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Research within the agricultural giant ADM raises questions about the commitment to nutrition

by SuperiorInvest

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Archer Daniels Midland aggressively expanded into nutrition and food ingredients in 2014, aiming to build a hedge against volatility in the commodities trader’s other businesses and shore up its revenue stream.

A decade later, the nutrition business has plunged one of the largest agricultural trading houses in the world into turmoil.

Shares of the Chicago-based company plunged 24 percent on Monday, its biggest one-day drop since 1929, after it announced that Chief Financial Officer Vikram Luthar had been fired amid an investigation into accounting practices and procedures. of the nutrition business. Ismael Roig had been appointed interim financial director, according to a statement published late on Sunday.

ADM is a low-profile company that plays a critical role in the global food supply, purchasing crops from farmers to process them into bulk ingredients, animal feed and motor fuel or ship them to customers around the world. Founded in 1902, it is the A in the so-called ABCD of global food products traders, along with Bunge and Cargill of the United States and Louis Dreyfus in Europe. The business is volatile and typically operates on very tight margins, driven as much by crop size and government policies as by management and corporate strategy.

Under CEO Juan Luciano, ADM sought to diversify into the lower-volume but higher-margin nutrition business, supplying flavors, probiotics and other ingredients to industries including plant-based meats and pet foods.

This week’s news “damages ADM’s growth strategy, damages its credibility and its plan to move from just creating crop marketing and trading to this more stable, higher-profit nutrition business,” said analyst Seth Goldstein. from Morningstar Investment Service.

Juan Luciano, executive director of ADM
Juan Luciano, executive director of ADM © Diego Levy/Bloomberg

ADM said it had launched the investigation after a request for documents from the U.S. Securities and Exchange Commission. The company also said the release of its fourth-quarter earnings would be delayed as a result of the investigation, and revised down its expectations for adjusted annual earnings per share from $7 to $6.90.

Goldstein said the revised guidance suggested a 40 percent decline in nutritional gains starting in 2022, “and that’s even assuming we can trust the 2022 numbers.” The market’s reaction this week is an indication that it has “lost confidence in [ADM’s nutrition] history,” Goldstein added. ADM declined to comment.

A little more than two years ago, the company set a goal of doubling revenue from its nutrition segment to between $1.2 billion and $1.5 billion by 2025. “Aggressive, yes; It’s doable, yes,” Vincent Macciocchi, who led the division through 2022, said during ADM’s global investor day in December 2021. “I tell our team all the time that this is the chance of our careers to build the world-leading nutrition business within “It’s a Fortune 100 company and there has never been a better time to be at ADM.”

Bar chart of operating profit (millions of dollars) showing that nutrition has represented a small but growing portion of ADM's profits.

ADM’s purchase of Wild Flavors, a Swiss-based ingredients maker, for €2.3 billion ($3.1) in 2014 remains the largest acquisition in the company’s history. The move led to the creation of a new division that has continued to grow with more deals, including French animal feed maker Neovia for €1.5 billion ($1.8 billion) in 2018 and dairy flavor maker Revela Foods together. with UK-based ingredients producer FDL. last year.

The Covid-19 pandemic and Russia’s large-scale invasion of Ukraine, a major exporter of grains and oilseeds, drove up food prices and worsened hunger rates in many parts of the world, but caused swings of prices that generated record profits for agricultural traders. ADM reported more than $100 billion in revenue in 2022.

Most of this came from ADM’s oilseeds and agricultural services business, but the nutrition segment also benefited. As feed crop prices rose, for example, demand grew for certain types of proteins, such as amino acids, used as supplements in feed mixes.

Traders’ overall profits fell from their all-time highs last year as price volatility decreased. Small victories for ADM’s nutrition division were also short-lived.

In 2022, the nutrition division’s operating profit grew just 6.5 percent, a far cry from the double-digit growth rates touted by Luciano a few years ago. The share of total operating profit from nutrition fell in the first nine months of 2023, to 10 percent, as ADM has struggled amid declining demand for plant-based proteins.

Protein powder samples at an ADM facility in Decatur, Illinois
Protein powder samples at an ADM facility in Decatur, Illinois ©Daniel Acker/Bloomberg

Investors have never been convinced of the value of the nutrition segment, said Jefferies analyst Dushyant Ailani. While ADM management was “pretty bullish on it,” he said, for investors “it’s always been a show-stopping story.” . . If you can show consistent performance within the segment, then we will give you credit for that.” The investigation will not help, he added.

Goldstein disagreed. The reason the stock sold off so much, even though the nutrition division was a relatively small part of ADM’s business, was because the market had been “giving ADM some credit for moving into a later nutrition business.” more stable and with higher profits”.

But the accounting investigation and the decision to put Luthar on leave suggested “that the growth wasn’t there,” Goldstein said. “ADM was never able to grow the nutrition business and diversify from cereal marketing as quickly as it appeared.”

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