Mark Schweitzer - Archer-Daniels-Midland Co. Juan Ricardo Luciano - Archer-Daniels-Midland Co. Ray G. Young - Archer-Daniels-Midland Co..

Heather Jones - Vertical Trading Group LLC Adam Samuelson - Goldman Sachs & Co. LLC Sandy H. Klugman - Vertical Research Partners LLC Robert Moskow - Credit Suisse Securities (USA) LLC Eric Larson - The Buckingham Research Group, Inc. Thomas Simonitsch - JPMorgan Securities LLC Brett W. S. Wong - Piper Jaffray & Co.

David Cristopher Driscoll - Citigroup Global Markets, Inc. Vincent Stephen Andrews - Morgan Stanley & Co. LLC Kenneth Bryan Zaslow - BMO Capital Markets (United States) Farha Aslam - Stephens, Inc..

Good morning and welcome to the Archer Daniels Midland Company Second Quarter 2017 Earnings Conference Call. All lines have been 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 second quarter earnings webcast. Starting tomorrow, a replay of 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 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 look. And finally, they will take your questions. Please turn to slide 3. I will now turn the call over to Juan..

Thank you, Mark. Good morning, everyone. Thank you all for joining us today. This morning, we reported second quarter adjusted earnings per share of $0.57, up 39% from the prior year quarter. Our adjusted segment operating profit was $658 million. 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 fourth consecutive quarter of year-over-year higher returns on invested capital. We did this by continuing to deliver on 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. Oilseeds 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 of the year reflect ADM's continuous efforts to create shareholder value and set the competitive standard in the industries in which we operate.

We are diversifying our capabilities and geographic reach through acquisitions and organic expansions. We recently closed on our acquisition of French sweetener company Chamtor, expanded our destination marketing footprint with the acquisition of Industries Centers in Israel, and announced the construction of a new flour mill in Illinois.

We're also aggressively managing cost and capital and taking additional portfolio actions. And we are ahead of pace for meeting our 2017 target of $225 million in run-rate savings.

We implemented over $130 million 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 capital allocation framework, we returned $875 million 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 in 2017, 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. Excluding specified items, adjusted segment operating profit was $658 million, up $85 million from the year-ago quarter.

The effective tax rate for the second quarter was 28% compared to the 29% in the second quarter of the prior year.

Our trailing four-quarter average adjusted ROIC of 6.8% is 100 basis points higher than the same period last year and 80 basis points above our 2017 annual WACC of 6.0%, thus generating positive EVA of $195 million on an annualized basis. Our ROIC has continued to improve for the fourth consecutive quarter.

On chart 19 of the appendix you can see the reconciliation of our reported quarterly earnings of $0.48 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 the proceeds of the 2015 sale of the cocoa business partially offset by the gain on the sale of the crop risk services business. We also had $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 and the components of our corporate line. Before Juan discusses the operating results, I'd like to highlight some of the corporate items affecting our quarterly results.

Net interest expense was up approximately $18 million to $81 million primarily due to higher short-term interest rates, our overall mix of short-term 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 due from prior years.

Looking ahead, we're continuing to project net interest expense of approximately $320 million for the full year 2017, consistent with what we indicated at the beginning of the year. Unallocated corporate costs of $134 million were up versus the prior year and modestly below our $140 million 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 million primarily due to updated portfolio investment valuations in CIP.

Turning to our cash flow statements for the first six months on slide 6, we generated $1 billion from operations before working capital changes similar to the prior year. We had favorable changes in working capital of a bit over $300 million. Total capital spending was $452 million.

Our current expectation for fiscal year 2017 is capital spending of approximately $1 billion. Acquisitions of $180 million were primarily related to Crosswind Industries, a pet treat manufacturer; and Chamtor, a French producer of wheat-based sweeteners and starches.

We spent about $511 million to repurchase shares and including dividends, we returned $875 million of capital to shareholders by midyear. Our average share count for the quarter is 574 million diluted shares outstanding, down 20 million shares from this time one year ago.

At the end of the quarter, we had 571 million shares outstanding on a fully diluted basis. Slide 7 shows the highlights of our corporate balance sheet as of June 30, 2017 and 2016. Our balance sheet remains solid. Our working capital of $7 billion was down $1.2 billion from the year-ago period.

Total debt was $7 billion, resulting in a net debt balance of $6.3 billion. Our leverage position remains comfortable with a net debt-to-total capital ratio of about 27%. Our shareholders' equity of $17.4 billion was down slightly from the $17.7 billion last year, due primarily to returns of capital shareholders in excess of net earnings.

We had $5.1 billion in available global credit capacity at end of June. If we add available cash, we had access to $5.8 billion of short-term liquidity. Next, Juan 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 million of operating profit, excluding specified items, up from $573 million in last year's second quarter. Second 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 fourth consecutive quarter of year-over-year increases in operating profit. Merchandising and Handling returns were higher versus the year-ago quarter.

North America grain results increased significantly over the prior year with a strong carries in wheat, corn and soybeans. We are seeing the benefits of our actions to improve the performance of the global traders. The group generated solid profitable results and was up over the year-ago quarter.

Good execution led to improved margins that more than offset some lower volumes. In addition, favorable timing effects benefited results. Destination marketing is on pace with our Egyptian joint venture, Medsofts delivering a strong quarter. Transportation decreased over the previous year primarily due to river conditions and lower freight rates.

Milling 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 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 sales volumes reaching full utilization levels during the quarter. Bioproducts results increased over a weak prior-year quarter, one with slow production.

Ethanol margins improved significantly due to lower production costs and increased industry exports. Animal Nutrition was up over the second quarter of 2016 driven by improvements made in the Specialty Feed Ingredients business. Slide 11, please. In Oilseeds Processing, the business benefited from diversity of 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 meal 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 real remain firm contributed to compressed South American origination margins.

On the other hand, our softseeds performance improved over the previous year as we continued to utilize our flex crush capacity to capitalize on margin opportunities. And Refining, Packaging, Biodiesel, and Others which is our value-added oilseeds business, continued its consistent pattern of 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 with higher sales and strong margins. North America Biodiesel results were up in the quarter, largely due to unfavorable timing effects from the year-ago period.

Our global peanut business benefited from improved shelling margins and good results from our specialty products and oils businesses. 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 continue to build the business globally and to invest in innovation and exceptional solutions for our customers.

WILD Flavors delivered another strong quarter with double-digit profit growth and higher year-over-year results in every region around the globe, powered by 9% revenue growth on a constant currency basis. Specialty Ingredients was down for the quarter. 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 applications and building new facilities such as Campo Grande and Tianjin.

These actions are positioning 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 WILD Flavors' natural flavor systems and ADM's nutrition, texture and functional solutions is positioning us to respond to local consumer preferences and for a 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 we will continue to see strong growth. Slide 13, please. Before I update you on the progress of the strategic plan, I like to remind you of a significant number of actions we have taken on our business portfolio to evolve 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 Nut Company, to Eatem, Caterina, Harvest Innovations, 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 processing facilities out of our former Eaststarch joint venture, and added further to our sweetener footprint with the acquisitions of Chamtor and in Morocco.

We expanded our logistics and destination marketing capabilities with Medsofts in Egypt, Industries 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 Wilmar International, a very successful processing and consumer packaged goods company focused in the emerging markets.

And we have divested businesses that we believe were unlikely to meet our long-term return's objectives including cocoa, chocolate, South American fertilizer, our Brazilian sugar operations, and crop risk services.

In the meantime, we have 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 three primary areas of focus. In the area of optimizing the core, we completed the divestiture of our crop risk insurance business while retaining our ability to offer customers a full array of ADM's grain marketing services.

In Santos, Brazil, we made a series of enhancement 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 million gallons, and we will also have a more simplified production process for the Peoria complex. We have achieved more than $200 million of monetizations in 2017, and we continue to be on track to achieving our $1 billion monetization target over two years that we announced in 2016.

In addition, this year we are converging two 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 $130 million on a run-rate basis and are ahead of pace to meet our 2017 target of $225 million. We have also talked in the past about our business process transformation program called 1ADM.

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 towards establishing how ADM will drive improvement 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 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 back and look at our overall structure.

So, as part of Project Readiness, we have taken another look at our structure organizational 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 and areas where we 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, we'll reduce certain positions within our global workforce, and align the organization to enable us to continue focusing on innovation and growth. In the area of strategic growth, we have announced or completed several important projects.

We closed on our Chamtor 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 Industries Centers, an 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 flour mill in Mendota, Illinois. As mentioned earlier, our Campo Grande 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 Macciocchi 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 the next quarter and the balance of the year. First, I'd like to say how proud I am of what this team has accomplished, particularly in delivering 39% EPS growth this quarter.

For us to be able to do this, even while conditions were less than ideal, speaks to both the great work of our team and the pay-offs of our strategic plan that we continue to execute. We feel good about where we are and where we are headed.

In Ag Services, we anticipate overall Q3 performance 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 may present merchandising opportunities in the second half of the year, particularly in the 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 third quarter results to be up over 2016. In Sweeteners and Starches capacity in North America remains tight amidst solid demand.

We will see some benefits from the addition of Chamtor and continue to see positive momentum in Asia. Ethanol margins are expected to improve in the third quarter compared to the second quarter due to seasonal demand.

As I mentioned earlier, our production levels will change in Peoria and with high levels of industry inventory entering the quarter will probably run our plants to maximize yield. For full year 2017, 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 weak year-ago period. The third quarter results could be similar to this year's second quarter. We expect soybean crush margins to be improved in the second half of the year as meal demand growth rates are projected to increase.

However, they will continue to be margin pressure from competing proteins and strong Argentine exports. In South America, we anticipate improving farmer selling as 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 blenders' tax credit for 2017, as well as the NBB antidumping and countervailing trade case and the European WTO dispute 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, third quarter results are expected to be better than the year-ago period, and WFSI is on track for a record calendar year of performance. WILD Flavors should continue its pace of double-digit percentage operating profit growth. Specialty Ingredients is expected to recover from a slow 2017 start.

The Campo Grande, 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 a strong improvement in earnings this quarter and the first half of 2017.

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'll 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 line for questions..

Thank you. Your first question comes from the line of Heather Jones with Vertical Group. Your line is open..

Good morning..

Morning, Heather..

Hi. I don't want to waste my only question, but I did have a clarification.

Did you say Oilseeds for Q3 you expect it to be similar to Q2?.

Correct, Heather, yes..

Okay.

And then going to the Peoria announcement, could you flesh that out further? So, are you 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 be taking 100 million gallons of ethanol production out of the system permanently?.

Yeah. You understood it correct, Heather. We are taking basically the ethanol that we're producing for domestic use, about 100 million gallon of that out of commission immediately..

Okay. So, you're saying 100 million 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 million gallons..

Okay. All right. Thank you so much..

You're welcome, Heather..

Your next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open..

Yes. Thanks. Good morning, everyone..

Morning, Adam..

Maybe a short and longer term question on Oilseeds. I know you talked about some improvement in – some 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 either get margins to a level that would incent new capacity and really improve your own base performance?.

Yeah. Thank you, Adam. Listen, looking forward, we're seeing obviously seasonal positive North American dynamics in Q3 and Q4. We're going to have good bean availability, and we expect a strong domestic demand in the second half. We saw a little bit of the softer demand in the first half with probably – excluding China – about 1% up year-to-date.

We're 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 to your question, we're looking at about 5% mill demand growth including China. So we see that continues to go strong.

We have taken this year the impact of the DDGs' shift from China not importing that anymore. So we absorbed that, and we also for the most part, have cleared with all the inventory of low quality feed wheat 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're moving into 2018 with better dynamics for that business. I also would like to emphasize maybe the importance of the flexibility that we have in ADM.

We crush eight seeds 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 is softseed margins improvement, but also our portfolio, and you probably noticed in our chart about the contribution of value added that has been brought by bottle oils, blended oils, and another products.

So, I think we feel very good about the growth rates of mill going forward. Certainly, protein demand, consumption, look at the increase in soybean imports from China. That's probably the best indication of true protein consumption every year there.

So, we feel good about the long-term fundamentals and we feel good about how our business is operating and how diversified it is to take advantage of this opportunity. So, we're strong in Oilseeds going forward..

I appreciate the color, Juan. And maybe just an Ag Services question. I know we still have a couple 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 things are shaping up, the carry opportunities, Gulf elevations, and just how the mosaic is shaping up as you look at the new crop environment?.

Sure, Adam. Yeah. Very good question. Listen, I said before, we are very proud of how the Ag Services business have navigating through all this. This has been the fourth consecutive quarter of improvement. And at times, we've been very critic about the things we needed to improve.

And I think the team has delivered on that, and we can with a better cost position and better operating performance to ourselves. As we look at the second half, we do believe that the exports will be a little higher than 2015, but certainly lower than 2016 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 see the improved performance of our global traders into the second half. We've seen good wheat and corn carries in the U.S., as you describe it. We see continued increase in our destination marketing volume is growing 10% over year.

And we're going to get the bigger contribution from Medsofts that is operating very profitably and now from our majority position in Industries Centers in Israel. We're going to see higher exports for us from Argentina in the second half and 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..

All right. That's helpful color. I'll pass it on..

Your next question comes from the line of Sandy Klugman with Vertical Research. Your line is open..

Thank you. Good morning.

Does your commentary regarding the reconfiguration of your ethanol assets in Peoria have any implications for the divestiture of the dry mill assets? And if not, can you provide an update on the process?.

Yes, Sandy. No, actually, it doesn't have any implications other than this plan has been removed from the consideration because we have considered already fixed in the sense that that reconfiguration allow us to 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 given that a little bit of time to see if we could see 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 for 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..

Okay. 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-over-year?.

Yeah. I think we see an – we've seen 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 summery weather, if you will, 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 entered Q3 with a little bit better equation in terms of inventories and margins popped up a little bit with lower corn prices and higher oil prices. So, we feel better about the margin structure of the Q3..

Thank you very much..

You're welcome, Sandy..

Your next question comes from the line of Robert Moskow with Credit Suisse. Your line is open..

Hi. I 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. If 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 markets for crush margins an accurate reflection of what's really going on for soy?.

Yeah. Thanks, Robert. Good morning. So, two-part question. The first part, most of the feed wheat we have basically – the market has basically consumed over the second – of the second quarter. So, I would say, going forward, we feel that that situation will improve, so still a competitive environment from a crushing perspective.

But I will 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 how representative our board crush margins at this point in time.

Sometimes, when we go into times of either extreme tightness or extreme or excessive of supplies, sometimes we see this dislocation between cash crush and board crush and it could be more pronounced.

And eventually, they all converge and I think that yeah, we need to be careful that sometimes don't get the expectations than maybe the board crush presents versus what we see in the market. And that's what you saw in our results, that 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 three months ago, I mean, are you more optimistic about the earnings power for this year or you're less optimistic? Is it about the same versus three months ago?.

Yeah, I would say we maintain our position as we said before. 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 will 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 first half results 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..

You're welcome..

Your next question comes from the line of Eric Larson with Buckingham Research. Your line is open..

Yeah. 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 rally in the – weather rally in the grain markets 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 two or three, probably your third quarter, so how much of the crop by your judgment in South America, both beans and corn, is yet to be commercialized? And how does that compare maybe to where it was a year ago?.

Yes. So, talking about Brazil, so if you think about soy, the farmer probably have sold about two-thirds of it and if we compare 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 all crop commercialized versus maybe 55% a year-ago.

So, probably not much of the new crop has been done at this point in time. I will say we probably see Brazilian farmers or 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 if you're a farmer, you try to position and take in the export opportunities while you can hold a little bit more on soy beans because eventually you still have a crush – domestic crush and 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 maybe the U.S. being able to compete in soybeans a little bit more during the second half..

Okay. Thanks. I'll pass it on..

Thank you, Eric..

Your next question comes from the line of Ann Duignan with JPMorgan. Your line is open..

Good morning. This is Tom Simonitsch on behalf of Ann.

Could you talk more on your interpretation of last week's court ruling on EPA and the 2016 RVO and what impact do you think this ruling can have on your priorities of business this year?.

Yeah. Well, there's a lot of speculation about this. So, basically, obviously, the Justice Department has said that they would not go back and adjust 2014 and 2015, but they will adjust 2016, which has been lowered to 14.5.

So, it means that for 2016, the obligated parties will need to either blend more ethanol or buy more RINs to the effect of maybe 0.5 billion gallons more than they thought. So, you said you see the bump in ethanol and RINs pricing on that. So, that's all that we can say at this point in time.

It seems to be a small positive for that, and it was a vindication of the RFS as a rule of the country, if you will..

Thank you.

And the impact on biodiesel specifically?.

I 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 optimistic about that..

Okay. Thank you. I'll pass it on..

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 exports, U.S. ethanol exports, for the year. Obviously they have been strong. And then just if you can talk about the Brazilian fundamentals.

And as we look at kind of the second part of this season for mills down there, and the fact that sugar prices are lower from where were 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 and to ethanol versus sugar, and how that could impact exports in the second half. As well as if you could talk to the tariff, too. And obviously that's been delayed here for about 30 days, but any insight there would be great..

Yeah. Thank you, Brett. So, the exports from the U.S. of ethanol continue to move nicely and grow stronger every year. At this point in time, our team has estimated something between 1.1 billion and 1.3 billion 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 where they have been trying to favor a little bit in the government the usage of ethanol by having some differentiated piece of things, (49:04) taxes, we think that both governments are trying to be prudent and very mature about their trade relationships.

And then both chambers have been discussing things and making sure they don't jeopardize the trade relationships between these two countries. So, we think that the situation in Brazil will normalize soon.

When we think about our expectations for ethanol demand going forward, we see – if we look at next year, we see potentially an extra 100 million gallons from increased gasoline demand, domestic gasoline demand. We see probably another 100 million gallons out of additional E15 usage.

The number of stations offering higher levels of blending continues to increase. We had about, I don't know, 600 stores dispensing E15 at the end of last year. We're expecting that to grow probably to 1,100 this year and maybe in the range of 2,000 by the end of 2018.

So, again, that's a very healthy growth of maybe 100 million gallons of E15 next year. We think about the potential to Mexico, taking maybe 100 million gallons even if we don't include the big cities. That's something that once we establish the 100 million gallons trade flow that will grow potentially into 200 million or 300 million.

And we think that, potentially, we could send 100 million to 200 million 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 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 in the margin going forward for the next year. So, 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..

Well, thank you, and good morning..

Good morning, David..

Wanted just to go back to – you made some comments here. But this is, I think, a critical question about what's gone on with board crush margins and how strong they have been – and it's not just a one-quarter phenomenon; it's been happening for a while – relative to cash crush margins and how much weaker they have been.

Can you really lay out the case here for why there's 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?.

Yeah, David, I will try my best to explain this. 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 Eric, during times of extreme tightness or excessive supplies, we have seen sometimes this dislocation between cash crush and board crush, and sometimes can be more pronounced like it's been now.

Certainly, one of the larger catalysts this year of lower cash margin have 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 board price is one price that is made up of thousands of cash markets in North America, South America, Europe and everywhere in the world.

And this cash markets use the Chicago price as their proxy, I will say, but just the basis to get to a local cash price that compensates for a local supply and demand dynamics, and that's what we see as operators. So, understand that the basis is that mechanism that manages regional and local cash markets.

You can see why cash and board crush don't always have the same price. This year has 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 famous DDGs trade to China that didn't happen. And extremely weak meal basis that Europe has also pressures from the Argentina crop side.

So, looking forward, it seems reasonable to believe that the South America soybean meal and oil take a larger role in supplying the world and that the U.S.-driven board crush delivery system will have to adjust for additional factors like currency, ocean freight and more influential region markets.

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 and hopefully these things will converge. So, a longwinded answer, hopefully it added some clarity, David, to this complex issue..

I appreciate that. If I could just have a follow-up on one of the programs you talked about on the call about ADM1 (sic) [1ADM] (55:04). But I'd just like to hear your impressions as to just the origination margins everywhere 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 if we address the different aspects of your very good question. First of all, that's not a 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 ADM 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 capacities 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 it's you crush corn or you crush soybean.

So, we seen that all the time. Our role is to adjust our company to the new opportunities we're seeing ahead of us. And we see that sometimes those opportunities are for us to go forward into crushing or milling of the product. And you saw the reflection in our investments.

Sometimes those opportunities are geographical like the removal of the sugar regime in Europe and the opportunity that present for corn syrups.

Sometimes that is even by our customers, how they shift, and we've seen that in, for example, WFSI part in which our traditional CPG customers are having more difficulties to grow revenue, but where we have seen a polarization, if you will, of the consumer in which consumers that are health conscious and maybe millennials or Z-generation are much more looking at natural solutions, that's where our WFSI is so strongly positioned.

But we also see people having more conventional food, leaning more towards private labels. 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 labels. So, we continue to see this.

And then we adjust sometimes to take advantage of the opportunity, sometimes to neutralize the negative like we've done 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 a very talented people around the world searching for those opportunities. We do believe that with all the things that we have done and I highlighted here, we established 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 plan every quarter because we think that that's the path to 10%, and we're highly committed to that..

Thank you..

Your next question comes from the line of Vincent Andrews with Morgan Stanley. Your line is open..

Thank you, and good morning, everyone. Juan, just a question on – there's been some chatter out of China that with the excess corn position, they're ramping up high fructose corn syrup production there. I assume that they wouldn't be profitable 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 the size of their capacity? And are you hearing or seeing anything about it in any of the markets that you play in?.

Yeah. Thank you, Vince. You know we have a new plant there in China, in Tianjin, of high-fructose corn syrup that we started last year. Our plant is very well located to be both supplying the Chinese market and the export markets. And you probably heard on my remarks that we achieved full utilization of our plant.

And this is because, as you describe correctly, the local situation with regards to corn has become more competitive. So, it 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 high-fructose corn syrup domestically. So I will say it barely pencils out of China, it doesn't pencil all the way to North America. So 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 higher rates. I don't recall top of my head, to be honest, Vince, the capacity that they have, but we will get that number to you. I don't want to guess here..

Okay, no worries. Doesn't sound like it's that meaningful.

And just as a quick follow-up, have you broken out your CapEx in terms of growth versus maintenance?.

Yes. So this year we're going to be around $1 billion in CapEx. For us, maintenance is something between $250 million to $300 million depending on the year and the project, the magnitude of the individual project. So, I will say you take two-thirds of that and it becomes growth and cost.

It's not only growth, it's – we split almost half and half between cost and growth the remainder of the capital..

Okay. Thank you very much. I appreciate it..

Thank you, Vince..

Your next question comes from the line of Ken Zaslow with Bank of Montreal. Your line is open..

Hey. Good morning, everyone..

Morning, Ken..

So, Juan, you've repeatedly said that you focus 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.

And yet that hasn't developed the way you would have thought, and probably 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 and 2019? Are we looking at a return of X (1:03:24)? 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?.

Yeah. Okay. Let me address that, Ken. Thank you for the question on WFSI actually. I would like to talk a little bit about both the short term and the long term. In WFSI and as you say, it's more what we can control.

First of all, you have to realize the movement in the consumer in the food and beverage industry this year and over the last three years has been spectacular. And it's take all our attention and all our agility to remain on top of that. So, I think we shouldn't underestimate just because these are not related to commodity market.

These are stable markets or markets that don't require a lot of adjustment. So, I'm very proud the way our team had positioned ADM to take, as I said, this polarization of the consumer, if you will, in which you have these natural products being introduced at the same time that we get more traditional products taken into more private label.

So, yeah, there has been a big shift and we've been – we'd remain on top of that. And that's represented by the WILD Flavors growth rate. 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 we continue to increase our margins in that business, pointing 20% year-over-year increases over the last two years. And I think we are in that rate this year as well. So I would say WILD Flavors 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 these customers. So, we open an innovation center in Sydney, that costs money.

We open an innovation center in Cranbury that I think you visited this year, but we also expanded recently the culinary aspects of that. We built a plant in – Fibersol 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 are capabilities, are earnings power that we're building that's going to hit the P&L next year. So, we feel good about this, but we've been in the commodity business for 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 issues. They are – we are recovering that.

I would say half of the businesses that we're having some problems are becoming much better. And we expect SI part of the 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 of the prospect of that.

And it has the broad growth rate for the company, a growth engine that we certainly didn't have before. When you put everything together, as you describe, I think we continue to make our footprint more resilient to some of these changes, Ken.

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 it's within the next two or three years. And we certainly are very convinced about getting back to the 10% ROIC that we set as target when we put together our strategy.

I don't know, Ray, if you want to talk a little bit about the....

Well. In terms of, Ken, 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 we can control, as Juan indicated, some of the actions that we're taking in terms of delayering spans of control. In addition, yesterday we announced that 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 2018, again, we haven't started our 2018 planning process yet.

But when you take a look at our run-rate type of savings, right, for 2018, for the things that we can control of the list that – of what Juan announced, there's probably at least about $100 million 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 2018 planning process yet. But, again, for things that we're working on right now, at least of what we have announced, at least $100 million of run-rate savings.

And don't forget, in terms of the savings that we're going to generate this year, as Juan indicated, we are 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 past 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 also or expand on what Ray said, when you think about our operational excellence savings, let's say, the $225 million that we're expecting this year, those are separate from the $100 million run-rate that we could have in 2018 by some of the delayering and other aspects.

So, the operational excellence is more about adding technology to get those cost savings. The other one is more of flexing our organizational design and reducing layers. So, this will be additive in 2018, if you will..

Great. I appreciate it..

Your next question comes from the line of Farha Aslam with Stephens, Inc. Your line is open..

Hi. Good morning. Thank you. Hi. Good morning..

Good morning..

Good morning, Farha..

A question all around your Corn Processing segment.

Could you share with us how much of the improvement you (1:10:29) is market-driven in both sweeteners and starches? And how much is really driven by ADM's actions to, for example, improve lysine, or improve international, 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 starches – first of all, when we talked a lot about our operational excellence and our cost improvements, Farha, as you know, the corn plants are the largest unit plants that we have in the company with the most complex operation sometimes.

So, those are the plants that normally receive or generate the bulk of the improvements, if you will, whether they are yields or energy efficiency or things like that. So, when we talk every year about these $225 million saving things coming to the P&L, a lot – a big proportion of that comes through the P&L of sweeteners and starches.

So, this is a business that has benefited a lot from being able to run at very high capacity utilizations and very stable rates, if you will, because that have allowed our engineers to fine-tune the operations. And we continue to see a strong demand for not only high-fructose corn syrup to Mexico and others, but also from corn syrup, from dextrose.

So, the more stable demand and high utilization levels that we have, the better our engineers can run those 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 Eaststarch 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 team has leveraged all these, and continues to excel year-over-year. And we continue to be very, very confident about the future of the Corn business. So, I don't know, Ray, if you can quantify a little bit what....

Yeah. I mean I think, Farha, I mean when I take a look at our second quarter results, I mean, clearly our Tianjin operation is improving, so that helps in terms of improving the S&S 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 improvement. 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, lysine is actually part of the Bioproducts division.

And so the – some of the Bioproducts' improvements are actually related -relate to lysine around that particular alliance.

So, all in all, Farha, again, I don't have the exact numbers but I can assure you that a lot of the improvements in sweeteners and starches are actions that we have taken either to grow the portfolio or actually make our cost even more competitive in our processing plants..

I think an important aspect of this, Farha, is also our Corn business as I said before has gone global. That's bringing increased earnings and 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 we are moving into the central part of that market with Chamtor.

And also diversifying feedstocks, because it's a wheat-related one. And we are in the middle of China. China and Eastern Europe offer spectacular opportunity to increase corn syrup versus sugar. And we are very well positioned to the point that we are already expanding Turkey and Bulgaria.

So, we feel very good about our quarter-end 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, so you expect earnings growth next year for both sweeteners and starches and bioproducts?.

Yes. I think that when I think about the contribution, for example, Farha, of the Tianjin plant, which is a large plant, the first year is a negative, because you bring a plant and you don't have it filled completely. This year, we announced it's already filled. So next year we're going to have another improvement in profitability in that plant.

So, you should count that. Second is Eaststarch. You're going to have expansions and continued improvements of that. Third, you're going to have a full year of Chamtor 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 will say our team has positioned the growth prospect of the Corn business very, very right, and we're very excited about the future of that business..

That's helpful. Thank you..

Thank you, Farha..

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..