Archer-Daniels-Midland Company

Good morning and welcome to the ADM second quarter 2023 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'd now like to introduce your host for today's call, Megan Britt, Vice President, Investor Relations for ADM. Ms. Britt, you may begin.

Thank you, Alex. Hello and welcome to the second quarter earnings webcast for ADM. Starting tomorrow, a replay of this webcast will be available on our investor relations website. Please turn to slide two. Some of our comments and materials may 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. 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 discuss our second quarter results share progress highlights on our first half accomplishments, and provide perspective on our outlook for the second half. Our Chief Financial Officer, Vikram Luther, will review segment level performance for the quarter and first half and provide an update on our cash generation and capital allocation action. Juan will have some closing remarks, and then he and Vikram will take your questions. Please turn to slide three. I'll now turn the call over to Juan.

Thank you, Megan. And thanks to those who have joined us for today's call. Today, ADM reported second quarter adjusted earnings per share of $1.89 with an adjusted segment operating profit of $1.6 billion. Combined with first quarter results, this equates to a first half adjusted earnings per share of $3.98 and an adjusted operating profit of $3.4 billion. Our trailing four-quarter average adjusted ROIC was 13.8%. The first half of 2023 has broadly unfolded as we expected, and our financial performance nearly replicates the record results from the first half of last year, even as we face a more challenging macroeconomic and demand environment to start the year. Through active positioning, strong margin management, and leveraging our geographically diverse end-to-end supply chain network, we maintain our earnings power and a strong ROIC performance, bolstered by key strategic accomplishments across the enterprise. Please turn to slide four. Let me highlight just a few across the business. In our services and oil seeds, our team leveraged, excuse me, past investments in port capabilities to produce record origination volumes out of our Brazilian facilities, expanded our regenerative agriculture partnerships, and leveraged our ability to flex crash capacity to capitalize on higher canola crash margins. In the latter instance, we flexed more than 300,000 tons of capacity and captured an additional $40 per metric ton of margins. In carbohydrate solutions, strategic investments in optimization and modernization allowed our team to manage increased demand for liquid sweeteners, drive growth in biosolutions revenue and operating profit, and produce record results in our milling and international corn businesses. In nutrition, Our unique go-to-market strategy continues to drive a larger sales pipeline and deliver double-digit growth in the flavors business, thanks to an impressive performance in EMEA and new wins in North America. When you combine all of these aspects across ADM's full business portfolio, it's clear how we are able to convert challenges in one geography, product, or business segment into value drivers in another. Next slide, please. Let's review the factors that we see as important drivers for a strong second half finish in 2023. We expect continuous strength in Brazil origination for the remainder of the year. Our past strategic investments in port facilities in Brazil, optimized origination network, and deep connection to our global trade and destination marketing teams will allow us to export strong volumes. capitalizing on the record Brazilian soybean and corn crops. Biofuels demand continues to remain strong. Through the first half of the year, we saw robust margins from biodiesel, strong demand for ethanol, and an increasing demand for vegetable oil from renewable green diesel. And we expect these trends to continue in the second half. Our Spiritwood North Dakota processing facility is scheduled to start up in Q4. adding 1.5 million metric tons of annual soil crash capacity to our portfolio and producing low carbon intensity soybean oil for our JV partner marathons nearby renewable diesel facility. Projects like this will support growing demand for renewable diesel and sustainable aviation fuel throughout the industry. We also see continued resilience in food demand for core products. We expect a continuous solid margin and volume environment for sweeteners, starches, and flours. We are beginning to convert our pipeline of wins in human nutrition into operating profit. While there are some factors that have hindered growth in the portfolio, we believe positive momentum from flavors is a predictor of a healthy rebound. We also see continued commodity market dislocations in the second half. ADM has the unique ability to execute with agility in a dynamic environment. Our team utilizes our unparalleled global asset footprint and end-to-end supply chain to adapt to evolving market conditions and meet global food security needs while driving strong returns. Lastly, our balance sheet remains healthy, and we are flexing it toward organic investments and opportunistic share buybacks. We continue to deploy capital to drive organic productivity and innovation-oriented programs such as Spiritwood, Valencia, and Marshall, as well as invest in our plant automation efforts and our broad decarbonization initiatives. And our $1 billion in share repurchases in the first half highlights our confidence in the strong cash generation and growth potential of our company. As we look at the back half of the year, we intend to continue our share reported product. We feel that these factors are fundamental drivers of our strong second half performance. I am proud of how our team has delivered halfway through the year and even more excited about the opportunities presented in the second half and what our team can deliver. Taking collectively, we are raising our earnings expectations for full year 2023. With that, let me turn it over to Bikram, who will go into more detail on the results of operations. Bikram?

Thank you, Juan. Please turn to slide six. The Ag Services and Oilseeds team continues to deliver exceptional results in a dynamic environment, leading to an extremely strong performance in the first half of 2023, surpassing the outstanding first half of the prior year. Q2 results were strong, but slightly below the prior year period. Ag Services results were in line with the strong second quarter of 2022. South American origination results were higher year over year as the team delivered record volumes and higher margins on strong export demand, leveraging our strategic investments to expand port capacity to capitalize on the record resilient soybean crop. Results for North America origination was slightly lower year over year, driven by lower export volumes due to large South America supplies. Our execution and destination marketing, as well as effective risk management, continue to deliver strong global trade results, though lower than the record quarter last year. In our crushing subsegment, results were much lower than the record result from the second quarter last year. Global soy crush margins remain strong, but were lower year over year in all regions due to softer demand for both meal and oil and a tight U.S. soybean carryout. This was partially offset by strong soft seed margins and higher volumes, supported by a strong Canadian canola crop and use of our flex capacity in EMEA. Additionally, there were approximately $195 million of negative mark-to-market timing effects in the current quarter, that are expected to reverse as the contracts execute in future periods. Refined products and other results were significantly higher than the prior year period, achieving a record second quarter. North America results were higher, driven by strong food oil demand and improved biodiesel volumes. In EMEA, strong export demand for biodiesel and domestic food oil demand supported stronger margins. Additionally, there were approximately $90 million of positive mark-to-market timing effects in the current quarter that are expected to reverse as the contracts execute in future periods. Equity earnings from Wilmar were lower versus the second quarter of 2022. Looking ahead for the third quarter, we anticipate solid results in ag services and oilseeds. We expect strong demand for grain exports to be heavily weighted towards South America and our Brazilian origination footprint. We anticipate strong volumes and margins for soy and canola crush based on the tight Argentine crop and improving demand outlook for meal and oil. We expect RPO to perform well, but have significant reversals of timing impacts from the second quarter, leading to lower net execution margins. Slide seven, please. Carbohydrate solutions delivered strong results in Q2, but lower than the record second quarter of last year. The starches and sweeteners subsegment, including ethanol production from our wet mills, capitalized on a solid demand environment during the quarter. North America's starches and sweeteners delivered volumes and margins similar to the prior years, and ethanol margins were solid as industry stocks moderated, but lower relative to the prior year. Q2 results were negatively impacted due to unplanned downtime at one of our corn germ plants. In EMEA, the team effectively managed margins to deliver improved results. The global wheat milling business posted higher margins, supported by steady customer demand. BioSolutions continued on its excellent growth trajectory with 22% revenue growth year-over-year. Vantage corn processors results were lower due to lower year-over-year ethanol margins. The prior year period also included a one-time $50 million benefit from the USDA biofuel producer recovery program. We continue to make progress on our initiatives to decarbonize the carbohydrate solutions footprint, including our definitive agreement with Tallgrass to sequester carbon from our Columbus, Nebraska facility, and continued progress on decarbonizing our Decatur complex through additional carbon capture and sequestration wells, as well as ultra-low carbon intensity electricity and steam generation. These are key steps in enabling us to produce low-CI feedstocks for use in many applications for our major CPG customers and underpinning our growth opportunities, such as SAF, BioSolutions, and our lactic acid-polylactic acid joint venture with LG Chem. Looking ahead for the third quarter, we expect continued steady demand and margins for our starches, sweeteners, and wheat flour products. Ethanol margins are also expected to remain solid. On slide eight, nutrition results were significantly lower than the prior year's record quarter. Cuban nutrition results were slightly up year over year on a constant currency basis. Our flavors business posted record results in Q2, growing revenues and EBITDA margins due to improved mix and pricing in EMEA, as well as improving demand in North America. Flavors will be a significant growth engine for human nutrition for the remainder of the year and will act as a base setter for the rest of our portfolio. Customer innovation in beverage is beginning to accelerate, and our value proposition is driving our sales pipeline to its largest ever. Growth in flavors was offset by lower year-over-year results in specialty ingredients. While there has been softening of demand for plant-based proteins, particularly for the alternative meat space, Other categories like alternative dairy, snacks and baked goods, as well as specialized nutrition are providing growth opportunities. Although still a small OP contributor, health and wellness is seeing demand recovery in probiotics and is benefiting from geographic expansion opportunities offered through ADN's global footprint and customer relationships. Our largest challenge in 2023 has been in the animal nutrition business. where significantly lower amino acid margins and softer global feed demand has affected volumes, driving much lower results. Over the past several months, we have made important adjustments to align the business to this environment, including simplifying our brands and go-to-market strategy, consolidating facilities and optimizing our footprint, right-sizing the workforce in association with these changes, and aligning the reporting structure to enhance synergies. We are also refocusing our efforts to increase offerings in the higher margin specialty feed and ingredients areas. We believe these actions will lead to improved commercial and operational performance, supporting profitable growth when market fundamentals improve. When looking at nutrition as a whole, we now expect 2023 results to be similar to the prior years, as we expect growth in human nutrition to be offset by lower results in animal nutrition. However, given the increase in customer innovation we've seen in our flavors business and our recent wins and pipeline growth across human nutrition, as well as the actions we are taking in animal nutrition, we remain confident about the future outlook and growth prospects for nutrition. Slide nine, please. Other business results were significantly higher than the prior year quarter due to improved ADM Investor Services earnings on higher net interest income. Captive insurance improved on premiums from new programs, partially offset by increased claim settlements. In corporate results, net interest expense for the quarter increased year over year, primarily on higher short-term interest rates. Unallocated corporate costs of $262 million were similar versus the prior year, as lower health insurance costs were offset by increased global technology spend. Other corporate was unfavorable versus the prior year, primarily due to foreign currency hedges. We still project corporate costs to be approximately $1.5 billion for the year. The effective tax rate for the second quarter of 2023 was approximately 18%, in line with the prior year. For the full year, we still expect our effective tax rate to be between 16% and 19%. Next slide, please. Through the second quarter, we had strong operating cash flows before working capital of $2.5 billion. We allocated $600 million to capital expenditures as well as returned $1.5 billion to shareholders through share repurchases and dividends. We continue to have ample liquidity with nearly $13 billion of cash and available credit, and our leverage ratios are low with an adjusted net debt to EBITDA ratio at 1.0. Our strong balance sheet and credit ratings provide a stable financial footing for ADM to pursue our strategic growth initiatives while also returning capital to shareholders. We still anticipate $1.3 billion of capital expenditures in 2023. As Juan mentioned, we have already completed the $1 billion of share repurchases that we announced in January this year. We intend to continue our share repurchase program, subject to other strategic uses of capital. Based on our very strong first half, we are raising our full year earnings outlook to around $7 per share, with potential for even more upside. Juan?

Thank you, Vikram. As we wrap up today's call, let me highlight a few opportunities that we're excited about as ADM continues to execute our strategic agenda, where we're seeing value generation today and have plans to accelerate. Let's start with digitization and automation. Our ongoing work to modernize and automate our operations is ramping up. Our eight current implementations across North America and Europe are generating millions in run rate benefits. And we have 10 more starting in Q3 with the expectation of similar scalable benefits. Our one ADM program is accelerating our decision making and analytics capabilities across the company. helping us find faster paths to productivity. With our HR systems now in place globally, our next milestone is bringing part of the nutrition flavors business on board. In LATAM, we have implemented technology to optimize trade and commercial processes while digitizing freight and logistics contracting. All of this is helping us reduce costs and make better, faster decisions to deliver value to ADM and our customers. Sustainability and decarbonization have opened new avenues for growth across the enterprise, while ensuring we are taking the necessary actions on our own footprint. Our STRIVE 35 program continues to deliver important progress, and our recent sustainability report shows our efforts in greenhouse gas emissions, waste reduction, no deforestation, and crop traceability achieving targets ahead of plan. As we continue to support our most significant customers with carbon advantage crop sources, we recently announced regenerative ag program targets of 2 million acres in 2023, with an additional 2 million acres by 2025. With the recent tallgrass agreement and permit submissions, CO2 from ADM facilities in Nebraska, Iowa, and Illinois is now targeted to be captured and stored safely and permanently underground within our expanded indicator CCS well capacity. This helps decarbonize our customers' value chains and our own across important opportunity spaces like biosolutions and sustainable aviation fuels. and we are continuing to invest in the next phase of innovation. Our new Decatur Protein Solutions Center is engaging ADM's world-class science and technology capabilities to deliver on tomorrow's most important consumer nutrition trends. Collaboration between ADM and our ventures partners take us beyond today's alternative protein sources to help address critical areas of sustainability. wellness and affordability. Leveraging our deep fermentation expertise and capacity is positioning us to scale the next generation of food, feed, fuel, fabrics and other industrial products with key partners. A combination of technology alongside global trends in sustainability, food security and is transforming the food and agriculture industry at the fastest pace since the last century. And ADM is at the forefront of this transformation and connected growth opportunities, which give us even more confidence in our long-range growth plans. Thank you for your time today. Vikram and I look forward to your questions. Alex, please open the line.

Thank you. If you'd like to ask a question, you can press star followed by one on your telephone keypad. If you'd like to remove your question, you may press star followed by two. Please ensure you're unmuted locally when asking your question. Please limit yourself to one question before re-entering the queue. Thank you. Our first question for today comes from Ben Burer from Barclays. Ben, your line is now open. Please go ahead.

Thank you very much. Good morning, Juan. Good morning, Vikram.

Good morning, Juan.

So I'd like to just a general question on obviously like the puts and takes, you're raising your guidance to what the higher end of what six to seven was now around seven. And obviously you had a very strong first half, but then at the same time, you're looking for a little more softness in nutrition. So maybe help us understand how you feel about just the macro picture in general demand. What are the, geopolitical assumptions that you have behind your outlook and how you feel about the second half and then also beyond maybe into 2024 as it relates to general demand in an environment where we're in right now. Thank you.

Sure, Ben. Yeah, of course, first of all, we're very proud of the results we accomplished in the quarter and in the first half. And certainly we are more confident about the environment ahead of us for ADM. I would say, let me highlight some of the reasons for that. Certainly, crash margins have started to pick up as we predicted before. They continue to get better. Board crash has been firmer, and mill basis has been stronger, and bin basis have dropped in the US as we have anticipated. I think there is this shift in which the world needs more protein, then we need more meal, and we're going to cover for Argentina's shortcomings this year. So that is happening as we predicted, and certainly it's going to be very good for Q3 and Q4. I think we're seeing these huge crops in Brazil. We see the Brazilian port congestion driving lower interior basis. and allowing us to procure cheaper grains, giving margins to those companies that have invested in the infrastructure to be able to capitalize on that, which we did, both in Santos and in Barca Arena in Brazil. So that's playing very well for us. The last time we talked, ethanol inventories were around 25 to 26 million barrels. Now we are at the end of June at about 22. There is, we see a strong spot demand for ethanol and corn tough to buy. So that has made margins strengthen and they are holding. So we are positive about ethanol margins continued in that regard. We continue to see this trend in biofuels and we have a strong book on biodiesel for the quarter. So we feel good about that. we are seeing lower recession chances and the U.S. consumer very resilient, and that's bringing resiliency in our core products for food demand. And we see that in carb solutions, whether it's sweeteners and starches, or whether it's in milling. And you highlighted, of course, and Vikram went deep into that, the issues in nutrition, I would say. We feel good about how our value proposition continues to resonate in flavors. Flavors is more beverage kind of business, if you will. The innovation happens a little bit faster there. So we see our pipeline continues to grow. That bodes very well for what we know the potential revenue is in 2024. So again, we continue to align the company to these big three trends, food security, that with all the geopolitics and the weather makes ADM assets more valuable and gives us more margin in destination marketing services, for example. We see health and well-being, and that continues to show in all the flavors innovation that we're seeing with our customers. And we see the sustainability trend driving all these opportunities in decarbonization. I would say we shouldn't forget when we mention these that either in automation or decarbonization, we are at the early innings of multi-year progress for the industry and for ADM. So I think that we feel very good about 2023, and we feel even better about the future.

Perfect. Thank you very much.

Thank you. Our next question for today comes from Ben Bienvenu from Stevens. Ben, your line is now open. Please go ahead.

Hey, good morning, everybody. Thanks for taking my questions. I want to follow up just on the, good morning, on the nutrition business and maybe to the extent that you can talk a little bit about the cadence as we move through the back half of the year. I appreciate the updated comments on overall results being flat year over year. But, you know, there's, with animal nutrition expected to be down year over year, there's a pretty substantial ramp in the human side of things. Maybe if you could talk a little bit about the visibility that you have into that, and then to the extent you can parse between 3Q and 4Q as you see it today, that'd be helpful.

Yeah, Ben. So I think let's just take a few minutes to talk about why our guide has gone from 10% growth to flat. Animal nutrition cyclical weakness is persisting for longer than we anticipated. Consumers continue to trade down from higher value, more feed-intensive to lower value, less feed-intensive proteins. reformulation to reduce feed costs is also impacting volumes. Plant-based proteins, particularly in the alternative meats, continues to be softer than anticipated. The destocking actually is still continuing in that category. And the broader market growth is also moderated, which we had signaled before. Third, the demand fulfillment challenge in pet solutions are taking longer than anticipated to resolve. The delay was driven primarily by slower than anticipated integration of the recent small business acquisition that we made in North America. And if you remember, we had COVID, and that delayed also the integration. So we were working through that. But what are we doing? And that's important as you think about the back half as well as the future. Flavors. Strong pipeline and wind rates. We talked about the largest ever pipeline we've had. Flavors actually grew profits in the first half 9%, 20% in Q2. So that's a very good sign of the recovery we are seeing in parts of the human nutrition business. The other thing that's important to note, flavors actually contributed almost 50% of the overall operating profits for nutrition in the first half. So that's an important signal if you think about the future growth of nutrition. Yes, that was primarily driven in the beverage category, but we see green shoots of opportunity in the food category as well. In the SI side, we are leveraging our CD and D capabilities to accelerate penetration into some of the faster growing categories. I mentioned alternative spaces. Alternative meat has been soft, but alternative dairy and some of the other categories are actually growing. And we are launching our Decatur Protein Innovation Center in Q3. All that, given our CD&D capabilities, allows us to pivot to categories that are growing, and that sometimes takes time. So we anticipate that recovery possibly to come more in the 2024 timeframe, less in the back half of this year. In animal nutrition, we are taking actions to improve margins, cost and product and footprint rationalization to improve margins. and also to drive profitable growth as the markets recover. So we feel good about the recovery as the market recovers. And in parallel, what we are doing is looking at the specialty part of our animal nutrition portfolio to leverage our human nutrition, CD&D, and go-to-market capabilities to be able to drive increased penetration there. On the pet side, demand creation is going to take a little longer, possibly into the back half of this year and into 2024. But overall, we clearly see signs of recovery, and our forward outlook for nutrition is still strong and robust in terms of growth. This year, given some of the challenges we faced, we expect it to be similar to last year. Juan, I don't know if you want to add some long-term perspective.

Listen, Ben, as Vikram said, we continue to be very positive. We look at this. Remember when we started the nutrition business, which we're still trying to build into the best nutrition company in the world. we ask our team that we're going to measure them by two factors. One was growing faster than market. And in markets where the customers are still moving and innovation is coming, like in flavors, we're seeing that we're growing faster than market. And you can see it by the double-digit growth that we have so far. And then the other thing that we said was a bit of margin on sales growing, and we grew a bit of margin on sales in flavors. So I think that, you know, in the others, I think Vikram has, this industry is going through, you know, a difficult stocking year. And there has been some self-inflicted things like, you know, the integration of these small facility in pets. So I think we're working through some of our growing pains as we build the portfolio. But I think, you know, the important thing is, Our innovation system, our value proposition to bring new recipes to customers faster than anybody else continues to outperform the industry, and that we're seeing in the results. When customers have projects like in beverage and all that, we excel. When customers are flat or destocking, it takes a little longer. We still expect the trajectory to be similar in that regard.

Okay, very good. My second question is on starches and sweeteners. You noted similar volumes and margins in the second quarter. You did have a plant that was down unexpectedly. Could you talk about the impact of that that's discreet to the second quarter? And then you point to solid margins for sweetener starches and flour in the back half of this year. Would you expect, would you characterize that more specifically as similar margins and volumes again, or would you expect an improvement in the back half of the year? Thank you.

Ben, let's talk about the germ crush facility outage. In April, we had an incident at one of our grain elevators at the West Point within ADM's processing complex in Decatur. This negatively impacted the carbohydrate solutions Q2 results by a significant amount. Germ was actually sold into feed markets as our wet mills were slow to reduce the overall exposure to germ, lowering also ethanol production volumes at a time when ethanol margins were strong. We anticipate this to come back in Q4. So yes, Q2 was impacted. I won't get into the specifics, but the fact that it was significant enough for us to call it out means it was a meaningful number. But it is going to come back in Q4. So therefore, based on that, you can expect some shift from Q2 to Q4 as a consequence of that. But for the full year, we still remain very the outlook for the full year still remains very strong. The sweeters and starches and actually also the global milling volumes have been very resilient. We've seen some softening in the specialty side of the portfolio, but that's been more than offset by a mix in margins. So I'd say overall, the outlook is solid. And yes, we did have a material impact, a significant impact due to the con germ in Q2.

Okay. Thanks and congratulations. Thank you.

Thank you. Our next question comes from Tom Palmer of JP Morgan. Tom, your line is now open. Please go ahead.

Good morning and thanks for the question. Perhaps we could just talk through the moving pieces as we migrate to the North America harvest. We've seen crush margins in the U.S. strengthen, especially in the past month or so. It looks like we've seen maybe just a little bit of weakening in other regions of the world. I think often when you see a weaker than expected supply coming out of a country, other regions of the world often benefit. And at least up to this point, and I know we're ahead of the harvest, we haven't seen that necessarily in margins. I mean, how do you guys think about, as we think about the balance of the year, kind of regional expectations for crush progressions?

Yeah, thank you, Tom. As I said before, I think that when you see the world needs more protein, and certainly we can see that given the Argentine gap, which is, you know, they produce probably 20, 25 million tons less soybeans than maybe the world was expecting them to produce, that's reallocating a crash. It's relocating crash to two places. It's relocating crash to Brazil, and it's relocating crash to U.S. So of course, the time of that is different. And so we see that in the margins that we see for the U.S. coming into Q3 and then Q4. Demand continues to be strong for meal. the world needs so much protein that it's not going to just be soybean meal, but it's going to be other types of protein feed, whether it's feed wheat and all that. So when you take that combined with the increased demand from fuels, but also oils for food consumption, if we expect soybean oil demand to go up like 8%, it's like about 6% coming from food. and maybe 2% coming from fuel. But my point is, crash margins are supported from everywhere. Of course, as the world gets to try to cover for these soybeans, the margins will be where you are closer to the physical product, to have access to the physical soybeans. And that's where ADM footprint and ADM combined with origination and global trade where we excel. So I think the team had a great first half, and they are expecting a great second half. And we don't see anything that can derail these for quite some time. So I hope that provides some perspective.

Thank you. Our next question comes from Manav Gupta of UBS. Your line is now open. Please go ahead.

Hi. My quick question here is we are in the second phase where a number of new plants on the RD side will start up in the second half of this year, including one of your partners, which is starting up a bigger plant on the West Coast. So I'm just trying to understand from the demand perspective of soybean oil, do you expect a much stronger demand environment than what we saw in the first half of this year?

Yeah, I think that we have all these plans that are coming that have been announced. And of course, we're looking all the time at the probability of those plans coming. Sometimes when you're building an industry, not everything comes at the right time. But as you said before, there are two or three large plans coming now in the second half, and that will continue to increase the demand. Of course, our plan for our partner comes with our crash capacity as well, that we're building these 1.5 million tons per year. When we look at these, we believe that at the end of the day, that demand will come through. At the end of the day, we will have enough crash for soybean oil to participate, being maybe 60 percent of the overall pool. of feedstock needed. And we think that that industry will continue to grow, but we continue to need to attract other feedstocks for it to fulfill its potential. So the industry is going to get tight. You're going to need capacity, technology, and capabilities, if you will, in order to deliver that. But that's the way you make progress, building a new industry and going through an energy transition. But that's very favorable for ADM, and I think that We are very pleased to bring in Spiritwood on time for the harvest, on budget, so we are very pleased the way the team has managed that implementation.

Thank you. Our next question comes from Adam Samuelson of Goldman Sachs. Adam, your line is now open. Please go ahead.

Yes, thank you. Good morning, everyone. Good morning, Adam. Hi. So I guess my first question, maybe coming back to nutrition, as I think about the revised outlook for the year, a profit now flat, how should we think about the pathway in 2024 and 2025 and the achievability of the prior 2025 target, I believe of 1.2 billion of OP in that segment, and maybe the split between human and animal within that, clearly it seems animal has been more pressured than human nutrition so just help me think about kind of as we think about the 23 targets kind of where you are on 50 to what was implied in your plans to get to the 2025 goals yeah so when we put the 2025 goals um and let me let me uh go back on on the comments i made before

When we look at our plans, we look at how do we grow faster than market and how do we implement projects and target applications to continue to grow a bit of margin on sales. The two businesses, animal nutrition and human nutrition, have different profiles and different goals in that regard. So when you see the final number, it's a combination of all those plans roll out. In the human nutrition, margins are much higher. and it continues to make it better and more stickier to customers as we develop better solutions. In animal nutrition was a margin up story since they were coming from lower margins. So when you think about our numbers are a combination of applying our growing faster than market and our beta margin on sales to a market number. Of course, this industry, as you can see by ourselves and our competitors, is having tough times, whether It is because customers are either not innovating fast enough or just talking at this point in time and making sure they have their supply chains in order. So to the extent that those projections are going to be reduced, our percentages applied to those numbers will be smaller numbers. So we haven't gone through that because, to be honest, we're looking at how do we address our current challenges. So we're not that worried about 2025 right now. We want to make sure we make all the adjustments that we need to make. And maybe as we talk about the adjustment, let me talk a little bit about animal nutrition. Animal nutrition, as we become more into the business, if you will, we know there is a commodity part and there is a specialty part. The specialty part matches very well with the playbook that we have in the human side. And that part is growing, and we will continue to accelerate. And Vikram said before, we are repurposing resources to add more of that. There is a commodity part of that, that at the beginning, when we put the two businesses together, we thought it was going to be a good way to open doors, if you will, for the innovation. But they have different dynamics. And so we are looking at you know, those different dynamics and how do we need to readjust either the capacities or some of the people associated with that and the intensity of resources in that part as the specialty part is not coming as fast as we thought. So we need to deal with the volatility of the commodity part while the specialty part is a little bit slower. So as those things balance, we are adding productivity to the commodity part of animal, and we are adding more resources to the specialty part in animals. And I think that we believe that that will take us to, again, a growth rate into 2024 for those businesses, but we're going through that. We will cover all that also, Adam, in investor day, and we will have developed more plans. Rest assured, we're very active in our interventions and we're testing different options in order for us to manage this better. This is also sometimes difficult to characterize on something specific and apply globally because we have operations in Southeast Asia, we have operations in Brazil, we have operations in Mexico, in Europe, in the US. And all those things have to be put together. And not all the dynamics in all those markets go perfectly aligned and synchronized. So that's why I think we need a little bit more granularity in December to be able to articulate that, which is a little bit more difficult to portray in a call without any numbers or slides.

Thank you. Our next question comes from Andrew Strolczyk from BMO. Andrew, your line is now open. Please go ahead.

Okay. Good morning. Thanks for taking the question. I wanted to ask about your view on the ag services' strength, durability. You know, it seems like we've got tighter global grain supplies than we maybe thought we were going to, refined oils premiums that are at record, crush margins obviously in the U.S. that are very strong. I know maybe Argentina comes back next year. You know, it doesn't feel like these are things that even though you guide for just 23 things that would end just because the calendar flips. And so, you know, how long do you think the strength in ag services can continue for? What, you know, I guess maybe are the risks? Because it seems like the setup should extend. So curious for your perspective there. Thanks.

Yeah. Thank you, Andrew. We have had two great years of crops in Brazil. And we're probably going to have a strong crop in the US. Volumes are good for us. So we like when there are volumes. But of course, the world has become, as you said, more complicated place where is geopolitics and we can see, unfortunately, what is transpiring in the Black Sea, or the weather that has become more violent and more volatile. So we go from a very dry La Nina that impacted a lot of locations around the world. And then we may go into a more extreme El Nino and you can see the temperature, record temperature that we are dealing with right now. So I would say all that volatility and all that uncertainty increases the value of our investments. When we invest more ports in Brazil, we see the leverage that that has today. Of course, we're going to probably export a little bit less from the U.S. because we're going to export more from Brazil. And that probably is not going to upset each other perfectly. So maybe our services earnings will be down a little bit based on that. But on the other hand, the big availability of crops in the U.S. will help our processing businesses. You know, if you look at the strength in oil cities because Soybean bases are lower as soybean meal bases have strengthened. So that's where we get the margin expansion. The world also is going into decarbonization, and that's affecting also the grain industry. The grain industry, and we're leading that with our regenerations program in RegenAg, but more and more people want crops grown a certain way. And the claims for deforestation limits are also increasing. So I would say you see a future in which maybe less land will be brought into production as we're climbing in the number of people in the world into 10 billion people. But it's not just the number of people. If you think about the protein consumption, the US In the U.S., we consume about 270 pounds per year per capita of proteins. China is about 170. The world on average is 100. So if the world were to get to the average of China, we need 70 pounds per person per year. If we were to get to the level of the U.S., it needs 170. That's a huge amount of grain that needs to be produced in not an expanding significant amount of land. So there is a lot that we will have to go through. So you will continue to have, given the weather and the geopolitics, you continue to have pockets of tightness where our footprint in the world, our, you know, All the plants that we've been blessed with and the ports and the logistic assets and our destination marketing people and our origination marketing people, they will be more valuable into the future, no doubt, as we try to secure food for the global population.

Thank you. Our next question comes from Salvatore Tiano from Bank of America. Your line is now open. Please go ahead.

Yes, thank you very much. On the crash margins, can you provide a little bit more color on why, setting aside, of course, Argentina, why in Brazil and Europe the margins have come down recently, and also now with the crash margin curve having gone up, at least in the U.S. substantially, where do you stand in your forward hedging book for the balance of the year, and what's kind of your approach going forward?

Okay, yes, Salvador. As you said, crash margins have weakened maybe in recent weeks to maybe $20 to $30 in Europe, especially as we transition through old to new crop in the U.S., and global oil bases maybe have weakened a little bit with firmer U.S. oil. We continue to bring biodiesel from there. So that continues to add value to the European businesses. But maybe the protein industry is a little bit weaker in Europe. In Brazil, I think Brazil, if I have to say something, maybe Brazil is trying to figure out how to accommodate all the production of soybeans and corn they have. So there are a lot of logistics challenges in Brazil. And I think that has pressured the beans basis countryside. Soybean oil, I would say, is pressured in Brazil because of lack of domestic demand. Brazil is one of those places where you have export markets, but you also have a domestic market. And I would say right now domestic market maybe for soybean oil is a little bit weak and without the huge benefit that we have with the biofuels policies here in the US and Brazil may be a little bit weaker. But I will say realistically, those are the two places that will pick up the slack that Argentina or the gap that Argentina left. So those are where the beans are. So we expect high crushing rates for both Brazil and the US.

Thank you. Our final question for today comes from Steve Haynes of Morgan Stanley. Steve, your line is now open. Please go ahead.

Hi, and thanks for taking my question. Just maybe two quick ones on nutrition. First, are you able to maybe put a dollar amount to the cost savings or the various kind of actions you're taking on the animal side of things in regards to kind of what's baked into the 2023 guide? And then secondly, maybe just a quick

uh a little bit more detail on what some of the inventory losses were on the pet solution side of things thank you yeah so on the animal nutrition side yes uh we've taken a lot of the actions over the course of a latter part of last year as well as ongoing this year i'm not going to call out specific numbers but i tell you the the vast majority of those results should be realized in the back half of the year. So it's going to be obviously analyzed as you think about it, but so the full benefit would likely come in 2024. So you should see an uplift as a consequence of those actions coming in a full year basis in 2024, but you'll see a partial benefit clearly in 2023 as well. On the inventory losses related to PET that we called out, it was again, some of the acquired inventory as part of the integration office facility that we have referenced where we've had some integration challenges with the small business that we acquired in 2021. So it is related to some of that acquired inventory and some contamination that we saw. So it was material enough to pet solutions. That's the reason we called it out. Clearly not material from an overall ADM perspective.

Thank you. At this time, we currently have no further questions, so I'll hand back to Megan Britt. Any further remarks?

Thank you for joining us today. Please feel free to follow up with me if you have any additional questions. Have a good day, and thanks for your time and interest in ADM.

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