The ADM Second Quarter 2023 Earnings Conference Call has begun with the introduction of Megan Britt, Vice President of Investor Relations. Britt has reminded listeners that the call is being recorded and that forward-looking statements may be made. She then introduced Chairman and Chief Executive Officer, Juan Luciano, who will discuss the second quarter results, accomplishments, and outlook for the second half, and Chief Financial Officer, Vikram Luthar, who will review segment level performance and provide an update on cash generation and capital allocation. The call will conclude with questions from the audience.

ADM reported second quarter adjusted earnings per share of $1.89 with an adjusted segment operating profit of $1.6 billion, and a trailing fourth quarter average adjusted ROIC of 13.8%. The company has managed to maintain its earnings power and strong ROIC performance despite a challenging macroeconomic and demand environment. This was achieved through active positioning, strong margin management, leveraging its geographically diverse end-to-end supply chain network, and strategic accomplishments across the enterprise, such as record origination volumes out of Brazilian facilities, expanded regenerative agriculture partnerships, increased demand for liquid sweeteners, double-digit growth in the Flavors business, and new wins in North America.

ADM expects to have a strong second half of 2023, driven by continued strength in Brazilian origination, robust margins from biodiesel, strong demand for ethanol, increasing demand for vegetable oil, the start-up of a processing facility in North Dakota, and continued solid margins and volume environment for sweeteners, starches, and flours. Despite some factors that have hindered growth, ADM believes positive momentum from Flavors is a predictor of a healthy rebound, and they have the unique ability to execute with agility in a dynamic environment.

The Ag Services & Oilseeds team had a strong performance in the first half of 2023, surpassing the first half of the prior year. In the second quarter, results were slightly below the prior year period, but still strong. South American origination results were higher year-over-year due to record volumes and higher margins on strong export demand, and this was made possible by strategic investments to expand port capacity. Additionally, Ag Services results were in line with the strong second quarter of 2022. The team is confident in their strong cash generation and growth potential, and they are raising their earnings expectations for the full year 2023.

North America origination results were slightly lower year-over-year, due to lower export volumes from South America suppliers. Crushing subsegment results were much lower than the record result from the second quarter last year, due to softer demand for both meal and oil and a tight U.S. soybean carryout. Refined products and other results were significantly higher than the prior year period, achieving a record second quarter. Equity earnings from Wilmar were lower. For the third quarter, strong demand for grain exports to South America is expected, with tight Argentine crop and improving demand outlook for meal and oil supporting strong volumes and margins for soy and canola crush.

Carbohydrate Solutions delivered strong results in Q2 despite unplanned downtime at one of their corn germ plants. North America Starches and Sweeteners saw similar volumes and margins to the prior year, while the wheat milling business posted higher margins due to steady customer demand. BioSolutions saw 22% revenue growth year-over-year. Vantage Corn Processors saw lower results due to lower ethanol margins. The company is making progress towards decarbonizing their footprint, including a definitive agreement with Tallgrass and decarbonizing their complex with carbon capture and sequestration wells. They expect steady demand and margins for their starches, sweeteners, and wheat flour products in the third quarter.

ADM's Q2 results saw record results in their Flavors business, driven by improved mix and pricing in EMEA and North America, while Specialty Ingredients saw lower year-over-year results. Animal Nutrition was the largest challenge, with lower amino acid margins and softer global feed demand driving significantly lower results. ADM has made adjustments to align the business to this environment, such as simplifying their brands and go-to-market strategy, consolidating facilities, optimizing their footprint, rightsizing the workforce, and refocusing their efforts to increase offerings in the higher-margin specialty feed and ingredients areas. Ethanol margins are expected to remain solid.

ADM reported improved performance in their Nutrition, Investor Services, and Captive Insurance businesses, as well as higher net interest income. Corporate costs were similar to the prior year, while the effective tax rate was 18%. Operating cash flows before working capital totaled $2.5 billion, with $600 million allocated to capital expenditures and $1.5 billion returned to shareholders.

ADM has a strong balance sheet and credit ratings, allowing them to pursue their strategic growth initiatives and return capital to shareholders. They are planning to spend $1.3 billion in capital expenditures in 2023 and are continuing their share repurchase program. They have raised their full year earnings outlook to around $7 per share. ADM is also ramping up their digitization and automation efforts, with eight current implementations and ten more starting in Q3, which are expected to generate millions in run rate benefits. They are also using technology to optimize trade and commercial processes and digitize freight and logistics contracting in LatAm.

ADM is making progress in sustainability and decarbonization through their STRIVE 35 program, regenerative Ag program, and Tallgrass agreement. They are also investing in innovation, such as the Decatur protein solution center, to create alternative protein sources and address sustainability, food security, and well-being. These efforts are helping to transform the food and agriculture industry and leading to long-range growth plans.

ADM is more confident about the environment ahead due to an increase in crush margins, a shift in the world's need for more protein, and the huge crops in Brazil. Juan Luciano and Vikram Luthar are proud of the results from the first half and are looking forward to the Q3 and Q4.

ADM is seeing success in Brazil due to port congestion, allowing them to procure cheaper grains and capitalize on the infrastructure they have invested in. They are also seeing strong spot demand for ethanol and corn, leading to improved margins. Additionally, the US consumer is proving to be resilient, providing resiliency for core food products. ADM is continuing to capitalize on the three main trends of food security, health and well-being, and sustainability.

ADM's Nutrition business is expected to be flat year-over-year, with Animal Nutrition down and Human Nutrition up. This is due to a variety of factors, such as consumers trading down from higher-value proteins, reformulation to reduce feed costs, softer plant-based proteins, and destocking. Additionally, demand fulfillment challenges in pet solutions are taking longer to resolve than expected.

The delay in the Human Nutrition business was caused by slower integration of a business acquisition and the impact of COVID-19. Despite this, the Flavors division saw 9% profit growth in the first half and contributed 50% of the overall operating profit. In the SI side, CD&D capabilities are being leveraged to penetrate faster-growing categories. The Animal Nutrition division is taking actions to improve margins and drive profitable growth as markets recover, while also looking to leverage Human Nutrition CD&D capabilities to increase penetration in the specialty part of the Animal Nutrition portfolio.

Nutrition is still expecting strong growth despite the challenges faced this year, with the Nutrition business measuring success by growing faster than the market and increasing EBITDA margin on sales. However, in areas where customers are destocking, such as Starches and Sweeteners, the company is experiencing slower growth and an unexpected plant closure.

Vikram Luthar discussed the impact of an incident at one of ADM's grain elevators on the Carbohydrate Solutions Q2 results, which was significant enough to be called out. The incident caused germ to be sold into feed markets, lowering ethanol production volumes and margins. However, the outlook for the full year remains strong due to the resilience of sweeteners, starches, and milling volumes, which have been more than offset by mix and margins.

Tom Palmer and Juan Luciano discuss the strengthening of crush margins in the U.S. and the potential for other regions of the world to benefit from the weakened supply of soybeans coming out of Argentina. Luciano notes that the increased demand for meal, wheat, and oils for food and fuel consumption will support crush margins. He also points to the advantages of ADM's global footprint in terms of origination and global trade.

Juan Luciano of ADM believes that the demand for soybean oil will increase in the second half of the year due to the addition of new plants, including one from ADM's partner. ADM's plant will have 1.5 million tons of crush capacity per year, and the industry will need to attract other feedstocks in order to meet the potential demand. The industry will be tight, and ADM will need capacity, technology, and capabilities in order to deliver.

Juan Luciano explains that when the company set the 2025 goals of $1.2 billion of OP in their Nutrition segment, they took into account their plans to grow faster than the market and increase their EBITDA margin on sales. Human Nutrition has higher margins and is working to make them more "stickier" to customers, while Animal Nutrition is working on increasing their margins. The final number is a combination of these plans and the market.

The company is currently dealing with tough times due to customers not innovating or destocking, which will reduce their projected percentages. To address these challenges, they are repurposing resources to focus on the specialty part of Animal Nutrition which matches their playbook in the human side, while readjusting capacities and people associated with the commodity part. This will help them reach a growth rate into 2024.

Juan Luciano explains that Ag Services have had two strong years due to good crops in Brazil and the U.S. Volumes have been good for them and they are expecting a strong crop in the U.S. He notes that due to different dynamics in different markets, it is difficult to characterize the situation and apply it globally.

The world is becoming more complicated due to geopolitical issues, extreme weather, and decarbonization. These factors have increased the value of investments and created new opportunities for exports. They have also led to lower soybean basis and margin expansion, as well as increased demands for crops grown in certain ways and limits on deforestation. As the world population grows, there will be an increased need for protein consumption, with the average per capita consumption in the US being 270 pounds per year.

Juan Luciano explains that crush margins have recently weakened in Europe and Brazil due to global oil basis weakening, protein industry weakening in Europe, and logistics challenges in Brazil. He also mentions that there is a lack of domestic demand for soybean oil in Brazil.

Vikram Luthar discussed the cost savings from actions taken on the animal side of things in regards to what's baked into the 2023 guide and the inventory losses on the Pet Solutions. He said the majority of the results of these actions should be seen in the back half of the year and the full benefit will likely come in 2024, with a partial benefit in 2023. He also mentioned that the inventory losses related to Pet were due to integration challenges with a small business acquired in 2021.

ADM called out an issue related to some of their acquired inventory and some contamination, which was material enough to Pet Solutions. However, it was not material from an overall ADM perspective. Megan Britt thanked everyone for joining the call and offered to answer any further questions.

This summary was generated with AI and may contain some inaccuracies.