(Bloomberg) — On a recent flying visit to Archer-Daniels—Midland’s European base, the company’s Chief Financial Officer Vikram Luthar had a pessimistic message to deliver.
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Speaking to employees in Rolle, a small Swiss town on the shore of Lake Geneva, Luthar said operating costs across the company were continuing to go up and that everyone had to find ways to boost margins, according to a person familiar with the events, who asked not be identified describing internal meetings.
Luthar, 56, who had been in the CFO role for less than two years, was under pressure from multiple fronts, not least from a faltering multibillion-dollar strategy related to ADM’s vaunted nutrition business that makes ingredients for humans and animals. The decline in earnings at its core crop trading business also fueled doubts over whether the storied Chicago-based company would hit its overall 2023 profit target.
As of this week, that target is history, slashed by ADM as it stunned the agricultural trading and processing world with its weekend bombshell that Luthar is on administrative leave pending an investigation into accounting practices at the nutrition unit, following a request for information from the US Securities and Exchange Commission. ADM also postponed its fourth-quarter earnings report that had been scheduled for later this week. Its shares plunged 24% Monday, wiping $8.8 billion from its market value.
The scandal has thrown the spotlight on a decade-long push, largely under the leadership of Chief Executive Officer Juan Luciano, to lessen ADM’s dependence on its legacy agricultural commodities trading business, which is notoriously prone to volatility.
“It never looks good for a CEO when the company is running an investigation into whether or not the financial statements are correct,” said Seth Goldstein, an analyst at Morningstar Investment Service. “While it doesn’t seem that ADM is planning a CEO change right now, I’d imagine the board is at the very least thinking about a succession plan.”
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An ADM spokesperson declined to comment.
For years, ADM and rivals Bunge Global SA and Cargill Inc. made money buying, storing and selling grain and profiting from exclusive information about supply and demand around the world. With information spreading faster and faster, the traders have sought to diversify their business. Cargill focused on beef. ADM followed with a bet on nutrition.
Across the industry, those efforts involved billions of dollars of acquisitions, bulking up the agricultural trading giants — known as the ABCDs (ADM, Bunge, Cargill; the “D” is for Louis-Dreyfus Co.) — and transforming them into massive players across multiple layers of the modern food supply chain. Many of those deals have been successful, but some have failed to live up to expectations, including ADM’s attempt to build its food-ingredient powerhouse.
ADM has focused on providing customers with products to help them change the formulation of processed food, such as reducing sugar content while preserving sweetness, or alter its appearance.
The push began in earnest with the $3.1 billion acquisition in 2014 of Wild Flavors GmbH, a European maker of food flavorings and colors. It remains the biggest deal in the history of ADM, which traces it’s history back more than 120 years. ADM also spent about $1.8 billion to buy animal feed maker Neovia from France’s InVivo.
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The war in Ukraine and the resulting supply-chain to agricultural supply chains provided a boost not only for ADM’s core trading activities but also its nutrition business. Companies producing specialty ingredients were in high demand in the immediate aftermath of the invasion, as food makers sought to tweak recipes.
But that gain was limited once the worst of the disruption had eased. The nutrition business subsequently struggled with demand for changes in the formulation of products including alternative protein used in veggie meats.
To make matters worse, the industry is expanding soybeans processing capacity in the US fast, boosting competition for ADM and threatening to hurt profits. US soybean crush margins are sharply down from last year, while margins for ethanol — the corn-derived biofuel of which ADM is the third-largest US producer — are at their lowest in almost a year.
In January 2021, Luciano told investors that ADM’s nutrition business was expected to enter a period in which annual operating profit growth would average 15%. Indeed, operating earnings for nutrition would go on to rise more than 20% that year, but the momentum soon faded. Growth was less than 7% in 2022, and earnings shrank by a fifth in 2023, according to analysts’ estimates compiled by Bloomberg.
Still, the company plowed on, announcing two ingredients acquisitions in December. ADM recently studied the potential purchase of International Flavors & Fragrances Inc.’s food and beverage business as a way to expand the nutrition segment, people with knowledge of the matter told Bloomberg in November.
As the nutrition business increased in importance and size, it also acted as a springboard for Luthar’s career at ADM.
Luthar, who hold an engineering degree from the Indian Institute of Technology and an MBA from the Wharton School at the University of Pennsylvania, joined ADM two decades ago from General Motors Co. After various roles, he became CFO of nutrition, before taking the CFO role for the whole company in April 2022.
Luthar’s surprise suspension — ADM executive Ismael Roig is now interim CFO — leaves ADM in a state on limbo. While the company trimmed its 2023 earnings forecast, questions clearly remain over the full impact of what has occurred internally, and investors have priced in a major hit.
At least five stock analysts cut their recommendations on ADM Monday. According to one of those analysts, Stifel’s Vincent Anderson, the probe and change of CFO “makes an already more difficult valuation case far more difficult.” The news “will be a setback for investor confidence at a time when valuation would already have struggled against normalizing earnings.”
–With assistance from Isis Almeida.
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