Archer-Daniels-Midland Company (NYSE:ADM) Q4 2022 Earnings Call Transcript
Archer-Daniels-Midland Company (NYSE:ADM) Q4 2022 Earnings Call Transcript January 26, 2023
Operator: Good morning and welcome to the ADM Fourth Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded. I would 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: Thank you. Hello and welcome to the fourth quarter earnings webcast for ADM. Starting tomorrow, a replay of this webcast will be available on our Investor Relations website. Please turn to Slide 2, which says that some of our comments and materials 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 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 the 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. On today's webcast, our Chairman and Chief Executive Officer, Juan Luciano, will discuss our full year accomplishments and share detail on our priorities for 2023. Our Chief Financial Officer, Vikram Luthar, will review the drivers of our financial performance at the segment level and review our cash generation and capital allocation results. Juan will have closing remarks regarding our planning framework for 2023 and then he and Vikram will take your questions. Please turn to Slide 3. I will now turn the call over to Juan.
Juan Luciano: Thank you, Megan. This morning, we reported very strong fourth quarter adjusted earnings per share of $1.93. Adjusted segment operating profit was $1.7 billion. Our full year adjusted EPS of $7.85, adjusted segment operating profit of $6.6 billion, and trailing fourth quarter average adjusted ROIC of 13.6% demonstrate once again the great work of our global team of dedicated colleagues who manage unprecedented market disruptions to deliver an outstanding year. Our full year operating cash flow before working capital was $5.3 billion. This strong cash flow and the disciplined management of our balance sheet allow us to continue to reinvest in our business, with $1.3 billion in capital expenditures and return cash to shareholders.
In total, we returned $2.3 billion to our shareholders in the forms of dividends and share repurchases in 2022. Next slide, please. With the expectation of continued strong cash flow, today, we are announcing a 12.5% increase in our quarterly dividend to $0.45 per share. We are proud of our record of 91 years of uninterrupted dividends and 50 consecutive years of annual dividend increases. And I'd like to thank our shareholders for their continued support of ADM. Next slide, please. When I examine 2022, our ability to drive structural growth in earnings and improvement in ROIC was supported by key strategic accomplishments across the enterprise, particularly the progress we made on our productivity and innovation objectives. Our productivity work in 2022 included enhancing our operational resilience, including through stabilizing our plant operations and streamlining our operating systems.
In order to meet growing customer demand and drive efficiencies, we delivered multiple projects to enhance our operational footprint, from modernization to improving and scheduled downtime to capacity expansions. We completed our Marshall, Minnesota modernization, opened a new mill house in Clinton, completed our Quincy refinery expansion and improved output and yields at our Rondonopolis diesel plant in Brazil. We also continued to optimize our North American milling footprint. As you know, we also introduced a new $1 billion challenge in 2022. There is no clearer demonstration of how our colleagues and culture are driving returns than the fact that thousands of ADM team members from around the globe took the initiative, step up and identified opportunities that unlocked more than $1.6 billion in cash in 2022.
On innovation, our accomplishments include a focus on capturing the benefits of organic growth investments and M&A as we continue to get closer to our customers and extend our capabilities to meet growing global demand for our products. Our Nutrition business continued to outpace the industry, with 18% constant currency revenue growth for the full year. We delivered an impressive 26% in year-over-year revenue growth in BioSolutions. The portfolio of acquisitions we made in the prior year continued to deliver OP above our financial projections and we advanced targeted production capacity expansions to meet growing customer demand. We announced expansions of our alternative protein capabilities in Decatur, Illinois, and starch production in Marshall, Minnesota.
We completed our alternative protein expansion in Serbia and are able to launch our expanded probiotic capacity in Valencia, Spain. And we continue to expect our joint venture crush and refining facility in North Dakota to be operational by this year's harvest. Slide 6 please. Now let's look ahead. We have a robust plan for driving enduring value creation in 2023 and beyond. In productivity, our work has a common theme, changing the way we work by standardizing, digitizing and automating our manufacturing plants and our offices alike. I previously mentioned our successful Marshall modernization. That was the blueprint for our wider work to unlock value across our production footprint through enhanced automation, more sophisticated control systems and the increased use of analytics.
We have now approved the scope for the first 2 years of the program, encompassing 18 manufacturing facilities. We continue to expect double-digit returns from this important initiative. And we are continuing to advance 1ADM, which is enabling us to improve our processes and expand capabilities across the value chain. 2022 was an important year for our 1ADM business transformation. We completed several rollouts and we are seeing benefits in areas ranging from indirect procurement to go-to-market strategies to grain merchandising. In 2023, we will continue to expand the breadth and scope of this work, which is empowering our businesses to deliver profitable revenue growth and higher margins. Next, we are focused on maintaining our structural growth momentum via our innovation work.
As you might recall, we have spoken in the past about our strategic growth platforms: sustainability, differentiated grain, alternative proteins, BioSolutions, microbial solutions and microbiome modification. These growth opportunities go through a natural evolution. When new, we launch them at the corporate level. As they mature, they become more embedded in our businesses. Differentiated grain is now firm part of our Ag Services and Oilseeds segments everyday work. BioSolutions is growing within carbohydrate solutions. Alternative proteins and microbiome are pillars of nutrition. With these efforts maturing in the businesses, we are able to focus on other opportunities. One of the most important is decarbonization, which is a critical component of our sustainability growth platform and is driving the evolution of our carbohydrate solutions business.
Our goal is to reduce the carbon intensity of our assets and value chain in order to be the preferred partner in low-carbon intensity feedstocks for a growing demand base. We have made several announcements to mark milestones towards this goal in recent years, including our regenerative agriculture efforts, which enrolled 1 million unique acres over the past year; our Strive 35 goals; our initiatives to connect and expand our carbon capture and storage capabilities; and our heat and energy project indicator. We are looking at multiple other pathways to reducing our carbon intensity, like more sustainable energy sources for our facilities. And our efforts aren't just in the U.S. We have plans for other regions as well, including some EMEA projects we hope to speak about in the future.
All of these projects contribute to our ability to offer low carbon intensity feedstocks and that is allowing us to continue to advance our work to transition our dry mills to produce sustainable aviation fuel; help scale up the scaled food products with new sustainable attributes, like the ingredients we will sell to Pepsi from the regenerative agriculture agreement we announced last year, and propelled the expansion of BioSolutions with joint ventures like with LG Chem. And even as we advance our decarbonization plan, we are always looking at new ways to help solve our world's challenges for food security, health and well-being and sustainability. For example, we are continuing to explore opportunities around precision fermentation, which we used to call microbial solutions, in which microbes rapidly grown in fermenters fed by dextrose, transform the sugars into a wide variety of products for food, feed and fiber.
That's a longer term horizon for ADM, but it gives us a hint of the kind of opportunities we see in the years ahead. Now, I would like to turn the call over to Vikram to talk about our business performance. Vikram?
Vikram Luthar: Thank you, Juan. Please turn to Slide 7. The Ag Services and Oilseeds team capped off an outstanding year with substantially higher year-over-year results in Q4. Ag Services results were higher than the fourth quarter of 2021. Low water conditions reduced North American export volumes, partially offset by the South American team, which executed well to deliver higher margins and volumes. Global trade results were lower than the strong fourth quarter of 2021 with lower ocean freight results partially offset by higher results in EMEA origination and destination marketing. The business benefited from a $110 million legal recovery related to the 2019 and 2020 closure of the Reserve Louisiana Export facility. Crushing results were more than double those of the prior year period.
In North America, strong export volumes for soybean meal and growing domestic demand for renewable diesel contributed to strong margins. In EMEA, oil demand powered strong rapeseed margins more than offsetting higher energy costs compared to the prior year. Expanding margins drove negative timing impacts in the quarter of approximately $40 million. RPO results were significantly higher year-over-year as the business continued to execute well to meet demand for food oil, renewable diesel in the U.S. and biodiesel globally. Equity earnings from Wilmar were much higher versus the fourth quarter of 2021. Looking ahead, we expect AS&O results for Q1 to remain strong, similar to last year's very strong quarter led by continued strength in crush margins and RPO.
Ag Services is likely to be lower year-over-year, particularly in light of very strong global trade results in the prior year quarter. Slide 8, please. Carbohydrate Solutions had a strong 2022, with full year results higher than 2021. For the quarter, results were substantially lower than the fourth quarter of 2021 due to pressured industry ethanol margins. The starches and sweeteners sub-segment, which includes ethanol production from our wet mills, delivered much higher year-over-year results. The North America business delivered solid volumes and strong margins in both starches and sweeteners, partially offsetting lower ethanol margins. The EMEA team effectively managed risk and delivered improved results on better margins in a continued dynamic environment.
The global wheat milling business delivered higher margins driven by solid customer demand. Vantage Corn Processors results were substantially lower as higher ethanol inventory levels pressured margins especially compared to the very strong margin environment in the fourth quarter of 2021. Looking at the first quarter for Carbohydrate Solutions, we expect continued solid demand and strong margins for starches, sweeteners and wheat flour. Ethanol margins are currently pressured due to high industry inventory levels. If industry stocks come back down, results for the quarter could be similar to Q1 of 2022. If margins remain pressured, results would likely be lower. On Slide 9, the Nutrition business continued its strong growth trajectory in 2022.
pipeline,storage tanks and buildings of a refinery - industrial plant for fuel production
ADM demonstrated that it remains the provider of choice in Nutrition for systems as our growing pipeline and continued strong win rates delivered full year revenue growth of 18% on a constant currency basis. The business continued to outperform industry growth levels and delivered 11% higher profits for the full year on a constant currency basis. For the fourth quarter, revenues grew 11% on a constant currency basis. Q4 operating profits were significantly lower than the prior year quarters. Human Nutrition results were lower than those of the fourth quarter of 2021. Flavors results were similar to the prior year as strong revenue growth helped offset demand fulfillment challenges. Specialty Ingredients continued to see strong demand for its product portfolio, including plant-based proteins, offset by inventory adjustments.
Health & Wellness was higher year-over-year, driven primarily by the bioactives portfolio, including the results from the Deerland acquisition. Animal results were substantially lower than the prior year quarter, primarily due to the lower margins in amino acids, driven by recovery in the global supply of lysine. Pet Nutrition volumes were lower in Latin America, partially driven by demand fulfillment challenges. Feed results were stronger driven by APAC and Latin America partially offset by the impact of softer demand in EMEA. As we look ahead, we expect overall Nutrition results in Q1 to be lower than the prior year's record first quarter, with Human Nutrition delivering similar year-over-year results on strong flavors and SI growth and lower Animal Nutrition results primarily due to weaker margins in amino acids.
I want to take a moment to expand on our view of Nutrition in 2023. Nutrition is expected to continue on a positive growth trajectory for full year 2023, including 10% plus profit growth and a similar level of revenue growth. The growth is likely to be led by Human Nutrition and to be weighted in the back half of the year as the first half will see headwinds in Animal Nutrition due to the continued impacts of weaker margins in amino acids and because we will see increasing recovery in demand fulfillment as we move through the year. Slide 10, please. Other business results for Q4 was significantly higher than the prior year's fourth quarter. Higher short-term interest rates drove improved earnings in ADM investor services, and captive insurance experienced favorable underwriting results and lower claim settlements versus the prior year.
In the corporate lines, unallocated corporate costs of $299 million were higher year-over-year due primarily to higher IT operating and project-related costs and higher costs in the company's centers of excellence related to growth initiatives. Other corporate was favorable versus the prior year primarily due to higher contributions from foreign currency-related hedge activity and lower railroad maintenance expense. Corporate results also included losses related to the mark-to-market adjustment on the Wilmar exchangeable bond and severance totaling $6 million. Net interest expense for the quarter increased year-over-year on higher interest rates. We expect corporate cost for 2023 to be around $1.5 billion, driven primarily by inflation and higher interest expense.
Other business performance should be higher than 2022, offsetting a significant portion of the increased corporate costs as higher interest rates positively impact our ADM IS business. The effective tax rate for the fourth quarter of 2022 was approximately 16% compared to 21% in the prior year. The decreased rate was driven primarily by changes in the geographic mix of pretax earnings in addition to lower discrete tax expense versus the prior year. Our full year adjusted tax rate was 17%. For 2023, we expect our adjusted tax rate to be between 16% and 19%. Next slide, please. Year-to-date operating cash flows before working capital of $5.3 billion are up significantly versus $3.9 billion over the same period last year. Our net debt to total capital ratio is about 25%, and we continue to have ample available liquidity.
Our strong cash flows and balance sheet have enabled continued investment in the business, with $1.3 billion in capital expenditures for the full year. We currently plan to maintain capital expenditures at about $1.3 billion in 2023 and continue to have significant financial capacity to pursue strategic growth objectives. We have been continuing to return capital to shareholders. We distributed $900 million in dividends and repurchased almost $1.5 billion of shares in 2022. We are planning $1 billion in opportunistic buybacks for 2023, subject to other strategic uses of capital. Juan?
Juan Luciano: Thank you, Vikram. Next slide, please. 2022 was a truly outstanding year for ADM. As we look forward to 2023, we expect another very strong year. There are a number of market factors that we see as relevant for shipping our performance. We still see tightness in supply and demand balances in key products and regions. We see strong demand for vegetable oil, driven largely but robust demand for biodiesel and renewable diesel. Resilient food demand should drive higher volumes and margins in starches, sweeteners and wheat milling. We see continued strong demand for ethanol, including positive discretionary blending economics. And as Vikram mentioned, we expect 10% plus constant currency OP growth from Nutrition. We have a strong playbook powered by our deep expertise and our unparalleled footprint and capabilities to manage a dynamic market environment.
Our healthy balance sheet provides ongoing optionality as we continue to pull the levers under our control to deliver results. And we expect positive contributions from productivity and innovation initiatives across the company that will help us drive value in 2023. Taken together, we expect to deliver another very strong year in 2023. With that, Bailey, please open the line for questions.
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