ADM Q2 profits hit by industry headwinds, flooding

By Aerin Einstein-Curtis

- Last updated on GMT

Severe weather, high water negatively effected ADM’s Q2 © GettyImages/VSargues
Severe weather, high water negatively effected ADM’s Q2 © GettyImages/VSargues

Related tags Adm weather financial returns

Severe weather and ongoing trade challenges between the US and China contributed to a decline in second-quarter earnings for Archer Daniels Midland (ADM).

The Illinois-based agri-giant released details regarding its second-quarter performance on Thursday (August 1). The financial period covered ended on June 30.

ADM faced several “external headwinds”​ during the first half of the year, said Juan Luciano, company chairman and CEO, on an earnings conference call.

Challenges related to extreme weather cost the company about $65m in the second quarter and $125m for the first half of the year, said the CEO.

Net earnings attributable to ADM were $235m for the quarter compared to $566m for the same period last year.

Weather impacts

AMD reported that its merchandising and handling results were lower when compared to the extremely strong second quarter of 2018. Despite solid execution, second quarter 2019 volumes and margins in North America were impacted by continued high water conditions on US rivers, which limited river asset utilization, and the competitiveness of US crops, particularly corn, in export markets, it said.

Transportation was down year over-year, as the unfavorable river conditions throughout the quarter limited barge volumes and margins, it added.

Across origination, high water conditions were more severe than originally anticipated at the beginning of the quarter, causing a negative impact of approximately $40m, reported the trader.

Aggressive action 

ADM took aggressive action in the face of challenging external conditions, and is now confident that its work over the first half of the year will help deliver a stronger back half, said Luciano.

Also the transformative changes it has made are positioning ADM to capitalize on significant market opportunities, and grow earnings and returns in 2020 and beyond, he said. 

“Although the timing is uncertain, we remain confident in the resumption of significant food and agricultural trade flows between the US and China, which will help bolster margins in the US grain export and ethanol industries,”​ he added.

The trader has been reorganizing, reducing management layers, centralizing activities, cutting positions and providing early retirement for select employees based in the US and Canada, said Luciano. An agreement with Cargill to exchange grain elevators was also part of such optimization efforts.

“We simplified our operational model by combining our origination and oilseeds business segments into a single business, ag services and oilseeds, which we'll begin reporting in the third quarter,”​ he said. 

ASF impact 

The CEO said the company is seeing early signs of how African Swine Fever (ASF) might impact global animal protein markets, and eventually support incremental soybean meal demand in key meat-producing regions outside of China.

He added that ADM was harvesting the benefits of Neovia and other growth investments.

Origination, nutrition business

Overall, the adjusted segment operating profit declined 26% from the same period last year, said Ray Young, CFO with ADM.

In the origination segment, adjusted results fell from $191m in 2018 to $71m for the second quarter this year, the company said.

“The second quarter of 2018 was an extremely strong one for origination as the drought in Argentina and increased purchases of US crops by China in anticipation of the tariffs combined to deliver very strong margins and volumes for US exports,” ​said Young. “This year, in the second quarter, the ongoing US-China trade dispute and the lack of US competitiveness, particularly for corn, limited North American export volumes and margins.”

Within the segment, destination marketing saw a strong performance in Latin America and Egypt and the stevedoring business had “impressive year-over-year strength,”​ he said. However, transportation saw challenges from river conditions, which limited barge volume and increased costs – high water had a “negative impact of about $40m.”

In the oilseeds segment, results were $291m for the quarter, compared to $341m in 2018, the company said.

Strong demand supported crush margins in both North American and in the Europe, Middle East and Africa (EMEA) region. However, crush volumes fell in North America when high water caused production halts at ADM’s facility in Quincy, Illinois, it reported.

South American crush margins decreased, based on high soybean prices, high oil supply and lacking export demand, he said.

“South American origination margins were down on lower China demand during the quarter.”

Total nutrition results improved from $114m in 2018 to $117m this year, ADM reported. Within the segment, animal nutrition returned $14m, up from $8m last year.

The uptick was driven mainly from the Neovia acquisition, which helped offset a drop in margins for lysine, said Young.

Nutrition's performance in the third quarter should be substantially higher, approaching double that of the $67m of operating profit in the third quarter of 2018. 

“Animal nutrition should be up year-over-year, benefiting from the improvements in premix margins," ​he said.

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