ADM (Archer Daniels Midland) – Pivot to High-margin
Products – 13 April 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Title:
Paul Woolard (PW)
Former Director, Strategy, Business Development & M&A, Corn Processing at Archer Daniels
Midland Co
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. ADM's (NYSE: ADM) Ag Services & Oilseeds business update
2. Impact of input cost inflation and international trade relations on margin
3. Human and animal nutrition innovation
4. Operational inefficiencies
Contents
Q: Could you give an overview of the food ingredient and processing industry? What are the main categories,
3
drivers and competitors?
Q: What industry trends were you monitoring pre-coronavirus?
Q: Could you outline the different businesses ADM [Archer Daniels Midland] operates in and how the
company has been impacted by coronavirus?
4
4
Q: Could you elaborate on the advantages of ADM’s global network of processing, storage and transportation
5
assets? You mentioned scale is important in this industry.
Q: What are the challenges of ADM’s very diversified business model?
5
Q: Do you think ADM has the critical scale across each region it has a presence in? You mentioned one of its
deals being blocked six or seven years ago.
6
Q: Are there any other international markets you think ADM has an opportunity to expand in besides
Africa? Can you elaborate on the opportunity of Africa, since it’s under-penetrated?
6
Q: ADM has been through a number of business cycles of shedding and purchasing different assets. What
criteria does ADM use when determining a group or a business no longer sits with the overall strategy?
Q: What role have high commodity prices and freight costs played in ADM’s profitability and near-term
margin outlook?
Q: Could you give an overview of agricultural services, oilseeds and carbohydrate solutions and how ADM
has maintained its market leadership in these business lines?
6
7
7
Q: Ingredion has made significant headway with its core and speciality ingredients. Could you talk about the
competitive profiles of the two companies and how Ingredion is making significant headway in those
categories compared to ADM?
7
Q: What are the key factors driving growth in the agricultural services and oilseeds businesses?
8
Q: Could you give an overview of ADM’s nutrition business and the drivers of its remarkable growth over the
8
past few years?
Q: You mentioned ADM has made a number of acquisitions over the past few years. When would you say it
decided to make these businesses a key pillar of growth and why do you think it decided to go in that
direction?
9
Q: What value add does ADM provide within nutrition that couldn’t be easily replicated somewhere else?
Cargill has an extensive animal nutrition business. Could you elaborate on some of the value-add products? 9
Q: How do the operating dynamics in nutrition change between animal and human? Are there significant
differences in profitability or growth outlook? You mentioned people now consider animals their kids as
well, and they pay a premium for their food.
Q: Are there any future acquisition opportunities you think would make a great strategic fit within ADM?
What is your outlook for ADM’s appetite to further expand its business?
Q: How capital-intensive is it to build extensive offerings within nutrition? How does that differ across
ADM’s core business lines?
Q: What do you think is the biggest threat to ADM’s operating model or long-term stability?
Q: Is there anything you think investors should know about ADM’s management team and their ability to
execute on priorities?
9
10
10
11
11
ADM (Archer Daniels Midland) – Pivot to High-margin
Products
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled ADM (Archer Daniels Midland) – Pivot to High-
margin Products. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr Paul Woolard, former
Director of Strategy, Business Development and M&A, Corn Processing at ADM.
Paul, before we get started today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
PW: I agree.
NH: Thank you, Paul. Could you start by giving the audience an overview of your background and various
roles you’ve held in the industry?
PW: I have an accounting background. Started my career with KPMG and then spent a bit of time in the
utility industry and then did two stints based in Decatur, Illinois with large global agri businesses. The first
was Tate & Lyle, the British sugar company that had acquired AE Staley Manufacturing, which was
headquartered in Decatur. Then, did a 10-year stint with Archer Daniels Midland. Left there in 2018 to get
closer to some family and so I now head up finance and risk for an ethanol and natural gas trading company
called Eco-Energy.
[00:01:37]
Q: Could you give an overview of the food ingredient and processing industry? What are the main categories,
drivers and competitors?
PW: Just from an overall, the way I look at this is that on a global basis the food ingredient/processing
industry is fairly well-concentrated in a group of large multinational companies that really dominate the space.
Colloquially, it’s known as the ABCDs of the world, Archer Daniels Midland, Bunge, Cargill, and Louis
Dreyfus. Then, below them are a handful of others, but those four are true global ag processing companies that
produce fundamental single ingredients that find their way ubiquitously into the consumer brand and food
markets. They find their way into animal nutrition. They also have a lot of inroads into industrial uses across a
variety of industries. Very concentrated but yet very diverse as far as their touch into everything that we eat or
otherwise consume on the planet.
The big drivers are scale and that’s why we have, over time, reverted to a very short list of true global players.
Certainly, emerging markets within the ABCD world are important. Each of them have made major inroads
into Asia, with ADM’s investment in Wilmar. All of them have very large operations in South America. Really,
fundamentally, Africa, Middle East is the final frontier, if you will. All of them trade into those regions but
none of them really have a major presence in Africa. Primarily limited because there’s just not enough
transportation infrastructure. The drivers of this industry are global scale, global capabilities and ability to
execute across the globe and take advantage of disruptions. If there’s a drought in eastern Europe, how do you
position and move product from South America, US? Vice versa, if there’s a drought in the US, how are you
positioned, how are you scaled so that you can move feedstuff, etc, around the globe to take advantage of
disruptions in the market? At a high level, that’s how I would encapsulate the industry, who the major
Private and confidential 3
competitors are and what has driven us to this point in time in the consolidation of this industry.
[00:05:09]
Q: What industry trends were you monitoring pre-coronavirus?
PW: Certainly, decarbonisation was and continues to be a major initiative across these companies. I think
ESG priorities were very important and have yet become more important as we come through the COVID era.
I think, fundamentally, from a food ingredient standpoint, shifting trends toward plant-based proteins, taste,
texture and regenerative nutrition, and putting a lot more focus on delivering solutions that combat some of
the negative trends that the industry had been tagged with relative to obesity, etc. To me, those are the three
top trends that were prevalent and have become yet more prevalent and more top of mind within these
companies.
[00:06:37]
Q: Could you outline the different businesses ADM [Archer Daniels Midland] operates in and how the
company has been impacted by coronavirus?
PW: Generally, ADM has been on, I would call it a decade-long transition with moving more progressively
toward value-added businesses and trying to shed from the portfolio businesses that have more inherent
volatility. They’ve sold their cocoa business, their fertiliser business, they continue to try to sell a chunk of
their ethanol capacity and, in the meantime, they’ve invested in flavours and fragrances from their acquisition
of Wild Flavors, they acquired a large animal nutrition business in Europe called Neovia. All of that geared
toward moving more toward high-value, higher-margin, value-added businesses and to hamper volatility in
the portfolio. The business has now been organised along three major verticals. Ag services and oilseeds
processing is one combined entity now, carbohydrate solutions, which is the legacy corn processing segment,
and then the nutrition business, which is an amalgamation of the businesses that have been acquired, Wild
Flavors, Neovia. Also, some of the sub-segments that have been latterly part of oilseeds processing and corn
processing in product lines like high-value food, starches, protein derivatives, etc, have all been moved into the
nutrition category. Those are the three main operating businesses that ADM operates in.
From a geographic concentration, fundamentally, the business started in the US and has its biggest
throughput and footprint across all those businesses in the US. Very large presence in both carbohydrate
solutions and ag services, oilseeds in Europe and in nutrition in Europe. Very large presence in South America
in the ag services, oilseeds. A little bit of nutrition in South America. Then, in Asia, they own a fairly
substantial piece of Wilmar which at one time Wilmar had a higher market cap than ADM and ADM, I think,
recently has sold off some of its stake in Wilmar but remains a majority, not a majority but a 20%-ish
ownership in Wilmar which is, effectively, how it is operating in Asia. They do have a port-based carbohydrate
solutions plant in China and there is a very small piece of the nutrition business is also in China. Very big
global footprint. Again, as with most of the ABCDs, they do not have a large presence in Africa, nor in
Australia. ADM had an aborted attempt to acquire GrainCorp in Australia. The competition authority shut that
deal down. That’s probably been about 6-8 years ago. That’s a thumbnail sketch of ADM.
As far as COVID, generally I think ADM has performed very well throughout the COVID time frame. Probably
the business that was most impacted was its ethanol business with US gasoline demand falling off which then
also impacted ethanol demand. Its fundamental food ingredient and animal nutrition businesses, which are
really the flywheel of the business, I think performed very well. The ag services component, which is,
effectively, a grain handling and merchandising component of the business, I think likewise managed pretty
well throughout. The 2020 harvest was a fairly normalised year, from an overall crop production standpoint.
When you have big crops, good crops, ADM performs very well because it touches the bushel of grain multiple
times and extracts margin at every point of the supply chain. Overall, I think ADM’s performance has been
quite good. I think their fiscal year in 2020 was a pretty solid performance year.
Private and confidential 4
[00:12:08]
Q: Could you elaborate on the advantages of ADM’s global network of processing, storage and transportation
assets? You mentioned scale is important in this industry.
PW: From a global standpoint, I think ADM is maybe only matched by Cargill, from an overall global
network. As I mentioned, it has major operations in all the major continents that both produce and consume
agricultural production. ADM also controls a lot of that network. ADM’s historical viewpoint was it much
preferred to own and control these assets, so they have major operations in rail, truck, barge, both in the US,
South America. They’ve got a river terminal network in Europe as well. They have major port-based facilities
in Germany and in the Netherlands that give them unfettered access to the entire European continent. They do
have some smaller investments in the MENA region. Again, ADM, because of its global scale, is able to then
capitalise on having those assets in position where, when there are disruptions for whatever reason, they can
move fairly quickly and capitalise on opportunities because they have such a broad and deep scale in moving
ag products around the world. Really, Cargill is probably who I would view as the only true competitor to ADM
in that regard. The other major participants, after you get past ADM and Cargill, they might be stronger in
particular regions and maybe not as diverse across. Bunge, as an example, much more focused on oilseeds, not
as strong in carbohydrates, doesn’t have quite the same global reach as ADM and Cargill have.
The customer base of ADM, it’s a global customer base. Many of the multinational consumer branded food
companies call ADM as a major supplier. The Cokes, Pepsis, Unilevers, Krafts are all very key long-term
strategic customers of ADM and ADM provides ingredient solutions across their entire network of products
that they handle. As far as farmer relationships, particularly in the US, ADM has a very large network of
country elevators, river terminals that all deal directly with farmers. ADM generally, across its entire platform,
does not own farmland. It deals transactionally with farmers and has a very robust network, certainly in the
US. Not quite as big in Europe, but certainly in the US has a very close relationship with its farmer customers,
farmer vendors, and has built out a very strong marketing presence to be a solid partner to those farmers as
being the most logical outlet for their crop.
[00:16:29]
Q: What are the challenges of ADM’s very diversified business model?
PW: I’d say the challenge is just, I guess, the cultural diversity that ADM has because it does operate around
the globe, and moulding all those different ways of doing businesses. I think the other challenge that ADM has
historically had is, as it reaches its tentacles into other parts of the world, dealing with appropriate business
practices has been a challenge. It’s not just ADM, the grain industry is ripe with challenges related to foreign
practices and ADM really tries very hard to put a lot of training and programmes in place and controls in
place. That’s an ongoing challenge when you work in a global ag business, and I guess the cultural challenge of
ADM historically was very much a trading, merchandising culture based in Decatur, Illinois in the middle of
the Midwest. As it continues to evolve and make management changes in this whole ESG type of framework, I
think retaining talent is the challenge they’re having in that, as they make improvements in their diversity
profile, etc, I think that’s causing an inflection point for some people. They’ve done several large-scale RIFs,
reduction-in-force initiatives, over the last 5-8 years where several thousands of them, thousands of employees
have been either offered an early retirement incentive or otherwise given an incentive to leave. I think
managing their talent drain is a fairly big challenge that they’ll continue to have as they move the organisation
in a different direction than its historical legacy. I would think those are really the two biggest challenges.
Private and confidential 5
[00:19:13]
Q: Do you think ADM has the critical scale across each region it has a presence in? You mentioned one of its
deals being blocked six or seven years ago.
PW: Yes, I think that’s a fair point that a challenge is that they don’t have a physical presence in Australia,
which is a major grain producing region and is a pivotal supply chain for the developing market of China and
far Asia. Not having an ability in Australia is a limiting factor. Again, they made a bid to buy GrainCorp and
the competition authority in Australia blocked that transaction, partly out of nationalistic tendencies, etc. Also,
as I mentioned, I think ADM had a business unit that had a major presence in Africa, this cocoa business, but
it sold that. I don’t know that they’re disadvantaged, it’s just that it’s a recognised next frontier of Africa, but
there’s still a lot of infrastructure that needs to be put to play in Africa. It’s not necessarily a large demand
market, but I think everyone still recognises that Africa has an uncapped potential to be an ag production
region and should be able to export a lot of grain and feedstuff but it just doesn’t have the transportation
network. Nobody really has a presence in Africa, but I think particularly, I would say, having no presence in
Australia continues to be a little bit of a challenge for ADM.
[00:21:45]
Q: Are there any other international markets you think ADM has an opportunity to expand in besides Africa?
Can you elaborate on the opportunity of Africa, since it’s under-penetrated?
PW: Again, the only other, maybe, regional area that I can see them making further investment would be
Brazil continues to diversify away somewhat from sugar cane and soybeans, have been the dominant crops,
and there’s more and more conversion to corn in Brazil, in South America but predominantly Brazil. ADM
would not have to do much to capitalise on that. They’re already fairly well-structured there, but I guess I
would remain with ADM would be able to, I think, provide opportunity for large-scale crop production in
Africa and would be able to provide an outlet because it has the nearest port-based facilities to receive those
type of crops from Africa, whether it be Rotterdam or Hamburg. They also have a port deal in Egypt, so they’re
well-positioned, it’s just that it’s going to have to be a public-private partnership in Africa to get enough other
transportation infrastructure to be able to upscale Africa’s ag processing capabilities.
[00:23:34]
Q: ADM has been through a number of business cycles of shedding and purchasing different assets. What
criteria does ADM use when determining a group or a business no longer sits with the overall strategy?
PW: The positive of the new management team that’s been at the helm for the last approximately 10 years of
ADM is that a lot more financial discipline was instituted. Again, going back 30-40 years, ADM ran almost as a
family business up until right at the turn of the century. When Pat Woertz came on from Chevron, she started
making inroads as to changing that culture, then Juan Luciano was brought in and Ray Young, from Dow and
GM respectively, as the CEO and CFO. They have really instilled a lot of discipline around using more
appropriate financial return metrics. The fundamental benchmark that ADM uses is return on invested
capital. They’ve pushed that down to a business unit level where, if a business is not generating returns in
excess of its invested capital base, then it starts showing up on the radar screen as to how do we remedy this
and is it still a core business or is it a business that needs to be considered for disposal or is there a better
owner of this business? It starts with not meeting very prudent and disciplined financial return metrics
starting with ROIC. EVA is also part of the culture, but, effectively, you get to the same answer. Really, looking
at businesses very critically and comparing businesses on a return basis. Also, just fundamental scale, does
this business have the chance to grow and really become a meaningful contributor to the overall portfolio, or
maybe it is making really good returns, but it’s not going to scale and ever be anything that’s going to move the
needle overall. Really, their fundamental measurement is return on invested capital and shedding businesses
that aren’t performing against that metric.
Private and confidential 6
[00:26:31]
Q: What role have high commodity prices and freight costs played in ADM’s profitability and near-term
margin outlook?
PW: I would say, and when I was there we did a lot of analysis around underlying commodity prices, generally
ADM is able to pass on, particularly any movement in commodity cost doesn’t really impact them. Those
commodity costs, effectively, pass through to the end user through contractual arrangements where the end
user really has the commodity exposure and ADM is simply assessing a processing fee to convert soybeans into
oil and meal and corn into its variety of products. I’d say, as a general rule, higher commodity prices don’t
generally impact ADM’s profitability at face value. Freight costs, likewise, ADM is pretty astute at passing that
cost onto the end user. ADM owns and operates a large transportation network, so it generally is going to be
the lowest-cost transportation source, but even in an environment where fuel costs or other transportation
costs are increasing, ADM historically is pretty adept as passing that cost onto the end user.
[00:28:21]
Q: Could you give an overview of agricultural services, oilseeds and carbohydrate solutions and how ADM has
maintained its market leadership in these business lines?
PW: Fundamentally, in both of those businesses, there has not been a significant amount of change. Those
businesses have been highly concentrated for 15-20 years. I guess the last major transaction was probably
Ingredion’s acquisition of National Starch in the carbohydrate side of the business. In ag services and oilseeds
there just really hasn’t been a large transformative transaction in the industry. Generally, their market share
has stayed fairly constant in the medium-to-long-term historical perspective. The way ADM maintains
leadership is just, because of its scale, it can supply customers across a wide geographic diversity, it can deal
CEO-to-CEO level across all the major global consumer branded food companies. With that, that allows them
to maintain very strong market shares in all the underlying product categories.
Across these businesses, I would say the one area that ADM is probably the weakest would be in high-value
food starches, and this goes back to there was a transaction where a company called National Starch, which
was the market leader globally in food starches, was acquired by, Corn Products is what it was called at the
time and the combined entity is now called Ingredion. ADM typically is probably the number three, number
four food starch player and that rolls up under carbohydrate solutions. I would say they’re behind Tate & Lyle,
Ingredion, and Cargill in that space. They’ve been going through a major initiative, they hired some folks from
Cargill to help them try to build that business, but otherwise they have number one, number two positions
across most all product categories in both of those businesses.
[00:31:31]
Q: Ingredion has made significant headway with its core and speciality ingredients. Could you talk about the
competitive profiles of the two companies and how Ingredion is making significant headway in those
categories compared to ADM?
PW: Structurally, Ingredion, through its acquisition of National Starch, has a much more customer-facing
technical service capability. A lot of the categories where Ingredion and ADM compete are really driven by
deep technical expertise and how ingredients will perform in a food system and having the ability to take sugar
out and replace it with other ingredients, etc. Ingredion really is the number one provider in that space
because it has a very deep tech service capability. ADM just has never had that. ADM’s culture was much more
just commodity-based and didn’t invest in that type of technical resource. To me, that’s the fundamental
Private and confidential 7
difference and where ADM is continuing to try to catch up, is by building out more people in research, more
technical sales capabilities to be able to compete head-to-head with Ingredion in those categories.
[00:33:31]
Q: What are the key factors driving growth in the agricultural services and oilseeds businesses?
PW: I’d say, again, ag services and oilseeds, it’s a combination of two businesses that previously had been
reported separately. Ag services is the supply chain, merchandising, grain origination arm of ADM and
oilseeds processing is just soy and canola, rapeseed processing facilities and the resulting go-to-market
products that come out of that conversion process. There’s really not much, ag services is a pretty stable,
stagnant business, if you will. There’s really not much growth opportunity there, other than some of these
destination markets that we’ve talked about would fall under the ag services piece of this business unit where
you would try to create a market or an ability to move products into a new demand centre through a port-
based facility or what have you.
On the oilseed side, the trends are, again, more focus on plant-based proteins, etc, which are helping drive
growth in this business. I guess the next big event that’s going to impact the oilseeds business is, in the US,
there’s a large movement towards renewal diesel, which will consume a lot of soy oil, corn oil, animal fats.
Through a conversion process, you can create a drop-in replacement for diesel fuel. It’s not biodiesel, which
has to be blended, that’s a different technology and you end up in a slightly different molecule, but, with
renewable diesel, it’s pure dropped in where you can burn renewable diesel in your engine just as if it was
petroleum diesel. I would say that’s going to impact the oilseeds business. It’ll also have an impact on
carbohydrate solutions for ADM.
[00:36:09]
Q: Could you give an overview of ADM’s nutrition business and the drivers of its remarkable growth over the
past few years?
PW: The nutrition business, again, it’s an amalgamation of several acquisitions and then also some business
lines that were pulled out of oilseeds and carbohydrate solutions. The key building block of the nutrition
business was the acquisition of Wild Flavors in 2014-15 time frame. Then, ADM then combined several other
businesses, has made one other major animal nutrition investment in Neovia, and they have combined human
and animal nutrition under this broad nutrition umbrella.
I’d say the growth has been driven by a couple of key trends. On the human nutrition side, this whole move
toward plant-based proteins, the products that ADM provides, whether it be meat texturisers or pea proteins,
etc, are all reported up under this nutrition segment and have had phenomenal growth in that part of the
business. I think the integration of Wild Flavors into the core ADM business, the whole business case for that
acquisition was sales synergy where ADM, with its key global relationships and single ingredients, could
combine with Wild Flavors and deliver broader flavour solutions to its customer base. One of the on-trend
changes in the global diet is more focus on taste and texture and combining Wild Flavors with ADM’s core
flywheel strength in large commodity ingredients has generated growth for the nutrition side of the business.
I’d say the third trend is on the pet food side of the business. ADM, through the acquisition of Neovia and a
legacy business that it had called Alliance Nutrition, has made major inroads into supplying ingredients into
the pet food and pet treat business. Both pre-pandemic and in the midst of COVID, those categories have seen
phenomenal growth. Some people spend more money feeding their pets than they do their kids, it seems,
based on the trends. They spend a lot of money on their pets, let’s just say that, and ADM has certainly
capitalised on that and was well-positioned to take advantage and to benefit from that changing dynamic in
pet nutrition.
Private and confidential 8
[00:39:28]
Q: You mentioned ADM has made a number of acquisitions over the past few years. When would you say it
decided to make these businesses a key pillar of growth and why do you think it decided to go in that
direction?
PW: I’d really line it up with when Juan Luciano was hired as first Chief Operating Officer and then very
quickly was elevated to Chairman and CEO of ADM. About the same time, Ray Young was brought in as the
Chief Financial Officer from General Motors. I think together they set strategy around, again, moving ADM
more toward value-added ingredients and value-added businesses and de-emphasising businesses that had
inherently more volatility. On that journey is where they formulated and, in their onboarding to ADM, they
realised that ADM had, buried within its legacy businesses, pretty interesting, pretty valuable food ingredient,
food nutrition and animal nutrition businesses and made the determination to pull them forward, to really
build around that as the inflection point, the pivot that they’ve made toward a different margin environment.
Once they set about doing that, Wild Flavors, I don’t think they were targeting Wild Flavors, I think it was an
opportunistic acquisition and went ahead and made that decision.
It is somewhat interesting thing that historically, pre-2010-ish time frame, 2011, about the time Juan and Ray
came on board, ADM historically was not an acquisitive company. The legacy culture was, “Why pay a multiple
premium for a business? Let’s wait until a business fails and buy it out of bankruptcy or buy it when it’s
distressed.” The historical context, that’s how ADM had grown a lot of its businesses, was by capitalising when
other businesses had struggled and failed. Historically, ADM was not an acquisitive company and nor was it a
company that paid market multiples for companies. That’s the strategy that’s been deployed, has been to buy
Wild Flavors at fairly steep multiples, buy Neovia, but then ring a tremendous amount of synergies and
savings out of those businesses through pretty good discipline and pretty good execution. It’s hard to argue
that they’ve not done very well at integrating those businesses and growing the total opportunity after paying
premiums for those businesses.
[00:42:57]
Q: What value add does ADM provide within nutrition that couldn’t be easily replicated somewhere else?
Cargill has an extensive animal nutrition business. Could you elaborate on some of the value-add products?
PW: I’d say, again, ADM and Cargill are really unparalleled in their ability. Really, what’s the value add in
both of those cases is that each of those entities controls a significant piece of the value chain, from originating
the crop from the farmer to putting the pet treat in the bag that gets sold to the end-user customer, and having
a lot control over the value chain from beginning to end. I do think that, and having a global capability to
deliver those solutions and to tailor the solutions by geography, and to move ingredients around the globe so
that you’re able to capitalise on that. I think that is, to me, the value add of the nutrition business of ADM, is
that it controls virtually every piece of the value chain all the way to the end user. It doesn’t have branded
exposure, but they do a lot of co-packing and a lot of private label things. That’s what differentiates ADM and
Cargill, in their nutrition segments, from the other businesses that they compete with in those spaces. Tate &
Lyle, Ingredion, while very savvy competitors in certain segments, they just don’t have the global scale and
global capability that ADM and Cargill have.
[00:44:58]
Q: How do the operating dynamics in nutrition change between animal and human? Are there significant
differences in profitability or growth outlook? You mentioned people now consider animals their kids as well,
and they pay a premium for their food.
Private and confidential 9
PW: Actually, in my opinion, it’s very hard, really, to distinguish and the profiles. They run very parallel and
you have virtually similar regulatory dynamics to work through, both from an animal nutrition and human
nutrition side of things. Fundamentally, at the end of the day, gut health is something that you think about in
animals and it’s something that we think about on the human side, so the operating dynamics between human
and animal nutrition, in my mind, are not different. They’re parallel and they run very similar. I’d say the one
slight difference is that particularly in pet food I think the margins are higher, the growth is probably higher. I
wouldn’t say it’s materially higher and it’s a slightly different final go-to-market where, as I mentioned, they
do a lot of co-packing and private label-type activity for treats and kibbles and things like that, which you don’t
really see ADM participating in the human nutrition side. On the human side, it’s all single ingredients or
blends that go into a formulation for Kraft or Unilever or Coke or Pepsi, but they do go maybe one more step
in the pet food side of things. At the end of the day, I would say it’s indistinguishable, the operating model and
the margin environment, as you move through these two different components of the nutrition business.
[00:47:32]
Q: Are there any future acquisition opportunities you think would make a great strategic fit within ADM?
What is your outlook for ADM’s appetite to further expand its business?
PW: I guess the one area which I’m sure they’re watching very closely and determining do they want to get
back into the business, it would be on the alternative meat space. I think that it’s fairly well-understood that
they have been a participant in several of the plant-based meat companies, in their growth and development,
and they supply ingredients into those platforms. If you go way back in time, ADM actually had a retail soy
burger that it took to market in the ’80s, early ’90s, and I think they sold off or got out of that business.
They’ve been in the retail meat business before, got out of it, but, as I sit back and look at the landscape, I
wonder if that might be an avenue that they might add a plant-based meat alternative to their portfolio. I
haven’t really thought through the dynamics of it, that if they pick one, then that means they can’t sell
ingredients to the other ones that are out there, but I would say plant-based meat might be an area. That’s one
place where they are differentiated from Cargill, where Cargill does have a pretty significant retail meat
presence. I think in all species, it has a very large presence in meat production and that might be an area that I
could see ADM moving toward. Otherwise, I’m not aware. That’s, to me, the most logical, maybe, potential
avenue, would be plant-based meat or meat alternatives and adding a company to the portfolio that’s directly
in that business.
[00:50:30]
Q: How capital-intensive is it to build extensive offerings within nutrition? How does that differ across ADM’s
core business lines?
PW: I think, generally, building new plant capabilities, production capabilities is a pretty capital-intensive
proposition. I mentioned earlier, they’ve been trying to build and increase their capabilities in food starches.
One of the challenges was to really truly build a capability was going to be a fairly large CAPEX, hundreds of
millions of dollars to build a food starch dedicated production facility. When I left, they were still trying to
figure out, “How do we do this on a capital-light basis?” I would say, generally, moving into new offerings in
nutrition does present some capital challenges because it is fairly specialised equipment that can’t be utilised
for other opportunities, etc. I think, generally, you would say that nutrition CAPEX is going to be some
multiple higher than just basic processing that it does in soybeans and corn. I do think the nutrition business
as far as moving into new lines, and particularly with that dynamic of being measured very heavily on return
on invested capital can create a little bit of a disincentive to do something new. If I put USD 300m in a new
plant, that’s going to hit my invested capital very quickly and then I’m going to take 10 years to build it and get
scale where I’m fully utilising. That’s really going to hurt my returns, and so that is a bit of a challenge and I
think somewhat therein is why they’ve chosen to acquire businesses vs build.
Private and confidential 10
[00:53:03]
Q: What do you think is the biggest threat to ADM’s operating model or long-term stability?
PW: Again, to me, the biggest threat that ADM faces in the next near-to-medium term is just making this
transition from the old-guard merchandising culture to the new way of thinking, new way of managing,
replacing some senior talent that had grown up in the business with people that have come from outside in. I
would just say cultural diversity, and cultural change, to me, is the biggest threat to ADM’s operating model. I
think another threat is, with all of the headcount reductions that they’ve done, etc, continuing to operate their
flywheel processing plants with the same efficiency, with the same safety while you’re making all these other
cultural changes is a pretty big challenge to them. To me, those are the bigger challenges. The fundamentals
are all there, the infrastructure is all there. It’s just making sure you’ve got the right people that are capable of
operating these businesses in a safe and healthy manner when you’ve taken a lot of talent out of the
organisation.
[00:55:11]
Q: Is there anything you think investors should know about ADM’s management team and their ability to
execute on priorities?
PW: I think, at the end of the day, the management team has done a very solid job and has generated very
good returns for the shareholder. When I arrived at ADM in 2009, all the focus was on, “How do we get to a
USD 60 share price?” 12 years on, they’re almost to USD 60 a share, so it’s taken a while to get there, but
they’ve executed, they’ve instilled a lot of discipline in the business and the share price has been reflective of
that over the last couple of months. Certainly, their share price has benefited from general market uptick, but,
at the end of the day, ADM is a very solid cash-generating, fortress balance sheet company and even though
I’m not there any more, I’m still bullish on their capabilities and their position in the global marketplace. I’m
still very upbeat on ADM and still have nothing but high regard for their capabilities and how they’ve
executed.
[00:57:21]
NH: We will now end the Interview. Let me close by saying thanks again, Paul, for your input. Thank you,
clients, for joining Third Bridge Forum’s Interview today. Paul, a really great Interview. Loved the insights,
very knowledgeable. I’m sure clients were pleased as well. I hope you all have a great day.
PW: Thank you. Bye-bye.
Transcription ends at 00:57:44 of the recorded material
Private and confidential 11