Archer-Daniels-Midland Company

Good morning and welcome to the ADM first quarter 2022 earnings conference call. All lines have been placed on a listen-only mode to prevent background noise. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Michael Cross, Director of Investor Relations. You may begin.

Thank you, Emily. Good morning and welcome to ADM's first quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at ADM.com. 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 uncertainty. 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.

To the extent permitted under applicable law, ADM assumes no obligation to update any statements as a result of new information or future events.

On today's webcast our Chairman and Chief Executive Officer Juan Luciano will provide an overview of the quarter and highlight some of our accomplishments. Our Chief Financial Officer Vikram Luther will review the drivers of our performance as well as corporate results and financial highlights. Then Juan will make some final comments and our Vice Chairman Ray Young will join us for questions. Please turn to slide 3. I will now turn the call over to Juan.

Thank you, Michael. This morning, we reported first quarter adjusted earnings per share of $1.90. Adjusted segment operating profit was $1.6 billion. Our trailing four-quarter adjusted EBDA was about $5.3 billion, and our trailing four-quarter average adjusted ROIC was 10.6%. What we saw in the first quarter was an extension and amplification of the factors that supported our growth in 2021. First was our team's great execution. Exceptional growth in nutrition and effective risk management exemplified how we continued to serve our customers and provide nutrition around the globe amid volatile market conditions and an inflationary environment. Second was an environment of tight supply and demand. We operated in the first quarter in a constrained supply environment for crops mostly driven by the smaller South American crop and for other products driven by some continued supply chain and labor availability issues. And we continued to see solid global demand across most of our products and in most regions. While the pandemic is not over, and we're particularly monitoring the impacts of raising cases and lockdowns in China, much of the world continued to emerge. Pent-up demand remained solid, even in the face of higher prices. The great work our team did was in service to our customers, our company, and our purpose. Our company has come together once again in the wake of the unprovoked and unjustified invasion of Ukraine. ADM has about 650 colleagues in Ukraine, and of course our highest priority continues to be supporting and protecting them and their families, as well as helping Ukrainian farmers to get as much of their crop production as possible into world markets. Our thoughts and prayers remain with the people of Ukraine. Slide four, please. Food security is foundational to ADM's purpose and beliefs, and recent events have only magnified its importance. From a global pandemic to the short crop in South America, to the conflict in Ukraine, it has become clear that we cannot take an abundant and efficient supply of food for granted. Even beyond the current dislocations, this issue will remain one of critical importance over the next many years. As the global population grows, the need for nutrition will continue to grow with it. At our Global Investor Day last December, we talked about how we expect demand to push global trade flows of corn, wheat, soybeans, and soybean milk up 21% or 130 million tons in the next 10 years. Meeting that demand will not happen automatically. It will take dedication, expertise, and agility, as well as global scale and capabilities. An example of that is ADM's destination marketing network, which gives us a presence in more regions where demand is strong and growing, as well as more direct connections to customers and the ability to offer the full end-to-end capabilities of our integrated value chain. We are seeing how important that is today as customers are coming to us knowing that they can rely on ADN to meet their specific needs in a supply-constrained environment. We are not immune to the impacts of global disruptions, including those in the Black Sea region, but our broad portfolio of nutrition products and our ability to efficiently move them around the world will allow us to manage through these dynamic market conditions and continue to help support the food needs of billions of people. Please turn to slide five. Sustainability is another one of the global trends so important to our companies and our planet's future. We remain focused on our strategy, which is aligned with fast-growing demand for an array of products that are environmentally friendly. including alternative proteins. That industry continues to show impressive growth. Global sales for alternative meats and dairy products are expected to increase 14% annually, reaching a staggering $125 billion by 2030. When you look at the full range of products that alternative proteins could go into, from meat alternatives and meat extensions to emerging categories like ready meals and specialized nutrition, the opportunities are even greater. Our own growth in this area is faster than the industry's. The quality of our product, our integrated end-to-end value chain, our innovative product development and application capabilities, and our global scale make us the partner of choice for our customers. In fact, we never had a stronger demand for our alternative protein products than we're seeing now, and we're confident in continued growth. That is why earlier this month, we announced a significant investment to nearly double extrusion capacity at our Decatur, Illinois specialty protein complex. We also announced the industry's first end-to-end alternative protein innovation center. This, of course, follows up on last year's addition of leading European alternative protein provider, Soya Protein. Alternative proteins are just one of the many areas in which we are expanding our capabilities to meet growing customer demand for more environmentally responsible products. Our biosolutions team, for example, continued to expand this pipeline and advance the evolution of our carbohydrate solutions business with an impressive $55 million in revenue growth in the world. Please turn to slide six. We are advancing sustainability commitments in other parts of our business as well. Last year, we unveiled new goals to reduce Scope 3 emissions and eliminate deforestation from our supply chain. This is critical work. We do not make these kinds of commitments without an achievable plan to meet them. And once we move forward, we constantly challenge ourselves to do it faster. That is why last week we announced that we have accelerated our deadline for a completely deforestation-free supply chain by five years. from 2030 to 2025. We also recently committed to work with the Science-Based Targets Initiative with the goal of obtaining their approval of ADM's climate targets and our alignment with ambitious global goals to limit rising temperatures to 1.5 degrees Celsius. Across ADM, we are continuing to align our portfolio with the world's growing needs and with our own purpose. positioning us to serve our customers, our communities, and our planet, and powering our future. I'll discuss our business outlook at the end of our call, but in the meantime, I'd like to turn to Vikram to talk about our business report. Vikram?

Thanks, Juan. Slide seven, please. The Ag Services and Oilseeds team effectively managed risk and executed exceptionally well in a dynamic environment of robust global demand and tight supply, driven primarily by the short South American crop. Ag services results were significantly higher versus the first quarter of 2021. Global trade results were higher, driven by strong performances in destination marketing and global ocean freight. North American origination margins and volumes were lower year over year. including approximately $75 million in negative timing effects, which will reverse in the coming quarters. Crushing was higher year over year in a strong global margin environment driven by robust protein and vegetable oil demand. Improving margins in the quarter resulted in approximately $60 million in negative timing effects, which will reverse in the coming quarters, versus approximately $50 million in positive timing in the prior year quarter. Refined products and other results were much higher than the prior year period, driven by healthy refining premiums and good refined oils demand in North America, as well as strong biodiesel margins in EMEA. Equity earnings from Wilmar was significantly higher versus the first quarter of 2021. Looking ahead, we expect substantially higher Q2 AS&O results than the second quarter of 2021. Slide eight, please. Carbohydrate solutions delivered substantially higher year-over-year results. The starches and sweeteners subsegment, including ethanol production from our wet mills, delivered much higher results versus the prior year quarter, driven by higher corn core product revenues, improved citric acid profits, and excellent risk management in North America. Higher volumes and margins in EMEA, and higher volumes and margins in wheat milling. Sales volumes for starches and sweeteners continued their recovery toward pre-pandemic levels. And as Juan mentioned, our BioSolutions platform continued to deliver impressive growth with $55 million in new sales as demand for plant-based products expands into more diverse applications. VantageCon processors delivered solid execution margins, but position losses on ethanol inventory as prices fell early in the quarter drove lower results versus the prior year. The prior year quarter's results also benefited from demand for USB-grade industrial alcohol from the Peoria facility, which was divested in Q4 2021. Looking ahead to the second quarter, we expect the current market dynamics to continue, delivering carbohydrate solution results similar to the very strong second quarter of 2021. On slide nine, the nutrition business delivered continued strong profit growth. Revenues increased by a very impressive 23%. Even when adjusting for currency effects and removing the impacts of recent acquisitions, revenue was up by 17%. And while margins have softened somewhat, they remain healthy. Human nutrition delivered higher year-over-year results. Flavors continue to deliver solid revenue growth, offset by some higher costs. Strong sales growth in alternative proteins, including contributions from our soya protein acquisition and positive currency timing effects in South America, offset some higher operating costs to help deliver better year-over-year results in specialty ingredients. Health and wellness results were also higher year-over-year, powered by continued growth in probiotics. including our late 2021 DLN probiotics acquisition and robust demand for fiber. Animal nutrition profits were nearly double the year-ago period, due primarily to strength in amino acids, driven by a combination of product mix changes, improved North American demand, and global supply chain disruptions. Looking ahead, we expect nutrition to deliver a second quarter significantly higher than the prior year period. And with our recent acquisitions delivering ahead of our expectations, we are raising our profit growth outlook for the full year from 15 plus to 20%. Slide 10, please. 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 higher, driven primarily by better performance in captive insurance, including reduced claim settlements versus the prior year. Some of the claim settlements that we expected to negatively impact Q1 results are now expected in the second quarter. Net interest expense for the quarter was higher year over year on higher expense for long-term debt, higher short-term borrowings to support working capital needs, and interest related to a tax item. In the corporate lines, unallocated corporate costs of $209 million were due primarily to higher IT operating and project-related costs and higher costs in the company's centers of excellence, partially offset by incentive compensation accrual adjustments. The effective tax rate for the first quarter of 2022 was approximately 16%. For the full year, We are now anticipating an effective tax rate at the higher end of our previously guided range of 16% to 19%. Cash flow generation remains strong, $1.6 billion before working capital changes versus $1.2 billion in the prior year period. Our balance sheet remains solid with a net debt-to-total capital ratio of about 34%. and available liquidity of about $9.3 billion, even with almost $3 billion in higher working capital needs since December. With that, I'll turn it back to Juan.

Thank you, Vikram. Slide 11, please. After a strong start of the year, we're looking ahead. In the near-term future, we expect lower crop supplies caused by the wheat Canadian canola crop the short South American crops, and now the Black Sea disruptions could drive continued tightness in global grain markets through 2022, well into 2023, and perhaps beyond. As we look further ahead, markets will continue to reflect the importance of the enduring global trends that are fueling performance across our portfolio, including a growing global population, driving expansion in demand, for food and healthy nutrition. That is why the work we've done to build a better ADM is so important. We have the global integrated network, risk management capabilities, and diverse product portfolio to help us navigate through tight market conditions and meet global nutritional needs. This is the challenge we expanded, improved, and repositioned our business to meet. And we'll continue to advance our strategy and grow our capabilities through our productivity and innovation initiatives in order to drive performance under our control and deliver on the evolving needs of our customers. But it doesn't stop with ADM. We're working with other participants across the food and agriculture value chain, from farmers who continue to do more every year to sustainably increase production, to technology providers who offer new ways to make more with less, to governments who in a tight supply and demand environment should resist the impulse to impose export restrictions. So looking at the balance of the year, when we combine the strategic work we have done to align our portfolio with fundamental global trends, with our strong execution, and the expectation of a continued tight supply-demand environment, we expect 2022 results to substantially exceed 2021's. And as we look further ahead to a future of increasing needs for more and better foods, we will continue to work to add new adjacent products to address the world's toughest challenges and unlock the power of nature to enrich the quality of life. Once again, I'd like to thank our colleagues around the globe for their commitment and hard work to serve vital global needs in a challenging and dynamic environment. With that, Emily, please open the line for questions.

Thank you very much. We will now begin the question and answer session. In the interest of time, please limit yourself to one question and rejoin the queue for additional follow-ups. Please register your questions now by pressing star followed by one on your telephone keypad. If you change your mind, please press star and two. When preparing to ask your question, please ensure that your device is unmuted locally. Our first question today comes from the line of Adam Samuelson with Goldman Sachs. Adam, your line is open.

Yes, thank you. Good morning, everyone. Good morning, Adam. Good morning. So, Vikram, I guess the first question, just as we think about the current market environment, obviously a tremendous number of moving pieces. I guess I'm trying to calibrate some of the things that could prove more enduring to the business. And the one that sticks out is inflation broadly. And I'm thinking about energy costs and what that, especially in Europe, I'm thinking about construction costs for new plants, and I'm just trying to think specifically in oilseeds, how higher operating costs in Europe, higher replacement costs if we're thinking about new builds, how that might be impacting oilseed crush margins around the world, and if you think that has a bit longer tail to it, and I would think that benefits you given your footprint is principally in the Americas.

Yeah, Adam, thanks for the question. Yeah, in terms of energy costs, clearly, we are not immune to that, and we have seen an elevation in energy costs. As you well know, we have a program to actively hedge our programs, so I think to a large degree we've been successful in doing that. Nevertheless, in places like Europe, where energy costs have been significantly elevated, yes, that's had an impact on net margins. But as you look at the broader dynamics, we continue to see very strong outlook in terms of vegetable demand as well as protein demand, And as you see, most of the grain flows, given what's happening around the world, particularly in the Black Sea region and the short South American crop moving to North America, that should actually support us in terms of our footprint. So the structural changes associated with RGD remain very much intact. So we think longer term, we feel very confident about the move higher that we cited in the Global Investor Day in terms of crush margins. And for 2022 in particular, we see even more strength given some of the near-term dynamics I just referenced.

Okay, that's helpful. And then I guess the second question is more on capital and the balance sheet. And I think it was impressive to see in the quarter the growth in inventories, yet the committed credit capacity basically being unchanged from year end. And I'm wondering how you think about that as a strategic asset and the opportunities it presents both in terms of merchandising and risk in the short term, but also if the M&A pipeline is maybe improving as some others may not have the liquidity that you do in the current high commodity environment.

Yeah, Adam, we clearly view our balance sheet as a competitive advantage. And in terms of capital allocation, we've talked about this before. Our capital allocation is inextricably linked to our strategies. In terms of the guidelines, in terms of the framework, we've articulated about 30% to 40% of our cash flow is real direct towards capital expenditures, and the remaining 60% to 70% for strategic growth investments. And given our balance sheet flexibility, we are clearly in a position to undertake some of those growth investments, including M&A, if that becomes attractive, but also shareholder distributions, including 30% to 40% towards dividends. As we cited in Global Investor Day, we expect dividend payouts to be actually at the higher end of that 30% to 40% range in the near to medium term. But at the end of the day, if you step back, think about the operating cash flow we generated, $1.6 billion in Q1. So we should be in a position to conduct meaningful buybacks as well in the medium term, as we noted in the global investor day. In the near term, we will repurchase shares to at least offset dilution.

Great. That caller is all really helpful. I'll pass it on. Thank you.

Our next question is from Ben Thera from Barclays. Ben, please go ahead.

Perfect. Thank you very much, Juan Bikram. Congrats on the strong results. I wanted to ask a question around just the global freight and global trade environment and obviously with some of the backlog that's been caused on unloading ships over in China because of all the lockdowns. Have you seen or are you seeing any incremental disruptions over the last couple of weeks that you think is going to cause greater opportunities for you guys within the next couple of weeks to excel here and to ultimately deliver a strong quarter on the X service piece, just similar to what we saw already in 1Q.

Thank you, Ben. Good morning. Of course, We've been dealing with supply chain issues for a while, and I think that the situation in China has nothing more than just bring back more challenges, if you will. We see the number of ships in congestion, if you will, from Cape size, Panamax, Supramax, and Handy size have increased over the last week. increases about 10% give or take, depending on the category. So I think that's especially complicated as you see that because of the different conflicts and different shortages in crops that we have, some of these trading flows around the world are being redirected. So you redirect the trading flows with maybe less ship availability and higher freight and longer travel times. So the situation continues to be dire, and that's why it's so important to have a team, a global team, very active with many options to provide supply and then to reach different destinations. So the combination, if you will, of our global trade with the destination marketing and all that becomes more and more important every day for customers around the world.

Perfect. Thank you very much. I'll leave it here so you can stay on track.

Thank you, Ben.

The next question comes from the line of Tom Palmer with JP Morgan. Tom, please go ahead with your question.

Good morning. Thank you for the question. Maybe just follow up on the outlook for the second quarter in the ASNO segment. Maybe just a little commentary on the sub-segment expectations. Are you expecting year-over-year profit increases across all three of the sub-segments? Are there any to call out of particular strength?

Yeah, I would say our first quarter showed strength across the three businesses, very good performance. And as we look at Q2, probably we see the same. There was some reduction in exports in act services in the first quarter because of weather issues, and some of that has been moved into the second quarter. So we have a good book there. China has put some orders also for corn, Q2 and Q3. We expect fresh profits to continue to be very strong in the second quarter. refining margins also very good. So I would say demand has been domestically strong for soybean mill in North America and certainly a lot of demand around the world for that. So we continue to see crash very well supported by the oil and the mill. We continue to see demand for our exports in second quarter. the window of exports of North America, it will have expanded a little bit. And certainly, the refining materials, they maintain very strong margins. If you look at last year, we entered into Q1 with low margins, and we ended with strong margins. This year has been strong margins across the quarter, and we expect that to continue into the second one.

All right, thank you.

Our next question comes from Ken Zaslow from Bank of Montreal.

Morning, Ken.

Oh, apologies. We have lost Ken from the queue. So next in the queue, we have Ben Bienvenu from Stevens. Ben, your line is open.

Hey, thanks. Good morning, everybody.

Morning, Ben.

I want to ask about the nutrition business. Strong results in the first quarter versus the prior expectation of 15% plus, now 20% growth for the year. You called out acquisition contribution or the performance of acquisitions. Is that a fair breakdown of organic versus inorganic growth, thinking about maybe 15% organic growth plus 5% inorganic? Or how would you delineate between the two contributing factors?

Well, so as we talked about, I referenced in my comments then, the revenue growth, right, was 23%. And if you exclude M&A and adjust it for FX, it was 17%. So strong revenue growth, frankly, across human nutrition and animal nutrition. The reason our profits were stronger than what we had guided in Q4 were threefold. One is We did expect some upfront costs that we cited, and we had anticipated inflationary cost pressures and supply disruptions. However, with the smart pricing and active supply chain collaboration with our ASNO carb solutions teams, we managed these very well across all the nutrition businesses. The other aspect is we talked about industry-leading win rates in our global investor day. Actually, our win rates are even expanding beyond that. And the second point is, as you referenced, the OP contributions from MNA were actually higher than expected. The third point is amino acids. Because of the deliberate switch we made from dry to liquid lysine last year, combined with the strong North American protein demand and the supply chain disruptions, our contribution from amino acids business was actually higher. So really it's a reflection of those three factors that resulted in higher than expected nutrition profit for Q1.

Okay, great. I'll get back in the queue. Thanks.

Thank you, Ben.

We do have a question on the line now from Ken Zaslow with Bank of Montreal. Ken, please go ahead.

Hey, good morning, guys.

Morning, Ken. Morning.

When I think about longer term, you guys set out two targets, one high single-digit growth and then the $6 to $7 outlook by 2025. Given the operating environment, I know you just literally just put this out, so it's hard to just change it on a change of environment, but how do you see that? Do you think that the growth rate is higher, or do you think that the ability to get to the $6 to $7 comes earlier than expected given the favorable operating environment?

Yeah, thank you, Ken. Good question. When we put the plan in front of shareholders in December, which is mostly to explain how our company and our business model and portfolio continues to evolve, aligning ourselves with markets of higher growth rates and actually higher margins. And so what we can control, as you can imagine, is portfolio, capital allocation, and our execution. So we focus on that. So directionally, We're going into that, and we just put a milestone there to have a reference for investors. Of course, at this point in time, we're going to hit those numbers earlier. It is obvious. But I think we don't worry that much of the pace. It's more important for us the direction we're going is higher margins, higher growth rates. The pace sometimes is dictated for outside events in which our team and their execution are supposed to capitalize as much as possible into them. So do you ask me it's going to be six to seven in 2025? Certainly it's going to happen sooner than that. But again, I think it's important to keep the team continue to build that better company. With Bikram's explain how we have generated $1.6 billion of cash flow in this That gives us much more optionality on how much to accelerate that shift of the company into higher margin and higher growth rates. And to be honest, after we have created nutrition, and nutrition, you know, we continue to upgrade targets, even if they make $700 million last year, we are now focusing on building the next scale business. We're looking at microbial solutions and how that will drive the next generation of fruit and proteins. We're looking at climate solutions or bio solutions, which will drive the next generation of sustainable products. And also microbiome modulators, which, you know, with the pre-, pro-, and post-biotics will drive personalized health and nutrition. And let me remind you and the shareholders, contributions for all these three elements they were thinking on building was basically muted during the forecast that we showed in the December Global Investor Day. So we feel very good about the existing businesses delivering six to seven, maybe earlier than expected, but we haven't the capabilities to build the next scale business for ADM.

Great. And then my follow-up question is, when I think about the renewable diesel and the way it's going to happen. And with the backdrop of inflation, how does the balance between, you know, the renewable diesel kind of going versus the, you know, potential for inflation to curtail that? Or do you see that renewable diesel is already, you know, the horse is already out of the barn, that, you know, that momentum is to continue versus is there a potential that the inflation can kind of either elongate the timing of it or delay anything. And then I'll leave it there, and I appreciate your time.

Thank you, Ken. Good questions, as always. Listen, first of all, let me say on that that I'm very proud of our team. And remember, when we announced Spiritwood, we said we've been looking at that for two years. So we took into consideration all these aspects. So our product remains on schedule to deliver on the harvest 2023. So most important, what we can control. That project is going well, and we're managing through inflations and delays. So proud of the team there. Listen, at the end of the day, we still expect the significant new capacity will come online. Of course, when there are so many announcements in any industry, you're going to have a percentage of that being, you know, coming on a stream. I think that there may be some variability on the timing of all that. It doesn't escape anybody that there are labor availability issues, especially in the U.S. Certainly, you know, raw materials, whether it's steel or energy or whatever, are more expensive than whenever some of these things happen. were announced and maybe the builders of these had hedged the raw materials exposure or bought things in anticipation. I would say if there is some delay, it may not be bad to allow crush expansions to actually come on the stream so they can provide the soybean oil for all these plants to run. We also wait for canola to have a path to that. I think, listen, the industry will develop. It may have some short-term issues here or there, but at the end of the day, a significant piece of new demand for soybean oil is being built and will be built.

Perfect. Thank you very much. Thank you, Ken.

Our next question is from Steve Byrne from Bank of America. Your line is open.

Yes, thank you. Given those comments you just made there, Juan, about the outlook for renewable diesel, and you also had comments in your slide deck about your own views about the demand growth for alternative meat and dairy, which could potentially lead to less demand for soybean meal, I'm curious to hear your own view on do you see any challenge here meeting what might be a disparate growth in demand for the oil versus the meal side of all of these crush plants that are going to be built?

Yeah, no. Listen, it's a very good question, and we look at that, of course, with a lot of attention. I think right now when we see the capacity coming, it's all capacity needed actually to supply the growth of protein around the world. We see North America with very strong domestic demand for meal, but we see also North America soybean meal being the most competitive around the world, especially now when you have issues in Argentina with some changes in DT, when you have short crops in South America like we have had, and we continue to have a strong demand. We see also, Steve, that customers are relatively open, so there's not a lot of inventory in the chain that at one point needs to be flushed out. And when you look at what happened with feed and competitive feeds, certainly wheat, given the conflict in Ukraine, the unfortunate conflict in Ukraine, Wheat prices need to go up high enough that they get out of the feeding rations so they can be preserved to feeding people. When you take that up, you bring corn as the most effective carbohydrate, and corn immediately brings soybean meal into the rations. So we not only see strong demand, but we see high inclusion rates staying. And again, given the strong lack of soybean oil in North America, that will make soybean meal the most competitive in the world. So we actually are very, very positive about that demand, and we think that we need all the expansion to match the market share that soybean meal North America will take from the rest of the world.

Thank you, Juan. Maybe just one more on the oil side, and that is what do you see as the global impacts of Indonesia's ban on palm oil exports. How does that affect, you know, the global supply of oil and your business in particular?

Yeah, you know, oils have been tied for several months already, if not a year. And, of course, any announcement in the... in the proximity of the largest producer of palm oil in the world, rattles the markets. Of course, you know, it was immediately clarified that this doesn't include crude palm oil, which is the biggest product. So I would say I think Indonesia is just trying to take a short-term, you know, palliative for their domestic inflation. I don't think it will significantly alter the global balances, although the global balances continue to be very tight. And any disruption, we have the Ukrainian disruption, of course, and the Russian with sunflower oil. So this is an area that everybody has to pay a lot of attention And it will require companies like ADM to having the ability to reformulate so we can take some customers that are existing customers or either palm oil or sunflower oil to have alternatives to continue to supply their customers. So we are seeing that through our LNX joint venture. We're seeing that through our Stratas joint venture. And we're seeing the opportunity to add a lot of value to some of the customers that are looking for replacements at this point in time.

Thank you.

Our next question comes from Robert Moscow from Credit Suisse. Robert, please go ahead with your question.

Hi, thank you. I was wondering if you could give us a little insight into your visibility into crush margins in the second half of this year. Are your customers locking in their commitments for demand and supplying you yet? And can you use that to lock in those margins? And then a quick follow-up, if I could.

Sure, yeah, Rob. As I said, I think that... we have very strong visibility, of course, into Q2. I would say further than that, I think the markets are inverted. So customers see prices relatively high right now. Those customers that are not covered, they feel like maybe the curve is showing them that they can get covered later at a cheaper rate than today. So I would say, in general, we have coverage for the next quarter. not for Q3 or Q4. But when we look at the demand that we're seeing around the world, we think that when you think about milk and oil in general, not only North America, but also Brazil, the crush margins need to be there to encourage the crushers to crush. We need the demand for oil and we need the soybean milk. So you will have to have the demand the crash margins to incentivize people to crash. And we are seeing that with the margins that are happening in Brazil or the U.S. or Europe. All our margins today are higher than what we anticipated. And we think that as the year rolls out and demand continues to be solid out there and strong, crash margins will continue to send that signal to all of us crashers, which is we need the meal, we need the oil, keep crashing.

Got it. And just to follow up, you mentioned ocean freight being a big benefit, and I think it had to do with some redirecting of ships in China related to lockdowns. But I'm sure it also has to do with just overall moving freight from one destination to another and shifting directions. Can I assume that that is a big benefit to you and that could continue for the rest of 22 or is it kind of like more episodic in nature?

Rob, we have as part of our global trade group, we have a strong ocean freight group and they work hand in glove to make sure that We continue to serve the customers with the most effective destinations, the most efficient destinations. So we are a big player, and as a big player with a lot of resources, we tend to have a relative advantage to others. So when things get complicated, and right now they are very complicated, we tend to have a relative higher competitive advantage than others. So I think that shows in the margins that we obtain in this. And, you know, logistics right now are complicated. They are complicated in the river. They are complicated in the oceans. And there is a lot of redrawing of trade flows. And you can only redraw a lot of trade flows if you have a lot of origin options and a lot of destination options because you need to connect both. And our ocean freight group counts with that blessing, which is ADM originates in all the key parts of the world and have destination units in all key parts of the world. So it provides them with more ability to play routes than maybe other players.

Our next question comes from Vincent Andrews from Morgan Stanley. Vincent, your line is open.

Thank you. And good morning, everyone. Congratulations to Vikram and Ray on your new roles. And Ray, it was great to work with you all those years. Juan, could I ask you just to talk a little bit about how you're thinking about the consumer and consumer demand, maybe particularly in Europe, but I guess also globally, just given we have a lot of food inflation, we have a lot of energy inflation. What do you think gives? Clearly, we need to destroy some demand, just given how tight supply is. But how are you thinking about that equation this year into next year?

Yeah, listen, we are paying, of course, close attention to that. At this point in time, we haven't seen any significant impact on demand for us. If you think about so far, customers are paying higher prices, but they still, especially in North America, they still haven't changed their behaviors. We think that, of course, if you have disposable income suffering from higher gas prices and higher food prices, eventually they will have to adjust. We have seen more, to be honest, Vincent, in some of the emerging markets in which maybe food is a bigger percentage of their disposable income. So we have seen some adjustment, a small adjustment in that. But I would say at this point in time, we have not seen any relevant or material adjustment to our demand. And we think that given the pent-up demand that existed from recovery of the coming out of COVID, people in general have been having higher saving rates. And we have seen wage inflation around the world that have gotten more money in the pockets of many. So at this point in time, we think consumer has been and demand has been very resilient. But, you know, there's going to be a point in which, you know, disposable income will get tight and we will see some changes into that. We haven't seen it yet. We don't see it in the immediate future either. Okay.

Thanks, guys. Thanks, Vince.

Our next question comes from Michael Paikin from Cleveland Research. Michael, please go ahead.

Yeah, hi. I was wondering if you could talk a little bit about the impact of the AVN clue here in the U.S. as well as internationally and what that might look like in terms of the impact for meal demand.

Yeah. Listen, Michael, we haven't seen at this point in time any significant impact to our our poultry demand in North America, the numbers at this point in time seem to be about half the size of the issue that was in 2015. So it's something we're following very closely, of course, but we cannot say that we have had an impact so far. And hopefully, you know, these viruses are difficult to control, so of course there is a lot of sanitary elements being thrown at that. They will placate, but we will have to keep a close eye to them.

Great. And a follow-up question is just, you know, shifting gears, are you concerned about, you know, the movement of fertilizer throughout the world? I know you have a fertilizer business, but beyond that, just, you know, the impact if we do end up in a really tight grain environment, are you, you know, how do you think if there is a food versus fuel debate, how do you see that sort of playing out, and is there any risk? you know, to ethanol volumes or, you know, the growth in biodiesel or how do you sort of see that playing out? Thanks.

Yeah. On fertilizers, to be honest, Michael, of course, fertilizer supply chains are tight and it's being highly publicized. However, we get our evidence shows that trade lanes are adapting and markets are getting sufficient supplies of fertilizer, of course, at much higher prices that they will, you know, dry prices for grain. I think today, especially Brazil, the U.S. certainly has the fertilizer for these crops. So the question is the Brazilian crop, which is coming in a few months. And I think it is still possible what we get from our people in Brazil to get enough potassium fertilizer in country by the planting season. And, of course, any shortages can produce production losses. At this point in time when people are thinking between maybe 15 or 20 percent less application, at that level we don't think that we're going to see a significant change in the production forecast. It's probably more depending on weather at this point in time and rain than fertilizer application. And the second was on food versus fuel. At this point in time I think that We are committed to try to help the world with, you know, food and the environment, so they're both axis of the same equation. I would say they both touch disposable income. As I was saying before, if you get ethanol to reduce the cost of gasoline, that creates more disposable income to take on food inflation. If you don't put any biofuels into gasoline and you pay more for gasoline, then you may get cheaper food, but you have less disposable income there. So to be honest, I think the molecules react to the prices that they are giving in the market, given the different regulations and the different values. And what we try to be is as efficient as possible, bringing as many of those molecules to the market as possible to satisfy everybody. So I think at this point in time, You know, we have seen some corrections in certain biofuels mandates across the world, but in other countries, it has been only a reduction and not an elimination. So this, I think, they are short-term things because we still have the climate crisis, which is a long-term objective that mostly the transportation industry, but also every industry will have to address, and biofuels, sustainable aviation fuels, and all that. are a big part of that reduction.

Our next question comes from Eric Larson from Seaport Research Partners.

Eric, please go ahead.

Yeah, thanks. Congratulations, everybody. And Vikram, I congratulate you on your new role. And Ray, you as well. I look forward to working with both of you on that. So congrats. You know, listening to the call today, you know, Juan, I hear, as all of us, there's a lot of confusion, there's a lot of moving parts. So when I look back 10 weeks ago, I realized that U.S. grain prices had to move higher in order to even kind of even begin to maybe ration demand or not. And of course, they've moved quite a bit higher. So what I'd really like you to do, Juan, is kind of take a 30,000 foot viewpoint here. As we all know, price does ultimately ration demand. And the only thing I can see that would maybe do that at this point is maybe, you know, global recession or U.S. recession. So can you kind of, I don't see a lot of demand destruction at this point. A little bit from bird flu, maybe it's 25 million bushels, which is a spit in the ocean, but do you see any significant demand destruction today, including what's happening in Ukraine and what they have in storage for corn and other things? How do you look at the world today from a demand, total demand perspective versus supply, and are we seeing demand destruction with high prices?

Yep. Thank you, Eric. Let me tell you how I see this. So last year was a big production year, and the world needed to consume more grain than that big production. So the issue is the world continues to grow, and sometimes it's not a matter of population growth, but it's a matter of income and how people, like people in China have been an incredible economic improvement of their standard of living, that improves their diet, that doesn't go down. So we think that's why we keep on talking about our trend of food security. We will have to provide more for the world. In situations like today where we are already tight from a supply-demand perspective, and we will get tighter as demand continues to grow, we see here in ADM that at least we need two very good systems of crops in North America and South America to actually balance and become more comfortable in those supply-demand balances. When we think about prices today, prices today are going up to mark three things that need to happen. One is export prices need to go up to being able to draw out all the inventories that that are stuck there or they are saved there or hoarded there to be able to replace the production that we have lost, the production we have lost in South America, but the production we are losing now in the Ukraine and Russia. So first you need to draw out those inventories and bring them into market so we can balance ourselves. The second, as I said before, wheat needs to be placed out of the rations so it can be preserved for human consumption. And the third one is to give farmers like you the the signal that they need to plant more and i think the world needs big more acres those acres today they're not going to happen from the baltic area they're not going to happen from us that we are basically maxed out so they may happen in south america so we need higher prices to bring south american acres we need higher prices to draw those inventories into the market and and we need

two good years of crops both in north america and south america that will that will allow us to balance the the supply demand given the strong demand yeah no and i i agree is that we need this year's crop in the u.s next year's crop in brazil and we need 2023 in the u.s to do very well again and maybe even another we need four maybe big crops around the world. But sometimes what rebalances some of this is this high inflation rate that we have around the world, there's an economic recession that comes in place. Have you factored anything into that forecast that would change your outlook?

Eric, I'm not an economist, but I think there is a narrow path to achieve soft landing here. And the U.S. economy has been very resilient through all these events. So, you know, I think the U.S. economy is driven by the consumer. The consumer has been saving money for two years that they didn't spend a lot. And as I said before, they were COVID recovery packages, but there's also been salary inflations and wages inflation that that has put money in the pockets of customers. So I think that for the foreseeable future, we don't see a significant impact of demand. If not, we will be flying that out. But we look at that. We look at our plans. We are preparing our plans for a long period of strong demand. We want to run them at high capacity. So at this point in time, I don't see, you know, I don't see an issue in the West. Maybe the only flag is how COVID lockdowns evolved in China, but I don't have a lot of visibility at this point in time.

All right. Thank you, Juan. I appreciate your comments.

Thank you, Eric.

Those are all the questions we have time for today, so I'll now turn the call back over to Juan Luciano.

Thank you, Emily. Before we close our call, I wanted to take a minute to thank Ray for his exceptional contribution all this year to ADMs as our CFO. So thank you, Ray, and it's been a pleasure. And I'm delighted that you continue with us to continue to help take ADMs to bigger places.

Thank you, Juan. And also I just want to thank all the investors and all the analysts for really like 11 years in this role. I've grown. I've learned from you. And hopefully we've also been able to teach you about ADM and how this is a great company. And, you know, the future is incredible for this company. And I look forward to continuing to support Juan and support the company in my new role. So thank you, Juan.

Thank you and congratulations, Ray. And, of course, welcome, Vikram. And, you know, this was your baptism of fire here in the earnings call. So thank you very much and welcome to the role. I'm looking forward to it. Thank you so much, Juan.

Thank you everybody for joining us today. Slide 12 notes upcoming investor events in which we'll be participating. I will also note that our annual sustainability report, which will detail our significant progress and our bold ambitions across the value chain, is scheduled to be published in May. 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.

Thank you everyone for joining us today. This concludes our conference call. You may now disconnect your lines.