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OFFON

ARCHER-DANIELS-MIDLAND COMPANY

(ADM)
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ARCHER DANIELS MIDLAND : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

07/27/2021 | 04:43pm EDT

Company Overview

This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements.

ADM is a global leader in human and animal nutrition and one of the world's premier agricultural origination and processing companies. It is one of the world's leading producers of ingredients for human and animal nutrition, and other products made from nature. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in 200 countries. The Company also processes corn, oilseeds, and wheat into products for food, animal feed, chemical and energy uses. The Company also engages in the manufacturing, sale, and distribution of specialty products including natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, and other specialty food and feed ingredients. The Company uses its global asset network, business acumen, and its relationships with suppliers and customers to efficiently connect the harvest to the home thereby generating returns for our shareholders, principally from margins earned on these activities.

The Company's operations are organized, managed, and classified into three reportable business segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. Each of these segments is organized based upon the nature of products and services offered. The Company's remaining operations are not reportable business segments, as defined by the applicable accounting standard, and are classified as Other Business. Financial information with respect to the Company's reportable business segments is set forth in Note 13 of "Notes to Consolidated Financial Statements" included in Item 1 herein, "Financial Statements".

The Company's recent significant portfolio actions and announcements include:


•the announcement in March 2021 of a new ADM policy to protect forests,
biodiversity and communities, furthering the Company's commitment to
sustainable, ethical, and responsible production;
•the announcement in April 2021 of the resumption of dry mill ethanol
production;
•the announcement in May 2021 of ADM's participation as a signatory to the
German Charter for Diversity in the Workplace which aims to advance the
recognition and inclusion of diversity in companies;
•the announcement in May 2021 of a plan to build a dedicated soybean crushing
plant and refinery in North Dakota to meet fast-growing demand from food, feed,
industrial and biofuel customers, including producers of renewable diesel, which
is expected to be open in 2023;
•the announcement in June 2021 of ADM Ventures, the corporate venture capital
arm of ADM, joining the Genesis Consortium, a global alliance of venture capital
firms and corporations dedicated to supporting startups that leverage biology to
promote human and planetary health; and
•the announcement in July 2021 of an agreement to purchase, subject to
regulatory approvals, Sojaprotein, a leading European provider of non-GMO soy
ingredients.

The next phase of the Company's strategic transformation is focused on two strategic pillars: Productivity and Innovation.

The Productivity pillar includes (1) advancing the roles of the Company's Centers of Excellence in procurement, supply chain, and operations to deliver additional efficiencies across the enterprise; (2) continued roll out of the 1ADM business transformation program and implementation of improved standardized business processes; and (3) increased use of technology, analytics, and automation at production facilities, in offices, and with customers.

Innovation activities includes expansions and investments in (1) improving the customer experience, including leveraging producer relationships and enhancing the use of state-of-the-art digital technology to help customers grow; (2) sustainability-driven innovation, which encompasses the full range of products, solutions, capabilities, and commitments to serve customers' needs; and (3) growth initiatives, including organic growth to support additional capacity and meet growing demand, and mergers and acquisitions opportunities.

ADM will support both pillars with investments in technology, which include expanding digital capabilities and investing further in product research and development. All of these efforts will continue to be strengthened by the Company's ongoing commitment to Readiness.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Environmental and Social Responsibility

The Company's new policy to protect forests, biodiversity, and communities includes provisions that promote conservation of water resources and biodiversity in agricultural landscapes, promote solutions to reduce climate change and greenhouse gas emissions, and support agriculture as a means to advance sustainable development by reducing poverty and increasing food security. Additionally, the policy confirms ADM's commitment to protect human rights defenders, whistleblowers, complainants, and community spokespersons; ADM's aspiration to cooperate with all parties necessary to enable access to fair and just remediation; and the Company's non-compliance protocol for suppliers. By the end of 2022, the Company expects to achieve full traceability of its direct and indirect sourcing throughout its soy supply chains in Brazil, Paraguay, and Argentina. ADM aims to eliminate deforestation from all of the Company's supply chains by 2030.

In 2020, ADM announced new environmental goals, collectively called "Strive 35" - an ambitious plan to, by 2035, reduce absolute greenhouse gas emissions by 25 percent, reduce energy intensity by 15 percent, reduce water intensity by 10 percent, and achieve a 90 percent landfill diversion rate, as part of an aggressive plan to continue to reduce the Company's environmental footprint.

Operating Performance Indicators

The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in Item 1A, "Risk Factors" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

The Company's Ag Services and Oilseeds operations are principally agricultural commodity-based businesses where changes in selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. As a result, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Therefore, changes in revenues of these businesses do not necessarily correspond to changes in margins or gross profit. Thus, gross margins per volume or metric ton are more meaningful than gross margins as percentage of revenues.

The Company's Carbohydrate Solutions operations and Nutrition businesses also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. However, in these operations, agricultural commodity market price changes do not necessarily correlate to changes in cost of products sold. Therefore, changes in revenues of these businesses may correspond to changes in margins or gross profit. Thus, gross margin rates are more meaningful as a performance indicator in these businesses.

The Company has consolidated subsidiaries in more than 70 countries. For the majority of the Company's subsidiaries located outside the United States, the local currency is the functional currency except certain significant subsidiaries in Switzerland where Euro is the functional currency, and Brazil and Argentina where U.S. dollar is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company's business activities in Brazil and Argentina, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require remeasurement to the functional currency. Changes in revenues are expected to be correlated to changes in expenses reported by the Company caused by fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar.

The Company measures its performance using key financial metrics including net earnings, gross margins, segment operating profit, return on invested capital, EBITDA, economic value added, manufacturing expenses, and selling, general, and administrative expenses. The Company's financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, trade policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information contained within "Management's Discussion and Analysis of Financial Condition and Results of Operations."





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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Market Factors Influencing Operations or Results in the Three Months Ended June 30, 2021

The Company is subject to a variety of market factors which affect the Company's operating results. In Ag Services and Oilseeds, North America origination benefited from strong margins due to solid execution amidst a volatile market. South American origination volumes were impacted by low farmer selling activity. Ocean freight rates are at a multi-year high due to increased global demand and supply chain bottlenecks. Crushing margins benefited from tight soybean and canola/rapeseed stocks. Refined oil margins were driven by strong demand, declining global oil stocks and increased biofuels consumption. In Carbohydrate Solutions, margins in starches and sweeteners remained solid while demand showed some seasonal and post-COVID-19 strengthening. Flour demand remained softer than pre-COVID-19 levels, but with continued strong margins. Co-product prices increased during the quarter. Ethanol demand and margins strengthened on higher domestic demand. Nutrition benefited from overall strong demand in various product categories. In Human Nutrition, demand for flavors, flavor systems, specialty proteins, bioactives, and fibers were strong. In Animal Nutrition, weak demand and higher input costs as a result of COVID-19 in South America were partially offset by the growing demand in complete food for petfood and livestock. Amino acids pricing and margins improved due to a tighter global supply environment. Favorable product mix also contributed to improved margins.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Net earnings attributable to controlling interests increased $243 million from $469 million to $712 million. Segment operating profit increased $332 million from $813 million to $1.1 billion. Included in segment operating profit in the current quarter was a net charge of $15 million consisting of asset impairment and restructuring charges of $37 million, partially offset by gains on the sales of assets of $22 million. Included in segment operating profit in the prior year quarter was net income of $9 million consisting of a gain on the sale of certain assets of $23 million, partially offset by asset impairment and restructuring charges of $14 million. Adjusted segment operating profit increased $356 million to $1.2 billion due primarily to higher results in Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and higher equity earnings from the Wilmar investment, partially offset by lower results in Other Business. Corporate results were a net charge of $320 million in the current quarter compared to a net charge of $261 million in the prior year quarter. Corporate results in the current quarter included a pension settlement charge of $82 million, a mark-to-market gain of $30 million on the conversion option of the exchangeable bonds issued in August 2020 and a restructuring adjustment of $1 million. Corporate results in the prior year quarter included early debt repayment expenses of $14 million.

Income tax expense increased $33 million to $113 million. The Company's effective tax rate for the quarter ended June 30, 2021 was 13.7% compared to 14.5% for the quarter ended June 30, 2020. The change in rate was driven primarily by certain favorable discrete tax items.

© Edgar Online, source Glimpses

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