Q2 2020 Archer-Daniels-Midland Co Earnings Call
Okay and welcome to the 80 and second quarter Twentytwenty earnings 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 Victoria seller Waco, Vice President Investor.
Relations for ATM, Delaware Echo you may begin.
Thank you Amy good morning, and welcome to 80, M. second quarter earnings webcast, starting tomorrow, a replay of today's webcast will be available at 80 M Dot com.
For those following the presentation. Please turn to slide to the company's Safe Harbor statement, which says that some of our comments and materials constitute forward looking statements that reflect management's current views and estimates of future economic circumstances industry conditions company performance and financial results.
These statements and materials are based on many assumptions and factors that are subject to risks and uncertainties.
ATM has provided additional information in its reports on file with the FCC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation and you should carefully review the assumptions and factors in our SBC reports.
To the extent permitted under applicable law ATM assumes no obligation to update any forward looking statements as a result of new information or future events.
On today's webcast, our chairman and Chief Executive Officer, Juan Luciano will provide an overview of the quarter and important actions, we're taking to meet our strategic goal.
Our Chief Financial Officer, Ray Young will review financial highlights in corporate results as well as the drivers of our performance and our outlook then one we'll make some final comments comments after which they will take your questions. Please turn to slide three I will now turn the call over to one.
Thank you Victoria.
Last night, we reported Cigna's second quarter adjusted earnings per share to 85 cents up from 60 cents interpret our year to year quarter.
Adjusted segment operating brokerage was $804 million, but I wouldn't really important water to adjusted otherwise he was 8.1 person.
I continue to be put out too far what were team is performing under children and dynamic circumstances.
We are feeling that were purpose by providing high quality nutrition around the globe.
We are doing it while remaining true to our wwes protecting the health and safety protocols.
It was putting a positive inclusive culture to both within and outside of ATM.
Safeguarding I would invite only.
But around the globe ATM colleagues have continued serving our customers are supporting the global food supply chain.
With no notable disruptions to our operations.
I would result, but as system into the out of education.
So we'll have the resilience of our business model under transformation, we amazing our company.
Hello, Good time, some challenging times, we have kept the strong can stay the focus on our words throughout this year.
We're not done.
Are we can be proud of where we are today.
Let me share with you some of our to complement accomplishments from the quarter.
You know what optimized pillar.
Are we dug services sonos its team continued their work to enhance the return structure of the business.
Identifying and executing on almost $50 million in capital reduction initiatives.
Losing the ongoing optimization of our where global origination footprint.
Under the decision to exit two golden peanut and three notes businesses.
We took further steps to optimize our north American milling operations with the announcement with announced closure and say look for Los Angeles, Lower mill and the sale of office space in Kansas City.
And finally, as we previously announced.
We've made a difficult but important decision.
Temporarily idle or were BCP dry mills in Cedar Rapids and Columbus.
Which has helped to rightsize seem to three ethanol stocks.
In other words drive pillar.
We continued to advance our one ATM business transformation with the launch of several new technologies.
Including applications to more efficiently manage expand on cash flow for our non commodity purchases and contract labor services.
We'll be continuing to deploy new one ATM technologies into second half of this year.
And we expanded our ambitious efforts to make a word operations more efficient on environmentally friendly.
Our the into our previously announced greenhouse gas and energy reduction goals with new commitments to reduce water intensity by a further 10%.
And achieve a 90% landfill diversion rate by 2035.
In our would expand pillar.
Our global destination marketing model continues to grow in export volumes and new markets, Let's say DM extended this product offerings in Asia, Latin America and Europe.
We announced that we're introducing high quality you will be great ethanol production in Clinton.
To complement production out there will be earlier facility as we continue to meet customer demand for hand sanitizer.
And we announced another expansion of our leadership position in the fast growing plant based protein market with the creation of planned plus foods, a joint venture with murphree that will offer a variety of planned base food products for customers and consumers across north and South America.
Yes.
Readiness continues to deliver excellence in execution.
Its value has never been more clearer than over the past few months.
Revenue this initiative like consolidation of businesses centralization of activities on simplification and improvements of processes.
We have significantly enhanced our resilience and agility.
Helping us continue to serve customers and keep our operations running through fast changing them vitamins.
We are never done improving and our team has continued to identify and delivered on readiness initiatives.
At the end of the second quarter readiness has allowed us to our look a total of just over $1 billion in run rate benefit on annual basis since the program began.
And based on our strong progress we're on track to exceed our were 1.2 billion goal billion dollar a gold gold by end of two anyway.
No ragle take us through our business performance before I come back to offer some final comment before we answer question Ray Please.
Thanks Juan.
Please turn to slide number four.
As one mentioned adjusted EPS for the quarter was 85 cents up from the 60 cents in the prior year core.
Excluding specified items adjusted segment operating profit was $804 million up 18%.
Our trailing four quarter average adjusted ROI C was 8.1% 235 basis points higher than our 2020 annual WACC a 5.75%.
And our trailing four quarter adjusted EBITDA was about $3.6 billion.
The effective tax rate for the second quarter point 20 was approximately 14% very similar to 13% in the prior year and in line with guidance, we provided last quarter.
For the third and fourth quarters, we continue to spec and effective tax rate in the range of 13% to 15%.
We generated $1.6 billion of cash from operations before working capital for the first half of the year higher than 2019.
Return on capital in the first half was $517 million, including a little over $100 million, an opportunistic share repurchases in the first quarter to help offset dilution.
We finished the quarter with net debt to total capital of about 29% just down from 31% a year ago.
Net cash and available credit capacity at the end if the quarter of almost $11 billion, a very solid amount of liquidity.
Capital spending for the first six months was about $360 million, we continue to expect capital spending for the year to be around $800 million below our depreciation and amortization rate of about $1 billion.
Slide five please.
Other businesses roll through a higher versus the second quarter of 2019, driven by improvements in underwriting results from our captive insurance operations.
In the corporate line unallocated corporate costs of $194 million for a higher year over year due to a larger delta in variable performance related compensation expense accruals and transfer so our cost from business segments into corporate as we centralize certain that these into our centers of excellence.
Other charges declined due to improved foreign currency hedging results on intercompany funding and improved investment performance.
Corporate results also include a debt extinguishment expenses of $14 million relate to it early retirement of a bond.
Then insurance expense for the quarter decreased due to lower average borrowing costs relate primarily to liability management actions taken in late 2018.
Looking forward, we expect unallocated corporate expenses to be inline with our initial 800 million dollar guidance for the calendar year.
And net interest expense to and similar to or slightly lower than the 2019 amount of about $350 million.
Other business results in the second half the year are expected to be significantly lower than the first half unlikely negative based on expected insurance claims settlements and lower interest income and ATM Investor services.
Please turn to slide six.
AG services, it will cease deliver higher results versus the second quarter of 2019.
AG services results were substantially better year over year strong execution by the team in South America helped deliver a record quarterly origination and export volumes in a significantly improve margin environment.
Driven by a weaker Brazilian real and strong farmer selling.
Global trade deliberate best second quarter ever continuing to demonstrate the importance for strategic efforts to create value throughout the global supply chain.
Destination marketing was a significant contributor as countries look to secure stable supplies of food amid the pandemic.
Lower into your Green margins impacted results in North America.
Crushing results were lower year over year.
The team delivered strong global crush volumes overall and did a great job capitalizing on solid South American meal demand and the weaker Brazilian real along with a lack of Argentinian imports into EMEA hi.
In North America margins were impacted by dip endemics effects on our customers.
Net timing impacts to the quarter, we're not significant as board harsh gains were offset by basis losses, and our cash flow hedge program deferred additional positive timing impacts.
Refined products and other results were higher year over year, driven by improved bio diesel volumes and margins in north and South America, as well as strong volumes and margins and refine and package wells in South America.
Demand was lower for biodiesel in EMEA high and for edible oils for foodservice in both EMEA I and North America.
Walmart results were lower year over year Lamar's core earnings were strong but reported earnings were impacted by mark to market losses on their investment portfolio in their first quarter.
Fundamental global demand trends continue to emphasize the underlying strength and resilience of this industry in our business model.
Looking ahead, we expect the pace of Brazilian farmer selling to slow significantly following the aggressive selling in the first half the year.
North American origination should strengthen throughout the second half as we move into the U.S. harvests and export demand is supported by China's import needs.
Global crush margins are like the remained pressured in the near term, but we expect tight soybean supplies in South America to lead to an improving margin environment as we move through the second half the year.
Our people should continued solid performance.
All told we currently believe the third quarter will be sequentially lower than the second quarter of this year, followed by a much stronger fourth quarter.
Slide seven please.
Carbohydrates solution results were similar to the year ago quarter.
Starches and sweetener results were lower year over year.
Cobot 19 related impacts on foodservice demand in North America pressured sweetener volumes.
Mark to market losses on corn oil contracts index to soybean oil also impacted results similar to what we saw in the first quarter.
These impacts were partially offset by lower net raw material costs and positive risk management results.
We also continued to benefit from the improvements we made in our Decatur corn complex and a continued turnaround in EMEA I.
Wheat milling had another strong quarter as increased levels of home baking in store sales helped drive solid retail demand and footprint optimization initiatives, which reduce costs continued to drive results.
Vantage corn processor results were higher than the second quarter of 2019, driven by favorable risk management results on inventory positions and strong demand for high quality U.S.P. grade ethanol use for the hand sanitizer market.
While average industry ethanol margins were down versus the prior year prices and margins improved throughout the quarter as lower production, including the two dry mouth dry mills that we idled and some recovery in driving models led to falling industry ethanol stocks.
Looking ahead, we expect a third quarter results were carbohydrates solutions to be similar to the second quarter, assuming sweetener demand continues to recover demand in wheat milling remain solid and average industry ethanol margins over the quarter remain in positive territory.
On slide eight.
Our nutrition business continued to deliver significant growth.
With 35% year over year profit improvement for the quarter.
Over the first half of the year adjusted profit for nutrition is up more than 50% and despite some cobot 19 impacts revenues up about 8% on a constant currency basis with growth spread across the entire broad portfolio.
Human nutrition results were substantially higher in the second quarter of 2020 versus the second quarter 2019.
Flavors continued delivered solid results as favorable sales mix in margin expansion North America was offset by some softness in EMEA eyes.
In specialty ingredients, our team's strong execution and operational excellence, including at our soy protein facility in comp of Grand a day and our Pea protein plan in enderlin enable us to continue to meet rising consumer demand for plant based proteins and edible beans, driving substantial year over year growth.
Health and wellness delivered higher performance on strong sales for probiotics improved volumes and margins in fiber and additional fermentation income.
Animal nutrition results were again higher year over year.
Despite impacts from coal the 19 on demand in some regions continued execution on the obvious synergies robust demand for pet food industries and improvement in amino acids drove our ongoing profit growth.
The investments we've made in nutrition in our unique value proposition have positioned us well to support our customers as they continue to innovate and adapt in the current environment.
We are winning new business and our pipeline today is strong and growing.
We've also equipped our teams with new digital tools and technologies to continue product development work in a virtual environment, ensuring that products advanced even in the current dynamic climate.
Looking ahead nutrition should be around 20% higher in the back half of the year compared to the second half of 2019 was similar rates of growth in profits in third and fourth quarters.
We expect strengthen flavors plant based proteins and probiotics continued drive human nutrition, and you'll be a synergies and improvements in amino acids to support animal nutrition results.
Now please turn to slide nine ill turn over back to one.
One.
Thank you Ray.
From our work to optimize our footprints and improve our capital position.
Through our new technologies and improved processes.
So I would have growth efforts to become a wall either in nutrition and expand margin opportunities across the value chain.
The team has done an excellent work executing this strategy.
And as we continue on this journey, we are increasingly seeing growing benefits flowed through our bottom line.
That does not mean that weird immune to external conditions.
This has been an unpredictable year.
I would only a because point.
Our team has done a great job moving quickly and adapting to the challenges of Cobiz 19.
And we are continuing to monitor unannualized purchasing and consumer habits to ensure we can continue to anticipate on meet that were customers needs.
We are seeing consumers still largely relying on retail and E commerce to feed their families.
On demand this is spanning a wide spectrum from comfort foods to healthy choices.
Income mm baking has dramatically increased the demand for both flowered conveyed goods.
Healthy eating this has significantly accelerated the purchase and consumption of alternative proteins.
On a focus on nourishment on wellness is pushing microbial solutions to the mainstream.
We are missing this wide variety of customer needs.
And we'll continue to do so as many of these trends advance into future.
For the second half of this year, we'll remain focused on optimizing business performance.
Advancion readiness.
Harvest in the benefits of facilities should growth finished investments, especially in our nutrition segment.
We are continuing to pull the levers under our control across the enterprise.
With our team currently exceeding our me the year targets by achieving more than two thirds of our where to $500 million to $600 million in targeted operating profit improvements towards 22 and.
Looking ahead.
We remain confident we're positioning.
Our capabilities and our strategy.
And we are excited about the second half of the year on delivering this strong earnings and returns into any 20 and beyond.
With that operator, please open the line for questions.
Thank you at this time, we won't be conducting our question and answer session.
In order to ask a question. Please press Star then the number one on your telephone keypad in order to allow for as many questions. It's possible. We ask that you teams from that your questions to one question with one related follow up you May then reenter the queue for any additional questions. Your first question comes from the line of Adam Samuelson with Goldman Sachs.
Your line is open.
Yes, thanks, good morning, everyone.
Good morning, Moran, Hi, Hi, so so I guess first just thinking about how you kind of frame some of the second half outlook.
For the that for the different businesses is it fair to say that the biggest wildcard our pace of U.S. exports and what that does both on the origination and crush side and just underlying kind of food ingredient demand I'm just trying to think about kind of the range of outcomes as we think about.
Ford business momentum into the second half of the year.
Yes, Thank you Adam.
Listen as we think about the second half of the year, we expect engender those businesses to perform better than in this first half so us overall results.
When we think about the different businesses.
With the aggressive selling in the first half of the year of the Brazilian farmer, we think the us having a big could also like we're going to have going into harvest will be the most competitive source and.
China is still needs to import a lot in the fourth quarter. So so we feel good about that we feel good also about destination marketing the goal for good though from an X. services perspective results.
Basically the results of the global trade were equally.
Contributing as the result, so for origination in South America for the results. This quarter I know those South America was shift to North America in terms of grain results, we see a destination marketing and the global trade to effort to continue to contribute in the second half.
We see pro leave so far if we look at those that way to July we see the worst of the demand. This production due to Colby was behind US I mean, we sold out in April and than we saw improvement in May June July it would probably be uneven in woods starts and stops for the rest of the year by within.
Good that works is behind us.
So I would say that that's how we characterize and then nutrition continues to go strong that are many opportunities for nutrition and.
We had a very strong beginning of the you know the second half of the year is seasonally a little bit softer for nutrition to but thats. The way the demand pattern goes over to you, but we feel very strongly about the second half of the at this point.
Okay. That's very helpful color and then I could just ask the second question.
On capital allocation, just help me help us think about with kind of the balance sheet, where isn't what would seem to be a pretty pretty strong position, what it would take or where you would want to see before you took a more offensive posture on whether its capital return to shareholders or maybe there's opportunities in the M&A market that might.
Be emerging.
Sure, Yes, flippant as we have said is the all along and at the beginning of the year, our priority remains to Delever, our balance sheet to the low twos.
Protecting our we're seeing delayed racing is very important to us and.
We have aggressive plans in the businesses to you heard me in their accomplishments of the second quarter to monetize assets and to the extent that we continue with Dod and monetize classic who think about increasing our were aware share repurchases, but I think the priorities delivered him, but we've been doing.
Very well in this divestiture and we continue to look for our large company and what are the things that we can monetize so we can we can applied to that with regards to M&A.
We have a very disciplined process or for doing bolt ons on organic growth and you'll see how we base our itself. We these while in 2014, we build the Olivia in early 19.
I think that that allows us to recover their noisy impact that you think about our do I see the endo for.
HM skiing was 8.3% we acquired May Olivia on now we are back to Doug Doug range, 8.1%. So so I think that that allows us to go and buy we need to buy continue to grow nutrition.
Jointly with all the harvesting that we're doing in nutrition with the organic growth with come program the underlying and all that so I think we have we have dug models and we like Ethan.
I think you're going to see that we continued to deliver to what we said we're going to do.
And it's a very predictable patterning knutsen.
All right great I really appreciate the color I'll pass it on thank you. Thank you on it.
Your next question comes from the line that Heather Jones with Heather Jones from Church Heather Your line is open.
Good morning, Thanks for taking the questions.
Hi, I.
So just a detailed question first could you explain to us I mean, the results from vantage core with.
Very impressive the was there a lower cost or market it inventory adjustments when they could you help us understand what drove that performance. Besides the industrial alcohol sales.
Yes, Heather through here, yes for Venice, corn processor remember up for VCP not only are the producing the ethanol from the dry mills, but they're also the distributor of the ethanol that comes all the wet mills, so over the course of or the quarter or we actually as we indicated we had very very good.
Risk management on our inventory positions now we knew coming in the quarter that the fact that we're going to cut back on ethanol production.
Shutdown or idle to dry mills, we had a pretty good census margins should improve throughout the quarter. So.
The inventory that VCP had as we went through the quarter, which includes the driver that the wet mill ethanol, we basically more or less left the unhedged, whereas we actually did hedged one position at a very very low cost and so we benefited from favorable risk management in terms of both the input side I mean.
Overall, corn and the output side, which is the ethanol within their distribution system system and so therefore, we had very very good risk management results based on our inventory position. So that was an important driver, but but the wonder estimate the industrial ethanol business, we actually increased the capacity of our Peoria plan.
No. It was like 85 million gallons entering the year and we were able to de bottleneck. Many aspects of the plant and actually get that being closer to 100 million gallons on an annual run rate basis, and so so different than we ran the plant full out over the quarter and as you would appreciate industrial ethanol margins improved also throughout the quarter. So.
VCP also benefited from a very stable environment in terms of the aspects of the industrial ethanol business and then lastly, I mean again as we indicated we idled the plants, we did a pretty good job in terms of reducing the amount in the stranded costs associated with those dry mills and that also contributed.
Towards our overall results. So overall it was it was actually you know from our perspective, but a good quarter for BCP in terms of how we manage the situation.
Yeah, It sounds like it thank you.
My second question is your.
One is usually hoping you can elaborate on your outlook for crush margins, so and the U.S. are clearly.
Pretty soft right now and you noted that they over the near term they'd be solved, but then you articulated a more constructive outlook further out I was wondering if she could flesh out for us what you're seeing on the demand.
And supply side that gives you confidence that we should improve as we move into Q4 in 2021.
Yes, Thank you Heather.
As you said they are soft at the moment in North America, but improving.
And we going to see that improvement over the end of through the quarter basically we're going to have we started to see a little bit better farmers selling than I think us as we get to the card of this weekend hub.
Less pressure on that side and we're seeing from the demand side that the customers our customers for soybean meal are coming back.
The and then we're seeing also a little bit more pressure on the oil side. So that they always story is getting a little bit better. So in general from from crush margins. We saw good crush margins in in Europe with the absence of.
Of course of Argentina, and meals, a more aggressive argenta and males with so good gross margins in China.
No we are seeing improving crush margins in the us for the rest of the or so so we feel pretty good about that business and you know we can debate numbers here or there about the growth rates, but in general.
In general we see we see growth going forward and that's what we're hearing from our customers.
Okay. Thank you so much.
You're welcome Heather.
Your next question comes from the line of Ken Zaslow with Bank of Montreal, Ken Your line is open.
Hi, good morning, everyone Hanukkah and.
Can you talk about the elevation margins in what you're seeing there and how meaningful will that be for ATM and how are you executing on that.
Sure is.
So the you explore us export market. This is enough to fulfil for very good times on very solid global demand and competitive prices and of course with it died supply the month of site refer before in South America. So we do expect a large programs for corn soy.
Greetings and I'm as well as we've done soybean meal.
For Q4.
So I would say.
Short term Q2 Q3.
About 10, 15 sand and for what we're seeing numbers loading the 30 sands range or even slightly better. So so again, we have big volume expectations and and we're looking Ken.
The full.
[noise] value chain. So elevation margins on also transportation margins. So we're seeing the the whole thing. So we cared about the full range of margins. So we feel we feel a stronger margins are coming ahead of us for the Q4 and ER and to be honest.
Equity evidence out there it's points into that direction as we go at around the world that we talked to our teams. So we feel confident other.
And then just switching to nutrition for a second.
So two parts to this one is obviously a growth rate has been very strong.
How long into the future will that last is this a good run rate for a little bit of years and then you also mentioned that you're winning new business can you quantify or give parameters to how much of that is is that you is it just typical winning a little business here in there or we're talking about you know.
Larger than a bread box, but not quite know game changing how do I think about those two things and I'll leave it there and I appreciate sure can.
This is the thing you need to remember is that.
Nutrition is still in early stages. So we were building this business I mean, we've been doing it for four or five years versus other businesses that we've been running for 200 years, So even us as a good the results as we're getting we're not even close to fulfill our potential and we continue to see that in the pipeline the pipeline country.
Just to be very strong.
And again, we measure the value of the pipeline to see the impact of 20 to any one sales 2022 sales and as I said that continues to grow but we also looked at the win rates to see how are we doing today and they win rates continued to increase I can disclose exactly the win rates because that's confidential information that is.
Very valuable to us, but and I think the important thing go from the tradition that sometimes its underestimate it is that the breadth of our pro the belford when we're talking here, we're talking Ken about we're bringing fibers to a lots of products, whether our beverages. So yogurt sort of serious we're bringing program.
Thanks to a lot of product.
We have a specialty proteins. So so I think the will of course, we have flavors going into into a myriad of publication. So I think the possibility that this program mix gives us again, even if you go to specialty proteins. We have soy base, we have people be base, so and when you combine.
These things into into systems. It gives us incredible possibilities and customers are reacting very well to they're about to Doug value proposition I'd have to give credit to the team in this difficult circumstances, you could have thought that may be innovation could have been impacted because of that remoteness of oh.
If I were operations and I were getting people to very quickly into into establishing virtual tasting rooms Vivitrol innovation.
Total typing.
Sessions and that has been very successful there has been able to keep the growth rate of our pipeline. So so I don't know you know how long can we predict that 20% rate, but at this point in time, we continue to see it into the into the immediate future. So we don't see any.
Any slowdown of that and as we as I was explaining two of them before we're going to continue to do I were bolt ons M&A and you know we've been getting benefit had these we integrated and we absorb the Olivia.
The results are under operations much faster than we these obviously with wild because this is a second diamond we have the perfected the system.
And I think we're going to be able to keep this pace.
A little bit more accelerated into the future. So the possibility. So this business are enormous okay.
Well I really appreciate it thank you Andy Keysafe.
Thank you. Thank you.
Yes.
Your next question comes from the line of Vincent Andrews with Morgan Stanley. That's what's your line is open.
Is that he hands on for Vincent.
Sorry to come back like card solution, but the second quarter result, with quite a bit better than what you had guided and I appreciate the commentary around risk management, but.
Also mentioned.
A number of other buckets. So can you kind of bucket out so that's the beat so it can get an idea for.
What drove that Delta.
You're referring to carpet Karp solutions in general for the quarter.
Yes.
Yes, I think like new book, Starches, and sweeteners or the other big sub segment here.
We had good results I mean actually for the segment.
As one talkable earlier provided that the trough in terms of demand for sweeteners, probably was the second quarter. It was probably in April may timeframe, and so therefore, we did experience reductions in volumes on the basis of corn sweeteners during that period, but what's interesting is when you looked at starts and sweetener senior saying <unk>.
We really strengths there as well number one for example, wheat milling demand for flower continued to be strong in the second quarter and in fact, when we look our global wheat milling results our process in the second quarter were up 50% versus the prior year. So that that was a big contribute towards the starts and sweetener result.
Secondly, I did outlined in my remarks that we did have mark to market losses on our core no contracts just like we had in the first quarter. The fact I didn't highlight a number indicates that the number was actually much smaller than what we had in the first quarter, but we're also able to offset.
That impact with good risk management from from the wet mills, there as well so thats on on a net basis that was really a neutral impact.
And then thirdly.
It is important to also highlight and start to sweeteners. The turnaround efforts. The improved efforts that we launched last year indicator corn complex in the European business. They are truly point paying off this year and also in the second quarter. So they are the all positive deltas that help neutralize some of that.
Negative effects that we saw in terms of starches and sweetener volumes in the second quarter and then I was just are we talked about BCP, which are again favorable risk management on inventory position. So overall I would have to say that yes. It was actually a very strong quarter for starches and sweeteners and the second quarter compared to.
Even than what our initial expectations, whereas we entered into the quarter, but have to give the team a lot of credit in terms of the efforts to date executed in order to help deliver the result, Sir.
Yes.
Okay. Thanks.
Your next question comes the line Tom Summit <unk> shifts.
The P. Morgan Tom Your line is open.
Thanks, Good morning.
One though.
Morning, as the United Just press release, some kind of at 19 impacts on your animal nutrition business can you elaborate elaborate on that please.
Sure Yes.
I think when you see these consumer shifts.
Coursa Aqua.
His consume a lot in the western hemisphere in a.
Dining out and so we see a little bit of impact on Dod negative impact on me.
Of course, when some of the large animals fees, we saw a little bit of softness there in North American Mexico, when some of the.
Mid bucking plans have to slow down.
The but we see positive benefits in pet food them that threed.
Very positive us well and I think that in general there been countries, where we are strong that their demand has continued strong like Brazil has continued Vietnam has continued.
And then we also saw lysine prices it and lighting performance accurately.
Came back in the quarter. So those are kind of the puts and takes all four of cobiz impacting us in animal nutrition.
Okay, Thanks, and United Immaterial amounts market impacts in Q2, which is a bit of a surprise to me at least particularly on soy crush. So can you elaborate on your hedging strategy and clarify any deferred gains are carrying into the back off.
Yes, Tom recalled the objective of our hedging program is really to manage margin risk on our products and to dampen volatility of earnings and cash flow.
And we'll call any impacts when integrated and $50 million I mean, that's what we've done the pass now so we entered the second quarter with about $80 million unfavorable timing effects that would be recognized in the future and then as you see into supplementary data, we exited second quarter with about $95 million a favorable timing effect.
So.
On net we have actually $15 million of unfavorable timing effects in the second quarter.
Now with Ford crushed falling dramatically in the second quarter, we naturally did have hedge gains on crush.
Now some were deferred due to our cash flow hedge program, which we put in place several years ago right and so for the so go for these gains are basically under under accounting Cashmore hedge accounting you don't have to mark to market to just simply deferred in the future and we'll recognize that we did also recognized some some timing effects.
Related to basis movements.
On oil meal and beads right. So different the favorable effect on board crush was offset by some the unfavorable timing effects on basis movements.
And as a result, we had a slight negative impact of $15 million and again, we didnt call and outlined in our prepared remarks, we can actually see that in the data there.
The other thing just know also we also had some bunker fuel hedges and we called that out in the first quarter write some unfavorable effects on bunker fuel hedges that should reversals in the in the second quarter and we did we did have some some fable reversals by get nothing significant in terms of size and Thats. The reason why we didn't call. It all so but in general Iowa.
To say our cash flow hedge program is actually something to help smooth out some of the fluctuations that we have honor hedging and then Theres also some other impacts that that actually impacted net amount, but again I think the keys to be solve of $95 million and favorable timing effects that will reverse out over the future quarters.
That's very helpful. Thank you I'll pass it on.
Your next question comes from the line and then be engineer with Stephens Bank. Your line is open.
Thanks, Good morning.
I'm going to reserve the vantage segment, I know and April when you guys decides the closure to dry mills, you talked about kind of a four month timeline and recognizing you might not one on.
Ah Telegraph too much the the timing of the reopening what are you looking for from a market perspective, as you think about reopening either sticking to that timeframe.
Or oscillating around the original timeline that you laid out.
Yeah, we did indicate that when we temporarily idled. The two facilities. We said there will probably keep it down for about four months, which frankly bring a city in the third quarter I think the data that when I look at includes things such as industry ethanol levels and it's actually very encouraging what we've seen recently where EA data.
On ethanol industry stocks inventory that they've come down from the peak 27 million barrels down to about 20 right. Now so that's actually very very encouraging and and you have seen a ethanol margins respond accordingly, with the that particular reduction in terms of inventory the other key variables distribute recovery of driving mine.
And your actually starting to see that yeah, we were down as much as 40% during the trough.
The state shelter in place in terms of gasoline demand, we're starting to see some level recovery replied down as an industry about 15% right now and so I think that some of the key data that were a look at as to how that recovery continues how the inventory levels get maintain as we go through next several months how the margin.
Army involved and that will guide US also in terms of the appropriate timing to kinda restart pools dry mills here. So it is a dynamic is a dynamic situation, but we're going to be very data driven as we look towards the strategy here.
Okay. Thanks for that.
Following up on a just a question of around hedging is how exposed are you the cash market how much of Threeq. You have you hedged and have you had any of your Fourq you crush commitments.
And normally I mean, our normal in terms of crashed we normally a kind of hedge the fourth quarter.
Significantly not 100%, but normally we're hedged 50, 75% Norton normally we're always optimistic by the way to look at the levels and we'll determine when we layer in the levels and then as you get into the future quarters or if theres lesson, but we also we also do have hedges are in 2021 and based upon the stable levels that we saw around.
Earlier in the years.
Okay. Thanks.
Your next question comes from the line of Michael Piken Sleep and research Michael Your line is open.
Yeah, Hi, I, just wanted to get an update or what have paid in terms of hot you know how you sort of see U.S., China trade situation you have playing out do you think that your China is going to be able to meet all the phase one commitments and then just sort of any update you have on not asked that over in China.
China and how quickly they are rebuilding and what that means current meal demand over there.
Yeah, Mike.
Listen we see I think you heard me, saying before things that.
China is taking all the auctions or the reflect their intention to comply with this.
Despite the rhetoric, we continued to focus on the Fox the facts are that they have imported more from the U.S. If you look at core or if you look at soybean so far versus last year.
And the reality that there is also a supply demand the reality here in Brazil is out of beans. The origin time farmer is not going to sell their beans.
So the U.S. is going to be probably in a big harvest on there I think China. If you think about they're going to important 90 596 million tones Sunday have important already.
70 give or take from a from South America. So they need to import about 25 26 million tones of which they have already committed half of that so half is still to be done, which I think is going to be them from the us in the into Q4.
So we feel good about dodson and as I answered before two canyon elevation margins I think thats going to be corn is going to be soy meal.
So we've been meal is going to be so it's going to be wheat. So it's going to be a good program for the U.S. in terms of volumes.
In terms of a itself I think they assess has been evolving as we predicted early on.
In which.
That created the 10 million storms.
GAAP operating in China.
China has covered some of that with the with imports than we've seen those import up around the world.
We we enjoy that especially from from Brazil.
The second order and I think we've seen that growing into the U.S. as well.
We also saw the professionalization of Anemos.
Processing in China, and we Dod we've seen.
The increase of soybean meal seem that Russia, some more up more efficient Russians.
So will it be linear probably like Colby. This was not believe they're going to be up some dollars are going to be a you know a service here or there that's going to be squash, but I think that overdose, we've seen the worst and I think that we're going to see probably full recovery by some time later to any.
When you two or something like that but is gonna be.
In crescendo from here.
Great and then now laptop is just on the destination marketing that increases here that you guys talked about I mean, when can we start to see that accrue to the TNL on what is the margin profile look like on destination marketing nurture the your North American operations. Thanks, Yeah, Yeah destination marketing here has been.
Impacting that's already as I said, when I say the global trade had a record second quarter, that's what's driving a lot of that.
You know this is a strategy that we put 345 years ago and to be honestly, it's been emphasize now with people around the world more concerned about that the stability of the supply chain. It's on the ability to move product around which we've been able to move but but having put other locally has been.
30 valuable we put a lot of customers around the world. So we've made acquisitions you know in Egypt in Israel. We believe we opened some offices and we continue to expand the number of countries in Asia in Europe on in South America that we're covering with that so.
At the beginning we saw an expansion in volumes, we doubled the volumes no volumes are growing a little bit more.
A more geographically, noting the same place I would say smaller by geographic expansion on margins continued to two to two increase so we feel good about did I Miss It is a big contributor and is it was already a big contribute or like services for the first half of the.
Your next question comes from the line of David Kantor with Baird Davis Your line is open.
Hey, guys. Thanks for taking my question.
Good morning up quickly wanted to clarify.
Getting update on your strategic review for asking where in the process are we kind of how has a cobot impacted that and what options are being considered.
But it would be reviews, continuing we have interested parties in the assets naturally indicative of 19 environment. When the dry mills are shut down the credit markets are basically shut down we've taken a little bit of a pause, but not the clearly the process. We expect a process to through to recommence or you know as we kind of moved through the back to back part of the year.
As the market start recovering back to more of our normality.
Got it and then one more I just kind of when I hear your thoughts on the readiness initiatives. It's on track to see that goal I think you mentioned, but how does the focus shifts store or how does your mentality change once you achieve that 1.2 billion gold I'm kind of what's the what's.
The next step rate EMS readiness.
Yes. This is a large company and growing company. So as we continue to.
Look for a photo opportunities for buckets of opportunity we continue to find more.
So every every the everything that we do.
David is run into into into readiness, which is a way to execute better all I would initiative. So I think that the first stage. If you will was more on the efficiencies.
We are shifting a little bit more to a two growth and innovation and to make sure that there would have growth and innovation has the same capability some power to execute the deficiencies guy.
But I would say from a numbers perspective, we feel very good above the 200 to 300 million dollar to offer net impact that we get every year and that we don't see any resell for does not to be in the forecast for next year, maybe even a little bit better. So so who feel good about that I would say if you look at.
If I if I take the opportunity real question to speak a little bit about the algorithm and how we're thinking for next year.
The the harvest impart there's still more in front of Pos and we continue to.
To see impact of Dodd them, probably growing maybe hopefully improve will be less sold because we are improving those businesses and we don't have doesn't have any more businesses to improve maybe on readiness continue to enlarge the scope. So the impact of revenue should continue to grow overtime.
That's an excellent. Thank you got.
It wasn't thank you.
Yeah.
[noise], Amy any more questions.
Amy.
Your next question comes online at bankers with Barclays. Your line is open.
Thank you very much good morning, Quandary hope, you're both Oh, well. So morning, just wondering permit. Thank you. Thank you Ben.
Good stuff just one quick one and a follow up so within the coverage rate solutions segment. You've also had mentioned that we've had a very strong performance and I think just says on the call something like it was up 50% I know, it's small but just out of curiosity. What do you what are you seeing.
In the month of July and into the rest of Freak, you and maybe a little ahead and to for Q on on the week part within the carbohydrate solution business.
No the demand that demand for flower continues to be strong.
I mean, probably first quarter, we saw a little bit the surgery is a pantry loading but did you pick the demand effects continued to be solid for for wheat, and hence our mills are actually running very very hard.
Yes, they're big contributor don't forget it's just the optimization initiatives that we had in or a week processing plants. So we actually shut down some inefficient mills and opens up opened up new mills, the timing cannot be more perfect for that right because the demand is there for our products and now we actually produced a flower homes very efficient operations and.
That has been actually an important contributor towards our overall improvement in terms of results for wheat milling. So we're actually we're very pleased in terms of how how this strategy has unfolded here.
Okay, perfect and then a little more medium long term I mean, clearly and maybe just talk a lot about the Brazilian farmer selling was very strong and I think as presentation, but the statues where they stand.
So what are you seeing on the ground, what's your expectation into.
The the second season in Brazil, and then maybe into next year.
What are you seeing underground in terms of intentions plans, just because of what what they've been.
Selling so strong right now do you see any significant uptick in volume and Brazil onto it could become a competitor for us in a more relevant way maybe looking into 2021.
Yeah. I think then we will continue to see Brazil, Ivy little it'll be thoughtful.
Area, and the and I expect to how the larger crop.
The next year in Brasil weather permitting so so I think that we will continue to do to say that to see that than we have a strong.
Origination team and the crush team in Brazil and.
And I think we're going to continue to a two profits from Dod.
I think the recent place for for Us on for Brazil.
So so I think it's just the.
I would say the short term dynamics depends in South America lot of what happened with currency and you'll see the this stark contrast between large and time farmer that.
You know.
That does see no benefit in parting ways with a crop with the Brazilian farmer, Doug you too that we recall.
No it wasn't an aggressive seller, even often over the new crop. So so I think those dynamics will happen, but I think over over time, Brazil will try to continue to increase production.
Okay perfect. Thank you very much in congratulations on the results. Thank you very much.
Okay.
Hello, Amy Alain.
Any questions.
Okay certain comes from the line of Benson and just kind of Stifel. Vincent Your line is open.
Hi, Thanks for Simon.
Good morning, and a nice quarter.
I did just wanted to clarify a little bit more on the positive mix shift nutrition, you called out growth in flavors and probiotics are those generally going to be higher merger contributors and then also on implant proteins.
It was that also representative of positive mix or was it more of that margins and in the protein business were improving as we build the cap abroad facility.
Yeah, a little bit of both certainly enderlin, then come forward and there are both new facilities. So they are both getting better every quarter on on on what did they do.
The EBITDA percentage on sales as a you know that I follow that in the business continued to have all favorably if you look at them.
ER previously or water was 11.3% and this quarter was 15.1 person. So of course, our team is very are generally into bringing new products and the new products bring.
New opportunities for a large enough to business. So we have those.
Probiotics are Oh of course.
Microbiome, what's the trend that was what's incipient if you will and Cobiz has put it right into the mainstream as people think about was more a health and wellness on immunity.
Concerns so I would say probiotics that our science based like ours are being added that supplements to many many products and.
Those products are highly technical as I said, they require clinical trials and things like that so of course, they command higher margins. So we feel that we feel very good about those products I'm flavors listened flavors are.
Incredibly important all these things have to be taken by people and they have to date.
Good so so the combination of I, where scientists, creating these these flavors and masking may be different notes. The maybe people don't appreciate is critical to these and that's one of the resource we acquired wild flavors of that point in time because of those capabilities. When you combine those capability.
As with the fact that pulls our flavors or 95% lots of our flavorless I'm not sure though that makes these they prefer solutions for most of our customers and certainly before the consumers. So so we feel very good about that.
Alright, thanks to keep everybody on schedule just leave it there are let's jump again. Thanks. Thank you Ben Thank you.
Your final question comes from the line, it's Eric Larson with Seaport Global your.
Your line is open.
Yeah. Thanks for sneaking me and congratulations on a great quarter guys.
It will come back. Thank you well. Thank you it's good to be back its a pleasure.
So just.
One really kind of technical question. It comes it comes to the.
Then I have along a broader question Brett. The technical question is we've got we've got elevation margins right now and in the Gulf ports that I haven't seen in quite some time.
Just quick China aside for a minute there's no theres good demand for.
A lot of other places outside of China, obviously, the U.S. dollar, helping a little Brett do you think.
The 19 here, maybe put some scare into some other countries maybe they they are they molded some inventory to make sure they've got enough grain supplies for their people et cetera, and someone that demand might taper off or are they actually using the product set their shipping I am.
Curious on the man factor outside of China.
Yeah, I would say or put it literally at the beginning of the year, we saw a little bit more of dietetic. I think now is true demand that is that this coming through I think that or even through all the peak of the crises, we've been able to manage every board.
We've been able to keep our operations running the the protocols that we have with the growth of the vessels under the for imports have worked well. So I would say oh well early on May be March April may be people to if people talked a little bit.
What about hoarding probe I don't think that's through anymore. I think now we're seeing through them on what is happening without them. On this is looking like you know strong demand going to strong volumes for the U.S.. So potentially we could have record profits in Q4 when when you.
Look at the volumes plus the attractive prices, because we're going to have a big harvest in the U.S.
We're talking about a large volumes for North America, and we're talking about large crop and maybe even early corn crop. So so we feel pretty good about the Dod programs and that's where you heard me, saying before or in general we look at the second half.
And I look at my businesses, though I think by businesses are going to perform better in the second half done in the first half so but all.
The profits coming from the business this should be stronger in the second half than in the first.
Yes, we are going to have an outstanding harvest this year and it's going to make us very competitive globally I would agree with that so [laughter] fight. The other question here that I have two small questions.
No one we're starting to see estimates for for a Brazilian for next year for Brazilian.
Soybean production.
Starting see estimates north of 130 million metric tons. I mean, we're seeing we're seeing continued to see with global production expansion across all the major production countries and.
Our real questions here you know obviously you know the world is growing as well are we gonna have enough demand over the next let's say three to five years help you know to sell all this product or you are some countries gonna have to see some share export share.
That's just production continues to grow pretty rapidly I, it's a longer term question, but.
I will just demand and production match.
I do believe so when we look at the of the.
We've been adding like 2 billion people every 30 years here in the world and so.
So and when you see how China is recovering I mean remember that this virus he does from the east.
I mean with so we've seen good <unk>, China is recovering co Europe is recovering and of course still the Americas Sony in the middle of the pandemic.
But we need all that I think that my my concern. So no I, we're going to find enough demand for that volume I think we're still on on on the biggest issue for China and a lot of guns that he sees food security Eric.
When we when I go at around the World and talk to London authorities have no doubt. The biggest concern is that I, we gonna see I. We don't do you have enough investments in infrastructure do you have the ports ready to bring goal that old those products. So we are no appeared in the lots of issues with demand.
Okay and then the one last question I'm, sorry to ask so many obviously nutrition is just doing exceptionally well and it's you you've had a lot of investment in there and it's actually performing the way you said, it's going to.
Not Japan, you too you know not to pin you too you know any kind of.
You know any kind of a guidance number one in the past you have shared.
What you thought nutrition could be <unk> as a contributor to the overall company over the long run.
Could you give us an update on your thoughts on that because that's truly.
A new Delta for the company.
Yeah, you know a statistically Eric.
I always have a we always have to north if you will one is we want to get to the 10% or do I see on the second is we sold the opportunity to bring growth into the company with extending our value chain into nutrition, and we always say you heard me, saying, we think that that's a business that could get easily to 25.
30% of our profits and it continues to move into that and to be honest is moving properly accelerated has accelerated into that number. So we might revisit that number. So we don't have a specific number but all I wanted to express at that point in time is it will be a meaningful contributor because we saw continued.
Unity we.
We saw the potential for that business are now I think that everybody else is realizing.
At the beginning we waited in investment phase so to a certain degree some of that performance was mass.
But now we're looking at what we're doing in look at Wf Aside W. Aside grew 27%.
Of course animal nutrition grew much more than that and when we look at all the microbiome potential there that's an incredible accelerator, but this is still pretty small so I think I answered order of before too can you come to remember this is that the beginnings of what we can uncover in terms of profitability.
We are just we are just deliberating, while we are building the business, but there is much more that will come from nutrition.
And I think that if I were track record serves us the giving you confidence trust us much more is coming from condition.
Thank you very much of a good day.
Thank you already.
This concludes our question and answer session I will now turn the call back over to stick to create Delaware I go for closing remarks.
Thank you for joining us today Slide 10 note upcoming Investor and then in which we will be participating.
As always please feel free to follow up with me if you have any other questions.
Have a good day and thanks for your time and interest in ATM.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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