Archer-Daniels-Midland Company (ADM) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Archer Daniels Midland Company Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Ms. Ruth Ann Wisener, Vice President, Investor Relations for Archer Daniels Midland Company. Ms. Wisener, you may begin.

Thank you. 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. 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 governments. 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. 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 Chief Financial Officer, Ray Young, will review financial highlights and corporate results. Our Chief Operating Officer, Juan Luciano, will review our operations. And then, Craig Huss, our Chief Risk Officer, will join Pat, Ray and Juan during the question-and-answer portion of the call. Please turn to Slide 4. I will now turn the call over to Pat.

Thank you, Ruth Ann, and welcome, everyone, to our second quarter conference call. This morning, we reported second quarter net earnings of $223 million or $0.34 per share on a diluted basis. Our adjusted EPS was $0.46 per share. Segment operating profit was $647 million. The team managed well through this period as tight U.S. crop supplies reduced overall volumes. Also, our corn results improved significantly amid a volatile ethanol industry conditions. During the quarter, we continue to work to improve the company's future returns and earnings power over the cycle. Our effort to unlock cash reached $2 billion, with the team reaching this milestone a half year ahead of schedule. And in costs, we made solid progress toward our goal of $200 million in additional cost reductions by the end of 2014. Our cash flow in the second quarter was strong, and we reduced our debt significantly. We've received 6 regulatory approvals for our acquisition of GrainCorp in Australia, and we await the final 3. Looking ahead, we will be managing through tight crop supplies until the forecast large, but delayed U.S. harvest. Now, I'll turn the call over to Ray.

Thanks, Pat. Slide 5 provides some financial highlights for the quarter, which I'll run through quickly. Quarterly segment operating profit was $647 million, up 19% from last year's $544 million. Our effective tax rate for the quarter was 29%, down slightly from the 30% rate in the same quarter last year. On a fully diluted basis, our earnings per share were $0.34 compared to last year's $0.43. Our adjusted earnings were $0.46 per share compared to last year's $0.38 per share. On Chart 17 in the Appendix, you can see the reconciliation of reported earnings to adjusted earnings for the periods ending June 30. For this quarter, we had a LIFO charge of $39 million or $0.04 per share. In addition, we had mark-to-market valuation losses on foreign currency hedges of $51 million or $0.05 per share related to our planned purchase of GrainCorp. During the quarter, we established some currency hedges for the purchase and the Australian dollar subsequently depreciated, resulting in these valuation losses. In addition, we updated our provision related to the previously disclosed FCPA matter. We increased this provision by $29 million to a total of $54 million, based upon recent progress in discussions with the U.S. regulators examining the case. Our trailing LIFO adjusted 4 quarter average ROIC of 5.2% was 50 basis points below our WACC of 5.7%. Excluding specified items, our trailing 4 quarter average adjusted ROIC was also 5.7%. Slide 6 provides an operating profit summary and the components of our corporate line. Juan will talk about the segment results in his update. Let me touch on a few items of significance in the corporate sector. I mentioned LIFO earlier, a charge of $39 million for the quarter as rising commodity prices during the quarter impacted our inventory valuations. That's compared to a gain of $50 million 1 year ago. Interest expense of $104 million for the quarter, lower than prior year, due to lower net debt levels. Corporate expenses of $71 million were up from the $67 million level 1 year ago as we incurred some additional projects-related costs. I mentioned the mark-to-market valuation loss of $51 million related to our Australian dollar hedging, and I also mentioned the increased provision related to the FCPA matter. And finally, on the other of $65 million, this includes a mark-to-market valuation losses related to our investment in CIP. Turning to the cash flow statement on Slide 7. We present here the cash flow statement for the 6 months ending June 30, 2013, compared to the same period the prior year. We generated $700 million from operations before working capital changes in the first half of 2013, compared to $1.1 billion last year. Working capital changes were source of $1.6 billion of cash in the period, compared to last year when there were significant use of cash. The company's efforts to focus on working capital efficiency were evident in our first half cash flow results. Total capital spending for the 6 months was $442 million, and acquisitions amounted to $16 million. After changes in working capital and investments, our free cash flow for the first half of 2013 was almost $1.9 billion compared to a large use of cash of $800 million last year. With the strong cash flows, we were able to reduce drawings on our working capital lines such as commercial paper borrowings. We did restart repurchasing shares in the quarter in a modest amount. We finished out the quarter with an average outstanding of 663 million shares on a fully diluted basis. Slide 6 shows the highlights of our balance sheet as of June 30 for both 2013 and 2012. Cash on hand was approximately $2 billion, up from the $500 million from the prior year. Our operating working capital was about $12 billion, down from the $14.6 billion level last year or a reduction of $2.6 billion. Of this reduction, about $1.6 billion was related to lower quantities of inventory. Total debt was about $7.5 billion, resulting in a net debt balance, that is debt less cash of $5.5 billion, down significantly from the 2012 level of $8.9 billion. The $5.5 billion net debt balance represents the lowest level at mid-year since 2007. Our shareholders' equity of $19 billion is about $1 billion higher than the level last year. Our ratio of net debt to total capital, excluding cash from gross debt, is 22%, much improved from the June 30, 2012, level of 33%. So we are reducing leverage and maintaining a very strong balance sheet. We have $8 billion in available global credit capacity at end of June. If you add the available cash, we had access to about $10 billion of liquidity. Clearly, we have a balance sheet strong enough that could easily finance the GrainCorp acquisition and handle the seasonal increase in working capital needs as we enter the North American harvest later this year. Next, Juan will take us through an operational review of the quarter. Juan?

Thanks, Ray. Good morning to everyone on the call. Beginning on Slide 9, I will take you through the highlights of each of our business segments. Oilseeds operating profit in the second quarter was $321 million, down $10 million from the same period one year earlier. Crushing and origination operating profit was $185 million, up $35 million from the year ago quarter. European crushing results improved significantly year-over-year as delays in the arrival of South American meal contributed to stronger margins. In North America, tighter crop supplies resulted in weaker soy and softseed crush margins. South American operations recovered from the first quarter and generated strong overall results equivalent to the year ago quarter. The team in South America continued to manage through logistical challenges and we saw improved export volumes and margins. In Paraguay, our new soybean processing plant ran at full capacity for the quarter. Refining, packaging, biodiesel and other generated a profit of $93 million for the quarter, up $9 million on the stronger European results. Cocoa and other results decreased $58 million due to lower margins on businesses contracted in earlier quarters. Oilseeds results in Asia for the quarter were up $4 million from the same period last year, principally reflecting our share of the improved results from Wilmar International Ltd. Please turn to Slide 10. Corn processing operating profit of $223 million represented an increase of $149 million from the same period 1 year earlier. Sweeteners and starches operating profit decreased $9 million to $126 million. Excluding the impact of corn hedge ineffectiveness, sweeteners and starches results improved by $25 million on steady North American sales. Bioproducts results increased $158 million to $97 million as ethanol results improved significantly amid volatile industry conditions. Turning to Slide 11. You will see a review of our Agricultural Services segment. Operating profit was $81 million, down $33 million when excluding Gruma from the year ago result. Merchandising and handling earnings declined $16 million to $14 million. The impact of last year's drought continued to limit U.S. origination and export volumes. And international merchandising results declined on lower margins. Results this quarter were also reduced by some non-recordable expenses. Transportation results decreased $14 million to $3 million as lower U.S. export volumes reduced barge freight utilization. Milling and other results remained steady, excluding last year's Gruma earnings, as the milling business continued to perform well. We sold our stake in Gruma last December. Looking ahead, the impact of last summer's U.S. drought continues as U.S. crop supplies remain tight. At the same time, the crops in the field seems to be developing well with 64% of the corn crop rated good to excellent compared to 23% the year ago. With high prices for last year's crop and lower prices for the crops coming this fall, the market is inverted. We have to manage this inverse carefully so we don't carry on -- carry high-cost inventory into a low-cost environment. In terms of timing, this spring rain delayed plantings and the recent cold weather will lead to late harvest this fall. Slide 12 is a progress update on our efforts around what we call the 3 Cs: capital, cost and cash. Through the first half of 2013 our CapEx is in line with our production of $1 billion. We continue to focus our growth investments outside the U S. In the area of costs, we have already implemented steps that will deliver about a 1/3 of our target of an additional $200 million in cost reductions by the end of 2014. These savings will come from improvements in energy and working efficiency, repairs and maintenance, process technology and procurement. And we have continued to strengthen our cash position. After our team achieved our $1 billion challenge several months ahead of schedule last year, we determined to find the second billion dollars. And as Pat mentioned, we now achieved that goal, once again, ahead of schedule. I'm proud of the team's effort in capital, costs and cash that are enhancing ADM's future returns and earnings power. Pat?

Thank you, Juan. So let me summarize. Segment operating profit up 19%. Ag Services down on tight U.S. supplies. Oilseeds had strong crush and origination, but weak cocoa results. Corn was up with volatile ethanol conditions. And we have to carefully manage the inverse as we look toward a later harvest. And very good ahead of schedule progress on the 3 Cs. Now before Craig Huss joins Juan, Ray and me for the Q&A, I wanted to let you know that this will be Craig's last quarterly call. After 37 years with ADM, he is retiring later this year. Craig has been a huge presence at ADM: his size and voice, and certainly, his contributions. So thank you very much, Craig, for all of your efforts. And with that, operator, if you'll please open the line for questions.

[Operator Instructions] And your first question comes from the line of Tim Tiberio with Miller Tabak.

A very quick question. Looking forward as the cost basis in both beans and corn have collapsed over the last few weeks, I suggest that it's going to be a challenging environment managing this inversion between build and a new corn crop. But I guess on the margin, are you feeling a little bit better about supply since the last quarterly call as maybe farmers are more willing to sell, or either around the margin are you becoming a little bit more cautious?

Tim, this is Craig. I would say that you've heard a couple of times that the crop is going to be a little delayed. And I think that the main reason for that is this crop is so healthy and it's 64% good to excellent. I think we'll have bigger crops. They may be a couple of weeks later, but we are recharging the process where our storage should be full and it should help us going forward. As far as the farmer selling, he probably will be a reluctant seller at some point, but -- for example, the $14 billion ballpark corn crop, there's going to be -- there will be plenty to move.

Okay. And then just moving on to the cocoa business. Any updates as far as your strategy there? And then I guess, if there is not the potential to divest this in the near term, based on your comments on the prior call, do you expect that you'll be able to get some pricing increases or at least margin improvement compared to the first half and the second half?

Tim, certainly conditions that have negatively impacted our cocoa business have subsided or moderated a bit. And this isn't the business we have to sell. We've been doing a very careful portfolio review. And as I know you'll understand, if the discussions are ongoing or if there's a process underway, it's premature to comment on that process. I will tell you that we're very disciplined and we look at portfolio importantly. It needs -- we need to take into account the both financial objectives and how it fits into our strategy. So in terms of confirming that we have -- we're taking a look at this, I can say that, but I can't say any more than that.

Okay. And just lastly, as far as the improvement in cash flow, should we expect any updates on your new initiatives forecast in the coming quarters, or are you still waiting for the GrainCorp transaction and the harvest to come in before making any final decisions on that?

Well, you can imagine if we have about $10 billion in cash that we have lots of opportunity and options. And of course, you -- as we've talked about the GrainCorp acquisition, we still believe it's on track to close by the end of the year. We hope for that. And we can take the uses of cash, including -- we started back our share buyback program. We are going into a harvest, as you know. So it's just a normal cycle. We'll have a need for cash. But we have lots of flexibility and extremely strong balance sheet.

Next question comes from the line of Dave Driscoll with Citi Research.

Craig, I want to wish you the best. I've always appreciated your insights and you really will be missed. Thanks for all the years' great stuff, and good luck in retirement. Certainly well earned.

Thanks very much.

Pat, want to ask you a few questions related to ethanol and the Renewable Fuel Standard, the RFS. The first one is just related to -- do you believe that the independent refiners have a legitimate complaint on the RIN costs? And I would just observe that, frankly, on their conference calls in this recent quarterly report, I mean, they seem to be going crazy on this issue. But I'd really like to hear your version of this RIN issue and whether or not they have a legitimate complaint. And then I have a follow-up related to ethanol, if I may.

Yes, this is Juan, David. Listen, the market today provides an incentive for people to blend ethanol. And I would argue that E85, for those people that are pricing it correctly, it has -- we have seen some of the volumes for these distributors, if you would, tripled. So there is an opportunity there. There is elasticity and good demand will come if this ethanol is properly priced and that passed to the consumer. There is also, if you've seen the very level in several countries -- in several states and we have counted already 10 states in which all the regulations have been -- are in place for this to be implemented. So we believe that people have options to blend more. And so we believe that the RIN price is a reaction to their behavior and they could price ethanol more effectively. That will increase demand and they don't need to resort to RINs. So that's my position.

Do you believe that there's any movement in Congress that is sufficient enough to alter the RFS?

I think to the extent that the RFS impact us, we feel very confident that, that regulation will be maintained.

All right. Last question on this. It's just E15, in particular. I think by my work, there is about 20 stations in the country that sell E15 and I believe that's about 6 states. So kind of -- what do you assess here on E15 at the moment? And maybe more importantly, do you think that this is really going to catch fire and that we're going to see a heck of a lot more E15 stations throughout the United States in 2014?

Yes, David. I think that we said it before that it was going to be slow and we didn't expect a material volume in 2013. We think that as people get more comfortable and more states have the regulations in place, this will start to proliferate. Also as people tried this effectively, I think that the incentives, especially on a larger corn crop, the incentive to blend ethanol will be there.

Would you then characterize the outlook related to this much better corn crop, much cheaper corn crop? Would you characterize the ethanol outlook as very good for 2014?

I think we said it before, David, that we are very optimistic about the ethanol future for '14 and '15.

Your next question comes from the line of Ann Duignan with JPMorgan.

As we look to this large crop, there are a lot of comparisons with 2009 in terms of crop year. I'm wondering if you could comment by segment, if that is the case and we get a very large crop, large volumes, is there any reason why ADM will impose the kind of operating performance in '14 that it did back in 2010? Are there any structural differences such as ethanol margins that would cause you not to deliver very strong margins next year?

Ann, let me start and then maybe Juan wants to go through by business a little more. Given that the U.S. is likely to produce a record crop, as your statement indicated, we think conditions are definitely unfolding in a way that would produce some very good conditions for us. But I would add, even more importantly, it's the work that we've undertaken as well with the progress on cash and costs and capital, as well as acquisitions and our investments in a higher return area that position us. We're thinking very well about the opportunities in 2014, a potentially very, very good environment and very good work that when that environment hits can position us for higher returns. Maybe by division, Juan can comment.

Sure. Ann, the way I look at the conditions in the future and maybe you can take Q4 since it's going to be a quarter that we're going to see -- start to see the impact of the new crop, we will see in that environment certainly North American crush utilizations coming up in oilseeds. We will have seen an improved softseed margin environment with a big canola growth in Canada. I think we will see, with lower corn prices, that will favor the relationship between corn products and some of the substitutes, so product inclusion should increase. I think you're going to see better blend in economics. They will entice more blending in terms of ethanol, maybe even improved sweeteners exports as you see a better relationship may be potentially between corn and substitutes like sugar. I think, fundamentally, what we see is that a larger crop will allow us for a better utilization of some of the investments that we've done in the past. So you take that is a source of improved earnings. As I said before, I think that we are optimistic about ethanol margins for '14 and '15. And certainly, a larger corn crop will -- or crops in general will provide ag services and opportunity to utilize all the asset footprint that we have in North America more fully. So I think the opportunity is there for potentially big results.

Okay. That was good color. I appreciate it. And just as a follow-up, is there any permanent negative margin impact on the fact that U.S. farmers have now expanded their on-farm storage capabilities?

No, I don't think it is at all. I think the on-farm storage, it just increases total storage and it may delay at times, the point at which they sell the crop. But they have the same pressures and incentives today they've always had is to forward thinking what they think it will do. But I -- it may take a little pressure off selling at harvest. But overall, I don't think it makes a major change.

Your next question comes from the line of Ken Zaslow with BMO Capital Markets.

Obviously, I guess an intricate part of the transition over the last couple of years and obviously even further back, can you talk about how, either you, Craig, how are you going to do a succession plan? Who's going to take over your spot and how that's going to work over the next couple of years?

I'm going to ask Juan to comment on that. Thanks.

Yes, Ken. I think we have explained it before. We have a risk committee that Craig currently chairs, and we have the business president there and Ray and myself and other people. In this role, Craig works very closely with our business unit heads as they manage their commodity risks within their segments. So Craig's responsibilities will be transitioned to ensure our ongoing oversight on commodity risk management. But this is a smooth transition. This is an area in which, although we're certainly going to miss Craig tremendously as being a great coworker and team member, we have huge expertise and bench strength in these areas. So I think that with the other participants in the chair -- in the committee, I think we're going to be fine.

Okay. My other question I have is -- obviously, with the big crop, your Ag Services is going to have a lot of volume. Can you talk about the margin side of it because there seems to be a lot of crop out there that's not the same sort of dislocation? Can you talk about how you can maximize profit to be maybe like the 2010 and 2011 environment or does it change where you got a lot of volume at a much lower margin structure? Can you just give us a little bit of a balancing act here because I think that kind of helps us all kind of think about the future for ADM?

Sure, this is Craig. I think, first, a large crop doesn't necessarily squeeze margins anymore than a small crop does as people are pushing to whatever capacity they can through their assets. So I don't like to tie those 2 together. We will meet some demand. But we have all these assets that we've talked about for the year that are not being utilized. And we, as the largest storer of grain in the United States, we will be filling those assets. And we'll manage those depending on the cost of carry, et cetera. But I think we've had 2 substandard crops and this is a recharge that is just essential for ADM and we plan on taking advantage of it.

Do you think -- as there's plentiful crops outside the U.S., is there the opportunity to, again, maximize the whole chain of crops or does that change the direction of how much profitability you could actually make in the Ag Services business?

We look at this, Ken. We think that potentially the U.S. could go a little bit lower in terms of exports in the future because there are other people that are growing their corn acreage. But we look at this in the sense of -- through the value chain. There are so many ways in which we can make money. And we'll look at this from Ag Services perspective, providing different services through the chain and we feel very comfortable about that. Demand continues to be very strong around the world. If you look at, for example, the imports of China, how they're rising to the different commodities. So we do believe that our rolling moving crops and handling crops around the world will benefit significantly with the largest crop around the world. Even our international merchandisers will profit from that as we have invested, as you know, in many, many units and the world. So we feel very good about the potential impact of large crops everywhere in our business.

Your next question comes from the line of Farha Aslam with Stephens.

Two questions, the first is on GrainCorp. Recently. we've seen press articles and increasingly you're seeing a lot of talk related to the election, regarding GrainCorp. Do you have any concerns about the timing and whether the transaction will be approved?

Well, our timing is still within the process of our expectations. You never know when a new election could have been called when we look back earlier in the year. But we believe that we are -- we've worked with both the Australian regulatory agencies, as well as outside and we're pleased that we have the 6 approvals that I mentioned. And the 3 that remain include FIRB in Australia, South Korea and MOFCOM in China. And I think we're on track for what we thought would be a good taste. We're very respectful of processes and each one have their own regulatory processes to go through and answer questions and so forth. And I feel like we're on track.

Great, that's helpful. And then the second thing is regarding South America. How did you think your team did in terms of opportunities versus challenges? And going forward, into next year, where can you look at that business growing because that is an investment area for you?

Yes, I think the team did a tremendous job in the second quarter. Remember, I mentioned in the first quarter we had 2 impacts, the impact of higher trucking costs that we couldn't hedge; and then the impact of less origination as the farmer was not selling. The team came back strongly in the second quarter, and I think execution was beautiful. In terms of our investments there, the Paraguay crop -- the Paraguay oilseeds plants continues to perform very, very well, running at 100% capacity. And we continue to evaluate other investments, both in the area of logistics in the area of processing. As you described, that's an area of investment for us or growth for us, and we have a very, very good team running it.

And just one comment. Could you just comment on crush margins in South America and perhaps the soy crush margins around the world, kind of what you're seeing over the near term and then how do you express -- expect that to progress going into next year?

Yes, crush margins in South America were good in Paraguay and Bolivia. There was a little bit less in Brazil as part of the issue is trying to export mill and you get to queue in the ports. So -- then everybody turns into the domestic market and there is some pressure there. Europe margins were very good when compared to last year. Obviously, some of the delays in South American export, they have provided some opportunity for better margins and soybean in Europe. And biodiesel with less imports and tighter oil inventories was also provided some good margin environment for rapeseed in Europe. South America -- North America, obviously some pressure and you will pressure in the next quarter as we're dealing with the tight crop situation and the inverse that we mentioned before.

And then the ability of managing soy crush into next year because we will have a more ample harvest, and do you think capacity in terms of supply demand going into next year, could you just kind of share with us about profit outlook for that business?

We continue to see demand growing, and our customers have been reporting very healthy earnings and demand, so we feel very good about it.

Question comes from the line of Vincent Andrews with Morgan Stanley.

So question is just you noted that ethanol was volatile in the quarter. So could you just give us some insight into what was driving that volatility and also what the team did well as opposed to results that you posted?

Yes, I think you pointed correctly, the team did a very good job. What happened there probably during the quarter is we saw some reductions in inventory early in the quarter. And obviously, that bodes well for margins. Then when margin increased -- this is an industry that still has overcapacity. It's a little bit immature industry. Some of these players are undercapitalized, if you will, so a lot of people tend to run for cash. So we saw basically capacity coming back and we saw at the end of the quarter a little bit of a stabilization of that reduction in inventory. And maybe even, to be honest, in July, we saw a little bit of a creep in inventory or a creep in -- yes, in inventory for a few days. So they continue to be volatile. I think that the industry is more disciplined. I think this is a time of the year in which most of us, before the big harvest and before the winter, people tend to do some maintenance to their plants. So we see that may be playing out, those dynamics playing out over the next couple of months. But that's kind of what's happened during the quarter, better margins at the beginning of inventory decline then some people came back into production and that puts some pressure to margins that moved from late June into July.

Vincent, maybe adding to Juan's point a little bit. I think we always have thought that there'd be continued volatility even through 2013, until you get the additional bump of the RFS. But import volumes should also decline as we kind of go into the fall. And the integrated network we have, I think, it's a core competency to be able to serve the business and move those volumes around as needed.

Okay. And then if we think about '14 and you just referenced the further step-up into the RFS, which theoretically at some point will either forces the RIN issue or forces E15 or forces some type of legislative response. Your optimism -- or maybe, Juan, give us an update on your optimism and just clarify whether -- how reliant it is on the RFS for 2014 staying where it is?

Maybe I'll start with Washington, and Juan can comment on the economics, which I think economics drive is more so almost than anything else. We did have hearings take place this summer and we heard that the RFS is an important issue. It is important for assuring market access to ethanol. The producers don't control the infrastructure. So consumer's ability to buy E15, E85, et cetera, continues to be important. We heard the White House reiterated support. I think it called it the backbone of the climate policy, included RFS. So you have to remember, for Congress to try to pass anything, there needs to be agreement in -- agreement by both houses and both parties, et cetera. So I think that's the less likely pressure. I think you'll see more the pressure of economics associated with additional blending and RIN sanity somewhat happening.

That's all right. I just want to emphasize what Pat just said in the sense that I think that the size of the corn crop will bring a very strong economic incentive to blend. I think we all want lower gasoline prices. I think that E15 is there and E85 is there. Listen, I lived in Brazil 20 years ago and we were using higher blend rates than 15% and this was -- these were cars produced by the same manufacturers of cars here. So I think that economic incentive on passing that to the consumer will prevail.

Okay. And then separately, just looking at your ROIC calculation, the one line in there, the interest-bearing liabilities, obviously that's been coming down as crop prices have gone down, your working capital has gone down. How low do you think that line can go as we move into next year's crop?

Well, Vincent, this is Ray here. I think in my comments, part of the reason why we're building up the balance sheet flexibility is that if there's an opportunity for us to accumulate some inventory and benefit from the carry, we will. And so therefore, from a capital perspective, clearly we're managing this thing very, very carefully and managing both the capital investments and also inventory and working capital. But we want -- but we're preparing our balance sheet in order to take advantage of carry opportunities as well. So as we enter the fourth quarter, if there are carry opportunities, we will invest. And we will benefit from that in terms of our financial results, including our returns.

The next question comes from Christine McCracken with Cleveland Research.

Just wanted to talk on a -- or had a couple of questions, first on -- relative to the last question on ethanol. You mentioned the issue of overcapacity. We've seen several smaller plants here over the last couple of months being acquired. The expectation is that they'll reopen and add back to some of the production given the margins that we've seen. Is there any risk that we add to the overcapacity situation? Is this something that ADM is looking at as some of these plants now are changing hands?

Christine, we said before this is part of the volatility we keep on referring to. This is, as I said, a relatively new market. It is a very fragmented market. It needs to go through consolidation and there is going to be a period of pain until we gain into that full capacity. As I explained based on the dynamics that I've seen before, we are optimistic for '14 and 15, but '13 is going to still have periods of great margins and periods of some margin pressure as we've seen recently.

Christine, we remember that, that 15 billion gallons is really how the industry has been built out to meet that requirement in 2015. And some of that is not running. Some of it maybe is a bit more -- or permanently might fold and maybe others will change hands, but we don't see it being built in a greater capacity than that 15 billion gallons.

I'm just curious on your sweeteners and starches because you did say, I think, in your comments that things were a little stronger there. And that's a little different, I think, than some of the CSD volume data that we've seen and the comments by some of your competitors. So I'm curious if you think you're gaining share or is there some other strength in that business that we haven't seen.

We've seen liquid sweeteners volumes that were in line with our expectations, probably slightly lower than last year. But the volumes to Mexico continues strong for us. So all in all, we reported a very solid quarter and we saw solid demand, yes.

And going forward, given how, I guess, soft sugar prices are and your competitive position, you're still fairly confident, I think, based on your comments?

Going forward in Q3, I see we expect volumes probably in line with last year and some down seasonality on Mexico, but as I said, normal year-to-year seasonality.

Your next question comes from the line of Diane Geissler with CLSA.

I wanted to ask about your capital spending plan. I know that you've talked over the last few quarters about reducing CapEx this year. I think you're running in the billion dollar range. One of your competitors on their call recently talked about -- that the industry had added a lot of capacity, greenfield capacity, over the last few years in emerging markets and that maybe the growth in volume hadn't been there really to support it because of what happened with commodity prices. So what is your take, as we look over the course of big crops this year, I'm sure we'll get big plants in Brazil next year about CapEx versus acquisitions in terms of building your -- obviously, you're making a big acquisition in Australia. But just in the emerging markets, in particular, how do you view that? Do you see additional capacity needed above and beyond what you already have in the works or are you more inclined to acquire it?

Yes, it depends. Our preference normally, Diane, is to go and try to acquire so we continue to consolidate the market. We've done that with Elstar in Poland, we're doing now with GrainCorp as we gain access to geographies we were not present in. When we cannot find that, like in the case of Paraguay, we build. So I would say probably we could build more in terms of, for example, South America infrastructure, if ports or logistics. And in terms of processing capacity, our preference will be to buy and try to consolidate the market.

You think now is the term to buy given that it seems like the profitability levels in South America and North America for that matter seem to be improving?

We have had a very -- having the world as the opportunity, we track all these in our pipeline around the world and when properties get in our range, that's when we activate the processes. So we are looking at our preferred properties around the world. So I will not show my hand into saying which area we're looking at, but we have a very disciplined process to allocate that $ 1 billion.

And then I guess for Ray, can you tell me what you think your optimum leverage ratio should be? I appreciate you're obviously going to have some working capital flows here coming down because of what's happened with the commodity prices. So you'll have increased cash position as you monetize higher value inventory. I guess, where do you think the optimum leverage ratio should be? And what are you going to do with your excess cash flow to the extent that Juan can't find stuff he wants to buy cheap enough?

Diane, I've always indicated that in this industry, it's very important to have a strong balance sheet. And hence, maintaining solid investment grade credit ratings is important priority for us. And so when we look at our leverage position -- again, we look at leverage, there's balance sheet metrics, there is income statement metrics. We look at those things very, very carefully. I think our balance sheet metrics right now are very, very strong. Some of our income statement metrics are a little weaker because we're still living through the residual impacts of the 2012 U.S. summer drought. But going forward, if you think it about, this company is a cash machine when it comes to generating cash. When you look at the past couple of years before the drought, we were generating $2 billion to $2.5 billion in cash flows before working capital and before CapEx. And so if Juan wants to look for investment opportunities, there's no doubt about that. But even with those investment opportunities, assuming we continue to grow this company and generate the cash flow, I do feel that we'll have opportunities in the future to provide additional returns to our shareholders. We always believe in a balanced approach towards investing the free cash flow of this company between internal projects and for our shareholders.

Well, I guess, what's behind the question is I kind of thought you were already getting that done in terms of maintaining your investment grade rating with the leverage ratios that you had previously. So I'm just trying to get a feel for it, the reason why you made such a significant debt paydown this quarter is because you're positioning your balance sheet for the closure of GrainCorp, or is it just an overall more conservative kind of step-down in where you think your leverage ratio should be...

No, no. I don't think you should read that. We're preparing ourselves for GrainCorp and we're preparing ourselves for potentially a very fearful [ph] harvest where there'll be some significant opportunities for us to invest in inventory to benefit from that carry. So that's what we're preparing the balance sheet for those opportunities right now.

Diane, I'll even reinforce what Ray has said. It's not a more conservative approach at all. I think we need to think about as year end approaches the year, there will be some significant needs for cash. And we are positioned to take care of those with a very strong balance sheet.

The next question comes from the line of Ann Gurkin with Davenport.

Just to return to the working capital question. As we think about the year, how should we think about that number? If you can help me again with the trajectory of that working capital needs given the larger crops?

It's tough to estimate that Ann, because it will be a function of what the opportunities look like as we get to the fourth quarter, the timing of the harvest. So that's part of the reason why I want to make sure we have full balance sheet flexibility right now because we could build up significant inventories if the opportunities were there or it could get delayed. So it's -- I don't have a point estimate in terms of what our inventory balance will be at the end of the calendar year. But I can assure you that if there are opportunities, we will take advantage of it.

That's great. And then ROIC at 5.7%, I think you said in the quarter or the trailing 12 months. Is that 200 basis point target still a good target? Or does that need to be adjusted?

No, no. It's still a good target. The way I kind of loo at it, I think our conditions -- again, we're still living through the residual impacts of last year. I kind of view ourselves pretty well near the trough right now. And so to the extent that we're still earning our whack at the trough, I think that's not a bad performance. Going forward and look towards 2014 when you get back to more normal conditions with greater earnings power and our continued focus on ensuring their invested capital base is low, I'm confident we're going to see improvements in the future.

Okay. And then will you comment on the relationship between sugar and HFCS, the gap -- the price gap you think where consumers were considering switching from one to the other?

Listen, when we look at these, there is always a small volume maybe in Mexico that some of the people switch. But in reality, most of our customers prefer to deal with the liquid. And we're very closed to a big corn crop that probably will bring all those prices much more in alignment. So we shouldn't magnify the impact of this.

Your next question comes from the line of Eric Larson with CL King & Associates.

Just a couple of questions. First of all, arguably, your second quarter was probably, just from a timing preview, probably your more -- would have been your most challenging quarter. Delayed harvest here, though, is probably reality in the third quarter. Now I'm really focused on 2014, but in the near term, you had really good soy crush margins 1 year ago. You did lose money in ethanol in Q3 1 year ago, but could the third quarter be a little more challenging than you may have anticipated earlier?

Eric, Juan here. Listen, Q3 presents a lot of challenges for us. Think about we are still dealing with the big inverse that we need to deal through. Yes, we're going to have something a big growth, but in the places where we are located which is in the corn belt, the harvest will probably happen late September, beginning of October, which is more Q4 tilted. So I would say, Ag Services will continue to suffer through low margins in Q3. And we're going to some pressure increasing in oilseeds as we fight with a very tight balance sheet. So Q3 will still be a tough quarter where we'll not see the full relief of the harvest yet.

Yes, exactly. And it's just a transition quarter anyway. It really reflects last year's crop harvest. It's nothing to do with the going forward. But it also looks like you moved a fair amount of high-cost grain through your P&L this quarter. And if we can get anywhere close to what -- if we can put in the bin what the harvest numbers and projections are this year, you're going to be replenishing with a lot lower cost grain. So it seems like you should be pretty well positioned on your inverse. Is that a fair assumption?

We like to say yes. We like to think that we manage well through the inverse. I think that the guys have done a good job of reducing inventories as we face these. I mean, you've seen it in the balance sheet. You've seen it in the billion dollar challenge. So I think we have a very experienced teams that know how to work through this and that's where our footprint and our integrated model shines. So we feel pretty good.

Okay. Just a quick question for Ray. Ray, you were 50 basis points below WACC on returns in the quarter, which given the seasonally and cyclically very depressed Q2, that was a big performance. Is there any way to quantify what your cost cutting and your return measures, your working capital improvements may have benefited your return numbers in the quarter year-over-year?

We haven't quantified it exactly, but there's no doubt reducing our invested capital base contributed significantly towards our results here. And then the prior cost cutting that we did last year and as Juan indicated, we've made good progress towards the next $200 million challenge. Clearly, these help in terms of helping with the earnings, the numerator of the calculation here. So I do believe both -- all the actions we've taken, it's helpful, the numerator, the denominator on your ROIC calculation. It's the exact -- how many basis points. I mean, we haven't calculated that, but clearly it contributed towards these results.

Yes -- no, I'm sure it did. One final question. Just remind me what are the 3 countries that were still -- you're still waiting for, for regulatory approval for GrainCorp?

We have one already received in Australia, which is the ACCC, the Competitive Commission, and we're waiting on FIRB, the Foreign Investment Review Board, so that's one. The second one is South Korea, and the third one is China or with MOFCOM.

Your next question comes from the line of Robert Moskow with Credit Suisse.

Two questions, one is just on corn processing for forecasting. You used to earn in corn sweeteners $500 million of profit a year; it's been more like $300 million lately. And with corn costs coming down, I would think that there might be a little bit of a benefit coming your way, if you can capture it in your pricing. So I want to know what's a normal level of profit for that? And then second, on share repurchase, why not be more aggressive in the market buying back your stock right now? I know you want to keep your balance sheet free to buy a lot of corn. But the value -- the price of that corn is going to be radically lower and you're going to have a lot of cash coming in. So why not step up at this moment when your PE is quite cheap and the outlook looks good?

Robert, Juan here on sweeteners. You know sweeteners have been -- consumption has been declining in the U.S. so we've been doing, I think, a good job of balancing capacity and demand with exports. And we think the situation will be stable going into next year. Again, a lot will depend on this relationship between corn and sugar. And we believe that with lower corn prices, we will have opportunities, as I said, to increase exports and increase conversions and increased inclusion of corn products in all the supplications. So we feel good about it. I'm not going to speculate on a specific dollar range for the business, but I think the business should continue to perform solidly going forward.

And Rob, on your share buyback question. I don't think the GrainCorp acquisition and share buybacks are mutually exclusive at all. I think we're dispositioning ourselves. And we did do some share buyback this quarter and I think the possibility of pace and amount can potentially increase as we go forward in 2014.

Rob, as I indicated, I think we've got very strong balance sheet. Where we have some pressure in our credit metrics is really our earnings metrics. And frankly, as we kind of get through this year and into the new year, our earnings metrics are going to improve and I think that's going to give us a lot more flexibility.

Your next question comes from the line of Ryan Oksenhendler with Bank of America.

Just a question for you on ethanol and E15. I guess, as you talk to, I guess, some of the gas stations offering E15 kind of what the demand has been like and what the price differential is for E15 and how much lower can prices go or the spread between ethanol and gasoline with the lower cost of corn? So I think, I guess at some point you're going to need the demand pulser from the consumer. And I guess, what is that price point that kind of gets them involved, which otherwise could back up the supply chain and then leads to an oversupply in ethanol?

Juan here, Ryan. I would say we continue to work very closely with everybody to try to help and facilitate as much as possible the incorporation of E15. That is like a $1 range right now, a $1 margin that they can profit from. And we've been -- I'm going to leave the economics to them in terms of what to do. But we've seen, for example, in people that price -- I think I mentioned it before during the call, for people that price accordingly and competitively, we've seen some of the people working in E85 farms tripling their volume in a very short period of time. So the consumer is very hungry for a reduction in gasoline prices and when they see the opportunity, they take advantage of that. So I think that this dollar delta is a big incentive. And with cheaper corn going forward or a more competitive priced corn going forward, this will present to me a huge opportunity for people to introduce either E85 or E15 more into the usage of the day-to-day American. So we see it with optimism.

Your next question comes from the line of David Driscoll with Citi Research.

For taking the follow-up, it's quick. Juan, just to be clear, I apologize. You almost answered this question, I think, 3 times but I still don't know the answer. In 2014, if we had $5 corn, will HFCS be priced at a discount to Mexican sugar?

I don't know exactly what's going to be sugar prices, but I would say it will probably be competitive in that sense. I don't know the calculation off top of my head, David.

And that concludes our question-and-answer session. I would now like to pass the call back to Ms. Patricia Woertz for closing remarks.

Thank you, everyone, for your interest in ADM. If you look at the last slide, it does show 1 investor event. As always, if you have any questions, follow up with Ruth Ann today. And thanks very much for your time. Bye now.

And ladies and gentlemen, this concludes today's presentation. We thank you for joining. You may now disconnect.