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spk06: Good day and welcome to the Bungie Limited second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Ruthann Leisner. Please go ahead.
spk01: Thank you, Rocco, and thank you for joining us this morning for our second quarter earnings call. Before we get started, I want to let you know that we have slides to accompany our discussion. These can be found in the investor section of our website at bungie.com under events and presentations. Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are posted on our website as well. I'd like to direct you to slide two and remind you that today's presentation includes forward-looking statements that reflect Bungie's current view with respect to future events, financial performance, and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Bungie has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and we encourage you to review these factors. On the call this morning are Greg Heckman, Bungie's Chief Executive Officer, and John Neffel, Chief Financial Officer. I'll now turn the call over to Greg.
spk02: Thank you, Ruthann. Good morning, everyone. I want to start by thanking the team for their dedication and focus throughout the quarter. Our performance proves that we can execute on big strategic moves, like entering into our business combination agreement with Viterra, while continuing to keep our eye on the ball operationally. We clearly had a lot going on over the past several quarters, and this team stayed sharp in our day-to-day business, delivering outstanding results and continuing to serve our customers at both ends of the value chain. At the same time, we capitalized on this unique opportunity to enhance the Bungie franchise for the future. John and I, along with the entire leadership team, are extremely proud of this work. We continue to make progress on our combination with Viterra and filed our preliminary proxy statement in connection with the proposed transaction last week. We're excited to bring our teams and assets together to create a premier agribusiness solutions company. built to address some of the most pressing needs of the 21st century across food, feed, and fuel. Turning to the second quarter, it was a dynamic environment and our team showed agility. They did a great job of managing against the downside and being smart with the opportunities that were available. In particular, we were able to use our footprint and value chain connectivity to optimize margins as market conditions changed later in the quarter. While volatility can provide opportunities, it's difficult to predict the timing and where within the value chain those opportunities for upside will appear. However, our ability to execute in rapidly changing environments gives us confidence that we can create value over the long term. We also saw benefits from our investments in maintenance and productivity with improved reliability and reduced the amount of unplanned downtime across our platform. Looking ahead to the remainder of the year, and based on the forward curves today and on the market environment, which from a macro and geopolitical, which is one that from a macro environment and is as geopolitically complex as we've ever seen, we're increasing our full year adjusted EPS outlook to at least $11.75 per share. I'll hand the call over to John now to walk through our financial results and outlook in more detail, and we'll then close with some additional thoughts.
spk03: John? Thanks, Greg, and good morning, everyone. Let's turn to the earnings highlights on slide five. Our reported second quarter earnings per share was $4.09 compared to $1.34 in the second quarter of 2022. Our reported results included a positive market-to-market timing difference of $0.59 per share and a negative impact of $0.22 per share related to one-time items. Adjusted EPS was $3.72 in the quarter versus $2.97 in the prior year. Adjusted core segment earnings before interest and taxes, or EBIT, was $893 million in the quarter versus $709 million last year. Agribusiness adjusted results of $674 million were up compared to last year. In processing, higher results in the quarter reflected better year-over-year performance across all value chains, driven in part by strong Brazil soybean origination, which contributed to higher crush results in Brazil and our destination crush operations in Europe and Asia. In the U.S., results were also higher as we entered the quarter with a significant portion of our capacity locked in at higher margins. In merchandising, higher results in global oils and grains were more than offset by lower results in our financial services and ocean freight operations, which had difficult comparisons to a particularly strong prior year. Refined specialty oils continued its trend of strong performance, though results were slightly lower than last year. Higher results in North America driven by food service and fuel demand were offset by slightly lower results across Europe, South America, and Asia. In milling, lower results in the quarter were primarily driven by our South American operations, which were negatively impacted by the small Argentine wheat crop. Segment results in the prior year benefited from effective risk management of our supply chains during a period of high market volatility. The increase in corporate expenses in the quarter primarily reflected planned investments in growth and productivity-related initiatives that will pay off in future periods. Lower other results related to our captive insurance program and Bungie Ventures. Results on our non-core sugar and bioenergy joint venture included a $39 million benefit from the reversal of evaluation allowance. In addition, improved results reflected higher sugar prices that more than offset lower ethanol prices. Adjusting for notable items, debt interest expense of $78 million in the quarter was down slightly compared to last year as higher average variable rates were offset by higher interest income. For the six months of the year, income tax expense was $381 million compared to $144 million in the prior year. The increase was primarily due to higher pre-tax income in 2023, as well as a change in geographic earnings mix. Let's turn to slide six, where you can see our adjusted EPS and EBIT trends over the past four years, along with the trailing 12 months. Our team continues to deliver excellent performance, especially when considering the rapidly changing market conditions we have faced, while also executing on a variety of internal initiatives to improve our capabilities. Slide 7 details our capital allocation of the approximately $1.4 billion of adjusted funds from operations that we have generated year to date. After allocating $181 million to sustaining CapEx, which includes maintenance, environmental health, and safety, we had approximately $1.2 billion of discretionary cash flow available. Of this amount, we paid $180 million in common dividends and invested $360 million in growth and productivity-related CapEx. leaving approximately $630 million of retained cash flow. We have not purchased any shares this year as a result of our discussions to combine with VITERA. However, we recently announced that our board has expanded our existing share repurchase program to $2 billion. We want to be in the market as soon as possible, and we expect that a meaningful portion of these repurchases will be executed prior to the close of the VITERA transaction, with the remainder to be completed within 18 months of that date. As shown on slide eight, at quarter end, readily marketable inventories, or RMI, exceeded our net debt by approximately $3.6 billion. This reflects our use of retained cash flow to fund working capital while reducing debt. Slide nine highlights our liquidity position. At quarter end, all $5.7 billion of our committed credit facilities was unused and unavailable providing us ample liquidity to manage our ongoing capital needs. In working with our key banking partners, we also recently secured $8 billion in the form of term loan commitments to fund our combination with VITERA. Please turn to slide 10. For the trailing 12 months, adjusted ROIC was 20.3 percent, well above our RMI adjusted weighted average cost of capital of 7.7 percent. ROIC was 15.1%, also well above our weighted average cost of capital, 7%. Moving to slide 11. For the trailing 12 months, we produced discretionary cash flow of approximately $2.1 billion in a cash flow yield of 19.2%. Please turn to slide 12 in our 2023 outlook. As Greg mentioned in his remarks, taking into account the first half of the year results, and the current margin environment and forward curves, we have increased our full-year 2023 adjusted EPS outlook to at least $11.75 per share. In agribusiness, full-year results are forecasted to be down from last year, though slightly better than our prior outlook, as higher results in processing are more than offset by low results in merchandising. However, depending on how market conditions evolve over the remainder of the year, there could be upside to our segment outlook. In refined and specialty oils, full-year results are expected to be up from our prior outlook and in line with last year's record performance. In milling, full-year results are expected to be lower than our prior outlook and significantly down from a strong prior year. In corporate and other, results are expected to be in line with last year. In non-core, full-year results in a sugar and bioenergy joint venture are expected to be in line with the last year. Additionally, the company expects the following for 2023. An adjusted annual effective tax rate in the range of 20% to 24%. Net interest expense in the range of $350 to $370 million, which is down from our prior outlook of $360 to $390 million. Capital expenditures in the range of $1 billion to $1.2 billion. which is up $200 million from our prior outlook, reflecting the purchase of a U.S. oil refinery during the second quarter, and depreciation amortization of approximately $415 million. With that, I'll turn things back over to Greg for some closing comments.
spk02: Thanks, John. Before turning to Q&A, I want to offer a few closing thoughts. Looking ahead, we remain focused on executing our top strategic priorities so we can better serve the needs of customers. both farmers and end consumers, regardless of the market environment. Over the last several years, we've seen more volatility in the market, and we're all managing through challenges, including food security, market access, and the increasing demand for sustainable food, feed, and fuel production. As the world's population continues to grow, it will take a collective effort in the industry to more efficiently address these challenges, and Bungie has an important role to play. Together with VITERRA, we will be able to utilize our combined platforms and capabilities to more broadly and rapidly expand our work to support sustainable and transparent value chains. This includes promoting sustainable practices such as low-carbon product streams, the acceleration of regenerative agriculture to reduce GHG emissions, and importantly, full end-to-end traceability across major crops. During the quarter, We announced the creation of a regenerative agricultural program in Brazil in partnership with Origio to support Brazilian farmers in the transition to low-carbon agriculture, offering technical support, tools, products, and services. The program has already enrolled large-scale farmers covering more than 250,000 hectares. We also launched a strategic alliance and commercial agreement with Nutrien Ag Solutions to support U.S. farmers in the implementation of sustainable farming practices that will help increase the development of lower carbon products. This alliance will further strengthen Bungie's connection with farmers in the U.S. and create value for participants across all our value chains. We continue to evaluate and execute on our pipeline of bolt-on M&A opportunities as we work through the process of combining with VITERA. And overall, We're well positioned to deliver on our purpose of connecting farmers to consumers to deliver essential and sustainable food, feed, and fuel to the world, while always looking for ways to improve. And with that, we'll turn to Q&A.
spk06: Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Ben Thurr with Barclays. Please go ahead.
spk10: Good morning, Greg. John, congrats on the very strong results, first of all.
spk02: Thanks, Ben. Thank you.
spk10: So it's like a kind of a two-sided question. Obviously, thanks for the clarity on the guidance increase and what you're implying into it. But in the commentary in the release, you talk about like the potential upside depending on market conditions. And I really like to understand and maybe ask you to flex a little bit on the upside. What are the factors that could drive that earnings higher and what's the potential here, also in light of just the general market conditions you've talked about, the geopolitical stress. We talked about Weber. There's El Nino coming in. So how does this all kind of combine and play a role to potentially help you boost earnings above what is that at least $11.75 target? Thank you.
spk02: Sure. Let me start here, and John can add in if I miss anything here. Look, I think we feel good about the at least $11.75, and we're also trying to evaluate the landscape on what's the size of the plus as we go forward. But if you look, the meal and oil demand drivers continue to be intact. You look globally in between pork and poultry, the numbers are stable. It looks like wheat is not going to be as competitive as it's a little tighter, so that should help meal as far as inclusion in the rations. And just generally, food and fuel demand for oil both remain solid. So when you think about the upside, right, merchandising is always the one that's tough to forecast, you know, not only the timing of it, but where within the value chain and within those opportunities are going to happen. But look, I think what we've seen the last four years and the challenges, and again, here in this last quarter, that this team does a heck of a job when the opportunity is there on bringing it home and executing. And so we'll continue to focus on that. You know, China, I think there's still the opportunity for improved demand there with the recovery. So that's one we're watching. And then we're now seeing the dislocation from the small crop in Argentina start to play out here in the second half. And we're having to call on capacity in the rest of the world. So with that dislocation, really, how will crush margins play out? So that'll be a key to watch with a little bit possible upside there. And then lastly, I think we saw it just starting the last time we all talked was the RD capacity starting to run better, seeing a little stronger demand for oil here in the U.S., and that's continued. So we'll be watching closely how they run in the second half. So I think those are some of the key flags. And, of course, weather is always out there. We've got to make this crop in North America. That's important. And then, of course, the humanitarian corridor now closed again, making it more difficult to get those supplies out of Ukraine and creating more volatility in dislocation. Of course, the market will do its job and try to bring what it can out over land, but that situation could change pretty rapidly. So that's another one we continue to watch.
spk03: Yeah, Ben, I'd also add that, you know, coming into Q3, we were fairly covered in terms of crush. So upside, if there's upside and crush, it's more likely to come in Q4 where we're a lot more open in terms of our capacity. And, you know, margins are pretty weak in Brazil right now. And so we'll keep an eye on that as well. You know, any improvement there obviously is going to be helpful.
spk10: Okay, and then just one quick follow-up. You talked about the renewable diesel capacity. I mean, obviously, we got the final decision from EPA. How do you feel about, like, the final decision, no major change to what came out back November, December, but just, like, the market itself and how that's going to play a role for the demand go forward for the feedstock you're providing?
spk03: Yeah, I think when you, Ben, this is John, when you look forward and look One of the things we've done is modeled kind of the look based on RVO thresholds. It's still, things are pretty tight going forward based on what's been announced in terms of crush capacity and what's going to be needed in terms of feedstock. What I would consider fairly modest capacity utilization numbers in the RD industry, things are still going to be very tight. So we feel pretty good about where it's headed. You know, we obviously do a lot of business in the energy space and feel good about the volume increase that we're seeing and, and the commitment to that. And, and so we're, we're still bullish.
spk10: Perfect. Thanks. I'll pass it on.
spk06: Thank you. And our next question today comes from Salvatore Tiano with Bank of America. Please go ahead. Yes. Thank you very much.
spk05: So personally, I just, good morning. I wanted to ask about the processing business performed extremely well. If you can tell us a little bit about your expectations, did our performance come more from higher crash margins, or was it the better trading environment in Brazil for oil seeds that helped you there?
spk02: Yeah, a little bit of both. If you look, when we came into the quarter, the team had done a pretty good job of getting us the capacity hedged out. during some of the crush margins. So when things got weaker there for a period of time during the quarter, we didn't have to participate. And then the team, I think, did a very good job on what capacity we did have open on being very patient. And what we saw in the numbers and as Argentina crush was slowing down, that we felt things had to recover. So they also did a great job with the capacity we did have open to being very patient and hedging that out late in the quarter as things recovered. We also saw the tail end of the soybean harvest there in South America, and our origination footprint down there, as you know, is very good. The team did a great job. So we not only got the benefit in the origination in our harvest, crushing in Brazil, but of course that feeds our destination crush in Europe and in Asia and China and Vietnam. So we got the benefit as well in crushing there. And then, of course, as we got into the corn harvest then in Brazil, right on the back of the big bean harvest, we had talked about things we thought were going to be pretty stressed from a logistics storage and handling, and our footprint is set up to handle that domestic demand as well as that export demand. And the team did a very good job managing that, not only the bean origination, but then on the exports on the corn side, and the corn value chain executed very well. So just real good execution across the opportunities.
spk05: Perfect. Thank you. And I also wanted to ask a little bit about the refining specialty oils business. As I said, fuel demand was good. Can you, especially in North America, can you let us know a little bit, how do your end markets look today versus a few years ago when we think about the food versus fuel demand?
spk02: Sure. Look, the RSNO and the specialty oils, specialty fats and oils team continues to do a great job serving our customers there. You know, over 80% of our oil still is going into the food market. channels, even though the fuel is growing and very important to us. And I think we're benefiting from what we saw in the back of the pandemic and the supply chain challenges that we were there for our customers. And so we've grown with those key customers and we continue to help innovate and supply them as we're seeing some of these value chains switch around with the growth in the fuel demand. I think you remember we have our new refinery that we bought from Fuji down in Louisiana. That's been a great addition here in North America, continuing to serve our food customers. And the team's done a great job of kind of getting that folded into our network and providing, you know, different seed and tropical oils to those customers as we bring all those food customers on and get them approved. So we've been excited about that. And just overall, the environment in North America is has remained strong. We've seen some channel switching, right? We've seen a little bit of switch from packaged foods into the Q, or from packaged foods from the brands, maybe into private label. And we've seen some switching on the food service side more into QSR, but that's not necessarily negative total overall volume for us in oil demand. But the consumer's doing a little bit of switching, but overall demand continues to be there.
spk05: Perfect. And if I may just ask a little bit also for more clarity, as we think about your oil volumes that do go into renewable diesel and generally renewable fuels, how would you compare the volumes that are sold as crude oil versus the volume that you sell as refined? And is there a shift in the past few quarters towards selling more refined oil towards fuel versus crude oil?
spk02: I think as the industries come up, right, there hasn't been as much pretreatment built in the beginning. So we haven't seen any big changes in the mix of refined versus crude. I think we've all talked about that going forward in the coming years, we expect maybe to see some of that switch move. from refined and move back to see the amount of crude grow. That doesn't mean refined will go down, but you may see the crude demand grow as pretreatment comes in, but the demand for oil overall increase. But I think that's, we're looking out 24 and beyond. Don't really see any big switch here in 23, I don't think, in our book.
spk09: Perfect. Thank you very much.
spk06: Thank you. And our next question today comes from Ben Bienvenu with Stevens. Please go ahead.
spk13: Hey, thanks. Good morning and congrats on the exceptional quarter. I want to ask a little bit about kind of another follow-up question on the processing business. Just because 2Q was so exceptional, when you look to the back half of the year, the curves are quite constructive. It looks as though, as you said, the supply-demand factors for meal and oil are positive. Can you tease out a little more, as you look to the back half, what in the second quarter was kind of unique to the second quarter that's maybe inherently difficult to predict recurring in the back half versus just uncertainty broadly for the segment?
spk02: Yeah, well, I think, you know, in the second quarter, of course, we had the last of the Brazilian harvest, right, and the origination there. And I think the focus really here in the second half comes to Argentina, where you had the crop that was, you know, 44 million tons in 22 and here in 23 is probably in the low 20s. And so we're going to really feel that crush missing in Argentina, that export of meal and oil. So that will be the key, how that plays out here for the balance of Q3 and Q4. And then continuing to make the crop in North America and seeing the bean crop come in for Q4 to support the crush margins there in the U.S. And the other is it looks like some of the global demand and primarily demand to China being filled by South America, that keeps the beans home in the U.S., which is probably constructive to crush there. So those would be some of the key things to watch as well.
spk13: Okay, fair enough. My second question is a little bit longer-term oriented. You guys filed your proxy statements. late last week, there were a number of interesting things in there. The long-term forecast that you presented, I'm curious if you could give us some context around kind of the confidence level in those forecasts, recognizing it's hard to forecast the business over a long time period, but presumably those were presented to the board as justification for the value of the VITERA deal. Can you talk a little bit about the assumptions that went into those forecasts is they look pretty constructive. And then second in the proxy, there were some incremental synergies that you called out as well, and kind of the extent that you can shed light on how you arrived at those synergies above and beyond the 250 million would be of interest as well.
spk03: Sure, Ben, I can take that. Yeah, when we, in terms of the long range forecast, Our forecasting is principally what we rolled out a year ago in our strategic financial model in terms of getting to the $12 a share by 2026, the $11 to $12, the 11 plus the upside, probably into 26 and 27. So very much the basis of our forecast was driven off of that same outlook. And we still feel like that's largely intact. And so, you know, we didn't have to do a lot of recreation to develop those forward numbers. We already had them. and have obviously tweaked those a little bit here and there, but largely right on track. With respect to VITERA, you know, they don't do, they didn't have a forward forecast, they don't do one, so we did put something together that we felt was a pretty good indication of baseline for them over the next several years, and obviously our goal would be to outperform that as we move forward. In terms of the synergies, you know, we had disclosed $250 million at the time we made the announcement. That was focused solely on cost. In the proxy, we also included about $80 million of what we would call kind of operating synergies, so things around logistics and procurement and things that weren't purely cost-related, but where we saw some opportunity from an operational standpoint. But none of that includes what we consider commercial synergies. The way we're going to operate going forward and the opportunity that the combined company is going to have from a commercial standpoint, transactional standpoint. So still a bigger number than what we used in our modeling and what we used in the announcement and what we used in our original accretion calculation, but still not including the upside that we see in the commercial side going forward.
spk13: That's great. Thanks so much, Greg, John. I appreciate you taking my questions. You bet. Thanks, Ben.
spk06: Thank you. And our next question comes from Manav Gupta with UBS.
spk00: Please go ahead. So, guys, my question relates to an announcement you made about a month ago where you are acquiring some businesses in Argentina with your partner Chevron. Help us understand the thought process behind this acquisition. The broader question is Chevron obviously wants to go much bigger in sustainable aviation fuel. They will need a lot of feedstock. Do you see your partnership with Chevron extending beyond where it is right now?
spk02: We love our partnership with Chevron. We're just at the beginning of that relationship, but We're very like-minded about each leveraging our strengths individually as well as collectively. And I think that's an example of an opportunity that we identified to invest in another novel seed that could create a low-CI feedstock for, as you say, not only renewable diesel, but maybe long-term sustainable aviation fuel. And so you'll see us continue to look for those opportunities, not just in North America, but globally, as shown by the Argentine investment. to do things that meet the needs of the marketplace, because we can serve both food and fuel. The market will work. There will continue to be innovation. And we're just really pleased to have a partner like Chevron to look at a number of these opportunities with.
spk03: Yeah, I would just say, too, I would add on top of that, that, you know, SAF absolutely is a long-term focus. And I think, you know, a lot of what we're doing today with Chevron on the renewable diesel side will will very much support a transition to SAF over time as they look to do that. We'll be right here, you know, providing the necessary feedstock, both soybean oil and more and more of low CI feedstocks as well.
spk00: We agree it looks like a great partnership. My quick follow-up is we have seen a very strong rebound in the soy crush spread in the U.S. The other regions are responding but at a slower pace. So help us understand a little bit better why has the U.S. crush spread rebounded so much faster than other places?
spk02: Well, I think some of it how the former marketing responded. We saw some weather concerns. You saw the markets rally on those weather concerns, and that created an opportunity for the producer to market some more of their crops. So that made the beans available here, even though we're in the old crop. And then, of course, the meal and oil demand has hung in there. As we talked about, the animal numbers are still there. Animal profitability has improved a little bit. And then on the oil side, the food demand, while we're seeing channels switching, the food demand has hung in there, and the energy demand is growing. So just a good demand environment.
spk00: Thank you for the detailed responses.
spk02: Thank you. Thank you.
spk06: Thank you. And our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
spk14: Yes, thank you. Good morning, everyone. Morning. Good morning, Adam. Morning. Maybe just following up on Manav's last question, and you alluded to this in the prepared remarks about Brazil crush margins and maybe still being not – the foreign currency being a little bit less robust. What do you think is holding back Brazil at this juncture from seeing the crush margin strength that you're seeing in North America? Argentina export competition won't be there. You know, demand seems to be healthy. So what's holding back Brazil in particular? Because that does seem to be an important source of upside or the plus in the second half guidance.
spk02: Yeah, Brazil's been pretty good until recently. So I think we're encouraged as, you know, we see less pressure from Argentina here in the second half now look we've got an election coming up and a devaluation is is possible but we really are starting to feel you know the shortage of beans there in Argentina and we're not going to feel it just in Brazil but but overall so I think we're you know I think we're encouraged uh for Q4 but the the global system it'll be more than just Brazil's got to step up you know we got lower energy costs in Europe uh and there'll be less pressure from bean and oil exports out of Argentina in Europe as well. So we think it's an encouraging setup.
spk03: Yeah, I think on top of that, Adam, you know, we had really good, strong farm origination in Q2. And since then, that has slowed down a bit. And we'll see, you know, how it transpires as we go through the balance of the year, whether liquidity will be there or not in Q4. And, you know, to Greg's point earlier, soybean oil is a little heavy and in Brazil right now, you know, but demand to be 12, we'll see how that how that plays out the balance of the year, but certainly an area where things line up, there could be some upside.
spk14: All right, that's, that's very helpful. And if I just ask a follow up on on the rejection side for Brazil on corn. And certainly, that was a nice contributor in the second quarter. Just can you be a little bit clearer on what is actually assumed from a corn origination perspective in the second half of the year? It would seem that with a large safini crop and still some of the logistics pressures that that should be a pretty healthy contributor, both absolute and year-over-year. in second half that didn't quite have last year.
spk02: Yeah, it was definitely helped contribute there in Q2. And then, of course, you know, we saw that some of the demand shift to Brazil from the U.S. as that corn crop was harvested and the markets adjusted. That, of course, is in our forecast for the The book that we've got on and what we expect from execution is in our forecast for the second half. Although, as always with merchandising, we're forecasting what we can see. As things shift around, there could be some continued upside that the team will take advantage of as we get other dislocations and as things play out in the Ukraine as well and as we get the final development of what's the size of that U.S. crop going to be.
spk14: Okay, that's all very helpful. I'll pass it on. Thanks. Thanks, Adam. Thanks.
spk06: Thank you. And our next question comes from Stephen Haynes with Morgan Stanley. Please go ahead.
spk12: Hey, thanks for taking my question. I wanted to ask a question on your JV on the West Coast with plans to triple. Plane yield capacity in the coming years and, you know, given that it's on the West Coast probably eliminates some destinations, but you know, where are you kind of expecting that soy meal to end up? And, you know, more specifically, is it kind of targeting China or, you know, kind of any thoughts generally on where you see some excess soy meal production from the U.S. finding its way overseas?
spk02: Yeah, it's definitely the Asian demand in general. And, you know, as a reminder, one of the, you know, great things about our team, we've got a lot of capillarity and granularity in our meal distribution and merchandising. Today, we market more meal than we produce. We actually have to buy market in from the market to serve our customers. So we're excited about that investment out at Longview to add meal handling capacity. So we'll want to be able to handle more. It'll also make us more efficient, which will help serve those end customers and also provide a market as some of the additional crush comes on here in the U.S. And, you know, we're already, we talked about the Destrehan where we'll be expanding with our Chevron JV. Our crush there will have Swing to Soft, but if you remember right, we're right there in New Orleans. So, again, able to export that meal. And so this is, you know, kind of a parallel investment if you think about it. in the P&W to get that meal that naturally flows off the west into those Asian demand markets.
spk03: Okay. Thank you. Thank you. Thanks, Stephen.
spk06: Thanks. And our next question today comes from Thomas Palmer, JP Morgan. Please go ahead.
spk11: Good morning, and thanks for the question. Your tone's been quite positive, I think, today with a few call outs about what could drive upside of guidance. So I don't think there are any major concerns, maybe in the second half. But at the same time, you just beat by over $1 on the EPS side, low end of your guidance was boosted by 75 cents. So I thought I'd at least ask, relative to your expectations, are there emerging risks that we should be monitoring as we look towards the second half of the year?
spk02: I think where we're always managing, you know, the volatility and the dislocation, the things that, you know, went into our thought were, you know, one, there was probably some of that earnings that fell in Q2. There might have been a little bit of timing from Q3. So that's maybe why 100% of that didn't transfer into the year. And then look, you can have, you know, two extreme of volatility, right? This humanitarian corridor, getting that supply out of Ukraine efficiently, you know, not only the volume but what it costs and the effect that has on the other origins in the world market to feed demand. You know, you've still got the weather situation playing out in North America. What will that supply be on the corn and the bean side? And then, of course, just the overall, how's the China demand continue to develop And then you've got Argentina with the election cycle with a possible devaluation. So if you look at it from a macroeconomic as well as a geopolitical standpoint, I don't think we've probably ever seen quite as complex environment. And then you can go ahead and throw interest rates and the effect on FX and how that can affect exports as well. It's a pretty interesting dynamic environment. we're real glad that we've got this great global footprint to operate from and the great team that's running it. And I think that's what, you know, we've shown that whatever the challenge, the team's been doing a great job of delivering. But there's definitely a few uncertainties here in the second half.
spk03: Yeah, and I think, Tom, given, you know, how we came into the quarter, coming into Q3 with quite a bit of our crush locked in Q3, probably won't get, the upside maybe if the market tightens and crush margins move up. Of course, Q4 is fairly open, but that's been where there's been the least amount of liquidity. And Brazil is still not super strong there. But, again, areas where we take the curves and then if things improve, it's going to provide us some upside.
spk11: Okay. Thanks for that. And maybe just maybe follow up on the flow through of earnings of these moving pieces as we think about just the cadence of the second half of the year. If we think about the lower end of your guidance, is there a favorability? I mean, it seems like if things go better, right, it would be weighted to that fourth quarter. But if it's just kind of more of that baseline guidance, how balanced would it be between the two quarters?
spk03: Yeah, we're weighted a little more toward fourth quarter today. So just the way we've put the forecast in today, it's already weighted a bit to Q4, just given what we know about Q3 and what we see. It's probably – you know, close to 40, 60, you know, maybe low 40s, high 50s between Q3 and Q4 is kind of how we think about it.
spk11: Okay. Thanks for that. You bet.
spk06: Thank you. And our next question today comes from Andrew Strelzyk with BMO.
spk04: Please go ahead. Hey, good morning. Thanks for taking the question. And you just touched on some of this, but I guess, you know, your first half, Earnings is typically over the last decade or so like 30% or 40% of what you would generate on an annual basis. Last year was, you know, around 50%, and the guidance this year at the 1175 would be more like 60%. So, you know, at the risk of being redundant, I guess. I mean, does it make sense that this year would be so much more first half weighted, absent, you know, kind of a particularly poor year? U.S. crop understanding. You just called out maybe a little bit of timing shift between 2Q and 3Q, but more broadly than that.
spk03: Yeah, Andrew, I can start and Greg can hop in here. Look, I think, yeah, last year we were a little closer to 50-50. We were weighted still a little bit more toward the first half of the year. But, you know, every year is different. I think the dynamics are, you know, we feel really good about the first half that we had, and it's really probably more an indication of, uncertainty in the second half than it is any sort of an unusual trend of earnings between first half, second half. I think just looking at, as Greg alluded to, the geopolitical uncertainty, you know, crops playing out, weaker forward curves in some parts of the world that, you know, we're hoping firm up. That's just kind of how things look today. But I think You know, I wouldn't point to or I don't know that we can point to any shift sort of in the global market that causes us to earn more in the first half other than, to Greg's point, we pulled a little bit probably forward just given the strong origination results in Brazil and how that impacted our crush in Europe and China. But we'll see. You know, I think that, you know, we hope to have some upside and we'll keep watching things.
spk04: Okay, that's helpful. Thank you. And then my other question, you referenced still looking at both on M&A and obviously you've been spending a lot of growth capital that you've expected to come on really in 2025. So I guess number one, with maybe a better operating environment, how is the M&A market right now? How do those opportunities look? And number two, given the strong environment, does it change the timeline for returns on those capital projects? Does it pull them forward? Are you still thinking that 2025 is really kind of the timeline to which you would start to realize that? Thanks.
spk03: Yeah, I would say I'll start and then Greg can hop in here. But I would say our capital, our CapEx pipeline, our growth capital is still pretty much on track in terms of timing. It is going to be You know, 2025, 2026, as we start to realize those projects, a lot of them are big multi-year builds, but we still feel very good about those. We're constantly challenging our assumptions and our view of those projects and still feel very good about what we have in the pipeline. In terms of the M&A side, you know, obviously our number one priority is VITERA, getting ready for VITERA on the integration planning side and thinking about how the organizations are going to run together You know, we're doing some pre-planning on our side, getting ready for that. That's our number one priority. But at the same time, we're still finding a good pipeline of smaller bolt-on M&A things. And, you know, as we said before, that hasn't changed our view of the CapEx and growth pipeline on the smaller bolt-on M&A. Viterra is going to be additive to that. So we continue to be active there. There's a lot of things going on. You know, maybe not all of them actionable. But certainly, we continue to be pretty busy on that front as well.
spk02: Yeah, I think John pretty much covered it. Just the one thing you asked from an environment, you know, we're definitely – the complexity that we've, you know, spoken to, you know, is definitely for everyone, as well as you've got the highest interest rate environment that anyone has seen for a long time. And so that is creating some opportunities on the bolt-on M&A and things to look at. But as John said, Viterra is absolutely – our number one priority, and we won't let anything get in the way of that.
spk04: Great. Thank you very much.
spk02: Thanks, Andrew.
spk06: Thank you. And our next question today comes from Sam Mangolin with Wolf Research. Please go ahead.
spk07: Hi. Hi, everybody. Morning. Morning. I've got a follow-up on U.S. crush, and maybe I'll phrase it in a little bit of a different way. But you referred a number of times on the call to some crop uncertainty in the U.S., and the effect of this soybean supply uncertainty seems to be accruing to oil because, as you say, that's where the demand is. And so, I don't know, that seems like it might be a paradigm shift or something to flag, whereas, you know, normally you would expect – a low soybean crop to compress the crush because you don't have enough input. Do you see it that way, or is this something that you've seen before with light crops or crop uncertainty, or is there maybe nothing to see here?
spk02: Yeah, I think the demand, you know, historically, right, oil's kind of been the laggard and meal in North America, and meal has been the driver for a long time. And with this switch in additional demand from energy now, biofuels in general, but renewable diesel specifically, we're now seeing oil carry a higher share. And, you know, we kind of think that's there to stay. But, you know, the market's going to do its work, you know, as that crop comes on. And The global market, you know, where are we seeing it? It'll probably be more fed that demand from South American beans, where more of the U.S. beans will probably stay at home, and that'll help balance the crush and the demand for the meal and the oil.
spk07: Okay. That's helpful. And then just to follow up, you know, you manage the volatility in crush really well. You talked about how you had a high degree of your exposure locked in, and the back end of the year is a little more open. But the curve is, like you say, it's pretty strong. Would you say, and maybe you don't want to give this away for competitive reasons, but is this kind of $1.40 to $1.60 level in the forward crush sort of a smash hedge and you're only limited by liquidity? Or would you play for upside?
spk02: Yeah, look, I'm really proud of the team being very thoughtful, right, to focus on the earnings at risk and the assets. And that's not only the crushing, but the milling as well as our export assets. And when those margins are there, we're constantly evaluating not only the public information, but our proprietary information and looking at the S&Ds. And you're right, there is more liquidity close in than there is farther out. But when those margins are there, we'll hedge them out. And I feel like the team is very focused on managing our risk, and we continue to stay focused. It depends on our earnings power, and it also depends on the environment that we're operating in. And we always push everything through those two lenses. So, you know, real proud of the team staying, you know, absolutely focused on managing the risk in these assets.
spk03: Sam, I just add that, you know, we talk about the coverage in general terms, but obviously it's by geography. So, or by value chain is how we see the opportunity. So it can vary between value chains. So the U.S. versus South America versus Europe or destination crushing China. Coverage can vary depending on how we see the market going forward or how we see the forward curve. But all in all, to Greg's point, I think we've been – the team's done a great job of taking the opportunities when they're there. Liquidity sometimes can be a constraint. But generally speaking, I think the discipline that we – that we practice, you know, in the organization has, has shown to be very successful.
spk14: Understood. Thank you. Thank you.
spk06: Thank you. And our next question comes from Robert Moscow with TD Cowan. Please go ahead.
spk09: Hi there. Hi. Maybe just a couple of follow-ups. You mentioned the, the demand outlook in China is still, you know, kind of up in the air. I want to know, do you have any more color on what you see in demand in China currently, restaurant versus just packaged food demand or livestock? And then a quick follow-up.
spk02: Yeah, the animal numbers have continued to hold up, you know, despite there being some margin compression there. The customers have been very spot, and I think one of our team talked about the margins being like an accordion. They're kind of up and down, but the way we're set up over there and support that business, the team is very agile, and so we've been able to lock those margins when they are there. From a demand standpoint, we think there continues to be some additional growth. I think Our kind of anecdotal, what our team on the ground sees is the domestic demand is kind of back. What we're really lacking are the places that we serve that are more tourist or business travelers. And the traffic there still we're seeing as down, although the domestic traffic is up. So that's where the upside would have to come from.
spk09: Got it. And I don't know if I've heard you talk about this recently, but in a higher interest rate environment, I would imagine your balance sheet is a real competitive advantage. And I was wondering if you could talk a little bit about how you've used it in your procurement practices in Brazil, how it's helped you maybe even in second quarter. And also, how does it impact the growers? Are their balance sheets impacted by rising debt costs and does it make them more willing sellers?
spk02: Yeah, I'll mainly talk to the macro, and maybe John will drill in a little bit. But I think you're exactly right. It is a competitive advantage for us. We are, you know, a non-bank lender. The relationship that we have with our origination customers, as well as our consuming customers, right, their facilities don't move, our facilities don't move. These are long-term relationships, and we want to help them be successful. The other thing is if you look the last few years with some of the commodity finance things that have happened in the market, the banks have backed off on some of the commodity financing. And then with higher interest rates and tighter credit, from a competitive standpoint, there aren't as many alternatives for people. So we do play that role as one of the services, whether it's with some of our minority investments with our resellers, if it's with our long-term origination farmer partners. or even our end users. So, you know, our balance sheet and John and team do a great job of protecting that and ensuring that we've got the liquidity to operate because, you know, in this business, it's very different than an industrial business. The working capital is, it's like electricity. It is a bit the blood and the veins of this business, and it's an important thing. And that's why we focus on AROIC and And the team is constantly focused on making sure they do get a return on that working capital.
spk03: Yeah, I would just add, Rob, that as we've strengthened our credit profile over the last couple of years, the industry, it's helped us from an advantage standpoint because the industry and the market structure is ultimately going to be on average interest rates. And to the extent that we can borrow money cheaper than others, it should and does give us somewhat of an advantage in terms of being able to fund you know, the RMI that Greg talked about, and as well provide the financing to the producers with the appropriate spread on it. And, you know, ultimately we feel like, you know, through the VITERA acquisition, obviously that's also viewed as very credit positive for us. So, again, should extend that advantage that we have in the market to borrow money cheaper and maintain that liquidity that we need.
spk09: And the farmers themselves, has this influenced their willingness to sell at all, or is it not like that?
spk03: Well, they're ultimately economic animals, and the cost to carry certainly, you know, is important to them. You know, and the market structure will have that cost to carry in it, but certainly I think what it's done for us is tighten our relationship with the farmers. I don't know, Greg, you want to, anything else there?
spk02: Yeah, no, you know, we're always, not only originating for our in-country demand, but for those markets that, those destination markets right out of Brazil where we're serving, you know, Europe and our Asian markets in China and Vietnam. So, you know, our ability to provide that liquidity and even, you know, like 24, we haven't seen much marketing of the farmers yet, but when they're there, we have the capacity to be there when they want to go to market and when they want to hedge their risk. So, you know, we want to stay focused on, you know, helping farmers you know, our customers, not only in consumers, but our customer, the farmer, be successful, manage their risk in this environment, and help them, you know, accomplish their profitability goals and their growth.
spk09: That's great. Thank you.
spk02: Thank you. Thank you.
spk06: Thank you. And our next question today comes from Brian Wright at Roth MKM. Please go ahead.
spk08: Thanks. Good morning. Can you provide an update on the VITERRA regulatory approval process and maybe some color on your term milestones and pathways for this process?
spk02: So, yeah, we're early on. I think, you know, we talked about we just filed the proxy and we are doing the regulatory filing. So, early on in the process, but we continue to engage and You know, the asset bases are very highly complementary, so we look forward to engaging on the facts. Thank you. Thank you.
spk06: Thank you. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Greg Heckman for any closing remarks.
spk02: Thank you, everyone, for your interest in Bungie. We're really excited about where we're at in the stage of the company and the path of growth that we're on, and we look forward to speaking with you next time. Have a great week.
spk06: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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