ADM profits up, ethanol returns down, production dialed back

By Susanne Retka Schill | February 07, 2013

Archer Daniels Midland Co. has reduced ethanol production as a response to poor margins, investors were told in a question period following the company’s  Feb. 5 earnings report. “We had a rough December and we made the decision to slow down two of our dry mills,” Juan Luciano, chief operating officer, said.   

ADM reported its financial results for the second quarter ended Dec. 31 as it transitions to a fiscal year aligned with the calendar for 2013. The company reported net earnings for the quarter of $510 million, or 77 cents per share, up from 12 cents per share in the same period one year earlier. Adjusted earnings per share were 60 cents, up from 51 cents in the same period last year. Segment operating profit was $808 million.

“The ADM team managed well despite challenges from the U.S. drought and from persistent, negative margins in the ethanol industry,” said ADM Chairman and CEO Patricia Woertz. “Our results in oilseeds and agricultural services demonstrated the ability of our people to use our global asset network to prepare for and manage in a range of market conditions.”

The oilseeds processing unit profit doubled in the second quarter, increasing to $411 million from the same period one year earlier. The agricultural services segment profit increased $77 million.

In contrast, the corn processing segment profit decreased by $207 million to a slim operating profit of $3 million. Within corn processing, sweeteners and starches operating profit increased by $22 million to $97 million, while bioproducts results decreased $229 million to a loss of $94 million. “Weak domestic gasoline demand and unfavorable global ethanol trade flows resulted in continued excess industry capacity, keeping ethanol margins negative,” Luciano said.

“This was a tough market,” Luciano said in his prepared remarks. “But we can do better. We are taking a look at all aspects of our ethanol operations and challenging every part.” A number of actions have been implemented to improve results, including the decision to reduce production as some of the company’s dry mills.

ADM’s total capacity at nine facilities is 1.72 billion gallons per year, according to Ethanol Producer Magazine’s plant map, of which a substantial portion is at corn wet mill facilities that can convert the starch fraction to a number of products, only one of which is ethanol. The company does not disclose production numbers for individual facilities.

Luciano fielded a number of questions regarding ethanol during the investor call. When asked whether the availability of corn contributed to ADM’s trimming back production Luciano replied, “We’ve not had problems with sourcing,” adding, “Our sales continue to be flat, and all of our customer needs are being satisfied.”

Regarding the industry outlook, he commented, “We think we touched bottom in the last quarter. The combination of lower production—we are a billion gallons down in the U.S. and [ADM is] a significant portion of that—and less imports will drive margins up.” Ethanol margins correlate more closely with ethanol supply/demand than corn pricing, he said in response to another question. “This industry was built for 150 billion gallons of gasoline consumption and 10 percent was going to be 15 billion gallons,” he said. “Reduced gasoline use has brought that down to 13 billion.” He sees two solutions to the supply/demand imbalance—increased exports and E15. “We don’t expect E15 to have much impact in 2013, but we do expect a gradual impact in 2014.”

In the short term, the over supply problem will be addressed by a combination of exports and industry discipline in taking down capacity. When asked whether ADM had a benchmark to be reached before bringing its capacity back up, Luciano replied, “This is a very dynamic picture. Our portfolio is very big and we’re trying to optimize. We look at all the elements of U.S. production and gasoline demand. We also look at the balance of imports and exports. Fundamentally, we are looking at our own margins.”

Investors on the call also asked whether the ethanol industry downturn would bring a round of consolidation, and whether ADM would participate. “We’ve seen some people shutting down and some of our competitors making moves to consolidate,” Luciano replied. “It is a big job to consolidate this industry which is very fragmented. We constantly are presented with units, and to the extent that they will be an enhancement to our footprint, we will consider those units,” he said, adding that ADM will be careful to consider the best locations and market positions.

ADM has focused its efforts on boosting returns to investors in the past year through improving its capital, cost and cash performance. In addition to unlocking $1 billion in cash, the majority of ADM’s growth capital is now invested outside the U.S., Luciano said, and the company has realized cost reductions in all of its sectors, including a 5 percent reduction in manufacturing costs in corn processing.