ADM profits down 2% in Q2

by Josh Sosland
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DECATUR, ILL. — Significant improvements in commodity processing operating profits at Archer Daniels Midland Co. were offset by a sharp decline in the company’s Agricultural Services segment in the second quarter ended Dec. 31, 2009.

ADM net income in the second quarter was $567 million, equal to 88c per share on the common stock, down 2% from $578 million, or 90c, in the second quarter of fiscal 2009. Net sales were $15,913 million, down 5%. The sales decline was attributed to lower commodity prices, offset partly by higher volumes.

“While our earnings total was comparable to last year’s strong second quarter, the market conditions and the mix of earnings were markedly different,” said Patricia A. Woertz, chairman and chief executive officer. Ms. Woertz participated in a Feb. 2 conference call with securities analysts.

Within its processing businesses, the widest improvement was in the Corn Processing Operating segments. Operating profits were $290 million, up 900% from $29 million in the second quarter of fiscal 2009.

The surge largely was attributable to improved ethanol margins and higher sales volumes. The company benefited from lower net corn costs, reduced manufacturing costs and “favorable gasoline blending economics,” ADM said.

Ms. Woertz was upbeat about prospects for the business, noting that developments during the quarter included commissioning of an ethanol dry mill in Nebraska, adding 300 million gallons of annual capacity.

“We have an optimistic view of the ethanol business or we wouldn’t have built the capacity we did,” Ms. Woertz said. “We have been in the business for quite a long time, so we have seen cycles. As you know, there is a renewable fuels standard that gives some certainty related to demand.”

While ethanol and other bioproducts accounted for $230 million of the $261 million improvement in operating earnings, the sweetener business was strong, too. The company attributed the $31 million gain to the lower net corn and manufacturing costs. A negative was lower sales volume.

During the conference call, Steven R. Mills, executive vice-president and chief financial officer, offered an assessment of prospects for the business in 2010.

“We’ve completed our sweetener and starch contract negotiations for 2010, and we saw a decrease in selling prices for sweeteners and starches,” he said. “On a weighted average basis, this decrease was in the high single digits, but we do expect a lesser impact on margins.”

He attributed the smaller corn sweetener volume in 2009 to reduced consumption of carbonated soft drinks.

Asked during the conference call about the lower pricing, Mr. Mills said the reduced volume was a factor.

Operating profit of the Oilseeds Processing segment was $352 million, up 10% from $319 million in the same quarter in the last fiscal year.

Results benefited from a small gain in crushing and origination, offset by weaker results in Europe. The fiscal 2009 results were pressured by fertilizer inventory write-downs. ADM said North American sales volumes and margins were off both in the second quarter and year to date in fiscal 2010.

ADM’s Other segment, which includes flour milling and cocoa processing, had operating income of $178 million, up from $5 million in the second quarter last year. For the six months, operating income was $305 million, up from $125 million in the first half of fiscal 2009.

ADM said the improvement was “due to increased equity earnings from the company’s investment in Gruma S.A.B. de C.V., improved global wheat milling margins and increased cocoa processing earnings.”

Mr. Mills offered a favorable assessment of the present picture for milling.

“Current market conditions show wheat flour production generally balanced in the milling group, and we have a good supply of work,” he said in the conference call. “Production in cocoa has slowed as the industry experiences both reduced demand and high cocoa and sugar prices. Customers have continued to be cautious about forward contracts.”

Sustaining a sharp drop in operating profit during the quarter was ADM’s Agricultural Services segment. Operating profits were $150 million, down 58% from $462 million in the second quarter last year.

While the company benefited from strong export demand for soybeans in the second quarter, “enhanced volume and margin opportunities created by last year’s volatile commodity markets and tight credit markets did not recur during the quarter and six months ended Dec. 31, 2009,” the company said.

For the six months ended Dec. 31, ADM net income was $1,058 million, or $1.65 per share, down 35% from $1,625 million, or $2.52. Sales were $30,834 million, down 18%.

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