ADM Q4 results solid, but tax and 199A dominate as Bunge off-limits

US agribusiness giant Archer Daniels Midland has revealed ‘solid’ results in the fourth quarter of 2017 during an earnings call that was dominated by questions on the US tax cut, Section 199A and Bunge.

Anticipating the most hotly discussed topic currently associated with ADM, Chairman and CEO Juan Luciano said at the outset of the Q&A section that "we are well aware of the recent stories about ADM and Bunge; we are not going to comment."

Earnings per share increased to 82 cents, versus 75 cents in the final quarter of 2016, with the agricultural services segment and the corn processing segment of the business seeing substantial rises in operating profit quarter on quarter, while oilseed processing remains under pressure.

Luciano acknowledged that the results had only been achieved after the company had "pulled levers to deliver value for shareholders."

The Agricultural Services segment saw operating profit rise to $301 million from $245 million in Q4 2016, with Corn Processing posting $261 million in the quarter, up from $255 million.

Oilseeds Processing profits declined from $239 million in 2016 to $202 million in 2017 with only Asia operations showing an uptick in performance.

Crushing and origination lost $11 million to record $44 million profit, while refining, packaging, biodiesel and other saw profits fall by a third to $64 million.

Overall that took total adjusted segment operating profits to $793 million, a fall of just over 4% versus Q4 of 2016.

No Bunge! Denied! 
Addressing the elephant in the room on the webcast from the outset, questions focused on the impact of the Trump corporate tax cut, Section 199A and the performance of the business’s corn and ethanol operations, and its outlook on biodiesel.

On the corporate tax cut, unveiled at the end of 2017, ADM’s effective tax rate would be between 20% and 23%, versus an historical effective tax rate range of 28% to 30%, according to the company’s Chief Financial Officer, Ray Young.

That would amount to approximately $100 million if the change had been implemented at the start of 2017, Young stated.

Sectioned
A side-effect of tax reform had been the unintended impact of the repeal of Section 199 – which removed a tax break for wider agriculture businesses and replaced it instead with one that favoured farmers trading with the cooperative sector.

In response to questions on the change’s impact, Luciano stated that the company had been closely involved in working with legislators to address the imbalance, which effectively froze out big international players like ADM, Bunge, Cargill and Louis Dreyfus from the heart of the US agriculture industry.

"So, it is clear that it wasn’t the intent of the revised 199A provision to make this change in the industry," Luciano told the audience, confirming that he company had received assurances from senior members of both the senate and the house that it would be "fixed legislatively certainly in the near future."

Its impact to date amounted to a "very minor impact commercially" Luciano assured, although acknowledged that it had "significant unintended consequences" and the longer the issue remains unaddressed, the more potential damage it would bring.

"If we didn’t act, we will [be negatively impacted] and of course the team has been looking at parallel potential options to offset that – we don’t want to go there, we think it will be technically it will be revised, but of course we are not going to sit idle and lose our share," Luciano said.

Bullish biodiesel
Despite the segment seeing reduced profits, ADM’s outlook for biodiesel remained strong with much of the uncertainty of 2017 stemming from the removal of the biodiesel blending credit in the US.

With oilseed supply and demand getting tighter for meal and oil, ADM’s crushing plants are "running hard; a lot of the headwinds seen last year are subsiding," Luciano told listeners.

"We are very bullish about that market," he concluded.

Corn and ethanol
Finally, on the strong performance of corn and ethanol for ADM, Luciano stated that the market looks capable of tightening and that bumper crops of the recent past were unlikely to be repeated.

"We already know enough to conclude that weather will be less favourable to crops than it has been over the last four years; we see things tightening up a little bit at a time when demand continues to be strong and that should bode well for the ags business," Luciano said.