Q2 2022 Archer-Daniels-Midland Co Earnings Call
Good morning, and welcome to the <unk> second quarter 2022 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 foot States Cool Micro Cross director of Investor Relations you may begin.
Thank you Alex good morning, and welcome to Aam's second quarter earnings webcast, starting tomorrow, a replay of today's webcast will be available at ADM dotcom.
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 estimate.
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. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in the presentation.
To the extent permitted under applicable law ADM assumes no obligations 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 highlight some of our accomplishments.
Our Chief Financial Officer, Vikram Luther will review the drivers of our performance as well as corporate results and financial highlights.
And then one will make some final comments and hand Vikram will take your questions.
Turn to slide three I will now turn the call over to Juan Thank.
Thank you Michael.
This morning, we reported outstanding second quarter adjusted earnings per share of $2 15.
Adjusted segment operating profit was $1 $8 billion.
Our trailing fourth quarter, adjusted EBITDA approach $6 billion and our trailing fourth quarter adjusted <unk> was 11, 6%.
Our team executed extremely well in the second quarter navigating a dynamic conditions to deliver on the three shows to billions.
And even as we work tirelessly to serve our customers and consumers around the globe.
We are continuing to advance our strategy.
With productivity initiatives that are improving our efficiency and cost structure.
On the innovation work that is plywood in profitable growth.
Slide four please.
Productivity is how we are improving our execution and optimizing costs.
Is key to our long term success.
But equally as importantly, our productivity work is helping us mitigate the impact of inflation.
We have a very strong pipeline of productivity initiatives and I will be updating you on them regularly.
There are two initiatives I'd like to highlight today.
First is a set of operational transformation efforts, we are driving our gross production facilities around the globe and its funding all those three businesses.
Earlier this year, we completed and Modernisation project, our Marshall, Minnesota corner facility that is unlocking significant new value through enhanced automation.
More sophisticated control systems.
The increased use of analytics.
We're already seeing double digit returns on the investments we've made in that project.
This is an example of the kinds of projects, we are undertaking across our operational footprint designed to unlock incremental volumes and delivered a safer more reliable more cost efficient operations.
Second as we look to continue to grow returns, we want to focus not only on the numerator, but also the denominator.
Regional $1 billion challenge, it's follow up the next $1 billion help us drive to 10% auto IC.
Earlier this year, we launched a new challenge aimed at monetizing assets and optimizing working capital to unlock another $1 billion in cash.
Helping us to continue to drive returns.
We're already realized more than $400 million.
Next slide please.
Yeah.
We're also advancing our innovation pillar.
In profitable growth as we continued to expand our capabilities to meet demand across the three global trends, So food security health and wellbeing and sustainability.
For example, last November we added significant new capabilities in our health <unk> wellness business with the acquisition of probiotics.
Demand in the human microbiome space is expected to reach nine $1 billion by 2026.
While 90, most feed probiotic demand is expected to grow to six 2 billion.
The airline with a broad portfolio of probiotics prebiotics and enzymes provides a wide array of commercial R&D and operations related synergy opportunities to help us meet that demand.
And we're taking advantage of those opportunities from connecting our <unk> capabilities with our buy your Polish team in Spain to utilize for probiotics in their functional chocolate bar.
So, bringing together our expertise to expand our capabilities impaired our key growth categories.
So looking across teams to offer new types of dietary supplements.
Thanks to the strong collaboration across the enterprise deal and today is increasing our share of wallet with four customers in both human and pet solutions.
And we're seeing similar outcomes from other recent investments as well.
In the first half of the year, our combined portfolio of 2021 nutrition acquisitions has delivered significantly more than we had in our acquisition models.
Now I would like to turn the call over to Vikram to talk about our business performance Vikram.
Thanks, Juan Slide six please the AG services and oilseeds team delivered exceptional results in a dynamic market.
AG services results more than doubled versus the year ago quarter.
Mobile trades had an outstanding quarter.
Western nation marketing teams ability to meet customer demand around the globe helped drive strong volumes and margins and good execution in global freight as well as next timing gains of about $65 million for the quarter contributed to significantly higher year over year profit.
North America had a solid performance as export volumes remained strong and a good global demand environment, though year over year results were lower due to the prior year's insurance settlement and strong positioning gains south.
South America results were higher based on stronger origination volumes and better margins driven by strong global grain demand.
Crushing delivered substantially higher results strong soy crush margins drove improved performance in all three regions as Neal and oil demand remained robust.
<unk> net timing effects of approximately $90 million for the quarter versus the $70 million up negative timing in the year ago period helped drive year over year results.
Refined products and other results were similar to the prior year period as strong demand for Biofuels and food oils drove refining premiums and biodiesel margins offset by approximately $150 million of negative timing effects versus negative $30 million.
In the prior year quarter.
Equity earnings from Wilmar was significantly higher versus the second quarter of 2021.
Looking ahead for <unk>, we expect Q3 <unk>.
Seasonal transition quarter from the South American to the North American harvest to deliver results significantly higher than the prior year period, driven by continued strong global demand for grains and strong cash crush margins.
Slide seven please.
The carbohydrate solutions team delivered a second quarter of extremely strong results.
Starches and sweeteners subsegment, including ethanol production from our wet mills delivered much better results due to solid demand at food service volumes reached close to pre pandemic levels.
Corn co products, including strong demand for corn oil and effective risk management drove higher ethanol and sweetener margins.
<unk> solutions continued its strong growth with $81 million in year over year revenue growth in Q2 and $136 million year to date.
Vantage corn processors results was slightly higher in an environment of good gasoline demand and strong ethanol blending economics.
$50 million recovery from the USDA biofuel producer recovery program helped offset the prior year's strong industrial alcohol results from the now sold Peoria facility as well as valuation losses on ethanol inventory as prices fell late in the quarter.
Looking ahead to the third quarter, we expect results significantly higher versus the third quarter of 2021, driven by steady demand for our products and favorable ethanol blending economics.
On slide eight.
The nutrition business continued on its strong growth trajectory with 19% year over year profit growth.
Revenues increased by 20% on a constant currency basis, and 13% like for like and the team did a good job protecting margins.
Human nutrition delivered higher year over year results flavors grew revenue in North America, EMEA and South America profits were lower due to negative currency effects in EMEA as well as weaker results in APAC.
Healthy demand for alternative proteins resulted in strong soy protein volumes and margins as contributions from the soy protein acquisition as well as good demand for excellence drove higher results in specialty ingredients.
Strength across probiotics, including in the recently acquired <unk> business as well as robust demand for fibers contributed to a stronger quarter and health and wellness.
Across the human nutrition business, we continue to see low price elasticity and good demand for our diverse portfolio of ingredients and systems as we continue to support our customers with new products and cost out innovation and drive industry leading win rates.
Animal nutrition profits were up substantially year over year, driven by continued strong volumes and margins and amino acids.
Looking ahead, we expect third quarter results for nutrition to be higher year over year as the business remains on a trajectory to deliver 20% growth.
For the full year.
Slide nine please.
Other business results increased from the prior year quarter, driven primarily by higher ADM Investor services earnings due to higher short term interest rates in the corporate lines on allocated corporate costs of $267 million was slightly higher year over year due primarily to higher <unk>.
Operating and project related costs and higher costs in the company's centres of excellence.
Net interest expense for the quarter increased year over year on higher rates and higher short term borrowings to support working capital needs as well as higher expense for long term debt.
The effective tax rate for the second quarter of 2022 was approximately 18%.
Based upon our current outlook, we expect full year corporate cost to trend towards one 3 billion versus our previous outlook of about $1 2 billion.
Largely due to higher year over year interest rates, we still expect the adjusted tax rate to be in the range of 16% to 19%.
Next slide please.
Year to date operating cash flows before working capital of $3 2 billion.
Are up significantly versus $2 2 billion at the same time last year are.
Our balance sheet remains solid with a net debt to total capital ratio of about 30% and available liquidity of about 11 5 billion.
Driven by our strong cash flows and robust earnings we expect to accelerate our share repurchase program, adding to the $200 million, we repurchased in the second quarter of the year with an additional $1 billion in the back half.
And of course, the strong cash flows and balance sheet also preserves our flexibility to continue reinvesting in the business and advancing upside growth opportunities. Our capex outlook is unchanged at approximately $1 3 billion for the year one.
Slide 11 please.
For context, as we discuss our outlook I would like to go back to the goals and drivers we laid out at our global Investor Day in December .
We talked about the planning, which our strategic productivity and innovation actions will continue to build a bit that ADM.
Aligning our portfolio to meet accelerating structural demand changes driven by the enduring global trends to put security health and wellbeing and sustainability.
So that will drive strong earnings trajectory over the planning horizon.
What's transpired. Since then is that some of the market factors have reinforced and further enhance the value proposition of our diverse product portfolio and our integrated global network of assets. Please.
This helps drive a stronger than expected margins. So while we may see some reversion in the medium term. We now believe that margin structures are generally higher than what we had laid out in December .
We already on a trajectory to deliver at a very strong second half.
Resulting in expected full year earnings above $6 50 per share.
Vikram said the strong cash flows we are generating will enable us to accelerate the timing of our share repurchase program with $1 billion in repurchases in the back half of the year.
As we look beyond that we have not changed our strategy, nor our expectations of strong earnings growth and returns over our planning horizon.
And as we laid out that our global Investor day, there are upside opportunities to our medium term plan.
But as we have already covered today, we are advancing dose now and realizing higher value from them.
By your solutions revenue growth higher.
Higher health and wellness OPEC contributions the operational transformation across the enterprise, we expect these and more towards further upside in the medium term.
The opportunities before us are significant.
I am proud of what our team has achieved but I'm, even more excited about what we're going to deliver tomorrow next year and in the years to come.
With that operator, please open the line for questions.
Thank you Andrew.
If you'd like to ask a question you compress star one on your telephone keypad, if a license throwing a question you May press star to say, please ensure you're on mute locally when asking your question.
Our first question today comes from Ben <unk> from Stephens.
Your line is now open.
Hey, Thank you good morning, everybody.
Good morning Bill.
I wanted to ask one kind of bigger picture conceptual question and then my second question is more near term in nature.
First is on the accelerated share repurchase I'd be curious to hear a little bit more about all of the.
Decision points that flow into that bigger picture decision.
I imagine you highlighted strong underlying fundamentals in the business.
I imagine there is a component associated with working capital as well as some of that frees up with commodity markets cooling a bit I'm curious also to get an update on your longer term capacity expansion pipeline on how on schedule those build outs are.
And should we think of share repurchase as a <unk>.
Levered throttle up and pull back depending on M&A and Capex timing of kind of long with capital investments. That's my first question.
Thank you Ben.
Good question.
We are maintaining our balanced capital allocation that we put together some.
Years back.
We always said, we're going to take about 30% to 40% of our free cash flow to reinvest in the business.
And that's what our strategy of bolt on and organic growth normally takes and that will be the priority. We have exciting opportunities ahead of us. So we're going to prioritize our investment plan.
But of course, we've been paying dividends for 19 years, we've been growing dividends for more than 40 years, and we will continue that we increase dividends, 8% this year.
And when we're looking at.
At our distribution again, this 60% to 70%.
Whether there are strategic opportunities to do M&A.
Or given back to shareholders as we said before at this point in time, when valuations may be correcting and rolled out we don't have any significant targets in front of us our team continue to look for bolt ons.
And given the significant strength of our cash flows we have decided to.
The return of shareholder.
Of funds to shareholders.
So I would say.
We will maintain that balanced allocation we are not.
In the plan we presented in December we were looking at the later part of the plan as we were approaching 6% to $7 per share that we will have ability to repurchase about $5 billion of that.
Certainly we will be as I said in my initial remarks, north of $6 50 today. So some of those <unk> are accelerating to the scenario. So I would say it continues to be consistent in that regard.
Is it a later part of the question.
Forget things.
So the capacity to increase yes.
Capacity listen we are.
As you can.
<unk> mentioned it we are increasing our capex.
One three and we've been accelerating some long lead.
Equipment.
This year to make sure that our capacity expansions remain on.
On our schedule. So it will look at the big ones that we have right now whether it's spirit is still expected to be online by the harvest of 2023.
We are expanding capacity in bioactive in Valencia, thus expected to come in the first quarter of 2023, thus also on our schedules.
So I would say in general across the globe since we have the ability under the funds we've been making sure that we eliminated the risk of we minimize the risk of course, there is always a risk of labor and labor is tight, especially in North America, but I think at this point in time, we don't have a major.
Any major deviation to our plans.
Okay, Great. My second question is related to.
Grappling of supply and demand that we're seeing right now obviously there you highlighted your expectation of structurally higher margins across your business that makes sense given the.
Kind of bigger picture structural changes in demand that support the profitability of your business over the next several years, but we are starting to see demand destruction cyclically as the consumer deteriorate I think your business is really well positioned but I am curious about kind of what you guys are keeping your eyes on relative to deteriorating.
Underlying consumer and that the consequence of that rippling back up the supply chain the value chain potentially thank you.
Yes, Lisa.
We're watching.
Demand of course, we go.
We work very closely with our customers on our farmers on these I would say we have seen demand substitution demand shifting here or there.
You see it in in retail maybe too.
The label we've seen.
A little bit to people.
People looking into smaller packaging to make things more affordable so.
I would say if I think of the big categories for ADM.
Crude tends to be despite all these comments.
More reliable and much more stable in the us.
Just the essential nature of that.
I think our fuels business, our biofuels business in general are more tied to programs that are long term and to initiatives to reduce.
Sure.
Emissions in unimproved climate of over the long term. So they also tend to be relatively firm. If you will and we see that with RGD, bringing new demand for oil. So if we have any issue in the edible oils has certainly been more than offset by the new demands on renewables and I would say the area where it may.
We keep the closer look towards that is animal feed animal feed has been impacted by this.
We estimate something in the range of maybe 10 to 15 million tons on a global basis that maybe we took out of our smbs from the global perspective.
Our total revenue from the Globus and these.
I think we have less of an impact on an <unk> perspective, because as people.
Like trade down if you will or if they were to trade down from beef chicken is a cheaper protein.
More affordable protein.
Chicken is where we get all the soybean meal, mostly source.
If you think about what's happening with soybean meal.
Is.
It has a cost advantage to corn. So it continues to have a high proportion and the Russians on things that are if you will more demanded right now like poultry.
When we go to.
Nutrition.
You said it in your question is we are well positioned in some of the applications that are growing the fastest and of course not completely insulated.
Certain degree we havent seen significant drops at this point in time, so our expansions.
Continue forward and you saw in our remarks.
Decisions, we made last year are actually performing from an op perspective better than in the economic model, we put together.
Okay. Thanks for the detailed answered congratulations on the results.
Thank you I appreciate it.
Thank you. Our next question comes from Ben Theurer from Barclays. Your.
Your line is now open.
Okay.
Thank you very much and good morning, Juan Vikram.
Good morning, good morning, so.
My first question is also related a little bit to the picture you draw and you've laid out just about seven or eight months ago. During the capital markets day back in December and you talked about the path to get to the 6% to $7.
650 for this year, but the one thing that kind of Pops.
Pops out.
The significant strength in the up we've been seeing on the return on invested capital and you still say Youre long term objective of 10%, but now we've been consistently gone higher so if we put it like in the context in your comments of the margin structure to remain higher how should we think.
Surely over the medium to long term.
Where is your real ROIC objective given that you've been consistently above that 10% level and what does that mean for your potential to return cash to shareholders via dividends buybacks versus then ultimately the capex needs.
Thanks, Ben for the question. So just to give you some context, when we decided on the 10% ROIC target. It was based on an expectation of about 300 basis points above our long term cost of capital and the long term cost of capital has been around 7% for some time now.
But as we look forward and we see interest rates on the rise there is likelihood that over the medium term. The long term WAC is going to increase we still want to maintain our buffer.
Our our spread versus that long term WAC. So in short, yes, we are actually looking at growing our rois beyond the 10% we haven't firmly established a new target, but clearly as you've seen we are well ahead of 10% on the back off a strong demand outlook for the medium term as.
Well, a strong discipline on the denominator from a balance sheet perspective so.
So in terms of the capital allocation and the forward outlook.
And I think it's consistent with what <unk> said, we expect that we are going to be very disciplined and balanced in terms of how we deploy that capital both in terms of reinvesting in the business and by the way the opportunities to reinvest in the business a significant one mentioned some including the operational transformation and much of that.
It is not even baked into the medium term plan that we highlighted so we anticipate there likely will be some additional reinvestment in the business, but that should still leave us enough flexibility to do share buyback potentially even in excess of $5 billion as well as continue our pace of dividend growth as we've done here.
<unk> over the last 40 plus years.
Got it that sounds very promising vikram. Thank you very much for that and then just coming back on the growth and what's being delivered within.
The nutrition segment, just to kind of frame it and understand it well.
You are seeing into the back half here, because clearly you're kind of reconfirm to 20 ish percent growth in op income.
A very strong first half.
You expect next quarter to be better.
Anything where you think there could be a little bit of a headwind.
More short term just because of people maybe down trading on the consumption side, you mentioned, a little bit maybe the packaging side going to smaller sizes et cetera, but to understand a little bit the risks versus the opportunities within nutrition.
Yes, Ben.
First of all nutrition is a business where.
We're probably exposed to the most to the supply chain issues.
He is talking about because we have a more variety of raw materials that we consumed all of these formulations. So.
That is always something.
The team worked very well to overcome but.
That's an issue we watch pretty closely the second is as you know that business is also very strong in Europe . So there is a forex exposure.
<unk>.
We keep on looking and I mentioned at the beginning that.
Animal nutrition volumes are a little bit more difficult I think that.
Given.
Given the price points, where we are so I would say those are the three.
The levers that we keep on looking to make sure that we balance that.
I would have to say the business has done a terrific job of offsetting all of that and again we're still.
Believing our enhanced guidance from 15% to 20% for this year, we're still going to do that.
And the business again.
Many many times before is clearly in its path to achieve our billion dollar operating profit objective probably next year. So we feel good about the business, but it's not it's not without a lot of active management if you will.
Okay perfect. Thank you very much.
Thank you Ben.
Yes.
Thank you. Our next question comes from Adam Samuelson from Goldman Sachs. Your line is now open.
Yes. Thank you good morning, everyone.
Good morning.
Good morning.
So I wanted to maybe dig into the outlook on oilseeds, a little bit in your prepared remarks, you alluded to.
Our mid cycle or normalized medium term kind of margin structure that moves higher.
I'd love to get a little bit more color on how you how your view over the medium term.
He's involved there and especially in the context of a north American kind of industry.
In the midst of some pretty healthy capacity expansions by you and many others.
Yes.
We continue to see.
Strong demand for for meal and oil.
North America has.
Many advantages in North America has the beans, and North America.
A robust.
Domestic consumption North America has the new demand for oil so that mix.
Of course in soybean meal more competitive in the world. We continue to see good margins and good volumes in poultry.
Yes.
Again, the consumer favors that means we continue to be to see soybean meal advantage to core as I said before in the Russian debt continues to have high inclusion rates.
We see.
China recovering from Covid.
So activity come embark.
And we see Argentina predict emerge even the current <unk>.
The national issues outside.
Outside of the markets in terms of their aggressiveness.
So I would say.
The scenario that we're being seen it continues with strength going forward.
I think that.
Kind of what.
What we see at the moment, so Q3's strong I would say, maybe if I go to canola canola has been.
Margins have popped. So maybe we had we didn't have that in the past now we have a very strong so we see.
The strong demand.
<unk> for biodiesel.
Just trying to go mentally through rewards.
The business is in.
As we said before.
Wilmar has been doing very good so.
We don't see any significant clouds in the horizon right now we have good expectations, we think that.
For the second half.
The U S will become the place to export for corn and soybeans. So I think that the exports should come to the U S from the period.
September to May be February or maybe even March.
So we will have to watch.
Logistics.
Where the logistics can allow us to execute a strong export season.
That's probably the only think of there that I will be thinking Adam.
In terms of puts and takes.
Okay. That's all really helpful and if I could maybe just switch gears over to.
Carbohydrate solution, specifically starches and sweeteners.
I mean, very strong kind of first half results and I guess I'm trying to think about.
The contributions of between.
Volume growth better ethanol profitability.
Co products and kind of risk management is just that.
We think could be your most mature business and seeing some very very healthy absolute and year over year performance and trying to just maybe disaggregate some of some of the drivers there a little bit.
Yes, sure so Adam just breaking it down into volume margin and mix in sweeteners and starches from a volume perspective actually we saw volumes in North America higher year over year in the first half and that is different from what you may have heard generally in the marketplace with <unk>.
The benefit from our integrated network that enables us to deliver to our customers effectively and efficiently and in some cases, we've actually also imported <unk>.
<unk> start for example from Europe to meet that demand. So volumes have been strong in terms of margin clearly we benefited from higher co product values, including corn oil in particular. So that's also helped in terms of the net corn and effective margins for sweeteners and starches and from a mix perspective.
We talked about by our solutions driving more and more growth higher than what we had anticipated. So on all three fronts in terms of volume margin and mix SNS looks brighter than what we had anticipated at the beginning of the year in terms of ethanol also if you think about similar way of thinking about volumes what is they've been strong.
Terms of gasoline demand locally strong exports expected we've had strong exports outlook for exports about $1 6 billion gallons for the year in terms of margins. We've also again benefited from the fact that we've had good co product values, particularly again in <unk> and that has helped us.
<unk> margins. The other aspect is the RVO RVO as had been finalized so thats puts that removes the cloud from the regulatory landscape at least for 2022 and gasoline and ethanol blending economics remain fantastic. If you include RIN values thats above two bucks relative to our book today.
So I think that based on all of those facts. We think Q3 is going to be stronger quarter over quarter and our outlook for the year is also very constructive.
Just to clarify that because I don't think that was a nuance you tend to remarks, you said in the prepared remarks, you said significantly higher year over year.
And youre, saying all of carbohydrate solutions will be higher quarter over quarter, as well and I just wanted to be clear on that point.
No my comments were specifically quarter over quarter significantly higher quarter over quarter for Q3.
And what I, just emphasize as well.
A constructive for the outlook for the full year.
Okay, Alright, that's super helpful. Thank you I'll pass it on.
Thank you.
Next question comes from Ken Zaslow from Bank of Montreal, Ken Your line is now open.
Hey, good morning, guys.
Hi, good morning.
Just couple of questions. One is how much dollar amount do you expect to increase in 2023 from the cost savings and you are harvesting of your.
Growth investments, how do we kind of thinking about that for 2023 in terms of dollar amount that's going to be coming out from both your cost savings and your investments in growth.
So I think Ken.
Providing context going back to the global Investor day in terms of the framework right, we talked about productivity.
And innovation driving about $1 $1 billion in an aggregate each and then we expected market forces should be at about $1 billion.
In terms of 2023, we haven't gone through the specific plan yet right. We are still working through that but you could assume kind of a flat roughly speaking over that four year timeframe, what I would submit to you Ken is over the last three or four months as Juan mentioned, we see additional opportunity.
<unk> on the horizon as it relates to operational transformation with Digitization and automation, we talked about the Marshal example, if we multiply that Marshall example, the upside could be even more but that's something that we are still fleshing out and we will be prepared in the foreseeing foreseen quarters should provide you a little more granularity on that.
Yes, Ken.
I would like to add to what Vikram said.
I think back to December .
There are two things that are different.
A lot of the productivity efforts this year have been used to offset inflation.
I think the team has done a terrific job of protecting margins in that sense. Those productivity efforts continue on as inflation, maybe receipts next year, we may see more of that coming to actually improve our productivity versus just offsetting inflation. The second thing that I've noticed and I try to.
Make a point in my prepared remarks is that.
We'll probably see innovation, a little bit more activity in innovation I think customers are trying to fight inflation and I think that bringing newness, bringing new categories, New innovation, we've seen that in nutrition and other pieces of the portfolio. So I think there is an opportunity there and.
Some of the things that were not included in our five year estimate whether it was some of the growth of health and wellness or some of the bio solutions.
Opportunities and all that are to come in stronger and faster than maybe we anticipated.
So.
Because I've said it we normally start the planning season, maybe late September and October So we're going to be looking at 'twenty three there but.
I think we're going to have a lot of puts and takes.
On the scenario. This is a very dynamic, but we feel good about the about the initiatives, we can control, let's say.
Great.
A clarification question.
You talked about the $6 50 number that includes share repurchases.
Is that does that.
Underlying fundamentals seems stronger than maybe you expected can you reconcile that because it includes the share repurchases I would.
Argued that maybe be better than that I don't know, if you're being conservative I am not trying to pinpoint it.
Incongruent in terms of.
The accelerated share repurchase and just kind of sticking to that $650 I just wanted to touch base on cell touch base on that if you can help us out on that.
Yes, so Ken just to be clear, we did not say an ASR, we did not see accelerated share repurchase right I want to make sure that we clarify that comment we did say that we are going to do $1 billion in the back half of the year and as you well know is EPS impact of that given the averaging is pretty minimized for this.
Calendar year, so the impact whether you consider share repurchases in the 650 dollar number or not is frankly insignificant for 2022.
Okay. So just putting this all together even as fundamentals kind of stabilize at this higher level your share repurchases your productivity and your growth initiatives can propel earnings higher in 2023, even if fundamentals kind of stabilize.
Not to say, we were peaking I don't want to use that word, but if we stabilize at a higher level is that a fair way to think about it that your internal actions.
Ponant can drive earnings growth in 2023, and I'll leave it there and I appreciate your time.
Ken.
The way I think about it.
Sure that is.
We need to have in ADM sort of thing ambidexterity on one side, we have a team that executes on opportunities presented by the market.
The team is executing.
On great opportunities. This year, we don't control that all the time, we control our execution, but we don't control the opportunities.
Based on the macro environment.
The other hand.
We are committed to keep improving the company so and Thats why we committed in December over the five year plan, so to the extent that.
Those forces whether favorable or negative.
Offset our productivity and innovation at times, we're going to see more of that effect.
At times, we are going to see list. So we know we're going to grow earnings over the next five years based on all of that.
We have not got in 2023 at this point in time so.
Want to make sure that people don't hear that what we're going to do is the promise to grow earnings every year, we cannot control the environment in the world, but we can control that we get better and we can control that we can maximize our execution on the opportunities provide.
2023 provide the same opportunities of 2022.
Unclear at this point in time, and we need to go through our scenarios.
But I think we're going to feel we feel very good as I said on the team's ability to execute some of the macro that we're seeing in terms of demand demand for food than has been growing over the last 15 years at one 8%.
Per year.
You can argue that at times, we are getting to the peak of arable land being brought into production.
We are hitting the peak of maybe even yield.
In the area. So we think that although margins may not.
Hey.
At this level, if theyre going to stabilized they are going to stabilize at higher levels than in the past and Thats where.
We based our forecast in December .
We are maintaining that so we feel good about continuing to grow earnings we haven't got into the specific 2023 number yet.
I appreciate it thank you guys.
Thank you again.
Thank you next question comes from Steve Byrne of Bank of America, Steve. Your line is now open.
Yes. Thank you Vikram you had some constructive comments about third quarter four.
AG solutions, and oilseeds and I wanted to specifically ask you about.
Which of those two big businesses is primarily driving that favorable outlook in AG services.
What is it what regions of the World, where do you see.
That strength coming from.
And then one more for you on that.
If there is less crop production in the world in 2022, just from significantly less fertilizer applications is that net positive or negative for you you could have tighter supplies, but.
Less volume.
Yes. So thanks for the question Steve in terms of.
<unk> I'll break it up in terms of as we talked about destination marketing being very strong right. So that's part of global trading we anticipate that to remain strong given our ability to deliver to customers around the globe and actually we have the the globally integrated network, we have enables us.
To do that very effectively and efficiently. So we believe that's going to be a continued contributor of the growth. You think about also where we are positioned as a company in North America, and South America, whereas we're likely going to come for grain in the back half of this year, it's probably going to be in North America, and with a reasonable crop that we expect.
Now, we should be well positioned to be able to benefit from that given our footprint. So I think the strength in destination marketing within global trade as well as our asset footprint and the dearth of grain around the globe in light of what's happened gives us good flexibility and.
<unk> margin outlook for the back half on the oilseed side. The fundamentals remained strong I mean, you've seen that the demand for oil both on the food side as well as RGD remained strong so north American crush margins should be constructive as soybean meal remains a very efficient and cost effective.
Protein substitute for even wheat is wheat prices, even though they come off they are still relatively expensive. So soybean meal remains an important.
Feed for all types of protein, especially for poetry, and you've seen the numbers of poultry rising. So we are constructive for crush margins in North America, and even with biodiesel as well. That's also providing another another avenue to support crush margins, even in Europe , So crush margin.
Outlook for the back half as strong in terms of the fundamentals that I highlighted so candidly the strength in ethanol is bolt on asset as well as all for the back half of this year.
And you made a comment on one of the slides about investing in this.
Sustainable Agriculture initiative of SPM. My question for you on that is how meaningful of an opportunity do you think this is for you or your.
Food company customers.
Willing to pay a premium to you and thus the farmer.
For Greens and oilseeds that are produced.
And various sustainable way is this a niche or is this a potentially meaningful portion of your origination business.
Yes, Steve.
This is juan.
Yes.
We are building this.
I think we have a division within the business to look at this.
Certified grains, if you will or differentiated grades.
There is certainly a consumer push into this that we feel through the cpg's.
Kevin.
The desire to engage in these transactions with us so.
So.
It continues to build I don't think it's going to be meaningful to our earnings over the next two or three years, but it's something that is aligned with sustainability trends is aligned with the ability of the whole industry to decarbonize and become better so it makes us more sustainable.
But it is growing it's still small but it continues to accelerate so.
Thank you should expect an op impact over the next two years, but we're building a good position here and with foreign looks like SBA and I know that we continue to improve the economics and simplify the recognition two harbors.
Embraced sustainable practices so.
So there is an economic.
Motive.
All results later on maybe in the planning cycle at this point in time is more of a sustainability.
Thing that we do to help our customers as they need more of this.
Thank you.
Okay.
Thank you.
Next question comes from Tom Palmer of Jpmorgan your.
Your line is now open.
Good morning, and thank you for the question.
Maybe I'll just start off on the crushing side.
Margin info in the earnings presentation was encouraging as it was your second half commentary at.
At the same time, we saw board crush at least temporarily weekend.
Going back a month or two so it looks like it hasnt carried forward.
In terms of board crush Orange.
Foreign spot as much but.
<unk> have much bearing on third quarter results, but I hope to get at least a little bit of color on what happened and why the impact was temporary.
Yes, I think so.
What we saw.
Of course.
This has become became a little bit tighter in the U S and soy and we saw a little bit on palm oil correction that may be impacted some of the also you've got bored compress a little bit.
In reality, the cash market never moved and they remain very constructive are very strong and now you have seen how.
Hello.
Board crush.
Bounce back I think that what we need to remember is like before all these volatility where there is the walk or this or that.
We were coming into very strong markets again demand continues to grow for meal and now we have another leg of that debt cost and new demand.
Mature markets like these.
When they get new demand in a significant quantity of like RGD.
You'll get a <unk>.
Significant change in margin when you think about the structural changes that have happened over time, where there is the different weighing with China feed.
Courts now or.
Argentina.
With an exchange rate built the mix the farmer really have no desire to sell.
Farmers to a certain degree curtailing crash.
Argentina, and then we see China coming back from the Lockdowns.
And soybean meal has been better than core in <unk>.
The Russian.
We continue to see this.
Strong.
Now we have also canola, helping them onto this.
On the strength in <unk>.
Biofuels biodiesel per se so.
I think from our perspective, we were always looking at cash margin. So.
He didn't make it.
Significant shift in our operating profit.
As we were saying in the last earnings calls to be honest.
It has moved in.
At times some of these moves to be honest in commodities has been driven more by financial flows fundamentals I would say the fundamentals were strong before the award.
We continue to be strong some prices.
Spike because of the war then they came back but they came back to the high levels that we had before because it was just supply demand fundamentals and as much as people talk about rising interest rates and all that rising interest rates do not produce grain. So we have not seen it.
Any change in our supply demand fundamentals that were in place before the war before the tightening by the fed so to a certain degree we need to keep our eyes on the fundamentals that's what matters.
Thank you that's very helpful color.
I'll just follow up on the soybean oil side.
There's a lot of renewable diesel capacity scheduled to come online late online later this year.
What are you seeing in terms of that demand environment are you starting to see inventories build so essentially new customers because the the soybean curve at least.
Downward sloping and it does seem like there is a lot more demand step up that could at least theoretically change that.
Yes.
I think we're building new industry.
There are so many players here and so many so many things.
In motion is a very dynamic environment that we continue to watch.
I think with we see the demand coming as expected I think you may have like in every capital project. These days. Some process, then maybe a little bit delayed.
But we don't see any significant change to our medium term forecast so we.
We see the strength.
We see the recovery on even.
Potentially.
<unk> based on China coming back into the market and coming back from Lockdowns.
So none of our forecast has changed in the oil side and if you look at.
The contribution of meal and oil to crash.
From the last quarter to this quarter. It has maintained so it looks like both legs continue to have the same strength at this point that we expected.
Alright, thank you.
Thank you.
Thank you our next.
Next question comes from Eric Larson of Seaport Research Partners, Eric Your line is now open.
Thank you.
Good morning, everyone and congratulations on a great quarter. So thanks for thanks for giving me. The question here. So this is based on kind of like a little bit of a corny question, one and 330000 foot kind of.
Speaking level.
In the past Theres enough of us have been around long enough. When you have global recessions. It does change the fundamentals for grain demand.
I get the question all the time my senses.
Structural changes, particularly in the U S market.
Even if we did have a global recession is that the fundamentals have a reasonable chance of remaining.
Fairly strong is that does that.
Is that off base thought or how would you look at that.
Yes.
As I was saying in the previous question I think that.
Again before rising rates that could drive into into a slowdown of the economy.
The war, we had a tight balance sheet I mean.
And you want to keep it at 30000 feet.
We're going to we're going to run. These experiments are trying to fit two more 1 billion people from here to 2015, something that we haven't done in the past.
Ted you could argue that if we're going to move population from 7 billion to <unk> nine five by 2050, there's not the same proportion arable land are going to be brought into production nor the same proportion of yield going to be.
So.
I think in recessions food is more protected.
One other thing so we don't expect a significant drop in demand at least not for a sustainable period of time, while the reality is that production may or may not.
Be there when you think about whether when you think about the limitations of acreage or the limitations of potentially yield.
So.
Our scenario is for Titan is going forward.
We will do our best to make sure we continue to supply the billions of people around the world with their needs.
But I think it is more prudent to plan on.
Tight supply demand scenario.
At this point in time, we would run the supply demand going a little bit more shorter term, we think that at least we need to have two very good years of good crops in North America, and South America to bring a little bit more of relief to the current supply demand inventories, even if we have a good crop in North America I don't think.
We are going to increase pipeline from for soybeans at this point in time so.
South America has been good linear for like three years or something like that so some of these events are starting to last a little bit longer thankfully in North America everything looks like it's still going to have another good year. So.
So we will come the end of the harvest to see a very good crop this year in North America.
Yes.
I would agree with that so.
I'll ask one more quick question, it's more technical in nature.
In the quarter.
Put over $3 billion on top of your inventories.
And.
I'm just curious when you look at where grain prices were on March 31.
June 30 at June 32 were down.
Cost of a board corn beans, Neal oil wheat, all the prices were down so does that mean that you've just taken on and <unk> been able to buy more grain taking on bigger positions. So your volume of inventory is larger.
Does that explain that $3 billion plus of inventory increase.
Well I think.
The inventory.
When you're talking about I think our working capital effectively from Q1 to Q2, it's come down a bit.
Right.
Eric So I think it's a function of both volumes as well as as as prices, yes prices have come off but I think it's a function of also whats happening around the globe you've got to think about not just our AG services and Oilseeds business you got to think about also the other parts of our <unk>.
Business so while in general there is a correlation to prices. There is also not necessarily same flat volume across every quarter.
Got it okay. Thank you.
Operator, Thank you Eric.
Thank you.
Next question comes from Steven Haynes of Morgan Stanley Steven Your line is now open.
Everyone. Thanks for squeezing me in at the end here.
I just wanted to ask a question on China, It's come up a few times, maybe could you just go into a little bit more detail around demand.
Demand dynamics, there I think soybean imports youre still kind of trending down year over year. So.
Or are we kind of at an inflection point, there and any additional color would be great. Thank you.
Yes.
We think.
We are in close contact with our China team of course.
I think demand there.
Of course suffered an impact you saw there are quarterly growth rate for the whole country.
But we get.
Encouraging reports.
Activities coming back I think that at the beginning.
Even if the relieved on some of the.
Some of the restrictions people were still a little bit shy to come out, but I think that now.
We're seeing people coming back to the office, we are at 100% back into the office that brings traffic and that brings the external breakfast.
To sum things like that so.
So we see that with.
A recovery if you will coming from our perspective.
If you think about the four main meats for China, China has produce about 5% more of the combined for meat in the first half of the year. So you could you could see there that.
That of course.
The milestone is still there to be fed and certainly.
And certainly put security continues to be a high priority of course, the very responsible Chinese government.
So.
Nothing significant to report other than the.
It's both.
Corporate situation that is happening in multiple cities.
Okay. Thank you.
Thank you Steve.
Thank you. Our next question comes from Robert Moskow of Credit Suisse. Roberts. Your line is now open.
Hi, Juan and Vikram.
One forgive me if you've addressed this already but.
There's a lot of grain still trapped in Ukraine, and I wanted to know if you have a view on what's going to happen to it and how.
How it will affect your business.
Yes so.
Thank you for the question on Ukraine, So our priorities in the company as we have said it before continue to be twofold first is too.
<unk> provides for the support and well being of our employees now and into the future, but the secondary close priorities with you described is how do we help the industry in Ukraine, the agricultural industry to come back on their feet.
As you know there are 230 million tonnes trapped there and we've been working to increase the land exports.
I think.
Even some of the river to exports and so we're very proud of what the whole industry have done to increase dose. We're still short of that and of course, that's why you see both countries signing these black Sea initiative, which is to allow for that.
Another ports there to come back to full capacity to be able to export.
At this point in time.
Read the news.
You get encouraging news, one day and may be discouraging news the other day.
I do believe that.
Both countries are committed to help.
Keep this quarter as our open I think that at the beginning you're going to see a little bit of a trickle down of exports may be of smaller boats. I think is going to take a little bit of building confidence that these awards before you can put the bigger boats.
There are issues in the country about getting fuel for that there are issues in the country about getting the crews.
Monday's vote. There are also issues about insurance and financial institutions guaranteeing some of these large transactions so I think I'm.
Im optimistic I think youre going to a trickle.
Trickle down that will be good for all for us and for everybody that we allowed that capacity not to be.
And utilize if you will at this point in time.
World need to access to those inventory. So this is an important thing if we don't have access to those inventories and theyre not clear from the storage next year. We may have an availability issue for food because we will lose part of the crop Ukrainians apparently have done a very good job of planting about 70 per.
<unk>.
All the capacity all the area.
They are.
They are harvesting right now that they are going to be harvesting in September and October the corn.
The sunset, so we need that space to be able to to store those in September and October . So we are optimistic we are helping as much as possible. There is a lot of people with good intentions. So hopefully we will see the sea exports to grow over the next two or three months.
Very helpful. Thank you.
Yeah.
Thank you our final question for today comes from Michael pattern of Cleveland Research.
Your line is now open.
Yes. Good morning. Thanks for the question a couple of parts on nutrition, the first part being within the human nutrition, how much of your revenue growth was with new customers versus expansion of current customers and then on the animal nutrition side, how much of the growth was due to the favorability of the lysine market.
Versus just internal operational improvement and how sustainable at that thanks.
On the human nutrition side, it was a balanced growth across new customers as well as existing customers and we think about our revenue growth in terms of volume.
Pricing and mix right. So I think we had balanced growth across the three.
We drove early action on pricing to ensure that we maintain margins and kept a strong focus on driving mix price elasticity. So some of the products are most of the products frankly, we participated in human nutrition has tended to be pretty low as Huang noted. So I think thats helped benefit protecting margins as well as driving revenue growth on the.
Animal nutrition side as I highlighted in my prepared comments most of that growth has come from amino acids and amino acids has benefited from a relative.
Relative.
Protein demand as well as supply chain challenges out of out of China and the third aspect. That's benefited us is our conscious effort to switch from liquid lysine to dry lysine and thats.
Alright, so from driver IC to illiquid likely, yes, and Thats actually helped us.
Half path to drive improved profitability and improved margins as well as increased stickiness with our customers. So most of that volume growth in animal nutrition has been driven by amino acids.
Yeah.
Thank you.
Thank you Mike.
Thank you we have no further questions. So I'll hand back to Michael Cross for any further remarks.
Thank you for joining us today slide 12 notes upcoming investor events 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 ADM.
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