Archer-Daniels-Midland Company

Q2 2021 Earnings Conference Call

7/27/2021

spk00: Thank you, Shelby.
spk04: Good morning, and welcome to ADM's second quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at ADM.com. For those following the presentation, please turn to slide two, the company's safe harbor statement. which says that some of our comments and materials constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. These statements and materials are based on many assumptions and factors that are subject to risk 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 this presentation, and you should carefully review the assumptions and factors in our SEC reports. To the extent permitted under applicable law, ADM assumes no obligation to update any forward-looking statements as a result of new information or future events. On today's webcast, our chairman and chief executive officer, Juan Luciano, will provide an overview of the quarter and highlight some of our accomplishments. Our chief financial officer, Ray Young, will review the drivers of our performance, as well as corporate results and financial highlights. Then, Juan will make some final comments, after which they will take your questions. Please turn to slide three. I will now turn the call over to Juan.
spk02: Thank you, Vikram. I'm pleased to share with you results that continue to demonstrate our success in delivering strong and sustained earnings growth. This morning, we reported record second quarter adjusted earnings per share of $1.33. Adjusted segment operating profits was $1.2 billion, up 44% versus the second quarter of 2020. our trailing four-quarter adjusted EBITDA was about $4.5 billion, almost $900 million more than a year ago. And I'm proud to report that our trailing four-quarter average adjusted ROIC was 9.7%, which is both significantly higher than the 8.1% of the prior year period and also represents the achievement of our 10% objectives. I'm proud of the entire ADM team for their great results this quarter. We're living up to our promises and our purpose, and the continuing execution of our strategy is delivering impressive, ongoing growth for our company, our customers, and our shareholders. I'd like to take a moment to highlight some of our accomplishments from the quarter. Slide four, please. Over the last decade, we made cultural, technology, and process changes that help us revolutionize how we do our work every day. We started with operational excellence, added to that performance excellence, and expanded into readiness, which encompassed a broader array of specific actions within our control to drive value creation, including profitable growth. Now, as we enter the next phase of our strategic transformation, the concept of readiness will continue to be embedded in everything we do. But we will categorize our efforts going forward as either productivity or innovation. Productivity is about using new technologies and thinking to automate, digitize, and standardize our processes. is a lever under our control that allows us to enhance efficiencies and manage costs. One great example of our productivity work is the digitalization of our procurement center of excellence. We're implementing best-in-breed technology that's standardizing processes and reducing costs in our indirect procurement. Most importantly, This advancement is unleashing our colleagues to drive even greater value by transforming their work from tactical to strategic. That's just one example of the kind of initiatives we're pursuing under productivity. Across the enterprise, our productivity efforts collectively are expected to deliver about $200 million in savings in calendar year 2021. Please turn to slide five. The other pillar of our strategy is innovation. Innovation is how we are delivering profitable growth. And one of the key ways we will support and propel our innovation work is through an initiative we launched this year called ISD. ISD is a fundamental realignment of our human nutrition business commercial organization and go-to-market approach from a product-driven focus to a more customer-centric, market segment-driven structure for global beverages, global health and wellness.
spk01: We are now able to move from consumer insight to concept, to prototype, to final solution more efficiently than before.
spk02: ISD is enabling us to expand our sales pipelines and register record win rates. And this is only the start. ISD is a broad and ambitious effort, encompassing talent development, digital analysis, all designed to better match our vast pantry and technical development capabilities to our customers' needs and accelerate our speed to market. This work is being supported and strengthened by our unique opportunity to use ADM's integrated value chain to advance the decarbonization process.
spk01: For example, late last year, our Decatur-based carbon capture system was the world's first large-scale production of a fuel source. surpassed 3 million metric tons of carbon dioxide safely and permanently stored more than a mile under the Earth's surface.
spk02: That's the equivalent of removing about 650,000 cars from the road for a full year. And our efforts are continuing. We expect to sequester an additional 2.5 million tons million metric tons over the next five years, and we have the ability to do even more. This project is a game changer, a valuable and unique asset in our efforts to decarbonize our production footprint and reduce the carbon intensity of our products, as demonstrated by our intention to work with eight rivers to help build an innovative zero-emission power plant that will utilize this carbon capture capability. Next slide, please. Our decarbonization efforts span the entire ag value chain, including transportation. Plant-based liquid fuels will continue to play a growing role in transportation, both on the ground and in the air, and we're investing to ensure we can meet that expanding demand. In the second quarter, we were proud to announce the construction of North Dakota's first ever dedicated soybean processing complex. We expect our new spirit would facilitate 600 million pounds of annual oil production to help support fast expanding production of renewable green diesel. We've already broken ground on the North Dakota complex and we plan for it to be operational in 2023. in time to meet growing demand. We expect the demand for U.S. green diesel to continue its current high rate of growth, increasing by about a billion gallons per year and reaching up to 5 billion gallons by 2025. Vegetable oils will be a key feedstock to meet that growing demand. And when you consider that it takes about 7.5 pounds of soybean oil to produce one gallon of renewable green diesel, you can appreciate the large potential opportunity and why we are investing to grow our participation, both in North Dakota and with our expanded oil refining capacity in Quincy, Illinois. Slide 8, please. Another area in which our farm-to-fork capabilities are helping us meet demand for more sustainable products is plant-based proteins. We made substantial investments in this space, from our Campo Grande soy protein complex to our pea protein facility in North Dakota to our Plant Plus Foods joint venture. And as the opportunity for plant-based proteins accelerates by 12% a year, We're investing further to expand our participation. Yesterday, we announced an agreement to purchase soya protein, southern Europe's largest producer of soy-based protein products. Soya protein is a perfect fit for our growth strategy. It represents a strategic addition to our global protein production capacity, It is a successful growing company with 2020 sales of more than $100 million and an extensive list of customers in 65 countries in the meat alternative, confectionery, protein bar, pharmaceutical, pet food, and animal feed segments. And it's locally sourced. Exclusively non-GMO products are closely aligned with European consumer preferences. When I look back on these accomplishments, I see our ongoing strategic transformation is delivering at an accelerated pace. Our productivity and innovation focuses are powering performance and growth in large and fast-growing market opportunities, particularly those being propelled by strong consumer sentiment around sustainability. That's painting a bright future for ADM. which I will talk more about at the end of this call. But first, I turn it over to Ray to talk about our business performance.
spk07: Ray? Yeah. Thanks, Juan, and good morning, everyone. Move to slide nine, please. The Ag Services and Wall Street's team followed up on their exceptional first quarter with another outstanding quarter. Ag Services' results were higher year over year. The North American origination business delivered an outstanding second quarter, managing its positions effectively in a dynamic pricing environment, and also achieved significantly higher export volumes driven by corn sales to China. South American origination was significantly lower than the previous year's quarter, driven by slower farmer selling and high commodity prices, which impacted contract fulfillment. Global trade performance was lower than the strong second quarter of 2020 when customers were building inventories amid COVID-19. Results were also impacted by timing impacts that should reverse. Crushing had substantially higher year-over-year results. The business executed well in an environment of strong vegetable oil demand to deliver higher execution margins in North America's soy and EU soft seeds. Results were partially offset by weaker soybean crush margins in South America driven by lower demand for biodiesel. In addition, there were about $70 million in net incremental negative timing effects which should reverse in the coming quarters. Refined products and other results were significantly higher than the prior year period driven by continued recovery in food service as well as positive timing effects in North America. partially offset by the effects of the reduction in the Brazilian biodiesel mandates. Equity earnings from Walmart were higher year-over-year. Now, looking ahead, we expect Q3 performance for ag services and oil seeds to be higher than the third quarter of 2020, driven by stronger results in crushing. We continue to anticipate full-year results that will be significantly higher than 2020's very strong performance. Slide 10, please. The carbohydrate solutions team did a great job delivering results that were almost double those of the prior year period. Starches and sweeteners, including ethanol production from our wet mills, delivered substantially higher year-over-year results in a highly dynamic pricing environment driven by about $90 million in positioning gains across the ethanol complex as well as more normalized results from corn oil. Sweetener bonds were higher, reflecting the beginnings of a recovery in demand from the food service channel. Ethanol margins improved versus the prior year period, driven by a resurgence in driving miles in the United States. Vantage corn processor results were much higher than the second quarter of 2020, supported by the resumption of production of our two dry mills, improved fuel ethanol margins, and favorable performance in USP-grade industrial alcohol from our Peoria complex. Now, looking ahead, we expect tightening corn markets and their effects on ethanol margins to result in a third quarter for carbohydrate solutions that is lower compared to the third quarter of 2020, which included strong risk management gains. However, we expect full-year carbohydrate solution results to be substantially higher than 2020. Slide 11, please. Nutrition delivered record sales and profits with 15% year-over-year revenue growth on a constant currency basis and offering profit of more than $200 million. In human nutrition, revenue was 13% higher than the second quarter of last year on a constant currency basis and offering profits were up 24%. In North America and EMEA, The flavors business delivered strong volumes in improved product mix, particularly in the beverage segment. Specialty ingredients delivered strong sales growth in specialty proteins, though results were lower due to certain one-time costs, mainly in texturants. In health and wellness, stronger sales and margins in probiotics were all set by higher constant fibers due to planned facility downtime. Animal nutrition revenue growth was 17% higher year-over-year on a constant currency basis, and profits were up 44%, as improved demand and margins in amino acids, strengthened feed additives and ingredients, and better performance in EMEA more than offset COVID-19 and labor-related impacts in other regions. Now, looking ahead, we expect nutrition once again to deliver higher year-over-year results in the third quarter, And with continued strong demand, product innovation, and great go-to-market execution by the team, we are raising our expectations for full-year profit growth to 20%. Slide 12, please. So let me finish up with a few observations from the other segment, as well as some of the corporate line items. Other business results were substantially lower than the prior year period, driven primarily by captive insurance underlying losses, most of which were offset by corresponding recoveries in the other business segments. As expected, net interest expense for the quarter decreased year-over-year on lower interest rates and the stable liability management actions taken in the prior year. In the corporate lines, Unallocated corporate costs of $248 million were driven primarily by higher performance-related compensation accruals, higher IT offering and project-related costs, and transfers of costs from the business segments into the centralized centers of excellence in supply chain and operations. In other corporate, results included evaluation gain in our ADM Ventures portfolio. Looking at total corporate costs, including net interest, corporate unallocated, and other corporate, we are still on track for the calendar year to be overall similar to 2020. The effective tax rate for the second quarter of 2020 was approximately 14%. We still anticipate our calendar year effective tax rate to be in a range of 14% to 16%. Our balance sheet remains solid despite a higher commodity price environment with a net debt-to-total capital ratio of about 29% and available liquidity of almost $9.5 billion. With that, I'll turn it back to Juan.
spk02: Thank you, Ray. Slide 13, please. When I look back on our outstanding first half results following a record 2020, I see a team that is executing at high level and a strategy that is delivering according to our plan. We have been constantly refreshing our portfolio, divesting from non-strategic businesses, and redeploying capital consistent with our strategy. In doing so, we've built industry-leading capabilities to meet customer and consumer needs in high-growth categories, such as meet alternatives a category we expect to reach more than $100 billion in sales worldwide by 2030, and in which our Plant Plus Foods joint venture now is participating, selling consumer products across Brazil and readying its North American launch. Another example is Dietary Supplements, a segment on track to have $80 billion in sales globally by 2025, and in which we're constantly expanding our product portfolio, including our recently introduced BioCult Brighton, which includes ingredients to reduce tiredness and fatigue. And then there is pet food, which is forecast to grow to more than $130 billion globally by 2025, and an area in which we launched our new premium cat food in Mexico earlier this year. The list goes on. Renewable green diesel, pharmaceuticals and personal care, beverages, all large high growth opportunities powered by macro consumer trends like sustainability and health and well-being. And in each of those segments and more, our unparalleled global footprint, fully integrated value chain, customer insight, broad portfolio, and speed to market, are setting us ahead of the competition and fueling our growth. That's why we are so optimistic about our path forward. Of course, there are always going to be short-term factors for us to navigate, but those are not things that will impact our long-term success. Our confidence is rooted in the transformation we began a decade ago and which continues with our work in productivity and innovation. as well as our expanding participation in large and fast-growing market opportunities. So to conclude, we have a great start of the year, and we expect to continue our momentum in the second half to deliver very strong 2021 earnings. As we've discussed, we are moving to a new phase of our strategic growth plan, With what we have accomplished over the years on capital discipline, targeted cost reductions, and cash generation, and moving through our portfolio transformation and our efforts to optimize business performance, drive efficiencies, and expand strategically, I believe we have successfully increased our base earnings power from $3 a share back in 2015 to a range of $4 to $4.50 And now, as we enter the next stage of our growth, leveraging the key macro trends of food security, health and well-being, and sustainability, with our continued focus on productivity and innovation, and with future targeted investments, we believe our medium-term annual earnings trend growth rate will be in the high single-digit percentages from this $4 to $4.50 per share baseline. With that, operator, please open the line for questions.
spk00: At this time, if you would like to ask a question, you may do so by pressing star, then the number 1 on your telephone keypad. Again, that is star 1 if you would like to ask a question. Your first question is from Adam Samuelson of Goldman Sachs.
spk08: Yes, thank you. Good morning, everyone. Morning, Adam. Morning, Adam. Morning. Maybe just something you just mentioned in the prepared remarks, the 4 to 450 baseline of EPS this year and the high single-digit growth thereafter. Just to be clear, should we take that as a reasonably formal EPS range for 2021, just given the performance year to date? I just want to clarify just how we're framing that.
spk02: Yeah, Adam, listen, when we put together the previous phase of the strategy, we were looking at going, as I said before, from $3 to land in the $4 to $4.50 area and achieve 10% at OIC. As we started to see those goals in sight, we started on the development of the new phase of the strategy. So we took that base of $4 to $4.50, and we created a five-year plan. When we put together that plan, with all these opportunities that I highlighted and focused on productivity and innovation, that plan shows that from that base of $4 to $4.50, we grow over the next five years at the rate of high single-digit growth per year. So that's what we said at the outset. Hello? Are we still on the line?
spk08: I'm sorry. And then just a market macro question, if I may, just There's been some volatility in oil seed crush margins around the world of late. It seems like, especially in China, the soy meal demand has waned a little bit with feed weed substitution, and it seems like the global industry is really crushing for veg oil, given all the RD demand around the world. Can you just help us think about kind of how that rolls forward? Sure. As we think, especially for you, more heavily weighted towards soybeans and some pressure in terms of soft seed crop availability on the oil side as we go through the balance of the year into 2022.
spk02: Yeah, thank you, Adam. So, listen, we are very optimistic about the prospects for crash for the rest of the year. and into next year. If I go by geography, as I always do, from a North American perspective, margin remains exceptionally strong in North America in the $45 to $50 range. As you said, with a strong vegetable oil demand, in part driven by RGD, but we had already a very good oil demand, and we see more recovery about food services and more reopening of the economy. And that continues to enhance, of course, the oil share of the crash contribution. And also the tightening supplies and logistical issues in South America are allowing also U.S. soybean meal to be a little bit more competitive in global markets. We see some compression in European soy margins, maybe to $10 to $20. As prices basically from South America oil imports are pressuring crash margins, especially this is the time of the year in which Argentina and Brazil are the most competitive. They are in the middle of the harvest. And, of course, they have reduced their biodiesel mandate, so there is more oil exportable, if you will. Although the beauty of our long supply chain is that as crash margins have softened, In Europe, we get the benefit in biodiesel and the RPV, given that. Brazil margins continue to remain solid for domestic plants, with maybe $25 to $35, despite the B10 biodiesel situation. And they are expected to remain solid as they move to higher B12 blend rates in the future, starting, I think, in September. China margins are low due to high bean prices and lower soybean mean demand. The herd is going through a rebalance there. And at the moment, there is a lot of wheat feed being fed. But we're going to go through the harvest of wheat. And I think that's something that we see with optimism going forward is that If you look at all the substitutes that we were facing last year, whether it was sorghum or canola or sun or wheat, they have increased their inclusion in the rations, and now all those things are having either weather issues or wheat is going to go through the harvest. So we see now the ability of soybean, meal, and corn inclusions to go up, and that's positive as we go forward. As you mentioned, on our watch list is canola margins. They have weakened. They were very strong during the first half, but they have weakened on concern of a short crop driven by the dryness in Canada. And canola margins are probably going to remain volatile until there is more certainty around the Canadian crop size. So two factors that we feel good about it here is how valuable our switch capacity is in this dynamic environment. Margins have shifted. And also how important it is, our integration, our long value chain. If you think North America today is capturing it in crash, and maybe less so in biodiesel. In Europe, we don't capture that much in crash, but we capture it in biodiesel. So all this ability of our footprint will allow us to follow the margin as it moves through the value chain has been very, very beneficial in these very volatile times.
spk08: That's an incredibly helpful color. Thanks so much. I'll pass it on.
spk02: Adam, maybe on the first question that you mentioned, Again, the 4 to 450, as I said before, just to clarify, it's our baseline in which we run the exercise because that was the landing spot of our previous strategy, and it's not the forecast or guidance for this year. Got it. That's helpful. Thank you.
spk00: Your next question is from Ben Thurer of Barclays.
spk02: Morning, Ben.
spk07: Ben, are you on the line?
spk00: We'll go to the next questioner. Your next question is from Luke Washer of Bank of America.
spk08: Hi, good morning, Luke. Good morning, Luke. So I wanted to ask you a few quick questions on your carbon capture projects. I think they're really interesting. Are you getting any 45Q tax credits for the implementation of that technology? And now that it appears that it's commercially viable, do you intend to start the permitting process or working with other partners to build out and start capturing carbon at some of your other plants?
spk02: Yes. So the answer is yes to both. We have a big permit for Decatur that we plan to, of course, leverage. And then, yes, we are exploring our ability to do so for other plants. We've been doing this relatively quietly, Luke, since 2017. And as I said before, we have stored more than 3.5 million tons safely underground. This gives us the ability to start differentiating our products that we can assign some of the credits to some of these products and have those products be deemed low carbon intensity products. So we have, again, big experience. We've been doing this for four years in two different facilities. And we feel very good about the future. And this is going to be a growing part of our operations, for sure.
spk08: And maybe just a quick follow up on that. This does lower the carbon score, the carbon, the CI scores of your plants, right?
spk01: Mm hmm.
spk08: Okay. Yeah. Okay, great. And then maybe just a more short-term question on carb solutions. It looks like you really did well this quarter, particularly relative to expectations earlier this year. So can you talk through, I guess, the delta in your expectations and how things progressed through the quarter and maybe talk through the $90 million in conditioning gains that you had? And then you also talked about normalized results for corn oil. Corn oil prices are really high right now. So are you saying that that is a bit of a new normal because of renewable diesel? Any other color there would be great.
spk02: Yeah, let me tell you what went better, if you will, as per your question. I think that this was the quarter that we needed to restart the ethanol dry mills that we have taken down due to lack of demand. And we have, from a technical perspective, a perfect startup. And certainly, they hit the ground with better margins than maybe we anticipated before bringing them up. Second, as we explained before, we had very good risk management. The team positioned very well on corn and on the ethanol complex. And certainly sweeteners volumes came back versus last year as customers were preparing for the summer. And to a certain degree, you might have to take both Q2 and Q3 together from a sweetener perspective because I think that a lot of customers bought in anticipation of refilling their pipeline given the summer and the openness with COVID that we were going to experience in the U.S. So it was a strong volume month as well.
spk07: This is on your question on corn oil. We've seen convergence of corn oil with soybean oil again. Recall last year, we saw a divergence because of the snack foods, people staying at home, high demand for corn oil, which is used for frying. That caused corn oil prices to move up dramatically. It diverged from soybean oil, and that's what caused a lot of the market issues that we had last year. We've worked through all those issues over the course of the period. we're actually seeing right now corn oil and soybean oil really converging. And so we're turning back to, let's say, the normal relationship that we've seen in the past. Great.
spk06: Thank you both.
spk00: Your next question is from Ken Zaslow of Bank of Montreal.
spk06: Hey, good morning, guys. Hey, Ken. Hey, Ken. You keep on tempting us with this productivity and innovation. Can you put some color in terms of quantification on how much this is going to create in not just 2021, but beyond that, and how do you frame those two opportunities?
spk02: Yeah, Ken, I would say if you look at our past, what we have been doing over the last five years, probably, and if you think about translating everything we've done in productivity and innovation, we were probably two-thirds in productivity and one-third in innovation, if you will, of all the savings we were getting. As we look at, as I said before, at our plan going forward, the contribution between productivity and innovation is equal. It's about 50-50. And it's mainly driven by all these opportunities that I mentioned, not only nutrition, but all the other things that we're seeing, whether it's biomaterials or, you know, or green diesel and all the other things that we've done. Again, when we look at our plan, when we start from this, again, theoretical $4 to $4.50 range, and we apply all these projects that are included in productivity and innovation, we see our program over the next five years growing in the high single-digit percentage every year in operating profit. So we feel very good about that. We will be having, Ken, in Q4, an investor day where we will be disclosing much more details and much more granularity about all this. But you can see some of the things that we're doing already, whether we are invested in the spirit wood or the acquisition of soya protein or, you know, or the... expansions of our plant in Valencia with biopolis and microbiome. So all these areas are receiving organic growth dollars. This will be, as we go forward, Chen, and you look at this plant, this is more an investment plant than maybe the previous period was. So you will see a little bit more capex and a little bit more investment given the size of the opportunities. When I was mentioning some of the sizes of these addressable markets we have, if you added some of the things I was saying, these are markets north of $300 billion in which we have positioned ourselves very, very well, and we think that we're going to capture a nice share of those. So the opportunity ahead of us is significant.
spk06: Let me just follow on. When you're thinking about the high single-digit growth rate, To what extent do you think that is associated with the improvement in or the structural improvement in RD over the next couple of years and how much of that is internally created?
spk02: Yeah. Let me say, when I look at the three businesses and we move them forward through the five years, we see our services and all seats grow significantly. moderately but but it grows we see uh car solutions being uh flat to slightly declining in our forecasting and then we see a strong growth in in nutrition that's kind of the the the if you will the algorithm of how the business is moved the act services and oil seeds part part of that it has been our own improvements Part of that has been the industry. There has been some consolidations, and the industry margins are strong. And there has been a strong demand, and we trust that there's going to continue to be a strong demand. There are 400 million people in the middle class in China that are consuming very much like U.S. type of consumer. And that's driving health and wellness. That's driving improving diet. And then there is sustainability that is driving a lot of the things that we're doing, not only RGD. Because remember that before RGD, we were already having a very tight oil market based on food, on food oil. So I think part is our structural issues, and part is our own improvements that we have done over these years.
spk06: Thank you very much.
spk02: You're welcome.
spk00: Your next question is from Michael Paiken of Cleveland Research.
spk08: Yeah, good morning. Maybe we can dive a little bit deeper into nutrition. And it seems like that's a good chunk of where the increase came from. But maybe this 20% growth rate, should we expect for 2022 to expect 15% year-on-year growth on top of this 20% level? And then also, what categories are you seeing the most growth in besides plant protein? Thanks.
spk02: Yes, Michael, listen, when we look forward at nutrition, nutrition is going to grow somewhere in that range, between 15% and 20%. So we said 15% this year, and half into the year we have moved it to 20%. So something in that range. The business is going very strong. We've been able to grow that revenue during this quarter, And we've been able to maintain margins, which, you know, it has been a very good job of controlling gross margins and the beta margin on sales. Our enthusiasm is not only for the categories in which we are positioned, but also on the win rates and the customer engagements. Our customer engagements as of, you know, in 2021 have doubled. our customer engagement last year. And as the economy is reopening and food service become more active, customers are more willing to launch new promotions and new products, something that they were not doing before. So we see that acceleration, whether it's in beverages or in health and wellness or alternative proteins. So, again, I think you should think conservatively 15% per year, more aggressively 20% per year, but in that range we will be growing over the next few years.
spk08: Right. And then a follow-up question, just shifting gears. Could you talk about the impact of the recent kind of Supreme Court ruling? And there's been some talks about possible changes to the renewable fuel standard. Maybe your thoughts on the growth potential or lack thereof for the U.S. ethanol market moving forward in light of some of these policy uncertainties. Thanks.
spk07: Yeah, Mike, there's been a lot of news regarding the recent Supreme Court ruling and some of the comments from the EPA. When you kind of cut through all the headlines and try to understand what's fundamentally happening, we still believe the Biden administration and the EPA is committed to fighting climate change and also decarbonizing the economy. And biofuels, frankly, is a very important part of that agenda. So the Biden administration has made it very clear that they don't intend to grant SREs or these small refinery exemptions like in the prior administrations. And as President Biden himself has said, he said that we should be insisting, not exempting. So we do expect the Biden EPA to take a very balanced approach towards granting future SREs. So when you look at supply-demand balances going forward, you take a look at the RINs balances, and you think about the recovery of driving miles as we move through the pandemic, our expectation is looking at supply demand for ethanol, for gasoline, and then which translates to ethanol, we believe that it is going to result in a reasonably constructive ethanol environment for the industry over the medium term. At the same time, Mike, it is important to note that in the case of our, you know, we made a strategic decision to monetize our dry mills. And so we kind of halted that process during the pandemic, frankly, because ethanol demand was very weak. But during that period, we did look at alternatives. We took advantage to, frankly, explore other options. And there's, frankly, as Juan talked about on the issue of sustainability, there's growing interest in sustainable materials and sustainable solutions. And it appears that there may be some opportunities for us to explore non-vehicle uses of ethanol and leveraging ethanol as a sustainable feedstock for other products. And so one of the promising areas is the sustainable aviation fuel, SAF. With the airline industry moving towards effectively a low carbon or net zero future, SAF appears to be an important component of how they will get there. And just for perspective, the U.S. airline industry before the pandemic consumed 30 billion gallons of aviation fuel a year. So we are looking at the possibility of leveraging our Decatur carbon sequestration site, which Juan talked about, with our corn processing output as a feedstock for SAF to get towards a low-carbon SAF product. So in addition to looking at potential monetization of dry mills, we are looking at the SAF concept, which might give us another option for finding another use of the dry mills and then taking those ethanol gallons off the vehicle market.
spk00: Our next question is from Tom Semenich of JP Morgan.
spk05: Good morning, Don. Good morning, everyone. Hi. So following up on the soil protein acquisition yesterday, can you provide some more color around how your strategy for alternative proteins varies by region?
spk02: Yeah, I think that, you know, the strategy in specialty proteins is stay close to our customers and match up with capabilities and supply this market that is growing very fast. The market is growing north of 10% per year, and it's moving fast in terms of the products. The products continue to be improved every quarter. So we have a strong position in North America, our heritage position in soy derivatives. Then we build our position in South America, which is very strong. I remind you that that was a quarter of a billion dollar investment, so significant. Then we build pea protein capacity in North Dakota. And now we're expanding that capacity to Europe. We have a small capacity in Europe. Now with this, we have bought, we have acquired the largest producer in Europe, which again has a great footprint in the middle of the non-GMO soybean harvest area. But also it has a very nice set of products, and they sell to 65 different countries in many, many applications. So we continue to build the capability. This will not be the last one that you're going to hear in terms of announcements for specialty protein. Again, these are early days, but it's a fast-growing market in which we have a leadership position and we intend to extend.
spk05: That's helpful. Thank you. And a question on China. The USDA cut its China soybean import forecast this month. What are you assuming for that trade in the near to medium term and how would it impact your crushing footprint?
spk02: Yeah, listen, I think that we are maybe more optimistic about China medium term than maybe what the news are giving right now. China has done an exceptional job of controlling COVID and as such, They have recovered from that very successfully. So there is a lot of economic activity and hence demand. They have done a terrific job in coming back from the ASF pandemic. They have recovered. So they have the consumer and they have the animals to actually consume. Of course, they are very strategic in their purchases. And right now is not the time to be buying a lot of things. because beans are expensive and there is a crop in the US coming. And we think that that's when they're going to come. You also have to remember a couple of things, Tom. Over the last two or three weeks, we lost 15 million tons of production around the world due to weather issues. Whether it was the drought in Canada that impacted canola and wheat, whether it was Russia whether the impact was on sand and in wheat, and whether it was the corn crop in Brazil because of drought, all these products are competitive products in the ration to soybean milk. So those products will not be available to compete with soybean milk, which will give soybean milk a higher inclusion in the ration. And in our estimate, given the small canola crop in Canada, We think that China will have to probably import 2 million tons of extra soybeans to offset that canola gap that they have right now. So all in all, we feel that we're still going to have strong export volumes in the Q4 of this year from North America.
spk05: Thanks very much. I'll pass it on.
spk00: Your next question is from Robert Moscow of Credit Suisse.
spk08: Hi. I had a question. Good morning. I had a question about the new earnings base that you're putting out there. Historically, external factors can change quickly and can have a big impact on your earnings. And I want to know, you know, what do we have to believe about the external environment to feel comfort that the earnings base is credible, that the earnings base is achievable under a variety of different external environments?
spk02: Yes, Rob, the way we thought about it when we put together the plan, and I think I expressed some of that before, is of course we look at the things that we can see into the future. You can argue the magnitude, but we give our forecast forward, and we add inflation to that, and we say some of these things, may come back to the middle, if you will, or reverse to the means or whatever you want to call it. So let's put the negative side there. So we consider some of that. And then we look at our productivity and innovation, and we said, can we build a robust enough agenda in productivity and innovation that actually can offset some of those headwinds, whether they are headwinds on ethanol or whether they are you know, whatever your favorite crash margin into the future or whether it's inflation. And we look at that, and the result of that exercise is that productivity and innovation earning stream coming forward offset all that potential decline that we have estimated and offset it and giving us a result that high single-digit growth rate in profits over the next five years. That's the way we think about it. This is not a scenario in which everything goes perfect and margins are at peak level for five years. In our scenario, margins normalize, we have inflation, and then we are able to offset a lot of that through growth and through productivity. That's what we are saying in terms of our new base.
spk08: Right. And in terms of things that are going to normalize, carbohydrates would be the biggest degree of normalization because it looks like it's going to earn a billion dollars this year.
spk02: Yeah, I would say maybe when I was answering Ken, I think when we look at the three businesses, nutrition provides A lot of the growth in that scenario, of course. You have to remember when we started reporting nutrition yearly, they were reporting about $300 and something million. This quarter, they crossed the barrier of $200 million. So now it's significant, and you will see that in crescendo, of course, over the next few years as we reach a billion dollars and beyond. CARB solution, as you said, it basically declines over the period. And then we have healthy but not exuberant growth rates for ag services and OECD. So all in all, when you look at our numbers, it doesn't look a far-fetched scenario. On the contrary, it's a scenario that we're very confident. That's why we are making it public today. And a lot of things are under our control, to be honest.
spk08: And last question. You said that there's been consolidation in the soy crush industry, and that is part of the reason for your confidence. But you are opening up a new crush plant now. Can you give a little more color about how much consolidation there's been? What do you think crush capacity looks like today compared to a few years ago? And where do you think it's going in the next few years from an industry perspective?
spk02: Yeah, listen, I think that... There has been consolidation in small regional players, which has been important. You know, we have the example of Algar in Brazil. We also did the Soyben joint venture with Cargill in Egypt. And there have been others around the industry. I think it's important to notice that we've been working – We've been working in this expansion, the Spirit Week, for the last two years. We just announced it now. But this is capacity that, of course, this one is held by RGD. But when you think about soybean mill in North America, we need about, you know, to offset 2% to 3% growth in demand every year. So we need a full-time, a full-fledged plant. every couple of years just to keep up with demand and to be able to supply the growth. So we don't think that any of this build is excessive. On the contrary, we think that it's needed to allow demand to be fulfilled. Okay. Thank you.
spk00: In the interest of time, please limit yourself to one question. Again, please limit yourself to one question. Your next question is from Ben Thurow of Barclays.
spk08: All right. Good morning, Juan, Ray. Now we try it again. Thank you very much in concrete on the results. Good morning, Ben. Just one question. If you could elaborate a little bit on those $90 million on positioning gains across ethanol and what's been driving that throughout the quarter, and is that something you think – Is something recurring? Is this a one-off? How should we think about it? Because it was obviously sizable within the segment. Thank you.
spk07: Yeah, Ben. I mean, our teams do an excellent job managing risks, right? And when you talk about managing risks, it's both managing the risks of the inputs and the outputs. And so the position gains that we had in the quarter, in the second quarter, 90 million, it's a combination of what I call the ethanol complex, right? So it's a combination of how they're managing the corn, how they're managing ethanol, how they're managing RINs, all these positions. And as you know, it was a very volatile quarter when you looked at the prices of corn and ethanol and RINs. but they managed exceptionally well. And so, you know, 90 million, normally they would generate risk management gains. We highlighted this quarter because this was an exceptional quarter. And by the way, it wasn't just an exceptional quarter. It was an exceptional first half of the year. Because when you take a look at the first half of the year, They probably had positioning gains roughly a similar amount in the first quarter as well. So therefore, the CARB Solutions team really hit it out of the ballpark in terms of risk management in the first half of this year.
spk08: So for the future, we should expect some of it, but maybe not at the same magnitude. That's a fair assumption.
spk07: Yeah, I mean, again, I would never ask the CARB Solutions team to hold back, but, again, they will always manage the physicians exceedingly well, and I would say this was probably an exceptional performance for the first half of the year. Okay, perfect. I'll leave it here.
spk08: Thank you very much for squeezing me in again. Thank you, Randy.
spk00: Our next question is from Vincent Andrews of Morgan Stanley.
spk08: Hi, this is Steve Haynes on for for Vincent. Just squeeze a quick one in on the bio solutions, you know, business slash portfolio talked about some of the other growth things. And you've announced you've made some announcements already in terms of some some partnerships and agreements. But can you I guess maybe just help us think about going forward where your specific, you know, kind of target growth areas would be within that, that that business?
spk02: Yeah, listen, that is a business that to a certain degree started from a customer pool. You know, we discovered one day that a lot of the products that we were selling in Carp Solutions were finding their way into non-food applications, non-beverage applications. So now we have started with a new team on a more proactive approach to that. So we have a market-based approach where we're targeting things like construction and pharmaceuticals and cosmetics and other products. And we've been very successful. This team has been growing. They have been growing sales about at the 10% click. These are very profitable opportunities. And opportunities at this point in time require no capital because these are existing products going into new applications. So we have hired experts, marketing experts and technical experts to be able to sell this into new applications. And we're feeling an incredible customer pool. Every CEO or company out there that is announcing these decarbonization goals for 2040 or whatever needs to shift to plant-based materials from oil-based in order to decarbonize. And we are the largest company in that space with the ability to provide the broadest footprint of products. So you will continue to see growth there, and we are just getting started. That will be my comment. We cannot talk a lot about, as you can understand, about our customer engagement because these are confidential agreements that we have, and a lot of these the customers don't want to disclose what they are doing. All right. Thank you. You're welcome.
spk00: Your next question is from Ben Callow of Bayard.
spk03: Hi. Thank you very much for taking my question. The first one is just on South American crush margin. Could you just talk about if there's a structural change or just a temporary change as it relates to the biodiesel headwinds? And then the second question is on M&A. I know you just did a deal, so congratulations on that. But, you know, on the larger acquisition front, from your experience, you know, one, are there targets out there? And then two, is it easier for the heavy lifting of integration to do a large acquisition than, you know, the smaller tuck-in ones like you did, you announced yesterday? Thank you.
spk02: Yes, thank you, Ben. So let me address South America first. So, of course, our bigger participation is Brazil. It has been a tough year for Brazil this first half of the year in general. We expect the second half of the year to have the possibility to be a little better. Biodiesel is B12 now, and that has been confirmed. We'll have to see the first... Auctions there. So crash margins are better. Domestic margins are $25 to $30 per ton. Exports about $10. Bottle oil and volumes and prices are better. In the last two months, we started the year tough there. Remember that this is a society that is going through the tougher parts of COVID. So demand is difficult there. But we have seen an improvement. Domestic meal, the market is also paying for the higher soybeans. So that's good. Brazil has reduced exports of corn, of course, because of the drought. But the domestic market is paying the premium. So Brazil is not going to run out of corn. It's importing a little bit from Brazil. I would say, in general, with domestic oil being supported and the volumes being there, and with biodiesel going back to B12, we expect the second half of the year to be a little bit better than maybe what the first half was.
spk03: And then the second question on target, you know, an appetite for a larger deal. And then, you know, the integration of smaller deals versus, you know, many smaller deals versus a large one.
spk02: Yeah. You know that we've been relatively quiet. We continue to be very selective. about this because valuations are in general for some properties are a little bit too high. So this needs to be a perfect fit into our portfolio and, you know, the perfect combination of things. With so your protein is in terms of the footprint, the complementarity of the geographic nature of it and the quality of management and the assets and the product. In terms of what is easier to integrate, I think that sometimes bolt-ons are a little bit easier. We find they fit better in a business that is already structured. When you bring a large company, you need more components. more adjustments on both sides, if you will. If you think about some of these companies have continued to operate in ADM almost like with the same agility they were operating before, whether you take Protexin or Biopolis and some of these companies. So I think that the smaller companies are probably an easy tuck-in than maybe large companies. Large companies take us a little bit longer.
spk03: Okay, great. Thank you very much. You're welcome.
spk00: Your next question is from Ben Bienvenu of Stevens.
spk08: Hey, thanks. Good morning, everybody. Appreciate you squeezing me in. Hi, Ben. One quick one for me. You talked about the operational flexibility to shift and flex between soft seed crushing and oil seed crushing. When you think about the backdrop for oil seed crushing margins across all your geographies, but in North America in particular where things are quite strong, The strong driven by soybean oil this go around, do you think the market is able to digest appropriately switching from a higher oil yield to a higher meal yield given the kind of relative softness in the meal market? And just how do you think about toggling between those two crush capacities in a market like this?
spk02: Listen, at this point in time, we are seeing good demand for both products. So, of course, as you know, there is a big pull from oil. There has been a big pull for oil, and then RGD is increasing a little bit of that. But our ability to place the meal, given our footprint and our commercial operations, is very strong. That gives us a lot of confidence for North America for the second half. Listen, let me be clear. The oilseeds and our services business will have a very strong year, much better than last year, and we expect a strong second half as well. That will drive the company to earnings that we never had before, certainly, and certainly will be probably on the higher side or maybe outside the range of $4 to $4.50 that I mentioned before that was the previous landing spot of our strategy. That's what we're seeing at the moment. So the year started strong, and we think that the second half will be very strong.
spk08: Okay, very good. Thank you, Juan, and best of luck in the back half.
spk00: Our final question is from Eric Larson of Seaport Research Partners.
spk08: Yeah, good morning, everyone. I hope everybody is doing well. Good morning, Eric. Thank you, Eric. So I know we're short on time here. I'll make this question pretty quick and pretty direct. It's really going back, I think, a little to maybe Adam's first question, maybe drilling down on some demand functions here in the near term. Obviously, you've addressed the global biodiesel markets, what's going on there, the U.S. ethanol, all the jawboning of RFS and all that stuff. But people are talking about, you know, some chinks in the armor and some of the Chinese demand, at least in the near term. You know, they've walked away from a little bit of corn imports in July, which has bought a thimble full. And I think it spooked the market. But I think the real issue here is, is ASF in China, you know, have they had a major setback in that? And, you know, we just don't know what to kind of believe what's coming out of there. And now you've had the floods in China that's impacted about 10% of their growing area. It's killed a lot of hogs. Is some of the near-term demand function... a piece of the Chinese AFS problems that they're having?
spk02: I think that, of course, as you described, there are many issues going on, and there is a little bit of a transition here. But the reality is that pork prices have come down. That will incentivize demand. But you also need to understand that during the ASF, people get to eat more poultry as well, and we have seen that demand grow. We think that when we have a better supply and cheaper supply of soybeans, things will come back a little bit more to normal. When we check with our customers over there, fundamentally nothing has changed. If you look at the, as I said, the middle class in China, and you look at the indicators of that, which is the consumption of the big four proteins, they are all higher than pre-pandemic levels. So the consumer is there, the animals are there to be fed, and I think that the rest is just a matter of tactical approaches, whether, you know... We had the big run-up in hog prices in China. Then the government intervened to try to control that. Now they are lower. They fed more wheat. I think that's going to shift to include more soybean in the portfolio, in the inclusion. So we think that at the end of the day, there may be many monthly gyrations, but over time, protein consumption continues to go up, and they will import more soybeans to China. to actually satisfy that demand. So we feel very confident about the future of the demand in China.
spk08: Yeah, okay, thanks. Yeah, we do seriously have wheat issues. We have small grain issues right now with drought areas, and they're going to have to supplement it with meal at some point. So thank you, everybody. Appreciate it. Thank you.
spk00: There are no other questions in queue. I'd like to turn the call back to Mr. Luther for any closing remarks.
spk04: Thank you. Slide 14 notes upcoming investor events in which we will be participating. As Juan has already mentioned in the Q&A, we'd also like to announce that we will be hosting a Global Investor Day in the fourth quarter of this year, during which we'll be talking more about the next phase of our growth. More particulars, including the specific date and format, will be forthcoming. 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.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-