CHICAGO, ILLINOIS, U.S. — “Challenging external conditions,” including unfavorable weather impacts, dragged down earnings at Archer Daniels Midland Co. in the second quarter of fiscal 2019.
Net earnings attributable to ADM in the second quarter ended June 30 totaled $235 million, equal to 42¢ per share on the common stock, down 58% from $566 million, or $1 per share, in the same period a year ago. The most recent quarter included $136 million in charges related to impairment of certain assets and restructuring, which compared with $24 in such charges a year ago.
Revenues for the second quarter eased 5%, falling to $16.297 billion from $17.068 billion.
“Over the first half of this year, we faced widespread external headwinds, including extreme weather that had a negative impact of $65 million in the second quarter and $125 million in total for the first half of the year,” Juan R. Luciano, chairman, president and chief executive officer, said during an Aug. 1 conference call with analysts. “The team executed well to minimize these headwinds, and we undertook a series of aggressive actions that, combined with the absence of severe weather going forward, will help deliver a stronger second half and set us up well for 2020. Just as important, we continue to advance our strategic initiatives to enhance agility, accelerate growth and strengthen customer service.”
During the call, Luciano highlighted several actions ADM completed against its three strategic pillars: optimize, drive and growth.
Within the optimize pillar, Luciano said ADM completed the significant global organizational changes announced during the first quarter, including further reductions in management layers, centralization of activities, the elimination of positions and the early retirement offering for eligible colleagues in the United States and Canada. The company also continued to optimize its U.S. origination footprint by reaching an agreement with Cargill to exchange grain elevators in Illinois and Indiana.
In its drive pillar, ADM simplified its operational model by combining the company’s Origination and Oilseeds business segments into a single business: Ag Services and Oilseeds. The company also centralized its milling management and commercial teams in Decatur, Illinois, U.S., a move Luciano said should offer efficiencies as the company integrates its flour and corn milling businesses.
“These actions are part of our wider simplification efforts as we continue to streamline decision-making and management structures in order to drive action and accountability,” he said.
Actions undertaken in the growth pillar included the completion of the acquisition of Ziegler Group, a European citrus flavor provider, as well as the ribbon-cutting on an upgraded nutrition flavor research and customer center in Beijing, China.
“These actions will help us deliver a stronger second half of the year, and even more importantly, they are helping us advance the transformation of our company to ensure we can capitalize on significant market opportunities and deliver strong results in 2020 and beyond,” he said.
Operating profit in the Origination segment decreased 63% in the second quarter of fiscal 2019, falling to $71 million from $191 million. Merchandising and handling profit fell 58% during the quarter to $68 million, while transportation profit plunged sharply to $3 million from $31 million.
“Our Origination team executed well in the second quarter despite a raft of difficult external conditions,” said Ray G. Young, executive vice-president and chief financial officer. “As you may recall, the second quarter of 2018 was an extremely strong one for Origination as the drought in Argentina and increased purchases of U.S. crops by China in anticipation of the tariffs combined to deliver very strong margins and volumes for U.S. exports. This year, in the second quarter, the ongoing U.S.-China trade dispute and the lack of U.S. competitiveness, particularly for corn, limited North American export volumes and margins. However, we are very pleased with the way our recent growth investments and the teams' execution helped to offset some of those negative results.”
Oilseeds Processing profit fell 15% in the second quarter, to $291 million. Crushing and Origination results decreased 23%, to $150 million, while refining, packaging, biodiesel and other fell 16%. Asia increased 19% during the quarter.
“In North America, crush volumes were down, mainly due to production outages caused by high water at the company’s Quincy, Illinois, U.S., facility,” Young said. “That high water resulted in a negative impact of about $10 million for the quarter. Crush margins in South America were substantially lower on higher soybean prices, oversupply of oils and lower export demand. South American origination margins were down on lower China demand during the quarter.”
Operating profit in the Carbohydrate Solutions segment decreased 22% in the second quarter to $192 million. Starches and Sweeteners profit eased 9% during the quarter, and the company’s Bioproducts unit suffered a loss of $26 million in the period, which compared with income of $9 million in the same period a year ago.
“In Starches and Sweeteners, the North American team did a great job growing starch volumes despite lingering impacts from the flooding at our Columbus, Nebraska, U.S., complex,” Young said. “North American sweetener margins remained robust overall. The EMEA region continued to be impacted by low sugar prices, the Turkish quota on starch-based sweeteners and higher wheat prices. Flour milling margins in North America were down in a market environment that limited wheat-basis opportunities.”
In the Nutrition segment operating profit increased to $117 million in the second quarter of fiscal 2019, up from $114 million a year ago. Within the segment, WFSI profit fell to $103 million from $106 million, but animal nutrition improved to $14 million from $8 million.
Looking ahead to the back half of fiscal 2019, Young said ADM should see overall results that are higher than those in the first half of 2019, when the company was adversely affected by $125 million of weather-related effects.
“The major variable impacting our fourth-quarter performance this year will be whether we will see significant purchases of U.S. agricultural products by China, particularly ethanol,” he said. “We actually see the net impact to the new Ag Services and Oilseeds segments as somewhat neutral, if there is a resumption of agricultural trade in the fourth quarter or not. For example, if trade resumes in the fourth quarter, the North American Origination business would benefit, but the South American Origination business may lose volumes and the North American crushing business may have higher input costs in soybeans. If we don’t see a resumption of significant agricultural trade with China, particularly ethanol, well before the end of the third quarter, it would be difficult to achieve adjusted earnings per share in 2019 similar to 2018 as it would be near impossible for the ethanol margin environment to significantly improve from where we are right now.”