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Soft Carbohydrate Unit Hurts Archer Daniels: Will It Revive?

Zacks Equity Research

Archer Daniels Midland Company ADM looks troubled, thanks to the persistent softness at its Carbohydrate Solutions segment. Decline in production volumes, lower ethanol margins and soft results in Starches and Sweeteners as well as Bio-products are hurting the segment’s performance.

In second-quarter 2019, revenues at Carbohydrate Solutions fell 7.8% year over year mainly owing to adverse weather conditions in North America. Also, the segment’s adjusted operating profit plunged 22.3% mainly due to weak Bio-products results on account of negative ethanol industry margins. The persistent unfavorable weather further affected the segment’s results by nearly $15 million. Moreover, margin contractions on account of low sugar prices and the Turkish quota on starch-based sweeteners negatively impacted the segment’s results in EMEA.

Going forward, management expects Archer Daniels to report weak third-quarter 2019 results compared with the figure registered a year ago.

Meanwhile, it continues to witness a challenging ethanol margin environment, particularly the recent run-up in corn prices. Consequently, Archer Daniels reported dismal second-quarter 2019 results, wherein earnings lagged the Zacks Consensus Estimate for the third straight time. Additionally, both the top and bottom line decreased year over year. Notably, extreme weather hurt segment operating profit by nearly $65 million in the second quarter. Moreover, Archer Daniels’ top-line performance was affected by revenue decline across all its segments, except Nutrition.

Quite apparent, shares of this Zacks Rank #4 (Sell) company have lost 16.4% in a year, wider than the industry’s 15.1% decline. This downside can also be attributed to the company’s unimpressive earnings surprise history, marking the third straight negative surprise in second-quarter 2019.

Furthermore, analysts are losing confidence in the stock. The current Zacks Consensus Estimate of 75 cents for the third quarter and $2.80 for 2019 witnessed a decline of 3.8% and 2.1%, respectively, over the past 30 days.

Can Efforts Aid Turnaround?

While the aforesaid factors make us apprehensive, Archer Daniels’ strategic endeavors including cost savings and the Readiness program appear encouraging.

Under the Readiness goals, the company has prioritized 275 Readiness initiatives by second-quarter 2019, up from 185 in the first quarter. These completed initiatives are likely to generate run-rate benefits of about $500 million on an annual basis, remaining on track to deliver nearly $1.2 billion by the end of 2020. Further, Archer Daniels estimates these initiatives to contribute about $250-$300 million in accrued benefits by the end of 2019.

These apart, Archer Daniels’ progress on its three strategic pillars — optimize, drive and growth — is worth mentioning. Progress on the optimize pillar is reflected by the completion of significant global organizational changes, which include reductions in management layers, centralization of activities, removal of positions and the early retirement for eligible employees in the United States and Canada. Under the drive pillar, Archer Daniels simplified its operational model by merging the Origination and Oilseeds business segments into a single unit — Ag Services and Oilseeds.

In order to improve performance at Decatur complex, management has centralized the milling management and commercial teams, and intends to combine the flour and corn milling businesses. Moreover, Archer Daniels remains committed to expand its global centers of excellence, which include key areas like technology, talent and growth.

Under the growth pillar, the company completed the buyout of the major European citrus flavor provider, Ziegler Group. This deal will aid Archer Daniels to become a global leader in the flourishing natural citrus ingredients space.

Backed by all these efforts, Archer Daniels is likely to deliver impressive performance in second-half 2019 and beyond.

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