使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good morning, and welcome to the Archer Daniels Midland Company second quarter 2013 conference call.
All lines have been placed on a listen only mode to prevent background noise.
As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's call, Ms. Ruth Ann Wisener, Vice President, Investor Relations for Archer Daniels Midland Company.
Ms. Wisener, you may begin.
Ruth Ann Wisener - VP of IR
Thank you.
Good morning, and welcome to ADM's second quarter earnings conference call.
Before we begin, I would like to remind you that we are webcasting this presentation on our website www.adm.com.
The replay will also be available at that address.
For those following the presentation, please turn to slide 2, the Company's Safe Harbor Statement, which says that some of the comments constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, Company performance and financial results.
Statements are based on many assumptions and factors, including availability and prices of raw materials, market conditions, operating efficiencies, access to capital and actions of government.
Any changes in such assumptions or factors could produce significantly different results.
To the extent permitted under applicable law, the Company assumes no obligation to update any forward-looking statements as a result of new information or future events.
Please turn to slide 3. On today's call, our Chairman and Chief Executive Officer, Pat Woertz, will provide an overview of the quarter.
Our Chief Financial Officer, Ray Young, will review financial highlights and corporate results.
Our Chief Operating Officer, Juan Luciano, will review our operations and then Craig Huss, our Chief Risk Officer will join Pat, Ray and Juan during the question and answer portion of the call.
Please turn to slide 4. I will now turn the call over to Pat.
Pat Woertz - Chairman and CEO
Thank you, Ruth Ann and welcome, everyone to our second quarter conference call.
This morning we reported second quarter net earnings of $223 million, or $0.34 per share on a diluted basis.
Our adjusted EPS was $0.46 per share.
Segment operating profit was $647 million.
The team managed well through this period as tight US crop supplies reduced overall volumes.
Also, our corn results improved significantly amid a volatile ethanol industry condition.
During the quarter, we continued to work to improve the Company's future returns and earnings power over the cycle.
Our effort to unlock cash reached $2 billion with the team reaching this milestone a half year ahead of schedule.
And in cost, we made solid progress toward our goal of $200 million in additional cost reductions by the end of 2014.
Our cash flow in the second quarter was strong, and we reduced our debt significantly.
We've received six regulatory approvals for our acquisition of GrainCorp in Australia and we await the final three.
Looking ahead, we will be managing through tight crop supplies until the forecast large but delayed US harvest.
Now, I'll turn the call over to Ray.
Ray Young - CFO
Thanks, Pat.
Slide 5 provides some financial highlights for the quarter, which I'll run through briefly.
Quarterly segment operating profit was $647 million, up 19% from last year's $544 million.
Our effective tax rate for the quarter was 29%, down slightly from the 30% rate in the same quarter last year.
On a fully diluted basis, our earnings per share was $0.34 compared to last year's $0.43.
Our adjusted earnings were $0.46 per share compared to last year's $0.38 per share.
On chart 17 in the appendix you can see the reconciliation of reported earnings to adjusted earnings for the period ending June 30.
For this quarter we had a LIFO charge of $39 million, or $0.04 per share.
In addition, we had mark to market valuation losses on foreign currency hedges of $51 million, or $0.05 per share related to our planned purchase of GrainCorp.
During the quarter, we established some currency hedges for the purchase in the Australian dollar subsequently depreciated resulted in these valuation losses.
In addition, we updated our provision related to the previously disclosed FCPA matter.
We increased this provision by $29 million to a total of $54 million based upon recent progress in discussions with the US regulators examining the case.
Our trailing LIFO adjusted four quarter average ROIC of 5.2% was 50 basis points below our WACC of 5.7%.
Excluding specified items, our trailing four quarter average adjusted ROIC was also 5.7%.
Slide 6 provides an operating profit summary and the components of our corporate line.
Juan will talk about the segment results in his update.
Let me touch on a few items of significance in the corporate sector.
I mentioned LIFO earlier, a charge of $39 million for the quarter as rising commodity prices during the quarter impacted our inventory valuations.
That's compared to a gain of $50 million a year ago.
Interest expense of $104 million for the quarter lower than prior year due to lower net debt levels.
Corporate expenses of $71 million were up from the $67 million level a year ago as we incurred some additional projects related costs.
I mentioned the mark to market valuation loss of $51 million related to our Australian dollar hedging, and I also mentioned the increased provision related to the FCPA matter.
And finally, on the other of $65 million, this includes some mark to market valuation losses related to our investments in CIP.
Turning to the cash flow statement on slide 7. We present here the cash flow statement for the six months ending June 30, 2013, compared to the same period the prior year.
We generated $700 million from operations before working capital changes in the first half of 2013 compared to $1.1 billion last year.
Working capital changes were a source of $1.6 billion of cash in the period compared to last year when there was significant use of cash.
The Company's efforts to focus on working capital efficiency were evident in our first half cash flow results.
Total capital spending for the six months was $442 million and acquisitions amounted to $16 million.
After changes in working capital and investments, our free cash flow for the first half of 2013 was almost $1.9 billion compared to a large use of cash of $800 million last year.
With the strong cash flows we were able to reduce drawings on our working capital lines such as commercial paper borrowings.
We did restart repurchasing shares in the quarter in a modest amount.
We finished out the quarter with an average outstanding of 663 million shares on a fully diluted basis.
Slide 8 shows the highlights of our balance sheet as of June 30 for both 2013 and 2012.
Cash on hand was approximately $2 billion, up from the $500 million from the prior year.
Our operating working capital was about $12 billion, down from the $14.6 billion level last year for a reduction of $2.6 billion.
Of this reduction, about $1.6 billion was related to lower quantities of inventory.
Total debt was about $7.5 billion, resulting in a net debt balance that is debt less cash of $5.5 billion, down significantly from the 2012 level of $8.9 billion.
The $5.5 billion net balance represents the lowest level at mid year since 2007.
Our shareholders' equity of 19 billion is about $1 billion higher than the level last year.
Our ratio of net debt to total capital excluding cash from gross debt is 22%, much improved from the June 30, 2012 level of 33%.
So, we are reducing leverage and maintaining a very strong balance sheet.
We had $8 billion in available global credit capacity at the end of June.
If you add the available cash, we had access to about $10 billion of liquidity.
Clearly, we have a balance sheet strong enough to easily finance the GrainCorp acquisition and handle the seasonal increase in working capital needs as we enter the North American harvest later this year.
Next, Juan will take us through an operational review of the quarter.
Juan?
Juan Luciano - COO
Thanks, Ray.
Good morning to everyone on the call.
Beginning on slide 9, I will take you through the highlights of each of our business segments.
Oilseeds operating profit in the second quarter was $321 million, down $10 million from the same period one year earlier.
Crushing & Origination operating profit was $185 million, up $35 million from the year ago quarter.
European crushing results improved significantly year-over-year as delays in the arrival of South American meal contributed to stronger margins.
In North America, tighter crop supplies resulted in weaker soy and soft seed crush margins.
South American operations recovered from the first quarter and generated the strong overall results equivalent to the year ago quarter.
The team in South America continued to manage through logistical challenges and we saw improved export volumes and margins.
In Paraguay, our new soybean processing plant ran at full capacity for the quarter.
Refining, Packaging, Bio Diesel & Other generated a profit of $93 million for the quarter, up $9 million on stronger European results.
Cocoa & Other results decreased $58 million due to lower margins on businesses contracted in earlier quarters.
Oilseeds results in Asia for the quarter were up $4 million from the same period last year, principally reflecting our share of the improved results from Wilmar International Limited.
Please turn to slide 10.
Corn processing operating profit of $223 million represented an increase of $149 million from the same period one year earlier.
Sweetener & Starches operating profit decreased $9 million to $126 million.
Excluding the impact of corn hedging effectiveness, Sweeteners & Starches results improved by $25 million on steady North American sales.
Bioproducts results increased $158 million to $97 million.
Our ethanol results improved significantly amid volatile industry conditions.
Turning to slide 11, you will see a review of our agricultural services segment.
Operating profit was $81 million, down $33 million when excluding Gruma from the year ago result.
Merchandising & Handling earnings declined $16 million to $14 million.
The impact of last year's drought continued to limit US origination and export volumes, and international merchandising results declined on lower margins.
Results this quarter were also reduced by some nonrecurring expenses.
Transportation results decreased $14 million to $3 million as slower US export volumes reduced barge freight utilization.
Milling and other results remained steady, excluding last year's Gruma earnings, as the milling business continues to perform well.
We sold our stake in Gruma last December.
Looking ahead, the impact of last summer's US drought continues as US crop supplies remain tight.
At the same time, the crops in the field seem to be developing well with 64% of the corn crop rated good to excellent compared to 23% a year ago.
With high prices for last year's crop and lower prices for the crops coming this fall, the market is inverted.
We have to manage this inverse carefully so we don't carry on -- carry high cost inventory into a low cost environment.
In terms of timing, this spring's rain delayed plantings and the recent cool weather will lead to late harvests this fall.
Slide 12 is a progress update on our efforts around what we call the three Cs, capital, cost and cash.
Through the first half of 2013, our CapEx is in line with our projection of $1 billion.
We continue to focus our growth investments outside the US.
In the area of cost, we have already implemented steps that will deliver about one-third of our target of an additional $200 million in cost reductions by the end of 2014.
This savings will come from improvements in energy and water efficiency, repairs and maintenance, process technology and procurement.
And we have continued to strengthen our cash position.
After our team achieved our $1 billion challenge several months ahead of schedule last year, we determined to find a second billion dollars, and as Pat mentioned, we've now achieved that goal, once again ahead of schedule.
I'm proud of the team's efforts in capital, cost and cash that are enhancing ADM's future returns and earnings power.
Pat?
Pat Woertz - Chairman and CEO
Thank you, Juan.
So, let me summarize.
Segment operating profit up 19%, AG services down on tight US supplies.
Oilseeds had strong crush and origination, but weak cocoa results.
Corn was up with volatile ethanol conditions, and we have to carefully manage the inverse as we look toward a later harvest, and very good ahead of schedule progress on the three Cs.
Now, before Craig Huss joins Juan, Ray and me for the Q&A, I wanted to let you know that this will be Craig's last quarterly call.
After 37 years with ADM, he's retiring later this year.
Craig has been a huge presence at ADM.
His size, his voice and certainly his contributions.
So, thank you very much, Craig, for all of your efforts.
And with that, operator, if you'll please open the line for questions.
Operator
(Operator Instructions)
We will pause for a brief moment to compile the Q&A roster.
Your first question comes from the line of Tim Tiberio with Miller Tabak.
Tim Tiberio - Analyst
A very quick question.
Looking forward as the cost basis in both beans and corn have collapsed over the last few weeks, you suggested that it's going to be a challenging environment managing this inversion between the old and new corn crop.
But I guess on the margin, are you feeling a little bit better about supply since the last quarterly call as maybe farmers are more willing to sell?
Or on the margin, are you becoming a little bit more cautious?
Thank you.
Craig Huss - Chief Risk Officer
Tim, is this Craig.
I would say that you've heard a couple times that the crop that's going to be a little delayed, and I think that the main reason for that is this crop is so healthy, and it's 64% good to excellent.
I think we'll have -- we will have bigger crops.
They may be a couple weeks later, but we are recharging the process.
Our storage should be full and it should help us going forward.
As far as the farmer selling, he probably will be a reluctant seller at some point.
But for example, with the $14 billion ballpark corn crop, there's going to be -- there will be plenty to move.
Tim Tiberio - Analyst
Okay.
And then just moving on to the cocoa business, any update as far as your strategy there?
And then, I guess if there is not the potential to divest this in the near term, based on your comments on the prior call, do you expect that you'll be able to get some pricing increases or at least margin improvement compared to the first half and the second half?
Pat Woertz - Chairman and CEO
Well, Tim, the -- certainly, conditions that have negatively impacted our cocoa business have subsided or moderated a bit, and this isn't a business we have to sell.
We've been doing a very careful portfolio review, and as I know you'll understand, if the discussions are ongoing or if there is a process underway, it's premature to comment on that process.
I will tell you that we're very disciplined and we look at portfolio importantly.
It needs -- we need to take into account the both financial objectives and how it fits into our strategy.
So, in terms of confirming that we have -- we're taking a look at this, I can say that, but I can't say any more than that.
Tim Tiberio - Analyst
Okay.
And just lastly, as far as the improvement in cash flow, should we expect any updates on new initiatives for cash in the coming quarters, or are you still waiting for the GrainCorp transaction and the harvest to come in before making any final decisions on that?
Pat Woertz - Chairman and CEO
Well, you can imagine, if we have about $10 billion in cash that we have lots of opportunity and options.
And of course you -- as we've talked about, the GrainCorp acquisition we still believe is on track to close by the end of the year.
We hope for that, and we can take the uses of cash including, we've started back our share buyback program.
We're going into a harvest as you know, so you just the normal cycle will have a need for cash, but we have lots of flexibility and extremely strong balance sheet.
Tim Tiberio - Analyst
Okay.
Thanks for your time.
Operator
Next question comes from the line of David Driscoll with Citi Research.
David Driscoll - Analyst
Great, thanks a lot and good morning, everyone.
Pat Woertz - Chairman and CEO
Good morning Dave.
David Driscoll - Analyst
Craig, I want to wish you the best.
I've always appreciated your insights, and you really will be missed.
Thanks for all the years, great stuff, and good luck in retirement.
Certainly well earned.
Craig Huss - Chief Risk Officer
Thank you very much.
David Driscoll - Analyst
Pat and Juan, I want to ask you a few questions related to ethanol and the renewable fuel standard, the RFS.
The first one is just related to, do you believe that the independent refiners have a legitimate complaint on the RIN costs?
And I would just observe that frankly, on their conference calls in this recent quarterly report, they seem to be going crazy on this issue.
But I'd really like to hear your version of this RIN issue and whether or not they have a legitimate complaint.
And then I have a follow-up related to ethanol, if I may.
Juan Luciano - COO
Yes, this is Juan, David.
Listen, the market today provides an incentive for people to blend ethanol, and I would argue that E85, for those people that are pricing it correctly, it has -- we have seen the -- some of the volumes for this distributors, if you would, triple.
So, there is an opportunity there that is elasticity and demand will come if this ethanol is properly priced and then passed to the consumer.
There is also E15 available in several countries -- in several states, and we have counted already 10 states in which all the regulations have been -- are in place for this to be implemented.
So, we believe that people have options to blend more, and so we believe that the RIN prices is a reaction to their behavior.
If they could price ethanol more effectively, that would increase demand and they don't need to resource the RINs.
So, that's my position.
David Driscoll - Analyst
Do you believe that there's any movement in congress that is sufficient enough to alter the RFS?
Juan Luciano - COO
I think to the extent that the RFS impact us, we feel very confident that, that regulation will be maintained.
David Driscoll - Analyst
All right.
Last question on this is just, E15 in particular, I think by my work there's about 20 stations in the country that sell E15, and I believe that's about six states.
What do you assess here on E15 at the moment?
And maybe more importantly, do you think that this is really going to catch fire and that we're going to see a heck of a lot more E15 stations throughout the United States in 2014?
Juan Luciano - COO
Yes, David.
I think that, we said it before, that it was going to be slow, and we didn't expect a material volume in 2013.
We think that as people get more comfortable and more states have the regulations in place, this will start to proliferate.
Also, as people price this effectively, I think that the incentive, especially on a larger corn crop, the incentive to blend ethanol will be there.
David Driscoll - Analyst
Would you then characterize the outlook related to this much better corn crop, much cheaper corn crop, would you characterize the ethanol outlook as very good for 2014?
Juan Luciano - COO
I think we said it before, David, that we are very optimistic about the ethanol future for '14 and '15.
David Driscoll - Analyst
Okay.
Thank you for the answers.
I'll pass it along.
Pat Woertz - Chairman and CEO
Thanks David.
Operator
Your next question comes from the line of Ann Duignan with JPMorgan.
Ann Duignan - Analyst
Hello, good morning.
Pat Woertz - Chairman and CEO
Good morning Ann.
Ann Duignan - Analyst
As we look through this large crop, there are a lot of comparisons with 2009 in terms of crop year.
I'm wondering if you could comment by segment, if that is the case and we get a very large crop, large volumes, is there any reason why ADM wouldn't post the kind of operating performance in '14 that it did back in 2010?
Are there any structural differences such as ethanol margins that would cause you not to deliver very strong margins next year?
Pat Woertz - Chairman and CEO
Ann, let me start and then maybe Juan wants to go through by business a little more.
Given that the US is likely to produce a record crop as your statement indicated, we think conditions are definitely unfolding in a way that would produce some very good conditions for us.
But I would add even more importantly, it's the work that we've undertaken as well with the progress on cash and costs and capital, as well as acquisitions and our investments in a higher return area that position us for thinking very well about the opportunities in 2014.
A potentially very, very good environment and very good work that when that environment hits can position us for higher returns.
Maybe by division, Juan can comment.
Juan Luciano - COO
Sure.
Ann, the way I look at the conditions in the future, and maybe you can take Q4 since it's going to be a quarter that we're going to see -- start to see the impacts of the new crop, we will see in that environment certainly North American crush utilizations coming up in oilseeds.
We will have seen an improved soft seed margin environment with a big canola crop in Canada.
I think we will see -- with lower corn prices that will favor the relationship between corn products and some of the substitutes, so product inclusions should increase.
I think you're going to see better blending economics that will entice more blending in terms of ethanol.
Maybe even improve the sweetener exports as you see a better relationship, maybe, potentially between corn and substitutes like sugar.
I think fundamentally, what we see is that a larger crop will allow us for a better utilization of some of the investments that we've done in the past.
You take that as a source of improved earnings.
I said before, I think that we are optimistic about ethanol margins for '14 and '15 and certainly, a larger corn crop -- or crops in general will provide AG services and opportunity to utilize all their asset footprint that we have in North America more fully.
So, I think the opportunity is there for potentially big results.
Ann Duignan - Analyst
Okay, thank you.
That was good color.
I appreciate it, and just a follow up.
Is there any permanent negative margin impact on the fact that US farmers have now expanded their on-farm storage capabilities?
Craig Huss - Chief Risk Officer
No, I don't think it is at all.
I think the on-farm storage, it just increases total storage, and it may delay at times -- the point at which they sell the crops.
But they have the same pressures and incentives today they've always had as to forward thinking, what they think it will do.
But I -- it may take a little pressure off of the selling and harvest, but overall, I don't think it makes a major change.
Ann Duignan - Analyst
Okay.
Thank you.
I'll get back in line.
Appreciate it.
Pat Woertz - Chairman and CEO
Thank you, Ann.
Operator
Your next question comes from the line of Ken Zaslow with BMO Capital Markets.
Ken Zaslow - Analyst
Hello, everyone.
Pat Woertz - Chairman and CEO
Good morning, Ken.
Juan Luciano - COO
Good morning, Ken.
Ken Zaslow - Analyst
Obviously, Craig has been an intricate part of the transition over the last couple of years, and obviously even further back.
Can you talk about how either you, Craig -- or how you're going to do a succession plan, who's going to take over your spot and how that's going to work over the next couple of years?
Pat Woertz - Chairman and CEO
I'm going to ask Juan to comment on that.
Thanks.
Juan Luciano - COO
Yes, Ken, good morning.
We have -- I think we have explained it before.
We have a risk committee that Craig currently chairs, and we have the business president there and Ray and myself and other people.
In this role, Craig works very closely with our business unit heads as they manage the commodity risk within their segment.
So, Craig's responsibilities will be transitioned to ensure our ongoing oversight on commodity risk management.
But this is a smooth transition, this is an area in which, although we're certainly going to miss Craig tremendously as being a great co-worker and team member, we have huge expertise and bench strength in this area.
So, I think that with the other participants in the chair, in the committee, I think we're going to be fine.
Ken Zaslow - Analyst
Okay.
And then my other question that I have is, look, obviously, it with a big crop, your AG services is going to have a lot of volume.
Can you talk about the margin side of it?
Because there seems to be a lot of crop out there that's not the same sort of dislocation.
Can you talk about how you can maximize profit to become maybe like the 2010 and 2011 environment, or does it change where you've got a lot of volume at a much lower margin structure?
Can you give us a little bit of a balancing act here, because I think that helps us all think about the future for ADM.
Craig Huss - Chief Risk Officer
Sure.
This is Craig.
I think first, a large crop doesn't necessarily squeeze margins anymore than a small crop does, as people are pushing to put whatever capacity they can through their assets.
So, I don't like to tie those two together.
We will need some demand, but we have all these assets that we've talked about for the year that are not being utilized.
And we, as the largest storer of grain in the United States, we will be filling those assets and we'll manage those depending on the cost of carries, et cetera.
But I think we've had two substandard crops, and this is a recharge that is just essential for ADM, and we plan on taking advantage of it.
Ken Zaslow - Analyst
Do you think -- if there's plentiful crops outside the US, is there the opportunity to, again, maximize the whole chain across?
Or does that change the direction of how much profitability you could actually make in the AG services business?
Juan Luciano - COO
When we look at this Ken, we think that potentially the US could go a little bit lower in terms of exports in the future because there are other people that are growing their corn acreage.
But we look at this in the sense of through the value chain there are so many ways in which we can make money.
And we look at this from an AG services perspective providing different services through the chain, and we feel very comfortable about that.
Demand continues to be very strong around the world.
If you look at, for example, the imports of China, how they are rising through the different commodities.
So, we do believe that our role in moving crops and handling crops around the world will benefit significantly with the largest crop around the world.
Even our international merchandisers will profit from that as we have invested, as you know, in many, many units around the world.
So, we feel very good about the potential impact of large crops everywhere in our business.
Ken Zaslow - Analyst
Great.
I appreciate it.
Thank you.
Operator
Your next question comes from the line of Farha Aslam with Stephens.
Farha Aslam - Analyst
Two questions, the first is on GrainCorp.
Recently we've seen press articles and increasingly, you're seeing a lot of talk related to the election regarding GrainCorp.
Do you have any concerns about the timing and whether the transaction will be approved?
Pat Woertz - Chairman and CEO
Our timing is still within the process of our expectations.
You never know when a new election could have been called when we looked back earlier in the year.
But we believe that we are -- we've worked with both the Australian regulatory agencies as well as outside, and we're pleased that we have the six approvals that I mentioned.
And the three that remain include FIRB in Australia, South Korea and MOFCOM in China.
And I think we're on track for what we thought would be the case.
We're very respectful of processes, and each one have their own regulatory processes to go through and answer questions and so forth, and I feel like we're on track.
Farha Aslam - Analyst
Great.
That's helpful.
And then the second thing is regarding South America.
How did you think your team did in terms of opportunities versus challenges?
And going forward into next year, where can we look at that business growing?
Because that is an investment area for you.
Juan Luciano - COO
Yes, Farha, I think the team did a tremendous job in the second quarter.
Remember, I mentioned in the first quarter we had two impacts, the impact of higher trucking costs that we couldn't hedge and then the impact of less origination as the farmer was not selling.
The team came back strongly in the second quarter, and I think execution was beautiful.
In terms of our investments there, the Paraguay crop, the Paraguay oilseed plants continues to perform very, very well, running 100% capacity, and we continue to evaluate other investments, both in the area of logistics and in the area of processing.
As you described, that's an area of investment for us, of growth for us, and we have a very, very good team running it.
Farha Aslam - Analyst
And just one comment, could you just comment on crush margins in South America and perhaps, just soy crush margins around the world, what you're seeing over the near-term and then how you express -- expect that to progress going into next year?
Juan Luciano - COO
Yes, crush margins in South America were good in Paraguay and Bolivia.
There was a little bit less in Brazil as part of the issue is trying to export meal and you get to queue in the ports.
So, then everybody turns into the domestic market and there is some pressure there.
Europe margins were very good when compared to last year.
Obviously, some of the delays in South American exports helped provide some opportunity for better margins for soybeans in Europe.
And bio diesel, with less imports and tighter oil inventories was also -- provided some good margin environment for rate set in Europe.
North America saw obviously some pressure, and it will see pressure in the next quarter as we're dealing with a tight crop situation and the inverse that we mentioned before.
Farha Aslam - Analyst
Okay.
And then the ability of managing soy crush into next year?
Because we will have a more ample harvest.
And do you think capacity in terms of supply/demand going into next year, could you just share with us that profit outlook for that business?
Juan Luciano - COO
We continue to see demand growing, and our customers have been reporting very healthy earnings and demands, so we feel very good about it.
Farha Aslam - Analyst
Great.
Thank you.
Juan Luciano - COO
You're welcome.
Pat Woertz - Chairman and CEO
Thank you Farha.
Operator
The next question comes from the line of Vincent Andrews with Morgan Stanley.
Juan Luciano - COO
Good morning Vincent.
Are you there?
Pat Woertz - Chairman and CEO
Vincent?
Operator
Mr. Andrews, your line is open.
Vincent Andrews - Analyst
Can you hear me now?
Juan Luciano - COO
We can hear you now.
Yes.
Vincent Andrews - Analyst
Okay.
Sorry about that.
Question is just, you noted that ethanol was volatile in the quarter.
So could you just give us some insight into what was driving that volatility, and also what the team did well to post the result that you posted?
Juan Luciano - COO
Yes, I think you pointed correctly, the team did a very good job.
What happened there probably during the quarter is we saw some reductions in inventory at the -- early in the quarter and obviously, that bodes well for margins.
Then when margin increased, this is an industry still has over capacity.
It's a little bit immature, some of these players are under capitalized, if you will, so a lot of people tend to run for cash.
So, we saw basically capacity coming back, and we saw at the end of the quarter a little bit of stabilization of that reduction in inventory.
And maybe even, to be honest, in July, we saw a little bit of a creep in inventory or a creep in -- yes, in inventories for a few days.
So, it continue to be volatile.
I think that the industry is more disciplined.
I think this is a time of the year in which most of us, before the big harvest and before the winter, people tend to do some maintenance to their plants.
So, we see that maybe playing out, those dynamics playing out over the next couple of months.
But that's what happened during the quarter.
Better margins at the beginning as inventory declined, then some people came back into production and that put some pressure on margins that moved from late June into July.
Pat Woertz - Chairman and CEO
Vincent, maybe adding to Juan's point a little bit.
I think we always have thought that there'd be continued volatility, even through 2013, until you get the additional bump of the RFS.
But import volumes should also decline as we go into the fall.
And the integrated network we have, I think is a core competency to be able to serve the business and move those volumes around as needed.
Vincent Andrews - Analyst
Okay.
And then if we think about '14, you just referenced the further step up into the RFS, which theoretically at some point will -- either forces the RIN issue, or forces E15, or forces some type of legislative response.
Your optimism -- or maybe Juan, you can give us an update on your optimism and just clarify whether -- how reliant it is on the RFS for 2014 staying where it is.
Pat Woertz - Chairman and CEO
Maybe I'll start with Washington and Juan can comment on the economics, which I think economics drive this more so almost than anything else.
We did have hearings take place this summer, and we heard that the RFS is an important -- is important for assuring market access to ethanol.
The producers don't control the infrastructure, so consumers' ability to buy it, E15, E85, et cetera, continues to be important.
We heard the White House reiterate its support.
I think it called it the backbone of the climate policy, included RFS.
And I have to remember for congress to try to pass anything there needs to be agreement, and agreement by both houses and both parties, et cetera, so I think that's the less likely pressure.
I think you'll see more the pressure of economics associated with additional blending and the RINsanity somewhat happening.
Vincent Andrews - Analyst
Okay.
And maybe -- go ahead, Juan.
Sorry.
Juan Luciano - COO
That's all right.
I just want to emphasize what Pat just said in the sense that I think the size of the corn crop will bring a very strong economic incentive to blend.
I think we all want lower gasoline prices.
I think that E15 is there for -- and E85 is there.
Listen, I lived in Brazil 20 years ago, and we were using higher blend rates than 15%, and this was --these were cars produced by the same manufacturers that are here.
So, I think that the economic incentive on passing that to the consumer will prevail.
Vincent Andrews - Analyst
And then separately, just looking at your ROIC calculation, the one line in there, the interest bearing liabilities.
Obviously, that's been coming down as crop prices have gone down, your working capital's gone down.
How low do you think that line can go as we move into next year's crop?
Ray Young - CFO
Vincent, this is Ray here.
As I indicated in my comments, part of the reason why we're building up the balance sheet flexibility is that if there's an opportunity for us to accumulate some inventory and benefit from the carry, we will.
And so therefore, from a capital perspective, clearly, we're managing this thing very, very carefully but -- and managing both the capital investments and also inventory and working capital.
But we want to -- but we're preparing our balance sheet in order to take advantage of carry opportunities as well.
So, as we enter the fourth quarter, if there are carry opportunities we will invest, and we will benefit from that in terms of our financial results, including our returns.
Vincent Andrews - Analyst
Okay.
Thanks, Ray.
Pat Woertz - Chairman and CEO
Thank you.
Operator
Your next question comes from Christine McCracken with Cleveland Research.
Christine McCracken - Analyst
Yes, good luck, Craig, you've been a huge [help] over the years.
And just wanted to talk on a -- or had a couple of questions, first on -- relative to the last questions on ethanol, you mentioned the issue of over capacity.
We've seen several smaller plants here over the last couple of months being acquired.
The expectation is that they'll reopen and add back to some of the production, given the margins that we've seen.
Is there any risk that we add to the over capacity situation?
Is this something that ADM is looking at as some of these plants now are changing hands?
Juan Luciano - COO
Christine, we said before, this is part of the volatility we keep on referring to.
This is, as I said, a relatively new market.
It's a very fragmented market.
It needs to go through consolidation, and there's going to be periods of pain until we gain into that full capacity.
As I explained, based on the dynamics that we've seen before, we are optimistic for '14 and '15.
But '13 is going to still have periods of great margins and periods of some margin pressure that we've seen recently.
Pat Woertz - Chairman and CEO
Christine you almost might -- we remember that, that 15 billion gallons is really how the industry has been built out to meet that requirement in 2015, and some of that is not running.
Some of it maybe is a bit more permanently mothballed.
Maybe others will change hands, but we don't see it being built in a greater capacity than that 15 billion gallons.
Christine McCracken - Analyst
And just curious on your sweeteners and starches, because you did say, I think in your comments that things were a little stronger there.
And that's a little different, I think, than some of the CSD volume data that we've seen and the comments by some of your competitors.
I'm curious if you think you're gaining share, or is there some other strength in that business that we haven't seen?
Juan Luciano - COO
We've seen liquid sweeteners volumes that were in line with our expectations, probably slightly lower than last year.
But the volumes to Mexico continues strong for us.
So, all in all, we reported a very solid quarter and we saw solid demand, yes.
Christine McCracken - Analyst
And going forward, given how soft sugar prices are and your competitive position, you're still fairly confident, I think, based on your comments?
Juan Luciano - COO
Yes, going forward in Q3, I see -- we expect volumes probably in line with last year and some down seasonality on Mexico, but as I said, normal year-to-year seasonality.
Christine McCracken - Analyst
All right.
Great, thanks.
Juan Luciano - COO
You're welcome.
Pat Woertz - Chairman and CEO
Thank you Christine.
Operator
Your next question comes from the line of Diane Geissler with CLSA.
Diane Geissler - Analyst
Good morning.
Juan Luciano - COO
Good morning, Diane.
Diane Geissler - Analyst
Say, I wanted to ask about your capital spending plans.
I know that you've talked over the last few quarters about reducing CapEx this year.
I think you're running in the billion dollars range.
One of your competitors on their call recently talked about that the industry had added a lot of capacity, greenfield capacity over the last few years in emerging markets.
And that maybe the growth in volume hadn't been there really to support it because of what had happened with commodity prices.
So, what is your take, as we look over the course of a big crop this year, I'm sure we'll get big plantings in Brazil next year, about CapEx versus acquisitions in terms of building your -- obviously, you're making a big acquisition in Australia, but just in the emerging markets in particular.
How do you view that?
Do you see additional capacity needed above and beyond what you already have in the works, or are you more inclined to acquire it?
Juan Luciano - COO
Yes, it depends.
Our preference normally, Diane, is to go and try to acquire, so we continue to consolidate the market.
We've done that with Elstar in Poland.
We're doing now with GrainCorp as we gain access to geographies we were not present in.
When we cannot find that, like in the case of Paraguay, we build.
So, I would say probably we will build more in terms of, for example, South America infrastructure, ports or logistics.
And in terms of processing capacity, our preference will be to buy and try to consolidate the market.
Diane Geissler - Analyst
Do you think now is the time to buy, given it seems like the profitability levels in South America and North America, for that matter, seem to be improving?
Juan Luciano - COO
We have a very -- having the world as the opportunity, we tracked all these in our pipeline around the world and where properties get in our range, that's when we activate the processes.
So, we are looking at our preferred properties around the world.
I will not show my hand into saying which area are we looking at, but we have a very disciplined process to allocate that billion dollars.
Diane Geissler - Analyst
And then I guess for Ray, can you tell me what you think your optimum leverage ratios should be?
I appreciate, you've -- you're obviously going to have some working capital flows here coming down because of what's happened with commodity prices, so you'll have you know increased cash position as you monetize higher value inventory.
I guess, where do you think the optimum leverage ratios should be, and what are you going to do with your excess cash flow to the extent that Juan can't find stuff he wants to buy cheap enough?
Ray Young - CFO
Diane, I've always indicated that in this industry, it's very important to have a strong balance sheet and hence, maintaining solid investment grade credit ratings is an important priority for us.
And so when we look at our leverage position -- and again, when you look at leverage, there's balance sheet metrics, there's income statement metrics, we look at those things very, very carefully.
I think our balance sheet metrics right now are very, very strong.
Some of our income statement metrics are a little weaker because we're still living through the residual impacts of 2012 US summer drought.
But going forward, when you think about, this Company is a cash machine when it comes to generating cash.
When you look at the past couple of years before the drought, we were generating $2 billion to $2.5 billion in cash flows before working capital and before CapEx.
And so Juan's going to look for investment opportunities.
There's no doubt about that.
But even with those investment opportunities, assuming we continue to grow this Company and generate the cash flow, I do feel that we will have opportunities in the future to provide additional returns to our shareholders.
We always believe in a balanced approach towards investing the free cash flow of this Company between internal projects and for our shareholders.
Diane Geissler - Analyst
Well, I guess what's behind the question is, I thought you were already getting that done in terms of maintaining your investment grade rating with the leverage ratios that you had previously.
So, I'm just trying to get a feel for -- is the reason why you made such a significant debt paydown this quarter because you're positioning your balance sheet for the closure of GrainCorp?
Or is it a -- just an overall more conservative stepdown in where you think your leverage ratios should be?
Because --
Ray Young - CFO
No, no I don't think you should read that.
We're preparing ourselves for GrainCorp.
Diane Geissler - Analyst
Okay.
Ray Young - CFO
And we're preparing ourselves for potentially a very favorable harvest where there will be some significant opportunities for us to invest in inventory to benefit from the carry.
So, that's why we're preparing the balance sheet for those opportunities right now.
Pat Woertz - Chairman and CEO
And I'll even reinforce what Ray said.
It's not a more conservative approach at all.
I think we need to think about as year-end approaches here, there will be some significant needs for cash, and we're positioned to take care of those with a very strong balance sheet.
Diane Geissler - Analyst
Okay.
All right.
Thank you for the comments.
Pat Woertz - Chairman and CEO
Thank you.
Operator
Your next question comes from the line of Ann Gurkin with Davenport.
Pat Woertz - Chairman and CEO
Hello, Ann.
Ann Gurkin - Analyst
Just to return to the working capital question, as we think about the year, how should we think about that number?
If you can help me again with the trajectory of that working capital needs, given the larger crops?
Ray Young - CFO
It's tough to estimate that, Ann, because it will be a function of what the opportunities look like as we get to the fourth quarter, the timing of the harvest.
So, that's part of the reason why I want to make sure we have full balance sheet flexibility right now because we could build up significant inventories, if the opportunities were there, or it could get delayed.
So, it's -- I don't have a point estimate in terms of what our inventory balance will be at end of the calendar year, but I can assure you if there are opportunities, we will take advantage of it.
Ann Gurkin - Analyst
That's great.
And then ROIC of 5.7%, I think you said in the quarter, or the trailing 12-months, is that 200 basis point target still a good target or does that need to be adjusted?
Ray Young - CFO
No, that's still a good target.
The way I look at it, I think our conditions -- again, we're still living through the residual impacts of last year.
I kind of view ourselves pretty well near the trough right now, and so to the extent we're still earning our WACC at the trough, I think that's not a bad performance.
Going forward, look towards 2014 when you get back to more normal conditions with greater earnings power, and our continued focus on ensuring that our invested capital base is low, I'm confident we're going to see improvements in the future.
Ann Gurkin - Analyst
Okay.
And then will you comment on the relationship between sugar and HFCS, the gap -- the price gap you think where consumers will consider switching from one to the other?
Juan Luciano - COO
Listen, when we look at these, we see very solid with a small volume, maybe in Mexico, that some of the people switch.
But in reality, most of our customers prefer to deal with the liquid, and we're very close to a big corn crop that probably will bring all those prices much more in alignment, so we shouldn't magnify the impact of this.
Ann Gurkin - Analyst
Great.
Thank you.
Pat Woertz - Chairman and CEO
Thanks, Ann.
Operator
Your next question comes from the line of Eric Larson with C.L. King and Associates.
Eric Larson - Analyst
Good morning, everyone.
Just a couple questions.
First of all, arguably, your second quarter was probably just from a timing point of view, probably your more -- would have been your most challenging quarter.
Delayed harvest here though is probably a reality in the third quarter.
Now, I'm really focused on 2014, but in the near-term, you had really good soy crush margins a year ago.
You did lose money in ethanol in Q3 a year ago, but could the third quarter be a little more challenging than you may have anticipated earlier?
Juan Luciano - COO
Eric, Juan here.
Listen, Q3 presents a lot of challenges for us.
Think about we're still dealing with a big inverse that we need to deal through.
Yes, we're going to have a big crop, but in the places where we are located, which is in the corn belt, the harvest will probably happen late September, beginning of October, so which is more Q4 tilted.
So, I would say AG services will continue to suffer through low margins in Q3, and we're going to see some pressure increasing in oilseeds as we fight with a very tight balance sheet.
Q3 will still be a tough quarter where we'll not see the full relief of the harvest yet.
Eric Larson - Analyst
Yes, exactly.
Well, it's just a transition quarter anyway.
It really reflects last year's crop harvest.
It has nothing to do with the going forward, but it also looks like you moved a fair amount of high cost grain through your P&L this quarter.
And if we can get anywhere close to what these -- if we can put in the bin what the harvest numbers and projections are this year, you're going to be replenishing with a lot lower cost grain.
It seems like you should be pretty well positioned on your inverse.
Is that a fair assumption?
Juan Luciano - COO
We like to say -- we like to say yes.
We like to think that we manage well through the inverse.
I think the guys have done a good job of reducing inventories as we face these.
You've seen it in the balance sheet, you've seen in the billion dollar challenge.
I think we have a very experienced team that knows how to work it through this, and that's where the -- our footprint and our integrated model shines.
So we feel pretty good.
Eric Larson - Analyst
Okay.
Just a quick question for Ray.
Ray, you were 50 basis points below WACC on returns in the quarter, which given the seasonally and cyclically very depressed Q2, that was a big performance.
Is there any way to quantify what your cost cutting and your return measures, your working capital improvements may have benefited your return numbers in the quarter year-over-year?
Ray Young - CFO
We haven't quantified exactly, but there's no doubt reducing our invested capital base contributed significantly towards our results here.
And then the prior cost cutting that we did last year and then as Juan indicated, we've made good progress towards the next $200 million challenge.
Clearly, these help in terms of helping with the earnings, the numerator of the calculation here.
So, I do believe both -- all the actions we've taken, it's helped both the numerator and denominator under ROIC calculations.
The exact, how many basis points, we haven't calculated that but clearly, it contributed towards these results.
Eric Larson - Analyst
Yes, no I'm sure it did.
One final question.
Just remind me, what are the three countries that we're still -- you're still waiting for, for regulatory approval for GrainCorp?
Pat Woertz - Chairman and CEO
We have one already received in Australia, which is the ACCC, the Competitive Commission, and we're waiting on FIRB, the Foreign Investment Review Board.
That's one.
The second one is South Korea, and the third one is China, or with MOFCOM.
Eric Larson - Analyst
Okay.
Thank you.
Pat Woertz - Chairman and CEO
Thank you, Eric.
Operator
Your next question comes from the line of Robert Moskow with Credit Suisse.
Robert Moskow - Analyst
Hello, two questions.
One is just on corn processing for forecasting.
You used to earn in corn sweeteners $500 million of profit a year.
It's been more like $300 million lately.
And with corn costs coming down, I would think that there might be a little bit of a benefit coming your way if you can capture it in your pricing.
So, I wanted to know, what's a normal level of profit for that?
And then second, on share repurchase, why not be more aggressive in the market buying back your stock right now?
I know you want to keep your balance sheet free to buy a lot of corn, but the value -- the price of that corn's going to be radically lower and you're going to have a lot of cash coming in.
So, why not step up at this moment when your PE is quite cheap and the outlook looks good?
Juan Luciano - COO
Robert, Juan here on sweeteners.
Sweeteners has been -- consumption has been declining in the US, so we've been doing, I think, a good job of balancing capacity and demand with the exports, and we think the situation will be stable going into next year.
Again, a lot depends on this relationship between corn and sugar and we believe that with lower corn prices, we will have opportunities, as I said, to increase exports and increase conversions and increase inclusion of corn products in all these applications.
So, we feel good about it.
I'm not going to speculate on a specific dollar range for the business, but I think the business should continue to perform solidly going forward.
Pat Woertz - Chairman and CEO
And Rob, on your share buyback question, I don't think the GrainCorp acquisition and share buybacks are mutually exclusive at all.
I think we're just positioning ourselves, and we did do some share buyback this quarter, and I think the possibility of pace and amount can potentially increase as we go forward in 2014.
Robert Moskow - Analyst
Okay.
Ray Young - CFO
Yes, Rob, as I indicated, I think we got a very strong balance sheet.
Where we have some pressure in our credit metrics is really our earnings metrics.
And frankly, as we get through this year and into the new year, our earnings credit metrics are going to improve, and I think that's going to give us a lot more flexibility.
Robert Moskow - Analyst
Got it.
Thank you, Ray.
Pat Woertz - Chairman and CEO
Thanks Rob.
Operator
Your next question comes from the line of Ryan Oksenhendler with Bank of America.
Ryan Oksenhendler - Analyst
Good morning, guys.
Juan Luciano - COO
Hello, Ryan.
Ryan Oksenhendler - Analyst
Just a question for you on ethanol and E15.
Have you talked to -- I guess some of the gas stations who are offering E15, what the demand has been like and what the price differential is for E15?
And how much lower can prices go -- or the spread between ethanol and gasoline with the lower cost of corn?
Because I think at some point you're going to need the demand pull through from the consumer.
And what is that price point that gets them involved, which otherwise could back up the supply chain and then lead to an oversupply in ethanol?
Juan Luciano - COO
Juan here, Ryan.
I would say we continue to work very closely with everybody to try to help and facilitate as much as possible the incorporation of E15.
There is like $1 range right now, $1 margin that they can profit from.
And we're going to -- I'm going to leave the economics to them in terms of what to do.
But we've seen, for example, in people that price, I think I mentioned it before during the call, the people that price accordingly and competitively, we've seen some of the people working in E85 pumps tripling their volume in a very short period of time.
So, the consumer is very hungry for a reduction in gasoline prices and then when they see the opportunity, they take advantage of that.
I think that this $1 build that we have, it is a big incentive.
And with cheaper corn going forward, or a more competitive price corn going forward, this will present to me huge opportunities for people to introduce either E85 or E15 more into the usage of the day-to-day American.
So, we see it with optimism.
Ryan Oksenhendler - Analyst
Thanks, guys.
I'll leave it there.
Operator
Your next question comes from the line of David Driscoll with Citi Research.
David Driscoll - Analyst
-- for taking the follow up.
It's quick.
One, just to be clear, I apologize, you've almost answered this question I think three times, but I still don't know the answer.
In 2014, if we had $5 corn, will HFCS be priced at a discount to Mexican sugar?
Juan Luciano - COO
I don't know exactly what's going to be sugar prices, but I will say it will probably be competitive in that sense.
I don't know the calculation top of my head, David.
David Driscoll - Analyst
Okay, okay.
I'll leave it there.
Thank you.
Operator
And that concludes our question and answer session.
I would now like to pass the call back to Ms. Patricia Woertz for closing remarks.
Pat Woertz - Chairman and CEO
Thank you, everyone, for your interest in ADM.
If you looked at the last slide, it does show one investor event.
As always, if you have any questions, follow up with Ruth Ann today, and thanks very much for your time.
Bye now.
Operator
And ladies and gentlemen, with this we conclude today's presentation.
We thank you for joining.
You may now disconnect.