CHICAGO โ ADM beat its long-term profitability targets by a wide margin in 2022, and Juan R. Luciano, chairman, president and chief executive officer of ADM, believes a strategy built around three principal trends positionโs the company for sustained prosperity.
In a May 31 dialogue with Alexia J.B. Howard, a senior analyst with Sanford C. Bernstein & Co., LLC, Mr. Luciano discussed both the companyโs success and how this success has given ADM opportunities to align its business with these trends. The discussion was part of the Sanford C. Bernstein Strategic Decisions Conference.
Having recently marked the companyโs 120th anniversary of its founding, Mr. Luciano said ADM is performing at a high level.
โWe are about $100 billion in revenue, and we celebrated, I guess, with a record year of profits for the company,โ he said.
The company has thrived through numerous crises and administration over its history and continues to do so, he said, noting the companyโs first quarter in 2023 was a record quarter for ADM.
โSo the strength continues,โ he said.
While ADM for several years has pursued a long-term target of a 10% return on invested capital, the companyโs 2022 ROIC was 13.6%.
โOur cash flow has been stronger than ever, and we have created more growth opportunities for the company,โ he said. โWe continue to invest in those. I think they will propel our structural margins certainly higher. If you think about it, we have aligned our portfolio with three main trends: food security, health and well-being and sustainability.โ
Capital allocation at ADM begins with funding the companyโs existing business in pursuit of organic growth, with the funding divided into what Mr. Luciano called โthree bucketsโ โ automation of the companyโs facilities, capacity expansion and decarbonization. After accounting for these needs, 60% to 70% of ADMโs free cash flow remains for opportunities around the three trends of food security, health and well-being and sustainability he identified, together with returning funds to shareholders through dividends and stock buybacks.
Landing on the three strategic trends was not a decision made lightly, Mr. Luciano said.
โThere is so much noise coming at you, and (the challenge is figuring out) how to differentiate what is a true trend that will stay long enough that we can recover the capital,โ he said. โWhen we invest, we put money that would depreciate over the next 30 years. So we are very deliberate about thinking about the three trends. Our marketing department came with 50 trends and then from 50 you go to 8.โ
He said the eight were narrowed to five and then finally to three. He described the three as high conviction ideas for the company to pursue.
โWe donโt know exactly when itโs going to happen, but if we invest in these, weโre not going to regret it at the end,โ he said.
The rapid growth of the global population underpins ADMโs focus on food security, Mr. Luciano said. The figure was 3 million when he was born and 5 million when he married.
โWe were 8 billion last November,โ he said. โWeโre going to be 9.5 billion by 2050. We have never done this experiment of trying to fit 10 billion people into the world.โ
Discussing health and well-being, Mr. Luciano offered ADMโs rapid growth in probiotics as an example of the growth opportunity the company sees in tapping into developing technologies around human and animal nutritional health.
Regarding sustainability, Mr. Luciano said the push for renewable green diesel has been a game changer for soybean crushing, a major business of ADM.
โFor years, we were crushing for soybean meal for protein demand, and we didnโt have the ability to have that pull from oil,โ he said. โNow we have those two robust things. So I think there are plenty of reasons why crush margins should be higher in the future than they were over the last 10 years.โ
Estimating the potential for the renewable green diesel business to grow from 2 billion gallons a year currently to 5 billion in 2025, Mr. Luciano called the opportunity an โenormous market with no ceiling for soybean oil.โ
Longer term he said ADM is exploring renewable aviation fuel potentially for the 70,000 aircraft currently in operation. He said the fuel has the potential to reduce the carbon intensity of air flight by about 50%.
During the discussion with Ms. Howard, Mr. Luciano also offered insights into the companyโs plans to automate its plants. He said the decision was driven by the aging of the workforce and by the opportunity the size of the companyโs facilities offers. The company is targeting between 70 or 80 facilities for such upgrades, with capacities to process up to 165,000 tonnes of feedstock per day at certain locations.
โWe started with a big plant of a few plants for about $250 million,โ he said. โI think doing the 70 or 80 plants that we need to do will cost about $1 billion, and weโre getting double-digit returns in the ones that we have done so far. So we expect that to give us an incremental run rate of about $200 million, $250 million per year every year as we bring them along.โ
Major acquisitions have been rare at ADM in recent years, which Mr. Luciano attributed to a determination at the company โto stay disciplined.โ He said hard-learned lessons gleaned during the first years of his tenure have reinforced a discipline to ask about any possible acquisition and the question, โAre we adding quality to our portfolio?โ
โWe spent too much time cleaning our portfolio to start bringing things that are not perfect,โ he said.
Asked by Ms. Howard how ADM has enjoyed so much success in recruiting growers into its regenerative agriculture initiative, Mr. Luciano said the nature of the companyโs relationship with growers has been key.
โFarmers trust ADM, not that much because of our own qualities, but because we pay them,โ he said. โWe are not people that need to sell them something. We are the people that give them a checkโฆ We have relationships with 200,000 farmers around the world, a relationship that lasted, that dated from 50 years or more. We speak their language because if the farmer is not successful, ADM doesnโt exist.โ
Recent crop troubles in major producing areas have underscored the value of ADMโs global footprint and its ability to source grains and oilseeds from many regions.
โLook at what happened in Argentina,โ he said. โA crop can be reduced by half on the largest exporter of soybean meal in the world. Thatโs not tiny. Thatโs a big issue. So I worry about those issues.โ
He said the company benefits from its ability to source not just from Argentina but, say, from Romania, the United States and Australia.
The companyโs success and the changing financial picture in the United States has led ADM to conclude its long-term financial targets should be raised, Mr. Luciano said.
โIn time, given that interest rates are higher, weโre going to modify our long-term target of 10% ROIC to bring something higher,โ he said. โWe havenโt calculated that yet. We havenโt disclosed that yet.โ
