ADM c.e.o. confident in trends underpinning company's strategy

by Josh Sosland
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Juan Luciano became chief executive officer of Archer Daniels Midland Co. Jan. 1.

BOCA RATON, FLA. — In his first CAGNY address as chief executive officer of the Archer Daniels Midland Co., Juan Luciano said ADM must confidently attach itself to high probability trends to ensure long-term growth.

Mr. Luciano, who became c.e.o. of ADM Jan. 1, spoke about the company’s structure and prospects for long-term growth in a presentation to the Consumer Analysts Group of New York annual conference Feb. 17 at the Boca Raton Resort and Club.

A challenge identified at the outset for ADM by Mr. Luciano as it invests for long-term growth is the highly capital intensive nature of its underlying businesses.

“So we need to make sure we invest on trends that are very solid, not fads that are going to evaporate in the short term,” he said. “So one of the things we look at is demographics and what are those inexorable trends that will be with us for the next 20, 30 years as we depreciate our assets.”

Certain of the trends identified by Mr. Luciano are historic in nature, beginning with what he said was the emergence for the first time ever of a “truly global middle class.” He said the population is expected to reach 3.2 billion in 2020, up from 1.8 billion in 2009. The figure is expected to jump to 4.9 billion by 2030.

“And this has profound implications in the way people eat,” he said. “So with increased protein consumption we see an increase in the demand for our products to feed those animals. So this is a very important trend for our commodity business. And this middle class is expected to double in size by the year 2030. So we feel very comfortable that we have this underlying global growth behind our commodity business for the years to come.”

Mr. Luciano also discussed a demographic barbell pattern he said will create major opportunities for ADM.

“Within the next five years the number of people in the bracket of 65 and over will exceed, for the first time in history, the number of people under the age of 5,” he said. “Obviously, this is a very health-conscious group of people and it’s a very affluent population with trillions of dollars of spending power.”

Against this demographic backdrop driving consumers toward healthier choices, Mr. Luciano said many customers are cutting costs and diminishing internal research and development capabilities.

“So we have positioned ourselves here a little bit of the outsourcer of R.&D. for our customers,” he said. “And we would like to think of some of our customers focusing much more on understanding the consumers, on driving their brands, managing their channels, and, more and more, relying companies like us for basic supplies, for getting the sourcing of the right audits, for traceability, for quality, for risk management, for R.&D. and even for some basic processing.”

Offering a snapshot of the ADM business, Mr. Luciano said the segments of the company fit together synergistically, beginning with what he called a “formidable grain company” that gives the business both excellent access to raw materials and an advantaged cost position. Next is what he called a “very strong basic processing unit.” ADM processes about half the grain it originates and sells the balance to customers. These two fundamental elements create a “very tight net of activities, one of them basically synergistic with the other,” he said.

Where within the company’s businesses the synergies do not exist, portfolio changes will be pursued, Mr. Luciano said.

“But key to that, when you run an integrated model the key piece you need to be worried in order to protect and create shareholder value is to make sure that each piece is actually earning its return, that you are maximizing each piece,” he said. “You cannot allow for subsidies going between the divisions. So one of our key goals in this strategy is actually to set the competitive standard by industry. We want to be the best grain company out there. We want to test ourselves against the best processing companies out there. And certainly we want to set the competitive standard in ingredients. And this is key not only from an operational perspective but also from a returns perspective. And our team is very committed to delivering on that.”

Among ways ADM will pursue growth in its grain business will be diminishing the proportion of its volume accounted for by grain origination.

“Today we take about only 15% of our grains all the way to the final customers,” he said. “So we originate, let’s say in the United States or in Brazil, and then we ship it all the way to, let’s say, (a port in Egypt) where only 15% of all that volume we actually taking to the final consumer.

“And that’s an opportunity for us to increase margins. So we put together a plan to increase that number from maybe 15% to 30%, 40%.”

Such a change would be highly financially rewarding, Mr. Luciano said.

“If we make, let’s say, $2 per ton in the first part, we can make maybe between $8 and $10 per ton in the second part,” he said. “So we believe that there is a big opportunity for us. All it takes is boots on the ground, is people on the ground, is credit risk. And this is part of the reason for which we acquired the 20% of Toepfer that we didn’t have.”

Mr. Luciano also offered areas where ADM has, for the time being, decided are not appropriate for investment. These include farming, major investments in sugar, palm or animal protein. He said the company would not go into a trading business in materials in which ADM lacks “strong core competency.”

“So we are not a trading company that will trade in metals or coal whatever,” he said. “So we stick to doing risk management for what we know well and for this very tight value chain that we run.”

Offering a big picture perspective on the ADM acquisition of Wild Flavors, ADM’s largest acquisition ever, was Greg Morris, senior vice-president and president, Wild Flavors and Specialty Ingredients Business Unit. While Wild Flavors is not a health and wellness company per se, Mr. Morris, a 20-year veteran at ADM, said the power of the health and wellness trend ultimately makes Wild much more attractive to ADM.

“A lot of the trends that you’ve heard a number of our customers talk about throughout the course of this week are the same trends that we are conscious of and that we are watching,” he said. “So health and wellness, for example, where 23% of all packaged foods and beverages sold last year carried some sort of health claim. Protein, global protein demand, whether it’s animal protein or vegetable protein, growing at 5% to 6% a year. Consumers want convenience. They want to be able to eat their food on the go.

“They want to know that when they get home from a hard day’s work they can prepare a meal very efficiently and quickly. They want clean labels. They want to understand what’s in their food.”

Information about food, accurate and inaccurate, has proliferated in recent years like never before, a trend which is affecting buying patterns, Mr. Morris said.

“So they are concerned about simple labels, in some cases minimally processed,” he said. “They want healthy ingredients.”

A desire for great variety is still another trend driving consumer buying, Mr. Morris said.

“But no matter what trend is driving or influencing your business, there’s one thing that trumps all of them,” he said. “The food still has to taste good. And so when you think about our desire to be a world-class specialty ingredient business, we knew some time in our strategic future we needed to add taste capabilities to the organization. This is where Wild comes in.”
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