ADM strengthens 2014 investor return in spite of lower revenues

By Susanne Retka Schill | February 04, 2015

Archer Daniels Midland Co. reported adjusted earnings per share for the calendar year 2014 of $3.20, up 37 percent compared to the prior year. That was in spite of total revenues being down from the previous year at $81.2 billion compared to $89.8 billion for the year ended Dec. 31, 2013. Fourth quarter results were $20.1 billion in revenues, down from the $24.1 billion in the same quarter the year before, although earnings per common share were up in Q4 2014 at $1.08, which compares to 56 cents per share in Q4 2013. Net earnings for the quarter were $701 million and segment operating profit was $1.26 billion.

The company’s largest biggest segment, oilseeds, showed record Q4 profits for its North American business and strong results from the European crush. Those positives were more than offset by weakness in South American results. Q4 corn processing decreased $31 million with rising net corn costs through the quarter partially offset be strong ethanol results. Corn processing includes starch and sweeteners, with Q4 operating profits of $67 million, down from $181 million in the same period a year before. Bioproducts, which includes ethanol, saw Q4 operating profits of $217 million, compared to $134 million in the same period in 2013.

The bioproducts segment also led the year-end results for ADM’s corn processing segment with $697 million in operating profit compared to $380 million in 2013. Sweeteners and starches for 2014 saw operating profits of $481 million, which compares to $520 million for 2013. Adjusted operating profits for all segments (including agricultural services) total $3.7 billion for 2014 compared to $2.9 billion for 2013.

In the investor call, ADM executives described the company’s progress in increasing its return to shareholders. During 2014, ADM returned more than $1.8 billion to shareholders through dividends and share repurchases. The board has also declared a quarterly cash dividend of 28 cents per share on the company’s common stock, an increase of 17 percent. The estimated annual dividend payments will total $700 million in 2015, plus the company has targeted $1.5 to $2 billion in share repurchases for 2015.

In the call, company executives stressed its actions in focused on the work being done across the company’s business segments to improve returns to investor. The company exceeded $400 million in ongoing cost savings in 2014, and they are targeting incremental cost savings of $550 million over the next five years. Besides divesting of under-performing assets, such as its cocoa, chocolate and South American fertilizer businesses, the company is creating a new operating segment, WILD and Specialty Ingredients, to incorporate two acquisitions from the past year and increase its presence in the food flavors and specialty ingredients market.  

Ethanol was the focus of a number of investor questions following the presentation in the investor call, including a question on how long it will take to correct the current ethanol oversupply situation.  “We’re not seeing a change in demand, and if anything, an improvement because of reduced gasoline prices,” ADM CEO Juan Luciano responded. “We’ve seen an expansion in production, but how long will it take to correct? When margins are good, plants run for volume, when margins tighter, they run for yield.” Luciano said ADM expects the low margins will improve by the end of Q1. The company expects lower margins in 2015 than was seen in 2014, but better than current levels. Luciano was also asked if the company’s ethanol margins were positive, to which he responded that the company’s mix of wet and dry mills offered the company an advantage, “overall, we’re slightly positive.”

On ethanol exports, Luciano said the company expects the export demand to stay around 800 million gallons for 2014. “Ethanol continues to be the cheapest oxygenate out there.”

The transcript of a Dec. 3 investor day, found on the investor presentation page of the ADM website, offers more insights into ADM’s ethanol business.  

Mark Bemis, ADM senior vice president and president of the corn business unit, talked about the segment’s business strategy and growth plans. “We have been steadily improving our cost position,” he said. With energy being the single largest contributor to overall manufacturing cost, a lot of effort has focused on improving its corn processing energy efficiency by about 40 percent in the last 15 years and about 10 percent in the last five years alone.  More recently the company has focused on improving yields.

Bemis gave two examples of areas where the company is redoubling its efforts to improve performance. “In our ethanol business we are now manufacturing our own cellulase enzymes, which we are introducing into our dry mill ethanol production process and seeing a significant yield boost.”  Other yield enhancements were achieved in the lysine production facility in the animal nutrition business and in the bio-based propylene glycol plant in the renewable chemicals. “While not all-inclusive with efforts we have ongoing in this area, these three projects alone, when fully implemented will give us cost savings in the range of up to $50 million on a per-annum basis.” 

Carl Willis, vice president of the ethanol business, began his remarks at the investor day discussing the big drop in crude oil that was just beginning in December. “We are the cheapest octane in the world despite this $20 to $25 drop. If you look at the forward markets and compare gasoline futures to ethanol futures in 2015, ethanol is trading at a 36 cent discount to gasoline,” he said. “On top of that, if you are a fuel blender here in the United States, any gallon of ethanol that you buy comes with a RIN, and it’s free. Today that RIN is worth 60 cents per gallon to the blender.” He went on to describe ethanol’s competitive advantage with the alternate oxygenate MTD, which in early December was trading at a 40 cent premium to gasoline. He predicted that the global shift away from MTD to ethanol will provide long-term growth potential, with China and Mexico being big users of MTD.