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Archer Daniels' Cost Savings & Project Readiness Bode Well

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Archer Daniels Midland Company (ADM - Free Report) is benefiting from its robust strategic endeavors including focus on cost savings, management of business portfolio and Project Readiness. These efforts coupled with higher spending in organic growth and strategic buyouts are expected to drive growth in 2019. Also, an encouraging outlook for first-quarter 2019 drives optimism.

Let’s Delve Deep

Archer Daniels is focused on strengthening business through increased cost savings, which is a key component of its long-term strategy. Management targets $550 million in additional run-rate cost savings in the next few years, including cost savings of $350 million from operational excellence and process enhancements, and about $200 million in incremental purchasing savings. In 2018, the company generated run-rate cost savings of more than $300 million, exceeding the targeted $200 million.

In order to curtail costs, the company is enhancing the operational efficiency at its production and supply chain networks. Also, it has been on track with its business transformation, under the 1ADM program, which forms an integral part of Project Readiness. Notably, the company has been progressing well with Readiness program and anticipates the program to make contributions of $200-$250 million to earnings by the end of 2019.

Readiness program is expected to help management have a more coordinated approach toward driving business improvement, standardizing functions and enriching consumers’ experience. Further, as part of this plan, Archer Daniels plans to allocate resources efficiently on more mature businesses and make prudent business investments.

Archer Daniels, which shares space with Calyxt, Inc. CLXT and Limoneira Company LMNR, effectively manages its business portfolio via acquisitions and divestitures to boost returns. Management also remains focused on five major platforms — animal nutrition, health & wellness, carbohydrates, human nutrition and taste — to drive growth.

Notably, the company has been expanding its nutrition portfolio with citrus ingredients and flavors. Citrus is among the fastest-growing and highest-demand flavors for food and beverages. In the latest move, Archer Daniels agreed to buy Europe-based natural citrus flavor ingredients provider — Ziegler Group. Earlier this month, it acquired Florida Chemical Company LLC (“FCC”) for $165 million. FCC, the Consumer and Industrial Chemistry Technologies segment of Flotek Industries Inc. FTK, specializes in citrus-based oils and ingredients.

Upbeat Q1 View

Archer Daniels has provided a solid outlook for first-quarter 2019 for all its segments, except the Carbohydrate Solutions segment, which remains sluggish for a while now. This segment’s overall results are expected to be lower year over year in the first quarter due to persistent pressure on European sweetener and North American ethanol industry margins as well as issues related to the Decatur plant. Nevertheless, North American volumes in Starches and Sweeteners are likely to remain robust.

Further, management expects increased profits at the Nutrition segment backed by operational improvements and gains from acquisitions as well as higher margin and sales. Also, the segment’s operating profit is projected to be significantly higher than the year-ago quarter number.

At the Origination division, Archer Daniels expects growth in the North American Grain business to continue in the first quarter and higher results for ARTCO, somewhat offset by normalized margins in Global Trade. At the Oilseeds, results are anticipated to be impressive, excluding the biodiesel tax credit impacts in the prior-year period. Also, crushing and origination’s robust volumes, and gains from Algar, SoyVen and North American plant expansions are likely to boost the segment’s results.

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