than offset by lower crush margins and higher manufacturing costs. Refined Products and Other results were $469 million higher, resulting in a record year.
Results were driven by higher volumes and margins in biodiesel. Market volatility drove positive timing impacts of approximately $235 million, compared to negative timing impacts of $90 million in the prior year. Equity earnings for Wilmar were $303 million in 2023, approximately 45% lower than the prior year. Now let's move to Slide 9 and look at Carbohydrate Solutions. For the full year Carbohydrate Solutions segment operating profit was $1.4 billion 3% lower versus the record prior year. In the Starches and Sweeteners segment higher pricing and mix were offset by weaker volumes and lower corn co-product values. The teams executed well in a dynamic environment, posting a record year in Wheat Milling. In Vantage Corn Processing strong exports and steady domestic demand and blending rates supported ethanol production and robust margins.
The prior year also included onetime benefits of $50 million related to the USDA Biofuel Producer Recovery program. We also continue to make significant progress on our BioSolutions strategic initiative, delivering revenue growth well ahead of our 15% plus target. Please now turn to Slide 10. In Nutrition, revenues of $7.2 billion for the full year were 6% lower versus the prior year. Demand headwinds and destocking impacts, coupled with operational challenges related to the ERP systems integration pressured volumes. This more than offset price and mixed benefits as well as positive currency impacts. In Human Nutrition volumes declined due to lower market demand for plant-based proteins, destocking impacts in beverages, and operational challenges related to the ERP system implantation.
This was partially offset by improved price and mix in flavors and texture and pricing in specialty ingredients. In Animal Nutrition, lower complete feed and premix volumes, the normalization of amino acid markets and demand fulfillment challenges in Pet Solutions led to lower revenue versus 2022. Now please turn to Slide 11. For the full year Nutrition segment operating profit was $427 million, 36% lower versus the prior year. Human Nutrition results of $417 million were 25% lower than the prior year as weaker volumes as well as increased costs related to operational challenges from the ERP implementation and unplanned Decatur downtime at Decatur East were partially offset by higher pricing. Animal nutrition results of $10 million were 91% lower compared to the prior year, primarily driven by lower volumes and the normalization of amino acid pricing.
When bridging from 2022, our performance can be characterized in three buckets, market forces, one-time items, and operational challenges. Market forces accounted for a majority of the deterioration in 2023 and as previously mentioned, this was mostly related to lower demand and plant-based proteins, destocking impacts in beverages and lower premix and completely demand which impacted volumes across the industry.
SAVAN: Lastly, we also had our own operation struggles that impacted our ability to deliver on the strong demand that we have created. The implementation of ERP systems over the course of the year led to complications in shipping and producing products, negatively impacting both volumes and manufacturing costs. Over the past month, we have seen a steady improvement in operations and are confident that we will see volumes lost in 2023 come back in 2024. Now please turn to Slide 12. For the full year Other segment operating profit was $375 million, up 125% compared to the prior year. ADM Investor Services results improved on higher net interest income. Higher Captive Insurance results on new program premiums were partially offset by higher claim losses.
In corporate for the full year, net interest expense increased year-over-year on higher short-term interest rates. Unallocated corporate cost increased versus the prior year on higher global technology spend to support digital transformation efforts. Other corporate was unfavorable compared to the prior year due to one-time investment valuation losses of approximately $57 million. Please turn to Slide 13. Over the last two years the company has generated significant cash flow that have bolstered our balance sheet and provided us with financial flexibility to drive long-term growth. In 2023 we again had strong cash flow of $4.7 billion which were actualized in line with our balanced capital allocation framework. 30% or approximately $1.5 billion of cash flows were reinvested in the business to support growth and modernize our assets, including investments in new capacity and the digitization of our existing asset footprint.
Our cash flows also supported significant capital return in 2023 with nearly 30% earnings going to dividends and nearly 60% of cash flows or about $2.7 billion going to shareholders via share repurchases. In 2024 we expect to hold capital expenditures to a level aligned with depreciation and amortization with focus spend around the safety and reliability of assets. We also intend to manage working capital needs prudently limiting M&A beyond previously announced transactions and focusing our team on cost savings and cash generation initiatives through the drive for Execution Excellence. As Juan mentioned earlier, our priorities for cash deployment in 2024 will remain focused around the shareholder. We finished the year with strong momentum in terms of returning cash, repurchasing nearly 1.6 billion of shares in Q4 and nearly 330 million of shares so far in Q1.
Over the course of the year, we intend to actualize 2 billion of additional share repurchases, with 1 billion being executed through an accelerated share repurchase program as soon as practical. Now, let's transition to a discussion of guidance for 2024 on Slide 14 please. In 2024, global grain and oil seed supply is expected to increase as anticipated improvements in weather should support larger production levels in key South American countries. Assuming commodity prices ease for recent highs and trade flows adjust to the dislocations created over the past two years, we anticipate global soybean crush margins will moderate in 2024, likely moving into a range of $35 per metric ton to $60 per metric ton. From the demand side, we continue to expect vegetable oil demand growth from renewable diesel and low single digit soybean mill demand growth to support structural margin improvement.
We expect adjusted earnings per share to be in the range of $5.25 per share to $6.25 per share, representing an 18% decline from prior year at the midpoint. Now breaking down our expectations by segment for 2024, let's turn to Slide 15. In AS&O, we anticipate the first quarter to be lower and the full year to also be lower versus comparable prior periods as increased global commodity supply and normalization of margins will weigh on the segment. We anticipate global soy crush margins within the range of $35 per metric ton to $60 per metric ton as the market balances better soybean availability against increased crush and renewable diesel capacity. Our Operational Excellence efforts and the ramp up of our Green Bison facility should lead to mid-to-high single digit improvement in our process volumes.
We expect significantly lower biodiesel margins in 2023, timing gains to reverse as contracts are executed. In Carbohydrate Solutions, we anticipate the first quarter to be lower versus the prior year. For the full year, we anticipate another strong year, but slightly lower than 2023 as the improved volumes and margins in Sweeteners and Starches could be offset by weaker ethanol. For nutrition, the first quarter is expected to be lower versus the prior year as we face headwinds from a normalizing texturants market, fixed costs associated with operational challenges related to the Decatur East and protein volumes. However, for the full year we expect Nutrition to begin its path to recovery. We anticipate conversion of our significant pipeline opportunities in Human and Animal Nutrition to yield mid-single-digit revenue growth.
We assume market normalization in texturants to be a headwind in 2024. We do not anticipate the significant one-time events of 2023 to recur. Back to you, Juan.
Juan Luciano: Thank you, Ismael. Please turn to Slide 16. In summary, let me once again share the three priorities for our year ahead. We will continue our efforts across the business to drive our productivity and innovation portfolio of projects, taking advantage of capacity gains we have made and ensure that our teams are generating and executing on our drive for Execution Excellence. We continue to take aggressive actions in the nutrition business to ensure that it can deliver on the areas of growth that we have continued to build into our opportunity pipeline. This includes supporting the operational changes we have introduced, driving simplifications through our products and brands, and ensuring that our business portfolio is tuned to best achieve our return expectations.
And we're also actively managing our balanced capital allocation strategy, both prudently investing in the business while growing our dividends and accelerating our share repurchase program to return more to shareholders in the near-term. I believe strongly in the powerful role ADM plays as a leader in the agriculture supply chain, and that our ability to bring partners together across the value chain will be critical to driving future transformation in the food, feed, fuel and industrial markets we serve. I want to express my gratitude to the ADM team for their dedication, hard work and resourcefulness. I'm confident in our ability to deliver solid results as we move into 2024 and continue to pave a path for long-term profit growth. Operator, please open the line for questions now.
Operator: Thank you. [Operator Instructions] Our first question comes from Adam Samuelson of Goldman Sachs. Adam, the line is yours.
See also 11 Oversold NASDAQ Stocks To Buy Right Now and 15 Best Stocks Under $100 To Buy Now.
To continue reading the Q&A session, please click here.
