Good morning, and welcome to the Archer Daniels Midland Company Second Quarter 2017 Earnings Conference Call. All lines have placed on a listen only mode to prevent any background noise. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Mark Schweitzer, Vice President, Investor Relations for Archer Daniels Midland Company. Mr.
Schweitzer, you may begin.
Thank you, Jack. Good morning, and welcome to ADM's 2nd quarter earnings dotcom. For those following the presentation, please turn to Slide 2, the company's safe harbor statement, which says that some of our comments 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 are based on many assumptions and factors that are subject to risks and uncertainties.
ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation. And you should carefully review the assumptions and factors in the SEC reports. To the extent permitted under applicable law, ADM assumes no obligation to update any forward looking statements as a result of new information or future events. On today's webcast, Our Chairman and Chief Executive Officer, Juan Luciano, will provide an overview of the quarter. Our Chief Financial Officer, Ray Young, will review financial highlights and corporate results.
Then Juan will review the drivers of our performance in the quarter, provide an update and discuss our forward
Thank you, Mark. Good morning, everyone. Thank you all for joining us today. This morning, we reported 2nd quarter adjusted earnings per in profit was $658,000,000. I'm extremely proud of the results our team achieved this quarter.
Under some tough conditions, we were able to deliver strong growth in earnings and returns. In fact, it was our 4th consecutive quarter of year over year, higher returns on invested capital. We did this by continuing to deliver around our strategic plan and capitalizing on improving conditions in some markets. Ag Services was up for the quarter, with improved merchandising results globally. Our corn business delivered another strong quarter earnings growth Olysis results decreased on less favorable global soybean crush margins and South American Origination WFSI earnings were in line with the prior year quarter.
In addition, I'm pleased to announce that we had our safest month on record in June with an improved safety record year to date over last year. Our actions in the first half we operate. We are diversifying our capabilities and geographic reach through acquisitions and organic expansion We recently closed on our acquisition of French sweetener company, Chantor, expanded our destination market in print with the acquisition of industry centers in Israel and announced the construction of a new flower mill in Illinois. We're also aggressively managing costs and capital and taking additional portfolio actions. And we are ahead of pace for meeting our 2017 target of $225,000,000 in run rate savings.
We implemented over $130,000,000 in operational run rate cost savings during the first half of the year, while continue to invest in R&D Innovation Centers And Process Improvements. And in line with our balanced CAPP allocation framework, we returned $875,000,000 to shareholders in dividends and share repurchases. Because of all these actions, we expect to deliver a strong year over year earnings growth and returns
and we are poised to be an even stronger company in 2018. I'll provide more detail on our results later in the call. Now I'll turn the call over to Ray. Thanks, Juan, and good morning, everyone. Slide 4 provides some financial highlights for the quarter.
Adjusted EPS for the quarter was $0.57, up from the $0.41 in the prior year quarter. A excluding specified items, adjusted segment operating profit was $658,000,000, up $85,000,000 from the year ago quarter, The effective tax rate for the second quarter was 28% compared to the 29% in the 2nd quarter of the prior year. Higher than the same period last year and 80 basis points above our 2017 annual WACC of 6.0%. That's generating positive EBA of $195,000,000 on an annualized basis. Our ROIC has continued to improve for the 4th consecutive quarter.
On Chart 19, the appendix, you can see the reconciliation of our reported quarterly earnings 48¢ per share to the adjusted earnings of $0.57 per share. For this quarter, we had a $0.04 per share net charge related to an adjustment of We also had a $0.04 per share charge for impairments, restructurings and settlements, and a $0.01 charge related to LIFO. Slide 5 provides an operating profit summary in the components of our corporate line. Before one discusses the offering results, I'd like to highlight some of the corporate items affecting our quarterly results. NAND interest expenses up approximately $18,000,000 to $81,000,000, primarily due to higher short term interest rates, our overall mix of short and long term debt following the issuance of our new fixed rate debt in August of last year.
A favorable interest rate expense adjustment last year and some additional interest expense related to foreign income taxes expense of approximately $320,000,000 for the full year 2017, consistent with what we indicated at the beginning of the year. Unallocated corporate costs of $134,000,000 were up versus the prior year and modestly below our $140,000,000 per quarter guidance for fiscal year 2017. The increase is primarily due to the planned increased investments in innovation IT and business transformation. Minority interest and other charges increased to $35,000,000, primarily due to updated portfolio investment valuations in CIP. Turning to our cash flow statements for the 1st 6 months on Slide 6.
Generated a $1,000,000,000 capital of a bit over $300,000,000. Total capital spending was $452,000,000. Our current expectation for fiscal year 2017 is capital spending of approximately $1,000,000,000. Acquisitions of $180,000,000 were primarily related to Crosswind Industries, a pet treat manufacturer in Chantor, a French producer of wheat based sweeteners in starches. We spent about $511,000,000 to repurchase shares.
And including dividends, we returned $875,000,000 of capital to shareholders by mid year. Our average share count for the quarter is 574,000,000 diluted shares outstanding, down 20,000,000 time 1 year ago. At the end of the quarter, we had 571,000,000 shares outstanding on a fully diluted basis. Slide 7 shows the highlights of our corporate balance sheet as of June 30, 2017 16. Our balance sheet remains solid.
Our working capital of $7,000,000,000 was down 1,200,000,000 from the year ago period. Total debt was $7,000,000,000 resulting in a net debt balance of $6,300,000,000. Our leverage position remains comfortable with the net debt to total capital ratio of about 27 percent. Our shareholders' equity of $17,400,000,000 was down slightly from the $17,700,000,000 last year due primarily to returns of capital June. If you had available cash, we had access to $5,800,000,000 of short term liquidity.
Next one will take us through a review of our business performance. Juan? Thanks, Ray. Please turn to Slide 8. In the second quarter, we earned
658,000,000 dollars of operating profit, excluding specified items, up from $573,000,000 in last year's 2nd quarter. 2nd quarter adjusted segment operating profit was up almost 15% versus the year ago quarter. We continued to see improving conditions in some markets throughout the year as well as benefits from the actions we have taken. And continue to take as we execute our strategic plan. Looking at the first half of the year, despite muted margin conditions persisting for some of our businesses, adjusted operating profit was up approximately 17%.
Now I'll review the performance of each segment. Starting on Slide 9, Ag Services was up over the prior year period and delivered its 4th consecutive quarter of year over year increases in operating profits. Merchandising and handling returns were higher versus the year ago quarter. North America grain results increased significantly over the prior year with strong carries in wheat corn and soybeans. We are seeing the benefits of our actions to improve the performance of the global trade The group generated solid profitable results and was up over the year ago quarter.
Good execution led to improved margins than more than offset some of lower some lower volumes. In addition, favorable timing effects benefited results. Defination marketing is on pace with our Egyptian joint venture MedSofts delivered in the strong quarter. Transportation decreased over the previous year, primarily due to river conditions and lower freight rates. Milin and other delivered solid results with modest growth over the prior year, driven by solid margins and favorable merchandising in North America Please turn to Slide 10.
Corn processing had another strong quarter with the results up from the year ago period. Our global sweeteners and starches business performed very well. Higher volumes and improved margins in North America, sweeteners and starches contributed to a strong performance. In addition, our European operations showed positive growth as a result of increased sales volumes. Results from our sweetener complex in Tianjin, China improved modestly over the year ago quarter with good growth in Bio Products results increased over a weak prior year quarter when we slowed production.
Ethanol margins improved significantly due to lower production costs and increased industry exports. Animal Nutrition was up over the second quarter of and 16, driven by improvements made in the specialty feed ingredients business. Slide 11, please. In Oilseeds processing, the business benefited from diversity of its feedstocks, products and geographies. However, Overall, results were down compared to the second quarter of 2016.
Crushing and Origination results were lower. Global crush margins remained pressured due to alternative protein substitutes, slower first half growth in mill demand, and a competitive global marketplace. In South America, when the Brazilian real dropped in value for a brief time in May, we saw more aggressive farmer selling. But in general, throughout the quarter, the result remained firm, contributed to compressed South America Origination Margins. On the other hand, our subsidies performance improved over the previous year as we continue to utilize our flex crush capacity to capitalize on margin opportunities.
And refining package in Biodiesel and others, which is our value added Oilseeds business, continued its consistent pattern earnings this quarter with solid results in all regions. Refined and packaged oils in both North America and South America were higher over the year ago quarter largely due to unfavorable timing effects from the year ago quarter period. Our global Peanut business benefited from improved shelling margins and good results from our specialty products and oils business. In addition, Asia experienced another good quarter, growing significantly over the prior year period due to our ownership stake in Wilmar. On Slide 12, WFSI results were in line with the prior year period as we continued to build the business globally.
And to invest in innovation and exceptional solutions for our customers. While Flavors delivered another strong order with double digit profit growth and higher year over year results in every region around the globe at around the globe. Powered by 9% revenue we have seen improvements in some businesses. However, results were impacted by some production interruptions and startup costs for new facilities. We continue to build and expand our capabilities in the WFSI platform.
We're investing for the long term including by creating new customer innovation centers, adding talent, developing new product application and building new facilities such as Campo Grande and Tianjin. These actions are positioned in the business to be a leader in flavor and specialty ingredients, which is able to reach a broader range of customers as its portfolio expands. We are seeing how combining wildflavor's natural flavor systems and ABM's nutrition, texture, and functional solution is positioning us to respond to local consumer preferences and ensure complete food and beverage solutions. We are making ongoing enhancements to WFSI's operations and customer offerings. And with a significant project pipeline, We are confident that we will continue to see strong growth.
Slide 13, please. Before I update you on the progress of the strategic plan, I'd like to remind you of a significant number of actions we have taken on our business portfolio, to avoid ADM for the future. During the last three years, we have dramatically increased our capabilities further down the value chain. Starting with the Wild Flavors acquisition in 2014, to Harrell Nat Company, to eat them, caterina, harvest innovation, biopolis, and more. We have increased our capacity and geographic reach, In EMEA, we added AOR to expand our packaged oils capabilities.
We purchased and then expanded corn facilities out of our former East Arch joint venture and added further to our sweetener footprint with the acquisitions of Chantor and in Morocco. We expanded our logistics and destination marketing capabilities with MedSoft in Egypt industry centers in Israel and our ports on the Black Sea. We're building facilities in China We added Amazon flavors in Brazil. We acquired Crosswind Industries in the U. S.
And we have increased our ownership stake in Wilbur International, a very successful processing and consumer packaged food company focused in the emerging markets. And we have divested businesses that we believed were unlikely to meet our long term return objectives, including Cocoa, Chocolate, South American fertilizer, our Brazilian sugar operations and crop risk services. In the meantime, We've continued to invest in R&D And Innovation In Operational Excellence, In Our Business Transformation in all of those things that will help us set the competitive standard by industry. So turn to Slide 14, please. Where we will provide an update on some of our accomplishments this quarter.
As you can see, we're continuing to execute in our 3 primary areas of focus. In the area of optimizing the core, we completed while retaining our ability to offer customers a full array of ADMs grain market in services. In Santos, Brazil, we made a series of enhancements that will improve our operational efficiency at our export terminal. And today, we are announcing that we will be reconfiguring our Peoria Ethanol Complex to focus on the more profitable high grade industrial and beverage alcohol and also export fuel. By doing this, we will reduce ethanol capacity by more than 100,000,000 gallons, and we will also have a more simplified production process for the Peoria complex.
We have achieved more than $200,000,000 of monetizations in 2017, And we continue to be on track to achieving our $1,000,000,000 monetization target over 2 years that we announced in 2016. In addition, this year we are converging 2 very important activities. Operational excellence and business process transformation into a strategic initiative called Project Readiness, We have talked in the past about how we have been driving operational excellence into our manufacturing and supply chain activities to help reduce costs. In fact, year to date we have generated operational cost savings of over 100 $30,000,000 on of $225,000,000. We have also talked in the past about our business process transformation program called one ADM.
This year, we have rolled out the project to our North American Corporate Finance Activities and are currently introducing the program to several processing businesses in North America. And we are in the design and planning stages for Europe. The convergence of these two activities into project readiness will allow a more coordinated approach So we're establishing how ADM will drive improvements in our businesses and functions that will be even more efficient, more standardized and with a focus on customer excellence. As you saw in the previous prior slide, since 2014, we have been quite active with our business portfolio as we have acquired many companies, divested various businesses and made investments in various segments and geographies. Because of this, we decided to step by a look at our overall structure.
To as part of our approach of Readiness, we have taken another look at our structure organization levels, spans of control, degree of centralization of activities, organization of various staff activities and leadership. We also looked at the allocation of resources between businesses that are more mature and businesses that are growing. With this review, we identify areas to streamline, an areas where we will need to invest even more resources, including people resources, And we took steps to ensure we have the right resources in the right places. As part of this effort, will reduce certain positions within our global workforce and align the organization to enable us to continue focusing on innovation and growth. In the area We closed on our Chantor acquisition, which expands our sweeteners and starch footprint in Western Europe.
We have once again expanded our destination marketing capabilities by acquiring a controlling interest in industry centers. And Israeli company specializing in the import and distribution of agricultural products. And we announced that we will be building a new state of the art flower mill in Mendota, Illinois. As mentioned earlier, Our Campogrande protein facility in Brazil and our Tianjin China fiber operation will increasingly contribute to our growth in the second half of the year. And as part of the strategic growth, I have appointed Ian Pinner to the position of Chief Growth Officer.
He will focus on helping us drive additional growth into the value added spaces and work very closely with Vince Machchioke, on our ingredients teams. In addition, Ian will continue to oversee our ADM ventures arm which focuses on making investments in new food and feed and bioactive platforms. So this highlights several of the actions we took in the quarter, we'll continue to update you on our progress regularly. So before we take your questions, I would like to offer some additional perspectives on particularly in delivering 39 percent EPS growth this quarter. For us to be able to do this, even while conditions were less than ideal fixed to both the great work of our team and the payoffs of our strategic plan that we continue to execute.
We feel good to be down versus a strong prior year period, although an improvement from this quarter's results. South America's large crop will continue to pressure North American exports in the third quarter, absent any major dislocation event we continue to expect it will be a very competitive global environment in the third quarter. However, strong U. S. Corn and soybean production present merchandising opportunities in the second half of the year, particularly in fourth quarter.
We expect international merchandising to continue to deliver favorable results. So overall, we continue to expect performance in Ag Services for calendar year 2017. To be better than 2016. In corn, we expect 3rd quarter results to be up over 20 16. In sweeteners and starches, capacity in North America remains tight, I mean, solid demand.
We will see some benefits from the addition of Chantor and continue to see positive momentum in Asia. Ethanol margins are expected to improve in the 3rd quarter compared to the 2nd quarter due to seasonal demand. As I mentioned earlier, our production levels will change in Peoria and with high levels of industry inventory entered in the quarter. Will probably run our plans to maximize yield. For full year 20 18, we still believe results will be significantly higher than 2016, even with the weaker than expected ethanol margins in the first half of the year.
Looking at the third quarter for oilseeds, we expect results to be up over a week, year ago period. The third quarter results could be similar to this year's 2nd quarter. We expect soybean crush margins to be improved in the second half of the year, as mill demand growth rates are projected to increase. However, they will continue to be margin pressure from competing proteins and ports. In South America, we anticipate improving farmer selling, but there are still significant corn and soy crops to be commercialized.
And our second half numbers could benefit from the positive resolution of the U. S. Biodiesel's blenders tax credit for 2017. As well as the NBB anti dumping and countervailing trade case and the European WTO built on Argentina biodiesel import tariffs. Our full year outlook for oilseeds is for a much stronger performance compared to 2016, but not as strong as 2015.
For WFSI, 3rd quarter results are expected to be better than the year ago period. And WFSI is on track for a record calendar year of performance, while labor should continue space of double digit percentage operating profit growth. Specialty Ingredients is expected to recover from a slow 2017 start. The Campo Grand, the Brazil facility should start incrementally contributing to results as soon as the complex gets fully operational in the second half. So in conclusion, I just want to again acknowledge the ADM team for delivering strong improvements in earnings this quarter and the first half of twenty seventeen.
We are successfully navigating through some challenging conditions, while continuing to invest in projects innovations and processes for the future, we were still able to return capital back to the shareholders and keep a strong balance sheet. I'm expecting a strong year over year earnings growth and returns in 2017. And ADM is poised to be an even stronger company in 2018 with the collective actions that we are taking. And we remain confident that as we execute our strategic plan, we will be able to deliver on our long term ROIC objective of 10%. With that, operator, please open the for questions.
Session. Your first question comes from the line of Heather Jones with Vertical Group. Your line is open. Good morning.
Only question, but I did have a clarification. Did you say oil fees for Q3 you expect it to be similar to Q2?
Correct, Heather. Yes.
Okay. And then going to the Peoria announcement, could you flush that out further? So are you you're taking from what I heard, you're reconfiguring that to focus more on industrial and beverage grade alcohol as well as ethanol exports, but the net net will be you will to be taken 100,000,000 gallons of ethanol production out of the system permanently?
Yes, that's you understood it. Correct, Heather, we taking basically the ethanol that we're producing for domestic use about the 100,000,000 gallon of that out of commission immediately.
Okay. So you're saying 100,000,000 gallons for domestic use, but like when we're thinking about total capacity for ADM, what's the net reduction as opposed to shifting it to
It's 100,000,000 gallon.
Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Yes, thanks. Good morning, everyone. Short and longer term question on oilseeds. I know you talked about some improvement in the competition in the back half, but some improvement on better meal demand. But I mean, can you talk about the longer term opportunity here to get crush margins back up?
And kind of what it will really take to see higher ex China utilization, to maybe incent either get margins to a level that would incent capacity and really improve your own base performance?
Yes, thank you, Adam. Listen, looking forward, we've seen, obviously, seasonal positive North American dynamics in Q3 and Q4. We're going to have a good bean availability and we expect a strong domestic demand in the second half. We saw a little bit of a softer demand in the first half with probably excluding China about 1% up year to date. We are forecasting ending the year about 1% to 3% excluding China.
When we include China, we're thinking about, 3% year to date performance. And when we look at 2018, maybe more important that to your question, we're looking at about 5% meal demand growth, including China. So, so we see that continues to go strong. We have taken this year the the impact of the, of the DDGs shift from China importing that anymore. So we have sorted that and we also, for the most part, have cleared with all the inventory or low quality feed width that was competing for milling to that.
So we feel good about how we have transitioned during this quarter. It was a relatively tough quarter for crushing. And we are moving into 2018 with better dynamics for that business. I also would like to, emphasize maybe the important of the flexibility that we have in ADM, you know, we crash eight seats in ADM, and we have seen in times like these where maybe soybean crush margins are subdued, our ability to shift capacity to others where it's see margins improvement, but also our portfolio, and you probably noticed in our chart about the contribution of value added that is being brought by, both the oils, blended oils and other products. So I think we feel very good about the growth rates of mill going forward.
Certainly, protein demand consumption, look at the increasing soybean imports from China. That's probably the best indication of true protein consumption every year there. So feel good about the long term fundamentals and we feel good about how our business is operating and how diversify it is to take advantage of these opportunities. So So we're strong on oilseeds going forward.
I appreciate the color, Juan. And maybe just an Ag Services question. I know we still have a couple of months to evaluate the full size of the U. S. Crop, but it does look like the combined U.
S. Corn soy wheat production will be lower than the prior year with some large competition, especially for corn and soy. Exports from South America. Can you talk about from 4Q onwards as you're as things are shaping up the carry opportunities golf elevations and just had some of the how the mosaic is shaping up as you look at the new crop environment?
Sure, Alan. Yes, very good question. Listen, I said before, we are very proud of how the Ag Services business have been navigating through all these this has been the 4th consecutive quarter of improvement. And at times, we've been very critical about the things we needed to improve. And I think the team has delivered that.
And we count with a better cost position and very better operating performance to ourselves. As we look at the 2nd half, Listen, we do believe that the exports, will be a little higher than 15, but certainly lower than seen from the U. S, because we're going to get all these potential exports from South America during Q3. Even as we consider that, we think we see the improved performance of our global trade desk into the second half. We've seen good wheat and corn carries in the U.
S. As you describe it. We're going to we will see continued increase our destination marketing volume is growing 10% over year. And we're going to get the bigger contribution from MedSoft that is operating very profitably. And now from our majority position in industrials, industry centers in Israel.
We're going to see higher ports for us from Argentina in the second half that we didn't have that benefit in the first half. So we feel strongly about that. We see that our Ag Services business will benefit from our ability to segregate high quality wheat as we go into the second half. So again, we're thinking higher growth versus, I mean, bigger earnings than last year, probably more tilted towards Q4 than Q3 where the opportunities for North America will be bigger.
Your next question comes from the line of Sandy Clugman with Vertical Research. Your line is open.
Thank you. Good morning. Does your commentary regarding the reconfiguration of your ethanol assets in Peoria had any implications for the divestiture of the dry mill assets? And if not, can you provide an update on the process?
Yes, Andy, no, actually, it doesn't have any implications other than this plan has been removed from the, from the consideration because we've considered already fixed in the sense that, that reconfiguration allow us focus on the profitable products that we wanted to maintain and take that capacity out of the domestic ethanol market. In terms of the other process, we don't have any updates at the moment, to be honest. We have been analyzing that. Remember, we said we were looking at the potential impact of tax reform, and we were giving that a little bit of time to see if we could see any any movement from the administration on that. So at this point in time, the financials have been carved out.
We understand the financials of those business, and we continue to look opportunities to have a transaction there with no rush. I mean, the business is performing well, or improving the performance. So we have no rush, but no announcement at this point in time.
Good. Thank you. And then what drives your expectation that ethanol margins are going to improve? Just given that we're in the heart of the summer driving season and margins are down very significantly year the year?
Yes, I think we see an improvement that we started in Q3. I think that when you look at Q2, there was a big drop in oil at that point in time. And also domestic demand for gasoline and somehow driving was not that strong. Maybe it was a little bit of, not kind of summary weather, if you will. And then, and that, reduced a little bit the miles.
As we've seen, the industry reacted a little bit with taking output out at the end of the second quarter. We enter Q3 with a little bit better equation in terms of inventories and and margins pop up a little bit with lower corn prices and higher oil prices. So, so we feel better about the margin structure of the Q3.
Next question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Was hoping you could comment a little bit more on the competing feedstock environment that you talked about impacting your crush margins. I thought that at this point, we were supposed to see, I guess, less competition from feed wheat And I want to know if that's still the issue. And if so, when is that finally going to pass through? And also on crush margins, when you look at the futures market for crush margins, I guess it looks okay, but I guess I've heard that in local markets, it might be quite different. So to what extent is the futures market crush margins an accurate reflection of what's really going on for soy?
So, 2 part question. The first part, most of the fit we have basically that the market has basically consumed over the second quarter. So, I would say, going forward, we feel that that situation will improve. So it's still a competitive environment from a crushing perspective, but I would say, probably the worst was in the second quarter and will improve progressively as we go through the year. Regarding your discussion about board crush margins and cash crush margins and the convergence or the, however, percentage of our board crush margins at this point in time.
Sometimes when, when we got into times of either extreme tightness of extreme excesses of supplies. Sometimes we see this dislocation be in cash crash and board crash, and it could be more pronounced. Eventually, they all convert And I think that, yeah, we need to be careful that sometimes don't get, don't get the expectation that maybe the board crashed presents versus what we see in the market. And that's what you saw in our results that the results for Q2 were a little bit more subdued.
Okay. And just in general, if you wrapped it all up, would you look at your guidance today compared to 3 months ago. I mean, are you more optimistic about the earnings power for this year? Are you less optimistic? Is it about the same versus 3 months ago?
Yes, I would say, we maintain our position, as we said before. We, when we entered 2017, Rob, we thought it was a tough year that will present some improvement in certain markets, but we were very confident about our improvements on the things that we were executing And we continue to be that way. I would say the first half was not particularly kind in some of the markets, even probably ethanol margins were lower than we expected. And yet, we were able to post, you know, 1st half results of almost 40% higher than last year. So it was based on our own plan.
And so our expectation for the end of the year have not changed. We have stayed on plan basically in that regard.
Okay. Thank you.
Your next question comes from the line of Eric Larson with Buckingham Research. Your line is open.
Yes, good morning, everyone, and thanks for squeezing me in. I'm just going to tag on to a question that was asked a little bit earlier, Juan. And the environment improved, pretty nicely in July. We saw a nice we saw a nice rally in the weather rally in the Grandmark in the U. S.
And given a lot of that back up again, but we did see some improved fundamentals for the U. S. Ag business. I guess the question that I had, and we know that the competition from South America is going to be pretty brutal, particularly corn, over the next month or 2 or 3, probably your 3rd quarter. So how much of the crop by your judgment in South America, both beans and corn has yet to be commercialized?
And how does that compare maybe to where it was a year ago?
Talking about Brazil. So if you think about soy, the farmer probably have sold about 2 thirds of it compared to about, over 80% a year ago. New crop, at the moment, probably maybe 8% to 10% versus maybe 15% a year ago. Corn, probably about, a little bit than half of the crop of the old crop commercialized versus maybe 55 percent a year ago. So probably not much of the new crop has been done at this point in time.
I would say, we probably see Brazilian farmers of Brazil exporting more of the corn and holding a little bit more of the beans as they go forward. You don't have a big domestic market for corn. So I think that the dairy farmer, you try to position and take in the export opportunities. Well, you can hold a little bit more on soybeans because eventually you still have a crushing, a domestic crushing that you can place those volumes later on in the season. So that's where we see the pattern, probably South America more aggressive in corn exports.
And And maybe the U. S. Being able to compete in soybeans a little bit more during the second half.
Okay. Thanks. I'll pass on
Thank you, Eric.
Your next question comes from the line of Ann Duignan with JP Morgan. Your line is
Good morning. This is Tom Simulish on behalf of Land. Could you talk more on your interpretation of last week's court ruling on the EPA and the 2016 RVO. And what impact do you think this ruling can have on your biodiesel business this year?
Yes, well, there is a lot of speculation about these. So basically, obviously, the adjusted department has said that they will not go back and adjust 14% 15%, but they will adjust 16%, which has been lower to 14.5%. So It means that for 2016, the obligated parties will need to either blend more ethanol or buy more rings to the effect of maybe half a 500,000,000 gallons more than they thought. So you said you see the bump in ethanol and real pricing on that. So that, that's all we can say at this point in time, seems to be a small positive for that.
And it was an indication of the RFS as a rule of the country, if you would,
Okay. And the impact on biodiesel specifically?
Think it was positive for biodiesel. I mean, but there are so many things to be resolved over the next month on biodiesel and all the other aspects. So I think that that's a business that we have many, many scenarios in which positives could come to biodiesel industry in the second half. So we feel think about that.
Your next question comes from the line of Brett Wong with Piper Jaffray. Your line is open.
Hi, thanks for taking my question. I just wanted to get some more color around your expectations around ethanol S. Ethanol exports, for the year, obviously, they've been strong. And then just if you can talk about Brazilian fundamentals. And as we look at kind of the 2nd part of the season for mills down there, and the fact that sugar prices are lower from where they were at the beginning of the year and last year granted a little bit of strength here recently, but, what expectations are around kind of the conversion of crush down there into, ethanol versus sugar and how that could impact exports in the second half, as well as, to the tariff too, and obviously that's been delayed here for about 30 days, but any insight there would be great.
Yes, thank you, Brito. So, the exports from the U. S. Of ethanol continue to be, to move nicely and grow stronger every year. At this point in time, our team is estimated something between 1.1 3,000,000,000 gallons of exports, going forward.
We see if we think about 2018 and as you understand, there are many moving parts here and there the dynamics in Brazil, whether they have been trying to favor a little bit in the government, the usage of ethanol by having some differentiated piece of tokens, taxes. We think that both governments are trying to be prudent and very mature about their trade relationships and then both Chumpberries have been very, have been discussing things and making sure they don't geoparize the trade relationships between these two countries. So we think that, the situation in Brazil will, will normalize soon. When we think about, our expectations for, for ethanol demand going forward, we see, if we look at next year, we see potentially an extra 100,000,000 gallons from increased gasoline demand. Domestic gasoline demand, we see probably another 100,000,000 gallons out of additional E15 usage The number of patients offering higher levels of blending continues to increase.
If we had about, I don't know, 100 stores dispense in E15 at the end of last year. We're expecting that to grow probably 1100 this year and maybe in the range of 2000 by the end of 2018. So again, that's a very healthy growth of maybe $100,000,000 15 next year. We think about the potential to, Mexico, taking maybe 100,000,000 gallons, even if we don't include the cities. That's something that once we establish the 100,000,000,000 gallons trade flow, that will grow potentially into 200 or 300.
And we think that potentially we could send 100,000,000 to 200,000,000 gallons to Europe as the market opens back to ethanol. You still have the potential for China to come back as a buyer. So even if something will happen to Brazil, we'll still see significant, significant demand coming into the ethanol market, which we think that's going to be not that much capacity expansion. So we think there's going to be a tightening of margins going forward for next year. So we're actually we're actually positive about the dynamics of ethanol going forward.
Your next question comes from the line of David Driscoll, Citi. Your line is open.
Good morning, Louis. Wanted just to go back to you made some comments here, but this is, I think, a critical question about what's going on with board crush margins and how strong they have been. And it's not just a 1 quarter phenomenon. It's been happening for a while. Relative to cash crush margins and how much weaker they've been.
Can you really lay out the case here for why this is such a big divergence And what should we expect going forward? Is the board crush margin a valid indicator to look at at this point?
Yes, David. I would try. My best to explain this. It's a there isn't one simple answer for this question as, obviously, there are a number of factors that weigh in on this, such as currencies, logistics, feed alternatives, local regional, cash market dynamics. So As I was saying before, when I was answering for Erika, during times of extreme tightness or excessive supplies, we have seen sometimes this dislocation between cash crash and board crash and sometimes can be more pronounced like it's been now.
Certainly, one of the larger catalysts this year of lower cash margin had been the high level of global stocks to usage inventories that we've seen around the world But the way I tend to think about it is the Chicago gold price is one price that is made up of of thousands of cash markets in North America, South America, Europe, and everywhere in the world. And this cash market uses Chicago price that they are proxy, I would say, but adjust the basis to get to a local cash price that compensates for a local supply and demand dynamics. And that's where we see as operator So, so understand that the basis is that mechanism that manages regional and local cash markets, you can see why cash and bulk cash don't always have same price. This year have, have been no exception. Each region has its own unique set of market dynamics, I guess, and like South America with slower than normal farmer selling and, given the lower board movement and currency fluctuations.
And North America has experienced pressure from feed substitutes, the same with DDG trade to China that didn't happen. An extremely weak mill basis that, Europe has also pressures from the Argentina crop side. So looking forward, it seemed reasonable to believe that the South America soybean meal and oil take a larger role in supplying the world and the U. S. Driven, you know, board crash delivery system will have to adjust for additional factors like currency, ocean freight and more influential region market.
So, we think that with solid global demand and global stocks usage levels expected to move lower, probably over the next year, we think that regional crush capacity utilization levels will improve. Hopefully, these things will converge. So a long winded answer, hopefully, it added some clarity, David, to this complex issue.
I appreciate that. If I could just have a follow-up on, on one of the programs you talked about on the call about ADM-one, But I'd just like to hear your impressions as to just the origination margins everywhere to have contracted over the last few years. You've often discussed it but it really feels like it's more notable in recent quarters. What do you think has happened just fundamentally with improved farmer access to weather data or other pricing information. And then really what I'm getting at here is, how does all this investment that you're doing right now in the company kind of help ADM regain some of the competitive advantage, this kind of balance of power between the farmers and the grain originators?
Yes, David. So let me see. Address the different aspects of your very good question. First of all, that's not that competition between the farmer and ADM, we like to think that we are part of the same value chain and we have very good relationship with farmers around the world. For ABM to be successful, we need a successful farming community.
So I will never want to pass the impression that we are competing or fighting with the farmer. I think there is a reality, David, is that, as we talked before about the basis, the markets are efficient and when you see places in which products don't have a very good use or very low basis, normally some capacity is brought into that to take advantage of the opportunity. So that's why you see movement in our footprint sometimes and movement in the farmers as well or even capacity, whether so you crush corn or you crush soybeans. So we've seen that all the time, our role is to adjust our company to the new opportunities we've seen we're seeing ahead of us. And we see that sometimes those opportunities are for us to go forward into crashing or or million of the product.
And you saw that the reflection in our investment, sometimes those opportunities are geographical, like the removal of the sugar regime in Europe and the opportunity that presents for corn syrups. Sometimes that is given by our customers, how they shift And we've seen that in, for example, at WFSI, part in which our traditional CPG customers are having more difficulties to grow revenue, but we have seen a polarization, if you will, of the consumer in which consumers that are health conscious and maybe millennials or lead generation are much more looking at natural solutions that that's where our WFSI so strongly positioned. But we also see people having conventional, more conventional leaning more toward private label. So you see this polarization, if you will, of the consumers. And we see how WFSI is very strong providing solutions also into the private levels.
So we continue to see this, and then we adjust sometimes to take advantage of the opportunity, sometimes to neutralize the negatives like we've done in, in, destination marketing. Destination marketing sounds very simple, but it's a huge undertaking around the world that takes us to new geographies that take us closer to customers, but take us to 10% volume growth or higher margin products all the time. So I would say markets are efficient David. And when there is an opportunity somewhere or a high ROIC somewhere, capacity tends to come to reduce that. And that's why competitive advantage don't last that longer and you continue to adjust.
So, we are an active team in that sense. We have very talented people around the world searching for those opportunities. We do believe that we all the things that we have done and I highlighted here, we establish a more robust platform for earning growth. And we do believe that we're going to be able to beat previous levels of earnings growth in the future. And we have calculated that all these will take us to a 10% ROIC as we execute this plan.
That's why we've been so, consequential about showing you the improvements of that plant every plan every quarter because we think that that's the path to 10% and we're highly committed to that.
Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open.
Thank you, and good morning, everyone. Just a question on there's been some chatter out of China that with the just corn position, they're ramping up high fructose corn syrup production there. I assume that they wouldn't be affordable coming back into the U. S. Market and they're mainly going to look to play in the Asian sugar market.
But do you have any sense of size of their capacity? And then are you hearing or seeing anything about it in any of the markets that you play in?
Yes. Thank you, Vince. We have a, you know, we have a new plant there in China, in Tianjin or high fructose corn syrup that we started last year. Our plant is very well located to be both supplying the Chinese markets and the export markets. And you probably heard on my remarks that we achieved full utilization of our plan And this is because, as you describe, correctly, with regards to corn has become more competitive, so has allowed us to sell.
I would say some of that capacity that we're running at very low rates is coming back in China, mostly supplying the domestic market. There is still a huge opportunity to grow hyperructures considered domestically. So I would say, it barely pencils out of China. It does and pencil all the way to North America. So once you will see this, you will see this volume still inside, but supporting the carbonated soft drink growth there in China.
But you are correct, units have become more competitive there and they have come to the, to higher rates. I don't recall top of my head, to be honest, being the capacity that they have, but we will get that number to you. I don't want to guess here. Okay.
No worries. It doesn't sound like I said, And just as a quick follow-up, have you broken out your CapEx in terms of growth versus maintenance? Yes. So this year, we gonna be around $1,000,000,000 in CapEx,
for us, maintenance is something between 2 to $300,000,000 depending on the year and the project, the magnitude of the individual projects. So I would say, you take 2 thirds of that and it becomes growth and cost. It's not only growth. It's we split almost half in half between cost and growth the reminder of the capital.
Your next question comes from the line of Ken Zaslow with Bank of Montreal Your line is open.
Hey, good morning everyone.
Good morning, Ken.
So, Juan, you've repeatedly said that you focus on the on the actions that you can control and you don't focus as much or you can't focus on the environment all the time and you do work within that. So with that, my first question really is, if I look at WFSI, that's a business that you should be able to control Yep. And yet that hasn't developed the way you would have thought. And probably under a you know, underperformed relative to your initial expectations, And then the second part of the question is, when you're taking all these actions and quite honestly, I couldn't write quick enough to find out exactly what you're doing throughout. How does this change your operating profit outlook for 2018 2019?
Are we looking at a return of X. Are we looking at an earnings power increase? What are all these actions doing or are they just compensating for the structural challenges within the market?
Yes. Okay. Let me address that, Ken. Thank you for the question on W sorry, actually. I would like to I would like to talk a little bit about both the short term and the long term.
In WFSI, and as you say, is more what we can control. First of all, you have to realize that the movement in the consumer in the food and beverage this year and over the last 3 years has been spectacular. And it's taking all our attention and all our agility to remain on top of that. So I think we shouldn't underestimate them just because these are not related to commodity markets. These are stable markets on market and don't require a lot adjustment.
So, I'm very proud of the way our team helped position ADM to take, as I said, this polarization of the consumer, if you're willing, which you have these natural products being introduced at the same time that we get more traditional products taking into more appraisal labels. So, yeah, that has been a big shift and we've been with remain on top of that. And that's represented by the wildflavors growth rates. If you look at so far this year, we have grown revenue 9%. And that's a very healthy growth rate today compared to anybody in the food and beverage industry.
So I think that the business have done terrific in that regard. And And we continue to increase our margins in that business, pointing 20% year over year increases over the last 2 years. Think we are in that in that rate this year as well. So I would say white label has been very, very good at that. But At the same time that that is happening, we are investing a lot in this business to get the capabilities up to provide the solutions for this customer.
So We opened an innovation center in Sydney that costs money. We opened an innovation center in Cranberry that I think you visited this year, but we also expanded recently the culinary aspects of that. We build a plant in five or so plant in China. And we built this complex in Campo Grande that it took the whole year to bring into operation So all those things, our capabilities are earnings power that we're building that's going to hit the P and L next year. So, So we feel good about these, but we've been in the commodity business for the 115 years, and we've been in the, ingredients and flavor business for the last 3 years.
So of course, we need to improve the capabilities and get bigger in that. We are very happy with wild flavors. Some of the products in Specialty Ingredients have suffered. Some of them have been, self inflicted wounds on things that candidly we did not execute well in some of the integrations of the acquisitions and some of them have been market, market issues. They are, that we are recovering that.
I would say half of the businesses that we're having some problems have becoming much better. And we expect SI parts of WFSI to have a much better second half than the first half. So, we continue to be as excited as we were at the beginning on the prospect of that. And it has the broad a growth rate for the company and a growth engine that we certainly didn't have before. When you put everything together, as you described, I think we continue to make our footprint more resilient to some of these changes, can And we do believe, as I mentioned before, that this will take us to earnings that will surpass historical earnings.
Will they happen in 2018? Probably not in 2018, probably, but this within the next 2 or 3 years. And we certainly are very convinced about getting back to the 10% ROIC that we set a target when we put together our strategy. I don't know, Ray, if you want to a little bit about the Well,
in terms of, again, I mean, naturally, you mentioned there are things that we can control and there's things that we can't control for the things that can control, as Juan indicated, some of the actions that we're taking in terms of delayering expansive control. In addition, yesterday, we are now set, we're going to effectively sunset our U. S. Salary DB plan. So when you take a look at things that we can control, when I look at 20 and again, we haven't started our 2018 planning process yet.
But when you take a look at run rate type of savings, right? For 2018, the things that we can't control of the list of what one announced, there's probably at least about $100,000,000 of run rate savings that we will be able to benefit in 2018. And that's going to continue into the future there. So again, we do believe, again, we haven't started our whole 2018 planning process yet. But again, for things that we're working on right now, at least of what we have announced, it's at least $100,000,000 of run rate savings don't forget, in terms of the savings that we're going to generate this year, as Juan indicated, we're well on track to pass our cost reduction targets for this year.
I mean, that will also be ongoing savings into the future. So again, I think we that's the reason why we feel good about the future. We feel good about our path towards getting back pass our historical earnings and towards our long term 10% ROIC target with the actions that we're taking.
So Ken, when we think about just to clarify what also or expand on what Ray said. When you think about our operational excellence savings, let's say, the 225 that we're expecting this year, those are separate from the $100,000,000 run rate that we could have in 2018 by some of the delayering and other aspects. So operational excellence more about adding technology to get those cost savings. The other one is more flexing our organizational design and reducing layer. This will be additive in 2018, if you
will. Great. I appreciate it.
Your next question comes from the line of Sarah Azulik from with Stephens Inc. Your line is open.
Hi, good morning.
Good morning.
Good morning, Carter.
Question all around your corn Processing segment.
Could you
share with us how much of the improvement is market driven in both sweeteners and starches And how much make acquisitions. Can you just kind of break that apart for us a bit?
Let me help you qualitatively while Ray think about the quantitative answer maybe to that question, Farha. Listen, the sweeteners and the starches, first of all, when we talked a lot about our operational excellence and our cost improvements, Farca, as you know, the corn plants are the largest unit plants that we have in the company with the most complex operations sometimes. So those are the plans that normally receive or generate the bulk of the improvements, if you will, whether there are yields or energy efficiency or things like that. So, when we look when we talk every year about this 225 $1,000,000 savings, things coming to the P and L. A lot a big proportion of that come through the P and L of sweeteners and starches.
So this is a business that has benefited a lot from being able to run at very high capacity utilization some very stable rates, if you will, because that have allowed our engineers to fine tune the operations. And And we continue to see a strong demand for not only high fructose corn syrup to Mexico and others, but also to from corn syrup, from dextrose, So the more stable demand and high utilization levels that we have, the better our engineers can run operations. So I would say, the other aspect of this is that we have made this business more international. Which helps in many, many ways, not only giving us an extra stream of earnings from Europe, from the Eastern operations or from China, but also allows us to give us better information, from a technology perspective and market perspective. So I would say, the teams have leveraged all these and continues to excel year over year, and we continue to be very, very, very confident about the future of the corn business.
So I don't know, Ray, if you can quantify a little bit what Yes.
I mean, I think, Farrah, I mean, when I take a look at our 2nd quarter results, clearly our Tianjin operations improving. So that helps in terms of improving SNS line. Our European operations are improving. Year over year improvements there. So that's a positive in terms of numbers.
Our cost reduction efforts in corn also translate to year over year improving. So there's a lot of actions that we've taken, which have driven the improvements in sweeteners and starches. You mentioned some of the other improvements. Remember, life seems actually part of the bioproducts division. And so the some of the bioproducts improvements are actually related related to lysine around that particular line.
So all in all, far, again, I don't have the exact numbers, but I can assure you that a lot of the improvements in swine and starches are actions that we have taken either grow the portfolio or actually make our costs even more competitive in our processing plants?
I think an important aspect of this far is also our corn business, as I said before, has gone global. That's bringing that's bringing increase earnings. We're going to increase earnings. We're going to continue to increase earnings in Europe as we take advantage of the sugar change regime, but also, you know, we are moving into the central part of that market with Chamtor, I also diversifying feedstocks because it's a weed related one. And we are in the middle of China.
China and Eastern Europe offers spectacular opportunity to increase concierge versus sugar. And we are very well positioned to the point that we are already expanding Turkey and Bulgaria. So, so we feel very good about our current results, but even more excited about the future for the corn business.
So your international growth opportunities for next year can help grow this business. Do you expect earnings growth next year for both sweeteners and starches and bioproduct?
Yes. I think that when I think about the contribution, for example, Farca, of the TNG plant, which is a large plant, the 1st year, it was it's a negative because you bring the plant and you don't have your field completely. This year, we announced is already filled. So next year, we're going to have another improvement in profitability in that plan. So you should count that.
2nd is e start you're going to have expansions and continue improvements of that. 3rd, you're going to have a full year of Chamto next year contributing to that. And don't forget, sweeteners and starches in the U. S. Continue to be very tight.
And we continue to have more demand for other corn syrups and dextrose. So I would say, our team has positioned the growth prospect of the, of the corn business, very, very, very right, and we're very excited about the future of that business.
That's helpful. Thank you.
I would now like to turn the call back over to CEO, Juan Luciano, for closing remarks.
Okay. Thank you, Jack. So thank you everybody for joining us today. Slide 16 notes some of the upcoming investor events where we will be participating. And as always, please feel free to follow-up with Mark if you have any other questions.
Have a good day and thanks for your time and interest in ADM.
This concludes today's conference call. Thank you for your participation. All participants may now disconnect.