Q2 2022 Bunge Ltd Earnings Call
Good morning, and welcome to the Bhangi Limited second quarter 2022 earnings release and conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now.
I'd like to turn the conference over to Ruth Ann Weisner. Please go ahead.
Thank you Jason and thank you for joining us this morning for our second quarter earnings call before we get started I want to let you know that we have slides to accompany our discussion. These can be found in the investors section of our website at bunge dot com under events and presentations.
Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are posted on our website as well.
I'd like to direct you to slide two and remind you that today's presentation includes forward looking statements that reflect <unk> current views with respect to future events financial performance and industry conditions. These forward looking statements are subject to various risks and uncertainties.
He has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and we encourage you to review these factors.
On the call. This morning are Greg Heckman monkeys, Chief Executive Officer, and John Neville.
Financial Officer, I'll now turn the call over to Greg.
Thank you Ruth and good morning, everyone.
I'll start by congratulating our team for another strong quarter. Thanks to their continued focused execution in this highly dynamic environment.
The results of the team delivered confirms the bunge global asset footprint, coupled with our operating model.
It moves us to more quickly adapt to market shifts.
As changes can be difficult to immediately predict but our team has the agility and discipline to adjust and capitalize on market opportunities overtime.
With our flexibility and global view of the Indian value change, we're able to help our customers find solutions to the challenges and opportunities they encounter.
The worn Ukraine is dramatically upset traditional origin to destination trade flows and we've worked to find different sources for products that our customers want.
Our innovation teams have also been working alongside our customers to help them reformulate products in response to tightening supplies.
At the same time, we're keeping our focus on sustainability include.
Including our commitment to have deforestation free supply chains in 2020 five.
Bhangi sustainable partnership program uses tools like farm scale satellite monitoring to help resellers assess their suppliers social environmental performance in the Brazilian cerrado.
As described in our most recent sustainability report.
She is now able to monitor at least 64% of indirect volumes and our priority regions, surpassing the 50% target set for the end of 2022.
Our ability to optimize value for both our customers and buggy is reflected in our results today as well as in our long term view of our opportunity, which we'll touch on later.
But first turning to second quarter numbers, we continued to build on our strong momentum.
<unk>, our 11th consecutive quarter of year over year earnings growth.
Results in agribusiness, and also when refined and especially oils from.
Strong demand and continued tight commodity supplies.
Milling results were up delivering a record quarter as our teams effectively managed our supply chains.
Dynamic in my environment.
Looking ahead, we're expecting to deliver adjusted EPS of at least $12 per share for the full year 2022 and.
And that's up from the outlook, we provided last quarter.
This includes increased estimates and all of our core segments.
Supplies remained tight in the physical markets across all of our key businesses, regardless of the commodity volatility driven by the broader financial markets.
Regular seasonal production factors and continued global supply chain challenges make the value of the services, we bring to our customers more relevant than ever.
Gives us confidence in our outlook.
Before handing it over to John I want to take a moment to discuss both the updated earnings baseline and the growth framework, we've announced today.
When we first introduced our mid cycle baseline in June of 2020, we were early in our work to transform our operating model and optimize our portfolio.
We provided that earnings framework to help you think about how we intended to operate the business with the changes we were making.
With the initial portfolio and organizational work now behind US we're updating our baseline in the earnings framework from $7 to $8.50.
And that reflects our global platform as it stands today.
This includes the structural improvements in the oilseed market environment.
And greater benefits from our operating model.
We're also providing you with the way to think about water platform can deliver in the future.
And that's because we've been deploying capital for growth.
Making investments in our business that will continue to increase our earnings baseline.
We also intend to allocate capital for share repurchases.
The incremental earnings from capital that we're deploying shouldn't enable us to perform at a higher level in a mid cycle environment.
As a result, we are providing a four year earnings growth framework of approximately $11 per share by the end of 2026.
This growth framework includes the increased earnings baseline of $8 50, plus.
Plus the futures benefits of investments in the business and share repurchases.
With that I'll hand, the call over to Jon to walk through the results and the updated framework in more detail.
Thanks, Greg and good morning, everyone, let's turn to the earnings highlights on slide five.
Our reported second quarter earnings per share was $1 34 compared to $2.37 in the second quarter of 2021.
Our reported results included a negative mark to market timing difference of $1 26 per share and a negative impact of 37 per share related to one time items.
Adjusted EPS was $2 97 in the quarter versus $2.61 in the prior year.
Yeah.
Adjusted core segment earnings before interest and taxes or EBIT was $709 million in the quarter versus $550 million last year, reflecting higher results in AG processing refined specialty oils and milling.
In total agribusiness results of 386 million were down compared to last year.
The higher results in processing were primarily driven by U S and Brazil, soy crush due to strong deal and oil demand.
<unk> and soft seed crush were also higher primarily driven by North America.
Okay.
Merchandising had a good quarter managing market volatility well.
<unk> results were down compared to a very strong prior year as a higher contribution from global grains was more than offset by lower results in ocean freight.
And refine our specialty oils results were higher in all regions with particular strength in North America, and Europe refining both benefiting from strong food demand as well as strong U S fuel demand.
In milling higher results in the quarter were driven by North and South America, wheat, milling, reflecting higher margins and effective risk management of our supply chains.
The increase in corporate expenses in the quarter was primarily related to expenditures on growth initiatives and timing of performance based compensation accruals.
The increase in other primarily related to our captive insurance program and gains on investments and buggy ventures.
And our noncore sugar and bioenergy joint venture higher ethanol and sugar prices were more than offset by the combination of lower ethanol volumes and increased costs.
For the six months ended June 30 income tax expense was $144 million compared to $242 million in the prior year. The decrease was primarily due to lower pretax income.
Net interest expense was up compared to last year due to both higher interest rates and higher average debt levels.
Also impacting the quarter were foreign currency borrowings in certain countries, where interest rates were high.
However, the incrementally higher borrowing costs were fully offset with currency hedges reported in gross margin.
Let's turn to slide six where you can see our positive EPS and EBIT trends adjusted for notable items and timing differences over the past four years, along with the trailing 12 months.
In addition to validating the resilience of our global platform and operating model over time. It also demonstrates continuing strong performance by our team that has successfully managed different and rapidly changing market environments over this time period.
As shown on slide seven addressable SG&A increased modestly year over year.
After two years of Covid related impacts employee travel and related expenses are picked up and as we have discussed on previous earnings calls, we are increasing investments in people processes and technology to strengthen our capability and drive growth.
Slide eight details our capital allocation of the approximately $1 $2 billion of adjusted funds from operations that we generated in the first half of the year.
After allocating $101 million to sustaining Capex, which includes maintenance environmental health and safety.
And $8 million to preferred dividends on shares now converted to common equity, we had approximately $1 $1 billion of discretionary cash flow available.
Of this amount, we paid $154 million in common dividends and invested $111 million in growth and productivity capex, leaving approximately $865 million of retained cash flow, which was invested in additional working capital.
Our strong balance sheet and cash flow generation puts us in a position to allocate capital to the best value, creating opportunities, which I will discuss later in the presentation.
As we have demonstrated in the past, we will continue to maintain a disciplined and balanced approach.
As you can see on slide nine at quarter end readily marketable inventories our rmi exceeded our net debt by approximately $2 7 billion a significant change from a year ago.
Year to date, our underlying cash flow has allowed us to invest significantly in inventory with only a small increase in debt.
Over time as commodity prices moderate the cash invested in inventory will be released and available for deployment toward debt reduction and our other uses.
Slide 10 highlights our liquidity position, which remains strong at.
At quarter end, we had just under $6 billion of committed credit facilities unused and available.
This provides us ample liquidity to manage our ongoing working capital needs in this volatile commodity price environment.
Okay.
As shown on slide 11, our trailing 12 months adjusted ROIC was 22% 15, four percentage points over our Rmi adjusted weighted average cost of capital six 6%.
Our ROIC was 14, 9% or eight nine percentage points over our weighted average cost of capital of 6%.
The spread between these return metrics reflects how we use rmi and our operations as a tool to generate incremental profit.
Moving to slide 12.
For the trailing 12 months, we produced discretionary cash flow of just over $2 billion and a cash flow yield of 28%.
Please turn to slide 13, and our 2022 outlook.
Okay.
As Greg mentioned in his remarks, taking into account our Q2 results. The current margin environment in forward curves, we've increased our full year adjusted EPS outlook to at least $12 per share a 50 cent per share increase over our previous outlook with potential upside depending on market environment and supply and demand balance.
In agribusiness full year results are expected to be slightly higher than our previous outlook, but remain down from last year due to lower expected performance in merchandising, which had a particularly strong prior year.
And refine the specialty oils full year results are expected to be up from our previous outlook and higher than last year, driven by strong demand in north American and European businesses.
Okay.
In milling full year results are expected to be up from our previous outlook and significantly higher than last year driven by strong first half results.
We expect results in the second half of the year to be more reflective of historical performance.
In corporate and other results are now expected to be less favorable than our previous outlook and more in line with the prior year.
The noncore full year results in our sugar and bioenergy joint venture are expected to be in line with last year.
Yeah.
Additionally, the company now expects the following for the year.
And adjusted annual effective tax rate of 14% to 16%.
Net interest expense in the range of $310 million to $330 million.
Capital expenditures at the lower end of the range of $650 million to $750 million and depreciation and amortization of approximately $400 million.
With that I'd like to now shift to an overview of our new earnings growth framework.
The waterfall chart on slide 14 shows the change from our baseline of $7 a share, which we established last year to an updated baseline of approximately $8.50.
We're also introducing an earnings growth framework. It shows an increase in our mid cycle baseline to approximately $11 per share by year end 2026.
Yeah.
We see potential upside of a dollar plus through additional investments in growth Capex bolt on M&A <unk> share repurchases from the deployment of additional retained cash.
Okay.
Let's turn to slide 15, and the drivers supporting this framework.
The increase in our baseline to approximately $8 50, primarily reflect structural improvement in the oilseed market environment and greater benefits from our operating model.
Consistent with our previous approach we are defining our long term average oilseed crush margin range by using a weighted average of our footprint for the past four years plus the trailing 12 months.
We also have adjusted for returns likely needed to Incent. The addition of crush capacity, especially in North America to meet the growing demand for renewable diesel.
This increases our average structural soy crush margin to a range of 37 to $39 per metric ton and it increases our average structural soft seed crush margin, which is more sensitive to oil demand to range of 57 to $61 per metric ton.
We believe both of these ranges reflect more reasonable mid cycle margins in the go forward structural market environment.
We are also further increased our normalized earnings of our oilseed origination and distribution businesses and our merchandising subsegment, reflecting the more coordinated and light approach within the value changed from the changes we have made to our operating model and approach to managing risk.
The slight increase in refinance specialty oils earnings to approximately $400 million annually is being driven by higher capacity utilization in North America refining.
Importantly, we assume that margins in North America refining moderate back to roughly historical averages as we expect in time that the renewable diesel industry will add pretreatment capability to their to their facilities.
However, the timing of this transition has become more uncertain as we continue to hear of delays to projects due to higher construction cost and supply chain disruptions.
There are no changes from our earlier baseline of approximately $100 million annually in milling.
Corporate and other are less favorable primarily due to inflation and increased costs related to growth initiatives.
We increase the contribution from our sugar and bioenergy, JV slightly reflecting improved execution and market dynamics.
With respect to cost management, we expect to partially offset inflation driven per unit costs through increased productivity.
Okay.
There was minimal change to our forecasted effective tax rate, which we updated last year with the increase of our baseline to $7.
Now, let's look at the drivers of the increase in our base aren't base of earnings over the coming years, which will enable us to generate EPS at near current levels, but in a mid cycle environment.
In total we expect to deploy approximately $3 $3 billion toward growth investments with about $2 3 billion being allocated towards Capex as we have highlighted in the past and approximately $1 billion towards bolt on M&A.
Our capex investments are oriented toward a combination of greenfield brownfield and productivity projects are.
Our M&A targets are primarily focused on core agribusiness origin and crushed capabilities.
We have also allocated capital towards share repurchases and expect to deploy approximately one point to $5 billion through the period.
While we plan to repurchase approximately $250 million annually.
Actual amounts could vary year to year, depending on M&A opportunities and the amount of dilution from stock based compensation.
Additionally, any proceeds from future divestitures used toward repurchases would be incremental to these expectations.
All three $3 billion of growth investments identified are currently in varying stages of development.
While we are confident about the completion of these projects not all had been formally approved.
As such there is risk that some will not be executed in which case the capital will be available for other similar projects or additional share repurchases.
Moving to slide 16, and an overview of the types of investments we are pursuing.
As we have highlighted in the past our growth is primarily focused on four strategic areas.
Strengthening our oilseeds platform.
Spanning and refine our specialty oils.
Increasing our participation in renewable feedstocks and expanding in plant based proteins.
These are all areas that align well with our footprint and capabilities.
Okay.
Examples of investments underway include new refineries in Europe , and India that are more flexible efficient and sustainable and the plants they are replacing as.
As well as soy crush capacity expansions in the U S as part of our joint venture with Chevron.
Additional projects will be announced at the appropriate stage.
Note that our capital allocation process is driven by our strategy and risk adjusted returns. The percentages shown here are not predetermined targets by strategic area, but rather are based on the mix of our current project list.
On slide 17, you can see the progression of our mid cycle baseline over time, along with our future expectations. The chart shows that as we increase our base earnings base, we will become less dependent on up cycle market conditions to generate level similar to our recent performance.
Should recent market conditions continue we would expect to exceed our mid cycle baseline as we have in the past.
As mentioned earlier, our upside scenario of $12 plus reflects incremental earnings driven by the deployment of available free cash flow towards growth investments. In addition to the list of identified projects as well as incremental share repurchases.
For these additional growth Capex projects, we have assumed earnings contributions ramping from zero to 100% over four years after investment.
With that I'll turn things back over to Greg for some closing comments.
Thanks, John .
Before turning to Q&A I want to offer a few closing thoughts.
What I'm bhangi strengths is our culture of continuous improvement.
This is not an organization that rests.
We're constantly looking to learn from what we've done.
And it put processes in place to ensure that we share best practices with our colleagues around the world.
We're using technology data and analytics to make it easier to innovate and increase efficiency.
And importantly to make it easier for our customers on both ends of the value change to do business with us.
It's this team's focus on making the business better today than it was yesterday. The continues to give me the confidence that we're well positioned to succeed.
Just in the current environment over the next few quarters, but well into the future.
And with that we'll turn to Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Tom Palmer from Jpmorgan. Please go ahead.
Good morning, Thank you for the questions and for all the detail on the presentation and the prepared remarks.
You bet. Good morning, I wanted to I wanted to start off maybe just by discussing the agribusiness results this quarter and how we might think about the set up for the balance of the year.
Presentation notes and increased our 2020 to forecast for the segment versus the prior outlook to reflect strong second quarter performance.
At the same time, you know there were some maybe added headwinds that we saw in that segment, just given the 20% dip in merchandising volume.
Processing profitability, especially on a unit basis dipping a bit versus what we've seen in the last few quarters. So as we think about the second second.
Second half outlook should we be looking for a rebound in some of this merchandising volume was there anything specific in the quarter that drove that and then.
Industry crush seems very strong my might we look for a rebound in processing at least sequentially.
Yeah. Thanks.
No. That's a good good set up the we feel really good about the quarter look it was a solid quarter.
You got to kind of think about our footprint right North America of course is very very strong Brazil performed well.
We had Europe of course, the complexities around energy.
<unk> got our footprint in Ukraine, which is basically not running.
The complexity in Argentina, and probably as high as we've seen it and then China. The Covid Lockdowns are absolutely killed demand and it's been a very spot market there.
All that being said.
The team did a fantastic job and probably one of the more volatile quarters that.
That we've seen which really drove our customers.
Towards the end of the quarter both the.
The producer not selling any crops as well as the consumer absolutely stop buying kind of trying to see where the market would sort itself out.
But as we look at our at the second half.
Really a pretty pretty interesting setup.
With the strong oil and.
And meal demand really continuing.
And you look at.
For the crush margins for the buggy footprint, we're really about the same place we were when we were together for the Q1 call.
But it looks it looks really interesting if you start in the U S. You've got smaller South American crops, and we should have good bean availability.
To support that strong oil and meal demand and in North America now we need a good U S crop.
But it looks like we're on on the way there.
No we talked about China no doubt.
The curves are challenge there, it's hard to imagine a situation where.
China could look worse than it has and we think it will start to recover from Covid, it's been a very spot market, but the team's done a great job managing our footprint there and I think we we don't want to forget that China has been the driver for.
For the last couple of years and demand around the world and they they will be back at some point.
Brazil, we've seen that Q3 curves improve.
Even though slower farmer selling has impacted Q4.
But with China being imports down the beans have been available for crush in the meal and oil demand has been good.
And then Argentina of course complexity there high the producer really not selling are very reluctant.
To protect themselves against devaluation and we saw more margins declined towards the end of the curves.
Yes towards the end of the quarter and the curves a week for the second half but of course, it does benefit our broader global franchise.
And then in the EU, we've seen great oil oil demand.
And with less meal out of our Argentina, and the Black Sea area.
That's been been supportive there to be able to overcome those higher energy costs on the margin. So.
It is.
It's really an interesting set up for the second half in a while the curves don't show up today. We are we are encouraged with the outlook.
Thanks for all that detail.
As a follow up maybe just on a different topic on the capital allocation side did reduce capex outlook.
At this point I don't know if guidance includes share repo things like that so I guess, just just given that longer term outlook. When do we start to see more of a ramp up in terms of.
The the expenditure side be it for repo M&A or Capex in general.
Yes.
Capex, we've called the low end of the range really just driven by some supply chain constraints.
It's not a shortage of opportunity. It's just a shortage of suppliers right now, but we do expect that to improve and I think you'll really see a ramp up next year on the capex side from a from a share repurchase standpoint, we're we're gearing up for that and and you know.
I think our expectation is we're going to be more active in that area going forward.
And then on the M&A side, you know it really depends on when.
When the opportunities are ready to engage we've got we have a list of things we're working on there.
Of course, sometimes those things can move quickly sometimes they take time, so it's hard to predict but but I would expect you know the balance of this year and certainly over next year for our allocation to ramp up and in all three of those areas.
Great. Thank you.
The next question comes from Stephen Byrne from Bank of America. Please go ahead.
Yes. Thank you.
Is it reasonable to assume that your outlook for you know.
For new capacity is primarily on the crush side rather than on the origination.
And if so.
Do you have any.
Particular advantages or technology that would allow you to build new crush capacity.
But at a lower cost footprints than others and on on the M&A side. If that's primarily focused on origination can you comment on you know.
Geographic regions, where youre likely to be focused on expanding your origination footprint.
Sure, let me start as far as the cost to build.
The largest global LC crusher, we better be able to build things as competitively as anyone the other benefit that we get is plugging them into our global system for our origination as well as the.
The granularity of our marketing and distribution that set up regionally and the other thought.
No as we make these decisions on expanding capacity for the long term are very thoughtful about our current footprint and where we want our footprint to be long term to make sure that we've got the lowest cost footprint in place.
To be competitive in any industry cycle.
Around the origination and the M&A look we're always have our list together and.
Our priorities in place and when the opportunity is right with the with the returns we know where we want to continue to strengthen some of our great franchises and we know you know to continue to be relevant to all of our customers at both ends of the supply chain.
And we've also got some targets, where we'd like to be stronger on the origination side.
And surprising enough you know that you had cranes one of the areas that we had targeted for growing our origination and of course, that's not happening now, but long term, we expect to be part of a rebuilding that because long term that's an important origin as well. So we'll look at where the long term. The the origination is going to be key to feed a growing world and feed the demand that continues to.
Move up into the right.
Stephen I might just add there that when you when you look at our forward model.
We got about 60% of our expected.
Capital focus in the area of strengthening our oilseeds platform and that's pretty evenly distributed right now between North and South America, and I would say on the North America side, probably more focused on on crush capacity in South America, probably more focused on origination.
On balance yes.
Okay.
One of the finer point on where you did ask me on origination I don't know if you've seen but some of the things we've been doing.
Great example, in Brazil, as you know strengthen our great franchise down there and some of that through partnerships minority investors with resellers and helping them be more effective, but basically giving us a broader reach on our origination down there. So we use a variety of.
A variety of ways to do that through partnerships JV as well as outright hundred percent acquisitions.
Thank you and do you think the crush margin advantage on soft seed versus soybean is sustainable longer term and if so what can you do to to invest and increase your your exposure on that side.
Yeah.
Should've mentioned when when I was talking about the second half outlook right soft seeds.
Those curves improve since Q1 and you look at North America, we expect that to be real strong.
Due to more seed supply with with new crop and good oil demand and.
And then in the Black Sea you were seeing lower seed prices in that supportive of the curves in the second half and so if you look at those drivers right. It's around seed supply and it's a wrong strong strong oil demand that'll continue for the long term so as we look at changing the footprint.
Absolutely, where it makes more sense to build soft capacity or switch capacity, you'll see us do that and then as you think about cover crops being developed things like cupboard Kras long term, it's being thoughtful about where that soft crushes in place to handle some of these crops that are being developed which will be more of a of a soft crush.
Probably technology needed so absolutely a big part of things.
Thinking about the future and whether its winter canola or what other sources to help meet the demand for renewable diesel and Biofuels in general which will continue to grow.
Thank you.
The next question comes from Ben BN venues from Stephens. Please go ahead.
Hey, Thanks, good morning.
Hey, Ben I wanted to ask kind of a two part question about your updated baseline.
Baseline earnings and long term growth outlook.
The first is the decision to delineate between what could be construed as cyclical drivers of your updated assumptions versus.
Characterizing them and structural drivers of an updated assumption and then the second is sensitivities to this as we move through cycles, and I and I ask because well I don't know that this is it.
Explicitly being expressed in the stock price implicit and kind of where the stock is trading relative to this update today.
It suggests that either we're going to go way below baseline earnings power over the next several years and with the market believes that and or these assumptions associated with your update today or maybe.
On the more bullish side of the equation so.
Kind of coming back to the beginning of the question. What do you think now of the business looks like in a down cycle.
And two.
What led you to say Hey, these crush margins are a structural change not just a cyclical kind of historical average.
Yeah.
You know thinking about the mid cycle, what we we started with very simply and updating to the $8 50. The first thing. We did was just update the average and so the first step was math and then we looked.
More closely at what we believe the go forward margin environment's going to need to be not only to incent.
The right kind of capacity expansion, but also what we believe is probably a longer term structural change in the market and and and that's how we landed on the margin environment. What we believe will be pretty sustainable going forward for the $8 50.
What what that also tells US is as we continue to increase the baseline earnings is that we should have higher highs and higher lows in terms of performance and so establishing.
Establishing.
We're gonna say a floor because that's you know, it's really hard to predict but but ultimately we feel confident that in any given environment, our low should be higher than they were in the past.
And then in terms of.
Going forward on the growth side.
Really.
Thinking about the opportunity where it can be invested I think.
Outlook is that.
We will focus on those areas that can provide us the best return.
And.
Thinking about also the allocation between.
Share repurchases and growth.
Just trying to get a balanced.
Portfolio going forward.
He had been when one other thing I might say is when we think about it I mean, if you look at slide 17, I think and that's why we've called out look here's the baseline and here's how the execution has been based on the market environment that we see out there.
Look we really like the global machine that we've put together here, we like the way our teams continue to work with customers through the complexity.
Created by the supply chain, whether it's truck or whether it's the way rails performing in North America.
And we're seeing that stickiness with customers for the long term and so you know one of our goals is to continue to outperform that baseline through execution. Because every dollar than we earn above that we're able to invest more quickly whether that be in M&A, whether that be an in organic growth or in share.
Our repurchases and then that just gives us the ability to move move that number forward.
Into the you know the.
More nearby.
Okay makes sense, yes, it's a great update in and it seems like you'll have a nice set up from here.
The second question is more housekeeping.
John the $3 3 billion of Capex or M&A, what does the start date on that is that including this year or is that starting in 2023, just to think about kind of the cash flow as we put those into buckets over the next few years.
Yeah, that's really starting this year and I would say a big ramp up in 2023, and 2024 and when you think about the timeline, it's going to be more front end loaded you know we're looking at probably roughly we've modeled it out 80% of that total spend probably over the next three years, but the the impact of that.
From an earnings standpoint is more backend loaded because a lot of this or you know some of it's bolt on M&A things that were we're assuming we'll get closed earlier, but when you look at the kind of the overall $3 3 billion more of the earnings is going to be backend loaded the 25 and 26, given the gestation of projects and the amount of time, it takes to get them up and running and fully.
Operational.
Yes, okay. Thanks very much.
You bet. Thank you.
The next question comes from Adam Samuelson from Goldman Sachs. Please go ahead Oh.
Yes, thanks, good morning, everyone.
Good morning, good morning.
I guess, hey, so I wanted to come on that long term kind of capital allocation question, maybe in a slightly different way and you just talked about maybe a bit more front end loaded on the Capex front over the next couple of years, which which makes sense, but as we look at kind of where the balance sheet is today kind of your operating well above that kind of baseline earnings level.
Now and it sounds like you are pretty optimistic about that environment certainly in the back half of the year and presumably that would persist into 'twenty three based on the.
And the way the market sets that there's excess capital.
Further that's being generated.
The balance sheet is quite under Levered. So I appreciate in the 26, you gave that dollar plus of upside.
From additional buyback additional capital allocation, but what do you think the right leverage.
Associated with that new business model would look like because I as I would sit here today I would think there's probably $3 billion to $4 billion at least of kind of unallocated excess capital to deploy relative to at least that $11 number.
Over the next four years.
And potentially more based on where the balance sheet sits.
Yeah no.
I think that's right and here's how we've done it so the $12. The dollar plus in the out year is really driven by and the model looking at our available additional capital that's not deployed today and so you take that and we looked we looked at over time, what we what.
Capital, we would have if we were targeting more of a triple B <unk>.
Leverage ratio sort of range. So, let's say two five times net debt that implies a considerable amount of available capital, but way we model. It out very conservatively is assuming that as we deploy that capital it's going to ramp up kind of evenly over four year period to get to a 100% contribution from those investments so early on capital being deployed.
Floyd, but not really seeing the benefits in fact, a lot of benefits beyond 2026. So the dollar plus in 2026 becomes a bigger number in later years is that that capital is deployed in longer term projects, but youre absolutely right. We've that was part of that upside potential is taking our available excess I'll say capital.
And and deploying that as well.
Correct. The thing that would move that forward, then would be M&A or share repurchases can make it happen faster.
Yeah, and maybe just on that point Greg.
As we think about where the stock is now or has been over the course of the past kind of year, how do you.
So if you think about the cadence of repurchase going forward should we expect a more ratable.
A more ratable cadence.
Should we think about you being opportunistic in periods, the stock weakness or maybe holding cash in reserve and depending on M&A pipeline I'm, just trying to get a sense of how we should because again, there's a pretty significant amount of excess capital that you are kind of how about your disposal to deploy and I'm just trying to think about how we should be layering that in especially in.
A moment, where your stock does not seem to be reflecting any of this kind of long term earnings potential.
Yeah.
Adam I'll take that so you know I think I think going forward, what we would expect to see is a higher frequency of share buyback.
You know I don't know if its going to be exactly.
Exactly ratable I think we'll also look at times, where it can be opportunistic in buying and you know if we divested something and we have cash proceeds will also look at that as an opportunity.
And you know on the M&A side, certainly as things happen.
With that but I think that our expectation is we want to have a good balance between near term returning opportunities, which would be M&A bolt on and share buyback and balanced out with you know longer term growth initiatives that we have underway today in that project list.
Okay, and if I can just squeeze a clarifying question on the guidance because I think in response to your Mark to the market outlook question, you talked about being kind of seeing kind of upside to the curves and being encouraged kind of about the way the market is being set up but I want to be clear that the 12, plus really just assumes the forward crush curves as they sit today, which you might.
Yeah, I think it's conservative is that the right understanding that right.
Yeah. That's that's correct, we're not okay theres no potential of the curves are improving in our outlook. We're just looking at what the curves are currently.
Perfect I'll pass it on thank you.
Thank you.
The next question comes from Ben Theurer from Barclays. Please go ahead.
Yeah. Thank you very much good morning, Greg Good morning, John Good morning, Good morning, Dan.
So just to wanted to follow up on one segment, we havent spend some time on to Dan It's familiar business, which obviously was very strong during the quarter can.
Can you give us an update.
Where you stand right now what you're seeing more short term for the second half obviously you raised the outlook because of the strength was in the first half.
It was obviously more than tripled in the first half compared to last year, but how should we think about the second half also in light of that you just reiterate that basically your your outlook for the baseline EPS and that's what you've essentially generated in six months would you expect to generate roughly on an annual basis. So just to put that.
Into context that would be my first question. Thank you.
Sure Yeah. The team did a fantastic job here in the quarter and I think it's a great example of managing our Indian value change I mean.
If you look at the South American business, the Brazilian wheat milling.
Not only feed that origination with Brazilian we bid with out of Argentina, and the way the team handled the value chain there.
And and got our got ourselves covered but then the key is the milling team executed as well right, we were able to get higher.
To help offset our industrial cost and we had higher volumes with both the food processing as well as the foodservice.
<unk>.
Great great job by the team can't you know.
Can't say enough about that.
We do expect the second half to kind of fall more in line.
With history, so wouldn't expect that that set up to repeat again.
Okay perfect. That's very clear and then just within the the framework and the update thanks.
Thanks for all the details here, but I was I was a little surprised to still see you are actually increasing even estimates for sugar and bioenergy JV could you give us an update where you stand on that potential disposal, because I mean, we've talked about it as being non core but its still treated as irrelevant piece in it you have it within your.
<unk> just to understand how we should think about it conceptually and where it fits in within that framework from summer 2022 back to 2026, and what where and when we shouldn't assume this to be disposed.
Yeah.
Yeah, Thanks for that band.
We continue to look at that.
JV.
As not permanent.
We model it in because we don't know until there is a deal.
We didn't want to.
Assume something like that in our modeling, but but I think our expectation would be that any proceeds we get from that well.
B you will be using some combination of <unk>.
M&A growth and share buyback and so I think whatever we do there should be net neutral to accretive to the model.
We just left it in a way it is.
Okay that makes sense perfect. Thank you very much.
The next question comes from Steven Haynes from Morgan Stanley . Please go ahead.
Everyone. Good morning, Thanks for taking my question.
I just wanted to touch on some of the product productivity initiatives you were alluding to at the end of the call and some of the you know it sounds like you're leaning into some technology.
So can you maybe just provide a little bit more color around you know what some of those investments are.
And how you can use that to you to offset some inflation that you're seeing thank you.
Yeah, I'll start John can can can fill in but I think it's you.
It's cultural it's not not unlike the financial discipline and the focus on risk management that we use to help our customers at both ends of the supply chain be successful at it.
Cuts through the business, it's not unlike sustainability, which.
Goes runs all the way through the business and as we work with our customers, whether it's feed food or fuel, but want lower carbon intensity products now, it's about taking digital and our focus on continuous improvement because we're now in a in a position to do that and to make those investments and whether that's improving our supply chain, making it.
As you are to do business with.
Using.
<unk>.
The sensing.
Well as analytics to drive efficiency into our facilities, where we've got tests going where we can now get.
The the machine can now outperform our best operator in our plants and those are things that will continue to work forward that will be multi year improvements that we can work against so it just becomes part of the of the thread that runs through the entire company and the culture.
Thank you.
The next question comes from.
Alright next question comes from Robert Moskow from Credit Suisse. Please go ahead.
Hi, Greg.
Greg and John .
Hi.
Is there any way to maybe frame the volume increase that this capital deployment might represent either tier.
Processing footprint or origination footprint.
It might it might help kind of give investors another way of looking at.
Why this is a structural growth benefit longer term over the next four years all the capital.
Order of magnitude is it like is it a 10% increase in your footprint or is there any way of thinking about it.
Yeah, I think it's it's it's a little tricky to say right now.
The project list, we have today.
Is is across a number of different things and I would say a 10% increase in our crush is probably a little high from where its models.
But on the origination side.
It's not it's not so much about maybe the amount we're originating but how we're originating it certainly there'll be some addition to origination, but it's getting more direct to the farmer, it's less reliance on other commercials for example, or finding other ways to two.
To have a financial relationship with the producer Theres a lot of what we're doing on the origination side.
But ultimately over time, there will be an increase certainly in volume, particularly in North America as we look at the expansion and with Chevron for example that we've announced.
Other projects potentially we're looking at on that side with Greenfield and brownfield. We've got some debottlenecking in there, which typically is kind of adding I'll say low single digit capacity over time through multiple projects. So.
I don't know, if I'd say, 10% increase globally, but but certainly.
If we if we ultimately execute on some of the projects we have on the list.
And.
You know.
You know see other opportunity it could it could be in that realm in that range I think today, we're looking at something more like a 5% volume increase overall.
Okay, Thanks for that and maybe a follow up.
Interest expense is theres a lot higher I think you've raised raised it for the year.
And I was just curious you know it you can see that the multiyear lay out for earnings power growing but is there a consideration here for or are you going to increase your debt load more because you're under levered today.
And given the rising interest rate is there an offset at all for for introspect interests interest expense being higher longer term.
Yeah, and we do have modeled in overtime to to lever a little over levered to some degree because right now we are yes.
Tell you we're under Levered certainly.
A big part of the increase in interest there there is certainly some from higher debt levels on average year over year.
And higher interest rates, but there's also a component in there where we've borrowed in local currency in other countries, where interest rates are high and that interest has to be reported obviously, an interest expense, but the offsetting currency hedges end up in gross margin based on the way GAAP requires us to report. It. So you don't get a really fair look at net interest expense.
On our on our financials, but I.
I would say half of the increase we've seen year over year and interest expense have that increase is related more to high high interest rate loans and in local currencies, where we've offset it with currency hedges.
Perfect and going forward that that will continue to be part of our strategy going forward. If it makes sense when and if it makes sense got.
Got it thanks again.
The next question comes from Ben <unk> from Baird. Please go ahead.
Alright, Thanks for taking my question so.
You talked about a little bit about the renewed.
Renewable diesel market.
Some pushed out maybe could you just elaborate a little bit more on that thank you.
Yeah, we continue to see.
Excellent demand.
From the from the fuel side, but the majority of our volume is still going to food so the fuel.
Renewable diesel demand in North America continues to ramp.
Also from a from an overall this pullback in price that we've seen globally in palm and vegetable oils in general.
It really slotted it.
Back into the Biofuels rations, which I think is pretty productive and constructive for for the mid and long term as well.
Okay.
Again, if you have a question. Please press Star then one the next question comes from Ken Zaslow from Bank of Montreal. Please go ahead.
Hey, good morning, guys.
I cant horn again.
Couple of questions what creates a disconnect between the curve and what will happen in the future is it simply the crop comes in.
Or are there things that you're seeing that would.
Improve the <unk>.
And besides what the inefficient.
[laughter] car would do at this point.
No I think as you look at you know at the second half here.
Look north American weather still still critical right. The next two months the world needs us to developer.
A good crop.
Here in North America, and we expect you know that'll happen, although kind of under any.
Any scenario corn may end up being a little a little short of trend on yield.
You've still got the Ukraine situation hanging over.
S and DS and can we get a ceiling opened to get some of the stocks that are trapped there on on wheat, and corn and soya oil into the global markets.
And I think under any scenario.
We need those and in the global market, but I think it'll be slow and we hope it can get opened up but.
There's damage to the origination theres damaging in the ports Theres complexity.
In ensuring those vessels. So that's a that's a big unknown I think that's that's hanging out there.
And then we've got to get the planting and crop development and in South America, and see how what how that plays out for getting the supply side kind of reset, but then if you go to the demand side.
Probably the.
The one negative would be if we did have a crop problem and you got a big run up in prices and that destroyed. Some demand again don't expect that I think that's the the one flag to watch.
But from a demand right now the meal demand.
Very good the inclusion rates are very high soybean meals, very well priced not only versus corn, but versus wheat and with the S. N. DS we don't don't look for a for that to change.
And then if you look at the oil demand as we just talked very good as we see the last of the recovery from Covid, We expect China to come back.
And then oil well priced into the bio fuels in general in renewable diesel specifically.
Specifically.
And then we talked to you know China overall, we expect to bounce back.
So.
Where are you know we're seeing the demand right.
The financial markets pulled back and there was a lot of volatility broadly outside of even AG, but in AG, the physical supply and demand remains.
Very tight globally and I think that's what we're starting to sense.
And as things have calmed down yeah, the buyers and sellers went away for a little bit why there was market volatility and now they are kind of sorting and saying, Okay. Wow things really haven't changed on the physical side and this looks pretty tight for the second half and I think that's why why do we think it's pretty constructive regardless of what the curbs Telus, but the curves are the curves and will go.
From there.
Can I just add you know customers have been staying in the spot and so as you look out to Q4 pretty indicative given we're much more open in Q4, certainly than Q3 at this point and it's very hard to get a good gauge on the outlook.
Outlook you'd look forward curve very far out when all the customers are in the spot because theres just not a lot of liquidity out there. So it doesn't necessarily reflect where we think smbs are going to be at that point.
Yeah.
Then my next question is.
So that's the environment stays at this level.
Beyond the curve and into 2023 through that.
And then as you go into 2024 or you didn't have the capital spending and returned so even if you go down to normalized so is there a scenario are likely scenarios that you're.
Earnings will actually stay about $10 almost through this entire period.
Because you get a quote unquote.
The stronger earnings and then as even kind of abate.
I bet you still have.
You know all this capital spending so I get the idea that you may go down to the base, but what's the scenario in which you actually hit.
<unk> in the next five years I mean is that really a viable scenario given the capital spending in the operating environment or do you stay at the 10 plus number yes.
Through 2026, and it almost seems like you're creating an environment you're in an environment that keeps you. There and then even if you are actually deploying capital to keep you there even as it might.
Am I not thinking about this right or is that incorrect, how do you think about that.
Ken I think I think you're spot on with how youre thinking about it when we when we model this out.
We do expect 'twenty three 'twenty four to be above baseline in terms of the market environment and so the assumption we have around crush margins for 'twenty three 'twenty four is still elevated over the long term average, but as that comes down and we model. The 850 to be sort of this ongoing apples to apples baseline that's one that at the <unk>.
Any time that the benefits of all the capital allocation should be taken hold so we absolutely think that at least given today, how we model it out at that we will stay at an elevated level over a timeline is that capital is being deployed.
Okay, and then when you think about the going back to another question that was asked.
If you go through that period of time, the cash created there's going to be far higher than what you are.
Dissipating unless you're I mean is that not an also so you're going to have more cash than you kind of anticipate and then you got to deploy that cash.
We're in that period of time as well is that also almost become like a.
<unk> cycle.
You can't get you can't get below it.
I mean are $10. If you keep on deploying cash as you generate more cash and the environment is strong.
It just seems like a a cycle that goes up not down I think boy am I wrong.
No. That's certainly our goal and I think as you as you look over time and do you think about the excess cash that we would generate it really depends on how it's deployed if it's deployed in longer term I'll say capex type projects or M&A M&A.
M&A that takes time to get done some of those things May result.
Our result in some of those earnings being beyond 2026, and so when we modeled it out we actually see benefits increasing beyond 26 that are not shown on the slides on the other hand, if we if we overweight towards share buyback youre going to see a quicker return on it.
Maybe not as high a high later, but you'll certainly see a more immediate return, but but overall I think over that whole timeline. We're really looking at building a business just should have higher highs and higher lows and that that's our goal and ultimately what would keep us from staying at that elevated level over the next few years as we deploy capital.
Simply be if the market goes below historical average or the averages that we have built in our model, but we don't we don't see foresee that at this point.
So if you've got that you've got the pardon me exactly exactly right Ken with the.
The second half setup and the momentum that should carry into 'twenty three.
And you know our goal is to continue to execute and then be able to pull that forward and have the tough decision of how to allocate that capital and where to allocate.
Great I appreciate it thanks guys.
You bet. Thank you.
This concludes our question and answer session I would like to turn the conference back over to CEO , Greg Heckman for any closing remarks.
Sure.
Thanks, everyone look we continue to be proud of the team's commitment and execution and we're absolutely confident in what we built here at Bungie. Thanks again for joining us today, and we look forward to speaking to you again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
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