Good morning and welcome to the Archer Daniels Midland Company Second Quarter 20 16 Earnings Conference Call. All lines have been placed on a listen only mode to prevent background noise. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Mark Schweiser, Vice President, Investor Relations for Archer Daniels Midland Company. Mr.
Schweiser, you may begin.
Thank you, Stephanie. Good morning and welcome to ADM's 2nd quarter earnings today's webcast will be available at adm.com. 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 response 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 assumption and factors in our 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 the financial highlights and corporate results. Then Juan will review the drivers of our performance in the quarter, provide an update on our scorecard and discuss our forward look. Finally, they will take your questions.
Thank you, Mark. Good morning, everyone. Thank you all for joining us today. This morning, we reported 2nd quarter adjusted earnings per share of $0.41. Our adjusted segment operating profit was $573,000,000.
After a challenging start of the year, general market conditions began to turn at the end of the second quarter. Providing us with improved opportunities for the second half of the year. Weak grain handling margins and merchandising results continued for Ag Services. Results for corn, including a strong performance in sweeteners and starches, offset by lower ethanol results. Our oilseeds operations leverage their flex capacity to crush record volumes of soybeans in the second quarter as global protein demand continues to grow.
WFSI saw strong growth in flavors and systems with operating profit in line with the year ago quarter. During the quarter, we continued to advance our strategic plan, acquiring full ownership of Amazon flavors, a leading Brazilian manufacturer of natural extracts, emulsions and compounds. We added soybean crushing capability to our facility in Strowing, Germany, allowing us to utilize flex capacity while also meeting growing customer demand for non GMO, soybean meal and oil in Western Europe. We continued to invest in Asia's growing and evolving food demand by further increasing our strategic ownership stake in Wilmar from 20% to 22%. In addition, we continue to make progress in the strategic review of our ethanol dry mills.
We have implemented almost $150,000,000 of new run rate savings actions in the first half of the year, and remain on track to meet our $275,000,000 target by the end of the calendar year. Also, we repurchased about $500,000,000 of shares in the first half as we continue to execute on our balanced capital allocation framework. The first half of the year was very challenging. However, with improved fundamentals, we anticipate a more favorable second half of the year. I'll provide more detail on our scorecard progress later in the call.
Now I'll turn the call over to Ray.
Hey, thanks, Juan. Good morning, everyone. Slide 4 provides some financial highlights for the quarter. Adjusted EPS for the quarter was $0.41, down from the $0.60 in the year ago quarter. Excluding specified items, adjusted segment offering profit was $573,000,000, down $151,000,000.
The effective tax rate for the 2nd quarter was 29% compared to 27% in the second quarter of the prior year, largely due to a $20,000,000 of unique discrete tax items in the quarter that negatively impacted our effective tax Note, we did not impact our adjusted EPS rate will largely depend on a number of factors going forward. At this point, I would expect our calendar year tax rate to be about 28%. Team annual WACC of 6.6 percent. Our objective for the full year 2016 remains to earn an ROIC equal to or in excess of cost of capital. On Chart 18 in the appendix, you can see the reconciliation of a reported quarterly earnings of $0.48 per share to the adjusted earnings $4.1 per share.
For this quarter, we had gains on sales or asset revaluations of $0.17 per share, asset impairments of approximately $0.01 per share and LIFO charges of approximately $0.09 per share. Slide 5 provides an offering profit summary in the components of our our quarterly results. In the Ag Services segment, there was a net gain of $43,000,000 reflecting the collection of the final deferred proceeds from the sale of Gruma shares in 2012, offset by some small impairment charges. In the corn segment, there was a net gain of $63,000,000 related to the sale of our Brazilian sugar assets, partially offset by $6,000,000 of small impairment charges. In Wellseeds processing, we did not have any material items that impacted adjusted EPS.
Over the course of the second quarter, we did have unprecedented volatility in the soybean crush margins. Earlier in the second quarter, we had expected the run up in the board crush margins to have a significant negative mark to market impact on our second quarter results, In June, however, margins fell dramatically and the net impact from a mark to market perspective ended up being minimal for the second quarter. We did have some negative timing effects related to softseed crush and biodiesel hedges, and these negative impacts should reverse themselves in the second ADM on a 1 quarter lag basis. To note, report net losses of approximately $230,000,000 for its second quarter. As a result, we expect to pick up about $50,000,000 of equity losses in our 3rd quarter results compared to the prior consensus estimates of about $50,000,000 of equity earnings for the third quarter or about a $100,000,000 swing in ADM's expected 3rd quarter results.
The tax rate we apply to Wilmar equity earnings is 0%. Hence, the EPS impact of this $100,000,000 swing will be about position of the remaining interest in the Wild Amazonas joint venture. In the corporate lines, net interest expense was down due to lower interest rates the favorable effects of the debt restructuring from last year and a revaluation of our liability to purchase the remaining stake in Harvest Innovations. I now located corporate costs of $116,000,000 were down from the year ago quarter, primarily due to strong cost management. Turning to the cash flow statement on Slide 6.
Here's the cash flow statement for the 6 months ended June 30, 2016 compared to same period the prior year. We generated over $1,000,000,000 from operations before working capital changes in the first half, slightly lower than the first half of last year. Total capital spending for the first half was $396,000,000 down from the prior year's $540,000,000. Acquisitions of $120,000,000 during the first half of twenty sixteen include Armas Innovations in WFSI metsaufs and ag services in Morocco in corn processing. Included in the other investing the first half of twenty sixteen, we spent about $487,000,000 to repurchase approximately 13,500,000 shares of ADM.
Our objective remains to repurchase $1,000,000,000 to $1,500,000,000 of our own stock in calendar year 2016. Our average share count the first half of the year was 594,000,000 diluted shares. Our total return of capital to shareholders, including dividends was about $800,000,000 for the first Slide 7 shows the highlights of our balance sheet as of June 30. Our $2,000,000,000 was down $100,000,000 from the year ago period. Total debt was approximately $7,400,000,000, resulting in net debt balance of $6,700,000,000, up from the 2015 net debt level of $5,700,000,000.
Our leverage position remains healthy with a net debt total capital ratio of about 27 percent. Our shareholders' equity of 17,700,000,000 was down from the $18,600,000,000 level last year, due primarily to capital returns in excess of net income and a decrease in the cumulative translation account. We had $4,900,000,000 in available global credit capacity at the end of June. If you had available cash, we had access to $5,600,000,000 of short term liquidity. Our balance sheet remains very, very solid.
Next one will take us through a review of the business performance. Juan? Thanks, Ray.
Please turn to Slide 8. In the second quarter, we earned $573,000,000 of operating profit. Excluding specified items, down from the $724,000,000 from last year's second quarter. In Ag Services, weak grain handling margins and merchandising results continued. Results for corn were down slightly compared to the second quarter last year, with continued strong performance in sweeteners and starches, offset by weaker bioproducts results.
With continued strong global protein demand, Our oilseeds operations were able to utilize flex capacity to crush record volumes of soybeans in the quarter. Excluding the startup items, WFSI operating profit results were in line with the year ago quarter. As a result, adjusted segment operating profit was flat versus last quarter and down 21% versus the year ago quarter. Late in the quarter, market conditions began to turn lining up a more favorable outlook for the second half. Now I will review the performance of each segment and provide additional detail.
Starting on Slide 9, we indicated last quarter that ARC Services in the second quarter will be challenged. And as it turned out, adjusted results were down significantly compared to 1 year ago due to compressed U. S. Grain handling margins. In the U.
S, We saw limited merchandising warehousing and storage opportunities due to reduced grain caries. International merchandising results remained weak overall, but were up versus 1 year ago due to the strong origination results in Argentina and the addition of destination market in Egypt through our MedSoft's joint venture. Net timing effects did not have a material impact on results. In transportation, results declined due to weak barge demand and lower freight rates. In milling and other, ADM milling had a strong 2nd quarter, driven by product margins and merchandising results.
Please turn to Slide 10. Corn processing results were up sequentially, but down slightly versus the second quarter last year. Sweeteners and starches results were higher as the business continued to perform well with higher volumes and pricing, and improved margins from optimizing product grind in our corn wet mills. In addition, The integration of the recent Easter and Morocco acquisitions have gone better than planned, contributing to our global sweeteners and starches portfolio and results. Bioproducts results were down in the quarter with high industry ethanol inventory levels coming into the quarter, we decreased production.
While ethanol margins have improved modestly and demand for both domestic consumption and exports continue to be strong, margins remain very volatile and extremely sensitive to reproduction rates and inventory levels. Licine results continue to be pressured by large global production. Particularly early in the quarter. However, results improved in June as global inventories declined and a strong demand continued. Slide 11, please.
Oilseeds results were solid for the 2nd quarter. But were down versus a strong quarter 1 year ago. Crushing and Origination declined from last year's high levels primarily due to weak canola margins as well as lower soy crush margins, which were historically high last year. Strong global demand for protein meal and the continued weak economics for soft seeds allowed us to flex and allowed our North American and European crash operations to set new second quarter so it crushed volume records. During the quarter, the team effectively managed unprecedented board crush movements that were caused by South American crop uncertainty.
By the end of the quarter, supplydemand fundamentals stabilized crush margins. Earlier in the quarter, we had expected significant soybean crush negative mark to market impacts for the 2nd quarter due to significant increase in board margins, but the actual net impact turned out to be quite minimal as poor crush margins failed in June. Refining, packaging, biodiesel and other results were down from 1 year ago, mainly due negative biodiesel timing effects, despite strong results in specialty fats and oils and gold and peanuts. Oils' results in Asia for the quarter improved partially due to Wilmar's 1st quarter earnings. As Ray indicated earlier, Wilmar had issued a 2nd quarter profit warning in July that we expect will have a negative impact for the ADMs 3rd quarter results.
On Slide 12, excluding startup costs, WFSI results were in line with the second quarter last year, with the strong growth in Flavors and systems, offset by slower separate individual ingredient sales. In the quarter, we added to our ingredient capability in South America with the full ownership acquisition of Amazon Flavors, a leading Brazilian manufacturer of natural extracts, emulsions and compounds. This gives us the full capability of flavors and systems in Brazil which boots with boots on the ground to develop systems and provide customers with rapid prototype delivery to meet local faces. Results included about $4,000,000 in operational startup costs for Tianjin and Campo Grande. We expect wild flavors to have an extremely strong second half of the year, which should result year over year operating profit growth of more than 20%.
However, continuing challenges with some of our legacy ingredients this demand factors in the case of hydro colloids, near term pricing pressures in the case of fibers, and some inventory management issues at SCI will limit overall WFSI segment operating profit growth this calendar year to lower double digit percentages. Now on Slide to update you on how we're strengthening our grow and growing our company. We've highlighted some of the areas in which we made significant progress recently. I'll discuss a few. In Ag Services, in the second quarter, we started operations in our MedSoft joint venture in Egypt as we continue to expand our distribution value chain through our destination marketing capabilities and an asset light approach.
The MedSoft's joint venture helps us diversify and expand our merchandising footprint. Grow our logistics services and get us closer to our customers as we deliver products directly to them. In corn, we completed the sale of our sugarcane ethanol operations in Brazil. We began operation of our Casablanca Morocco based corn wet mill as we continue to expand the geographic footprint of our sweeteners and starches business. We expanded our sweetener portfolio by entering into a partnership to offer low calorie non GMO Stevia and monc fruit ingredients.
Within our animal nutrition business, We introduced new products and announced plans to expand and modernize facilities. In our life team business, we made progress process improvements that should improve yields in the second half of the year. And we are advancing on the strategic review of our ethanol dry mills assets. We have made management presentations to 7 parties that have indicated interest in our dry mill assets. We will await all the proposals to determine what is the best value maximizing the strategy for ADM.
We anticipate receiving bids backed by the end of August will then evaluate and determine our next steps in the process. In oilseeds, We completed the canola crush expansion project at our plant in Lloydminster, Canada, and we added soybean crush capacity at our facility in Straub in Germany, allowing us to meet growing customer demand for non GMO soybean meal and oil in Western Europe. And in WFSI, we built out additional synergy projects and now have more than 1300 projects in the pipeline. Our latest forecast for the end of 2017 is shifting to about 2 third cost synergies and 1 third revenue synergies due to revenue synergies taking a little longer to realize. We added to our ingredient capabilities in South America with the full ownership acquisition of Amazon Flavors, And we have another productive IFT just a week, a few weeks ago, highlighting recent additions in SCI, Eton Foods, and harvesting innovations.
Together, we showcased the industry's broadest and deepest ingredient portfolio giving customers access to innovative products, extensive technical expertise, and best in class service. These are just a few of the highlights from the quarter. We'll continue to update you on our progress each quarter. And over time, you should expect to see the results of this. Before we take your questions, I wanted to offer some additional forward perspectives.
As I indicated earlier, both the 2nd quarter and the first half of the year were challenging. Throughout this period, we continued our ongoing focus on costs. And importantly, we continue to execute on our strategy, which includes additional geographic diversification and moving further downstream in the value chain. Now looking ahead, with recent improved market dynamics, we anticipate better opportunities. The outlook for the large US crop and some of our businesses experiencing improved margin conditions creates a platform for a more favorable environment in the second half of the year.
And some optimism as we start move into early 2017. For Ag Services, current U. Crop conditions indicate the growing season is progressing very well. This is expected to translate into improved export volumes and margins. Higher utilization of our transportation network and better merchandising and handling opportunities for the second half of the year.
For corn, the strategy and flexibility of our wet meals, along with continued operational excellence achievements and high capacity utilization rates should support improved margins for our sweeteners and the starches business for the second half of the year. Into the future, as global sweetener than start demand continues to grow, Our product and footprint expansions will provide diversification of both geography and start sources to help maximize cost positions and drive value creation. Ethanol margins have improved since the beginning of the year, and the forward demand environment from domestic consumption and exports would appear favorable. However, The future margin environment will remain dependent upon industry production levels relative to demand and the resultant inventory levels. We have seen this inventory to margins relationship over the years, and we have seen the margins being somewhat volatile as well.
In oilseeds, the outlook for the second half of the year has improved due to continued strong global protein demand, leveraging our flex capacity and improved crush margins. Looking ahead on trend, complex consumer demands are creating value for our oils portfolio and oilseeds network. For WFSI, increased innovation in natural health and nutritional products, and leveraging our industry leadership in plant based proteins, powders and specialty grains, all our positive support for the future progress of WFSI. With organic growth, synergy execution and small bolt on M And A, we continue to build this business for the future. With that operator, please open the line for questions.
Question. Your first question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Great. Thanks. Good morning, everyone. I guess, 1st, we'd like to talk about the second half opportunity and one you laid out some thoughts on drivers of better performance, particularly in Ag Services. And I'm just trying to think about some of the range of outcomes or some of the the bigger variables in that Ag Services outlook as we think about, I guess, the 4th quarter specifically, is it the export cadence of corn and so I try to find go through the ports at the same time?
Is it farmer selling? Is it, the magnitude of carries in the corn and the wheat market? Other factors, just help bend some of the kind of the bigger opportunities or the risks there?
Sure. Yeah. Thank you, Adam. So as I said before, the outlook for U. S.
Exports is much better. And current elevation margins are much higher than the last two quarters. Export elevation margins are unlikely to continue higher in the back half of the year. So as you said, demand continues to be strong and the U. S.
Is competitive now. For the future months. We also are seeing with carriers and basis gains that have returned to the market. We expect, in the same area that destination marketing continue to increase for us. The impact of that and and we expect and even more impact in 2017.
Milling volumes normally get into, our high season in Q3. So we expect another pickup from there. And in general, transportation results are expected to improve on increased loads and higher freight rates, we expect, southbound volume probably increase in the range of 30% in Q3. So all in all, we are optimistic by the picture we're seeing in our services after many months of subdued performance, if you would.
Your next question comes from the line of Ann Duignan with JP Morgan. Your line is open.
Good morning. This is Tom Simanich on for Ann. Could you discuss your expectations for U. S. S and I exports for the remainder of 20 16, in particular, given that China has been a major importer year to date, if China were to stop importing ethanol, are there other markets you would expect to absorb U.
S. Production?
Yes, thank you, Tom. Our expectation for, net exports is in the range of 850,000,000 to 900,000,000 gallons. And, Obviously, China is the 2nd largest market of ethanol in the world. And we have seen their both in China and in India, the export, the imports picking up. And that has been a boost obviously for U.
S. Exports. Your concerns are probably given by the change in corn policy in in China and to what extent that will reduce the imports. We believe in that range in the 850 to 9 $1,000,000. We continue to see other markets coming on again strongly like India.
We believe China may or may not reduce there. We believe Canada will be there. We believe Mexico will join. So in general, we feel strongly about it. And, you know, we could argue China may indicate some of that corn to make ethanol, but also there are questions about the quality of those reserves and how much of that can actually be turned into ethanol So, again, when we look at the forecast and without having a significant amount of China exports in the second half, we believe into the in the 850,000,000 to 900,000,000 gallon range for net exports for the U.
S.
Your next question comes from the line of Evan Morris with Bank of America. Your line is open.
Hey, good morning, everyone.
Good morning, Evan.
Just, I guess, just following on Adam's question, then just had a quick follow-up, just on the the optimism about the second half. I mean, there's been a lot of moving pieces, a lot of volatility in the first half, and your view kind of changed as you move through the year. So just getting a sense as your level of optimism now back to back half of the year today relative to let's say, a month ago, what's changed? And within that, should you talked about a favorable third quarter should profits be up year over year? If you can kind of just sort of frame your outlook where it is today versus a month ago and certainly just your broader expectations?
Yes, it's Ray here. I mean, the way we kind of look at this year, second half compared to, let's say, the second half of last year, I mean, there are several variables that have moved in our favor. In first of all, the U. S. Dollar actually has stabilized compared to where we were last year.
In fact, you've seen that relative to other crop grown regions, the dollar is actually become a lot more competitive. And that's a favorable factor for ag services as we look towards exports in the back half of the year. And frankly, that's been the if you recall, last year, there was this overhang regarding Argentina. Remember, we went into second half of the year. There was a lot of concern that with the change in the government, that there was a flood of Argentinean products entering world markets and that actually depressed margins significantly.
What we've seen this year is in the back due to some weather issues down in Argentina and Brazil, this overhang doesn't exist. In fact, a lot of the surplus corn and wheat that was in Argentina actually moved to the world markets already and hence you don't have the Argentine overhang. And that's going to be favorable in terms of how U. S. What it's going to look like.
I mean, thirdly, global demand remains very, very strong in terms of what we're seeing in terms of demand factors. And then as I indicated that there has been, due to weather factors shortages that have occurred out of the South America, that's actually helped in terms of global supply demand balance that we're seeing right now, and that's a fable with respect to U. S. Exports in the back half of the year. Then lastly, you take a look at the U.
S. Crop. I mean, the USDA numbers are very, very healthy, but I mean, expectations are that potentially crop could actually be bigger than what the USDA is predicting. So the supply environment and the opportunity to look for basis opportunities in the U. S.
Actually becomes a lot real as we move into the back half of this year compared to where we were last year. So in general, that's the reason why we're seeing a lot more optimism, particularly for the Ag Services division as we move into the back half of this year compared to where we were last year.
Your next question comes from the line of David Driscoll with Citi.
Great. Thank you and good morning.
Good morning, David.
Wanted to ask a little bit more about Wilmar and just kind of what's going on right there. 1, I think you're on the board. It's one of you guys are on the board over there, and I'm just curious as to kind of the risk management failure over there and has it been corrected? I believe this relates to soybeans and business, as you guys know, extremely well. So I'm just curious on what's going on.
The question specifically then relates to Is this like a 3rd quarter effect only with their losses kind of persistent to other quarters? And then, and then are some are there were there opportunities in the 2nd quarter in terms of crushing margins that ADM might have been able to lock in That could be a big offset to these problems that Wilmar is going to generate in the P and L in the third quarter. Thank you.
Yes, thank you, David. So yes, I am in the board of Wilmar. Listen, the significant loss was triggered by extremely volatile movements in soybean future prices and the board crush margins in Q2. Caused by rapidly evolving crop conditions in Argentina. The Wilmar Risk Management to the extent that I can comment on that, I mean, they're going to be releasing earnings next week.
So I need to be prudent here. But there will not risk process include having risk limits and loss limits and having stop losses on positions like every risk company. And with the abrupt moments in prices, this stop losses were triggered in Q2. Without going into the details, of their performance. We do believe this being a one off situation.
And if you think about Wilmar that participate a very I mean, they are a very large crusher and they're participating in a very volatile part of the world. This is the 1st quarterly loss since they are IPO in 2006. So this is not that this is a common occurrence. And as unfortunate as it is, we do believe that, that hopefully is a one off. And, but again, I will relate you to their earnings call that were going to happen in, I think, in August 12th.
Regarding our ability to offset some of these with Q3 performance in in oilseeds. Obviously, this is a $100,000,000 delta in Q3, which is difficult. We are optimistic about our access, our oilseeds performance in the second half, and we believe that for, the U. S. Will be a center stage for exports during the second half of the year.
So at this point in time, we believe that that oilseeds will be able to have a very good performance in Q3 even despite the $100,000,000 that you will have to adjust for the Wilmar impact.
Really appreciate the comments. Thank you.
Your next question comes from the line of Faiza Islam with Stephens Inc. Your line is open.
Hi, good morning.
Good morning. Good morning.
My question focuses on Ag Services. There's been a lot of volatility in the grain market. So could you kind of help us benchmark what that earnings range and earnings on a normal year. We should think about Ag Services. And going forward, what are the key drivers of fundamental growth in
couple of years that we have with a lot of volatility, I will probably refrain from issuing a statement on the range until we see us going through these more normalized conditions, if you will. We certainly are very for the second half of the year in Ag Services with several components. I talked a little bit about the ports and we feel very confident about that. We have a big book on already with a strong elevation margins. We see a strong demand continues and the combination of strong demand with certainly large crops in the U.
S, will bode well for Ag Services in order to be able to, to handle a lot of grain. With carriers are there. And I think with a little bit of softening on the dollar plus the big crops. The U. S.
Is competitive in soybeans. It's competitive in certainly is competitive in corn. It's competitive in soybeans. And it's getting competitive in wheat. So I think that that bodes pretty well for our Ag Services business.
Thank you.
Your next question comes from the line of Kenneth Zaslow with BMO Capital Markets. Your line is open.
Hey, good morning everyone.
Good morning, Ken.
Can I take a picture of kind of like 2017 and beyond? If I think about the increased protein consumption out there, I think about increased chicken production, hog production, cattle production, increased soybean meal demand. Can you make a case that your soy your crush margin outlook should actually be structurally higher going into 2017? And how are you positioned to take advantage of that? Or are you not positioned to take advantage of that?
I think we are, Ken. We tend to agree with you. We think that with the growth rates that there are out there, and it's going to continue to tighten capacity until the point in which it makes sense to start expanding capacity. So we believe in growing margins going forward and we believe that we are in excellent position to do that. You heard me saying several times about our flex capacity and how we have added to our plants, the ability to crush more soybeans.
And we have done that in several parts of the world. Not only North America, but also in Europe. And there has been the bottlenecks we reported this quarter record soybean crush in both Europe and North America. And that's the fruits basically of our operational excellence efforts in which every plant is being able to turn a little bit more of a bigger output as the market demands. So, we think we think we are very well positioned and we think that the market requires that.
So, we tend to agree with you. We think that 17 forward could be good years for us.
Your next question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Hi. I was hoping kind of give us a sense on that subject about where forward, crush margins are today in the second half. You said they had come down from from very high levels, would you consider those forward margins better than average, average, how would you describe them?
Yes, I think at this point in time in the U. S, the plants are running at the mid-80s capacity and we believe that the margins are solid margins, strong margins for North America So, without giving you any specific numbers, it came down from an exceptional position, if you will, but we still believe that they are strong. The full the global customer have not come to the market that aggressively yet. So at this point in time, I would say our export book trails a little bit the one of last year, but we believe that that's going to be corrected soon.
Your next question comes from the line of Eric Larson with Buckingham Research. Your line is open.
Yes. Good morning, everyone. Thanks for taking the questions. I've got 2 questions, both pretty brief 3rd quarter, egg services, we've all seen the USDA export numbers, that they have for this crop year, which we only have, what, 4 weeks left or 4.5 weeks. And it seems it seems like I don't know if we'll get that all shipped in this quarter, but it seems like on a sequential quarterly basis, We should see an improvement in your Ag Services business, whether you get to a year over year positive in Q3 is, is questionable, but would you expect to start seeing some improvement in Q3 with majority mostly Q4 for the year?
Yeah, Eric. We expect Q3 to be significantly better than the quarters that we've been posting in our service. And certainly with the potential for Q4 obviously to be even bigger. But we will see the improvement already in Q3 and I would say it should be a strong improvement
Okay, good. And then, Juan, one of the things that's actually been a bit of a surprise to me, really, I think it started fourth quarter last year. Can you give us
a little flavor for
the soft seed business? I think in Q4 last year, it was a was bought a negative $50,000,000 operating profit swing, in soft seas, which was a big number. And it continues to be pretty soft. Can you talk about the canola side of it for a minute? And does that have a chance of coming back.
And that would be a, I would think, as good an improvement in your oil seed crush or in your oil seed profits the second half is probably anything else?
Yes. It's been weak so far as you referred to, Eric. And, but, you know, at this point in time, Canada is looking at a very good crop and with China having drawn down some of the oil stocks we think that a good story may be brewing out there for a Canadian crush business. So we have become recently more positive about that business and the perspectives of that business for the second half.
Your next question comes from the line of Kevin Faslow with BMO Capital Markets. Your line is open.
Hi, just a quick follow-up Can you talk about your progress? When you talk about the ethanol options that you have, can you give us a wide range of what you're looking at and what the timing is of that?
Ken, it's Ray here. As we indicated, we've already done management presentations to some potential interested parties. We've been very open minded in terms of there. We're going to evaluate all these options. We expect 1st indications back us in the month of August and we'll look at what makes sense from a value maximization perspective for our company here.
Is there an option that you'd actually want to keep more of the business than you previously expected given the progression of the ethanol margins?
I mean, if we get fair value for the assets, I think that's highly unlikely
Great. Thank you.
Your next question comes from the line of Michael Piken with Cleveland Research. Your line is open.
Hi, this is Mike Henry in for Mike Pike in.
Thank you for the
question. Going back to ethanol, just curious if you guys could give some color on the current run rate or capacity that you were utilizing during the second quarter, what that should look like going forward any commentary on what level you would potentially bring, capacity back online or run production a little bit harder? And then Just second question, if you could give some more color around the biodiesel impact in the second half on timing and the potential for that. To provide some incremental upside in the oil season? Thank you.
Yes, Mike. So, the issue with when you think about the ethanol industry, when we came into the Q2, in April, ethanol inventories were basically very high about running about 8% above last year. So, obviously going into the driving season, we took some some shutdowns. And at the end of July, inventories are about 3.4% above last year. So a more, a more normal, if you will, inventory situation.
So, At this point in time, we will continue to titrate that whether we run for yield, as I described, sometimes or we've run for volume. I think that given the volatility of the ethanol results, we probably always keep an eye on running for yield, but we probably don't see the need right now to slow down like we did in Q2. Where we took a hit for the volume that we didn't move. On
the issue on the question regarding just the timing effects, I've indicated in prior calls that in the oilseeds division, we normally have some level of timing effects. In this quarter, it was really related to soft seeds and biodiesel. In the past, I've indicated this normal range of anywhere up to $40,000,000 to $50,000,000 plus or a minus. And so in this particular quarter, it was more of a negative timing effect that we expect to reverse out in the second half of this year. So it's within so we didn't call a number within our normal ranges.
So it's within the normal $40,000,000 to $50,000,000 Peppa number that we would normally have.
Great. Thank you.
Your next question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Hi. Juan and Ray, can you comment a little bit more about the legacy businesses in the WFSI division and what's causing the underperformance. And I think you said that there were slower than expected revenue synergies Was it in that division? And if so, can you explain why?
Yes. So some of the legacy businesses, one of the businesses is, for example, hydro colloids, hydro colloids go like about half of it to food applications and that continues to go very well. But about half of it goes to drilling fluids. And as you can read, the industry has basically, reducing significantly the drilling in the it. So nothing to do with our food strategy, if you will, but it happens that we report it in that segment.
The second is related fibers. The fibers market, has a little bit of overcapacity. So prices have been soft there and we have some more competition. And one of the businesses that we acquired SCI have had some issues with inventory and we needed to write off or sell it at the discount because they might not have been in the greatest of condition. So all those three things basically impacted the WFSI business.
On the other side, on the other hand, wild flavors is growing significantly and, you know, it's going to post growth of about 20% year over year on the basically on innovation that is happening at the customer level. So when we talked about the revenue synergies being a little bit slow, is because obviously, you need to 1st of all, you need to think about how to combine all these products into a new solution. And then you create the prototypes and then you present those to the customer and the customers create a marketing campaign and also look at look at the potential for that product and look at the stability of those products. So that approval process takes a little bit longer, especially especially in some of the companies that are very much focusing nowadays on cost and productivity. And it may not have that many people to take care of this product.
So that's why we try to ramp up a little bit more of the cost synergies to make sure we don't fall behind in our promises. But as I said, the wild flavors business is going strong and having, having, again, probably a 20% increase in profits versus already a record year like it was 2015. So we are extremely proud of the
Thank you.
Your last question comes from the line of Far Ozlem with Stephens Inc. Your line is open.
Hi, thanks taking the follow-up. It relates to sweeteners and starches. Do you think that the profits you're seeing in that business are sustainable going into next year? And could you discuss your shifting of the grind to higher value added products? Is there any measures we can put against that?
Yes, Farka. I would like to describe a number or talk about the number for 2017, but certainly the dynamics at this point in time in the industry calls for a little bit of a continuation of the supply demand fundamentals we're seeing now. Certainly exports to Mexico have been better than expected it certainly, there has been a flattening of the secular decline of the U. S. Domestic market, if you will.
And what we continue to do, which we like and it bodes well for the future of the business is we continue to introduce new products. And Some of these products are more at the developmental stage, if you will, but some you can see in the press releases that we continue to launch these products. At this point in time, I cannot give you top of my head something that you could look at to track the progression of that portfolio, but Traditionally 5 years ago, we look at trying to replace 10% of the grind, if you will, just in case a high fructose consider, we're going to decline 2% per year. Which is happening. So we haven't needed to bring all those products, but we have all those developments and as as we're trying to sell up our capacity and bring products that have higher margins, we continue to introduce some of that.
So So probably we will get together with our businesses and we will try to come up with some kind of indication that at least you can you can track on the progress of initiatives. We haven't done it, as I said, because of the strength of sweeteners and the searches, we didn't feel that we need to communicate anything with that.
One thing to know Farah is we have purchased the remaining interest in E Starz. That is something different and that is an increment compared to where we were before. So that clearly is a positive. And as we indicated in prior calls, I mean, the E Star Jack position was about $0.04 per share accretive to our overall earnings going forward.
That's helpful. Thank you.
That was our last question. I'll turn the call back over to Juan Luciano for closing remarks.
Thank you. Thank you for joining us today. Slide 15 knows some of the upcoming investor events where we will be participating. As always, please feel free to follow-up with Mark if you have any other questions. Have a good day.
Thanks for your time and interest in ADMs.