Archer-Daniels-Midland Company (ADM)

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Archer Daniels Midland (ADM)

Q2 2012 Earnings Call

January 31, 2012 9:00 am ET

Executives

Dwight Grimestad - Vice President of Investor Relations

Patricia A. Woertz - Executive Chairperson, Chief Executive Officer, President and Chairman of Executive Committee

Ray G. Young - Chief Financial Officer and Senior Vice President

Juan R. Luciano - Chief Operating officer, Executive Vice President and Member of Risk Management Committee

Craig E. Huss - Chief Risk Officer, Senior Vice President and Chairman of Risk Management Committee

Analysts

Vincent Andrews - Morgan Stanley, Research Division

David Driscoll - Citigroup Inc, Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Christina McGlone - Deutsche Bank AG, Research Division

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Christine Healy - Scotiabank Global Banking and Market, Research Division

Lindsay Mann - Goldman Sachs Group Inc., Research Division

John E. Roberts - Buckingham Research Group, Inc.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Christine McCracken - Cleveland Research Company

Ian Horowitz - Topeka Capital Markets Inc., Research Division

Presentation

Operator

Good morning, and welcome to the Archer Daniels Midland Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference call, Mr. Dwight Grimestad, Vice President, Investor Relations for Archer Daniels Midland Company. Mr. Dwight Grimestad, you may begin.

Dwight Grimestad

Thank you, Christie. Good morning, and welcome to ADM's Second Quarter Earnings Conference Call. Before we begin, I would like to remind you that we are webcasting this presentation on our website, adm.com. And the replay will also be available at that address.

For those following the presentation, please turn to Slide 2, the company's Safe Harbor statement, which says that some of the comments constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results.

Statements are based on many assumptions and factors, including availability and prices of raw materials, market conditions, operating efficiencies, access to capital and actions of government. Any changes in such assumptions or factors could produce significantly different results. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events.

Now please turn to Slide 3. On today's call, our Chairman and Chief Executive Officer, Pat Woertz, will provide an overview of the quarter. Our Senior Vice President and Chief Financial Officer, Ray Young, will review financial highlights and corporate results; and our Executive Vice President and Chief Operating Officer, Juan Luciano, will review our operations and outlook. Craig Huss, our Senior Vice President and Chief Risk Officer, will join Pat, Ray and Juan during the question-and-answer portion of the call.

Now please turn to Slide 4, and I'll turn the call over to Pat.

Patricia A. Woertz

Thank you, Dwight, and welcome, everyone, to our second quarter conference call. This morning, we reported second quarter net earnings of $80 million or $0.12 per share on a fully diluted basis. Our adjusted EPS was $0.51 and that would exclude LIFO and the impairment charges we took this quarter related to our Bioplastics business. Segment operating profit when excluding the impact of the impairment charges was $648 million.

It was a tough quarter, particularly for comparisons. Last year's segment operating profit was a record. And this quarter, we took our asset impairment charges on PHA. And the operating environment was challenging. Ongoing weakness in global oilseeds margins, lower results in corn and poor international merchandising results hurt our second quarter profits.

We remain optimistic about the long-term fundamentals of our business and the growing earnings power of our company. We continue to execute our plan to drive shareholder value. We are prioritizing capital projects, and we have adjusted our combined CapEx and M&A projections from $2 billion to $1.7 billion for this fiscal year. We are driving productivity. Our savings from these efforts should exceed $100 million when they are fully implemented. And we are returning capital to shareholders through dividend increases and share buybacks. This quarter, we returned over $300 million in capital to our shareholders.

Now I'll turn the call over to Ray.

Ray G. Young

Thanks, Pat. Slide 5 provides some financial highlights for the quarter, which I'll run through briefly. As Pat noted, segment operating profit, excluding the PHA charge, was $648 million, down from the record quarterly $1.4 billion level a year ago. Quarterly net earnings, including the charges, were $80 million, down 89% from last year's second quarter.

Looking at our effective income tax rate for the quarter, we recorded taxes at 31% to bring our 6-month rate to 30%. We continued to analyze our forecast geographic mix of earnings. But for the purposes of estimating our effective tax rate for the 2012 fiscal year, we still believe a 30% rate is a good number, inclusive of the impact of the PHA charge.

Our earnings per share were $0.12 on a fully diluted basis compared to last year's $1.14. We recorded a LIFO charge of $59 million pretax or approximately $0.06 per share compared to a $0.25 charge in the same period last year. Adjusting for specified items, including LIFO and the PHA impairment charges, ADM earned $0.51 per share compared to last year's $1.20 per share. On Chart 19 in the appendix, you can see the reconciliation of reported earnings to adjusted earnings.

We also had some significant negative mark-to-market timing effects in the Other segment, which impacted our overall results by $127 million pretax or about $0.13 per share. Our 4-quarter trailing return on invested capital of 6% including the impact of the charge was below our WACC by 30 basis points. If we excluded the impact of the charge, our 4-quarter trailing ROIC would be about 7%.

Slide 6 provides an operating profit summary in the components of our corporate line. Juan will talk about the business segment results in his update. Let me touch on a few items of significance in the corporate line. I talked about LIFO earlier. Market prices for our LIFO-based inventories rose in the second quarter, resulting in a charge of $59 million compared to a charge of $254 million last year. Our interest expense is lower due to lower interest rates and lower debt levels. Unallocated corporate costs are slightly higher due to labor costs and outside services. Last year's results had the positive impact of gains on interest rate swaps related to the debt remarketing.

Turning to the cash flow statement on Slide 7. We generated $1.4 billion in cash from operations before working capital changes in the first 6 months of 2012. Working capital was a source of cash to us of $1.6 billion, as commodity prices have fallen this fiscal year versus last year's first half when there was a large use of cash.

We made capital investments of $852 million in the first 6 months of 2012. In addition, we spent $206 million in acquisitions of assets. Our net debt decreased $1.2 billion in the first half of the year. For the quarter, we returned $304 million to shareholders in the form of dividends and share buybacks. For the first 6 months, we returned $651 million to shareholders.

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