Bunge Global SA (BG) 2016 Q2 法說會逐字稿

Welcome to the second-quarter 2016 Bunge earnings conference call. My name is Vanessa, and I will be your operator for the today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr. Mark Haden, Director of Investor Relations. Sir, you may begin.

Thank you Vanessa, and thank you everyone for joining us this morning. Before we get started I want to inform you that we have prepared a slide presentation to accompany our discussion. It can be found in the investor section at our website at Bunge.com under investor presentations. Reconciliations of non-GAAP measures disclosed verbally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the investor section.

I'd like to direct you to slide 2, and remind you that today's presentation includes forward-looking statements that reflect Bunge's statements that reflect Bunge's current views with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Bunge has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and encourages you to review these factors.

Participating on the call this morning are Soren Schroder, Chief Executive Officer, and Drew Burke, Chief Financial Officer. I'll now turn the call over to Soren.

Thank you Mark, and good morning everybody. The second quarter finished better than expected and we're optimistic for the balance of the year. We managed the business prudently in a period of volatile markets and margins, and made progress on strategic initiatives. In agribusiness we continued to improve the efficiency and growth potential of already industry-leading footprint and cross-[generation] origination. We (inaudible) and field improvement in soft seeds will come later this year with the new crop.

In early June we inaugurated a state-of-the-art crushing facility in our (inaudible) complex in Mykolaiv, Ukraine. And in Viet Nam we recently announced a cross-joint venture with Wilmar and Green Feed which will link our offstream crushing operation to Wilmar's downstream oil refining and consumer products business and Green Feed's marketing activities.

This week in Brazil we announced a joint venture with AMAGGI, a leading Brazilian farming and agribusiness company. Together we will share the export terminal at Barcarena and transshipment station in Miritituba to ensure the facilities operate at the highest levels of utilization and efficiency. We have other partnerships, such as with SALIC, the Saudi Cultural and Livestock Investment Company, in Canada which will help fill gaps in our global grain footprint.

In food ingredients most of our recent investments have been in milling. In September we will start up a new state-of-the-art mill in Rio de Janeiro, which along with our Pacifico acquisition will put us in a strong position to compete as the Brazilian market stabilize. In Mexico and the US our milling footprint is strong and diversified, and with the new product offerings. We are well placed to grow earnings in our Global Milling segment.

As we make new investments we also continue our strong focus on cost reduction. In both agribusiness and foods, improvement programs are delivering as planned with approximately $60 million recorded in the first half and we are on track for the $125 million for the full year. Global SG&A is down significantly over the last few years, partly helped by foreign exchange, but also as a result of discipline and process improvements.

Earlier this year we referred to four areas of focus: Europe and Brazil foods, China crush, and US grains. I want to spend a few minutes discussing what we are doing.

In both Europe and Brazil we have restructured our food businesses and are reducing cost. We have regained market share in Brazil in both retail oil and in margins and in Europe volumes are also strong. But retail margins in both regions continue to be pressured, and that is why we are focused on building out our B2B capabilities.

Given our offstream strength, we have the prerequisites to build strong added value positions in oils and fats. An important step in this direction is our recently announced acquisition of Walter Reu Neusser, a highly regarded oils and fats business in Germany. The company has strong products and capabilities in the B2B customer segment, which can be leveraged throughout Bunge, and fits perfectly into our existing soft seed crush network. We're on the right track and making good progress.

In China, demand growth continues for both proteins and oils. But margins remain very weak due to structural over-capacity. We've been very disciplined managing risk and pipelines tightly and reducing costs to remain lean. We're also increasing production of full-fat soya to diversify earnings and we are growing our downstream oils business. The expected profitability of the crushing industry in China will improve in the medium term and when it does, we will be in a strong position.

In the US the upcoming grain export season looks very promising compared to last, but there are still structural industry overcapacity. We are adjusting, having shut down 12 interior facilities over the last two years and consolidating volumes in our best locations. We are continuing to focus on leaner operations and looking for ways to perfect our footprint, both on the West Coast and in the US Gulf.

We're optimistic about growing earnings this year and next. We have a solid foundation in agribusiness, the most balanced footprint globally, and our food businesses will [assume] growth with a strong upstream connectivity. Fertilizer is solid. And in sugar we are well placed to profit from the upswing in this cycle.

Now I'll turn it over to Drew for some more details on the financials.

Thanks, Soren. Let's turn to slide 4 and our earnings highlights. Net income for the second quarter was $121 million, $35 million higher than the prior year's $86 million. On a year-to-date basis, net income is $356 million versus $349 million in the prior year. Our year-to-date tax rate excluding notable items its 26%.

Earnings per share from continuing operations diluted for the quarter is $0.81 versus $0.50 in the prior-year. Year-to-date earnings per share is $2.43 versus $2.11 in the prior year. 2016 diluted earnings per share for the six month period adjusted for notable items is $2.23 versus $2.12 in the prior year.

Total segment EBIT adjusted for the quarter is $217 million, $65 million higher than the previous year, with all segments reporting improved results. Agribusiness adjusted EBIT was $180 million versus $134 million in the prior year. The higher performance was due to our grains business which was reported an adjusted EBIT of $124 million versus $71 million in the prior year. The increase was primarily driven by our grains trading and distribution business where we benefited from increased volumes and improve risk management results.

Our South American port operations performed well, as both volumes and margins were higher than the prior year. Brazil origination was an important contributor to the quarter, but results were below prior year as farmers were more reluctant to price their crop due to the combination of lower production, volatile currencies, and commodity prices.

Origination margins in the United States and Argentina remained under pressure. Argentina was impacted by the April floods, continued concern about inflation and lower prices, which reduced the farmers' willingness to sell. The US is expected to pick up as harvest [nears] later in the year and export demand picks up.

Oilseed's adjusted EBIT for the quarter was $56 million versus $63 million in the prior year. 2016 results benefited from approximately $40 million of mark-to-market gains on our oilseed processing hedges, which were reversed mostly in the third quarter. Adjusting for this, oilseed's second-quarter adjusted EBIT was approximately $60 million.

The low result was due to continued weak soya margins in both Canada and Europe, our Argentine processing business that was negatively impacted by the adverse weather early in the quarter that delayed both deliveries and shipments, and processing margins in China which remained under pressure. Additionally, our oilseeds trading and distribution business reported lower results. Our Brazilian and North American soy processing businesses reported stronger results, as strong meal and oil demand supported cross-margins.

Our food and ingredients business adjusted EBIT for the second quarter was $35 million versus $29 million in the prior year. The second-quarter result was negatively impacted by the reversal of approximately $12 million of mark-to-market gains that were recorded in the first quarter. The improved performance was led by our milling business, as EBIT increased $13 million to $33 million. All our major businesses, Brazil and Mexico wheat milling and US corn milling reported earnings increases.

Brazil wheat milling achieved both higher volumes and margins, and is successfully integrating the Pacifico acquisition. In Mexico margins were higher due to improved sales mix and ongoing productivity and cost gains. US corn milling benefited from higher volumes and industrial cost reductions.

Edible oils' 2016 second-quarter EBIT was $2 million versus a $6 million loss in the prior year. As mentioned earlier, the edible oils second-quarter results were negatively impacted by the approximate $12 million mark-to-market reversal. European results were an improvement from prior year but continue to be impacted by weak economic conditions in Eastern Europe resulting in lower demand.

Asian results were higher as margins improved. In Brail results were in line with prior year as volumes were strong and at pre-economic crisis levels, but margins were weak as an excess supply of domestic soybean oil from the peak crushing period pressured retail margins, and consumers continue to buy lower value products. In the United States results were lower than last year as an improvement in packaging was more than offset by decline in refining margins. Our Argentine business continues to produce solid results.

Sugar EBIT was breakeven versus a loss of $12 million in the prior year due to improved performance in our sugar milling business. Sugar millings' improvement was primarily due to higher sugar and ethanol prices and an improved overall cost structure as a result of our productivity initiatives. These benefits were partially offset by lower crushing volumes due to wet weather. Our trading and distribution business performed in line with last year. Results from our Argentine biofuels joint venture were lower as margins compressed.

Let's go to slide 5. Our return on invested capital for the four-quarters average ending June 30 was 8.1% for Bunge Limited. For our core agribusiness and food businesses, our return on invest capital was 9.6%, 2.6% above our cost of capital. The returns are down slightly from full year 2015, as invested capital was higher reflecting the impact of higher commodity prices on working capital levels.

Let's turn to slide 6 and our cash flow highlights. For the six months ended June 30 cash used for operations was $684 million. Funds from operations of $866 million was more than offset by changes in operating assets and liabilities, which resulted in an outflow of approximately $1.6 billion. The increase in operating assets was primarily due to inventories and reflects the normal seasonal impact from the arrival of the South American harvest and increased commodity prices.

Our liquidity position remains strong. At June 30 we had $3.4 billion available in unused under our committed credit lines.

Let's turn to slide 7 and our capital allocation priorities. Our first priority continues to be maintaining a strong balance sheet and a BBB credit rating. After that we allocate funds amongst our shareholders, mergers and acquisitions, and capital expenditures in a way that maximizes long-term returns for our shareholders.

This year we have returned $324 million to our shareholders through dividends and share buybacks. We have not used funds for mergers and acquisitions, as our recently announced acquisition of Walter Reu Neusser has not yet closed. Bolt-on acquisitions remain a key element of our strategy going forward. We have spent $275 million on capital expenditures, and expect to be at or below our annual target of $850 million.

Let's terms to slide 6 (sic --"8") and the outlook. We continue to expect earnings growth in 2016. In oilseeds, underlying demand is expected to remain solid. USDA is projecting 7% global consumption growth for both soybean meal and oil.

The outlook for US processing margins is positives and should benefit from a tighter supply situation in South America. Both Canadian canola and European sunseed margins should benefit from large new crops. Rapeseed will remain under pressure as [wheat filed] diesel demand results in overcapacity. Results will be weighted towards the fourth quarter, as farmer retention in South America is putting processing margins under near-term pressure and we will absorb most of the mark-to-market reversal in the third quarter.

The grains business in United States and Black Sea should benefit from the combination of large new crops in the Northern Hemisphere and reduced crops and farmer retention in South America. While we expect our South American origination activities to remain slower than typical for this time of year, any spike in prices or currency could trigger increased selling.

Food and ingredient results are expected to be the $200 million to $230 million range, as our performance improvement initiatives continue to support profit growth. Milling should continue on its current positive trend. While our cost structure and capabilities continue to improve and volumes are increasing, the pace of profit growth in edible oils will largely be determined by the speed of margin recovery in the Brazilian and Eastern European markets.

Our sugar business continues to develop policy -- positively. Our agriculture productivity efforts are producing positive results. Our sugar is hedged and ethanol pricing is expected to remain strong.

We forecasted an EBIT for the segment of $50 million to $60 million, assuming normal weather patterns. In fertilize we expect EBIT to be approximately $35 million as improved Argentine farmer economics drive volumes. We continue to project a tax rate excluding notable items of 25% to 29%.

Now I will turn the call back over to our operator Vanessa, and we will take your questions.

(Operator Instructions)

Sandy Klugman, Vertical Research.

Good morning. Thank you. Soren, in the US on-farm storage for both corn and soy remains at pretty elevated levels. Do you have any expectations for how the environment for storage evolves going forward? And whether or not we will see more willingness on the part of growers this to originate crops at current levels?

My impression is that storage -- increases in storage capacity have peaked. So whatever we have, we have. With what looks like another record crop in both corn and soybeans this year, it is a little early to talk about soybeans. We still have August to go through. But it does look like it is another record combination of corn and beans. You would think that the more normalized marketing patterns as we get into the fall. That being said, farmers in general don't like prices where they are. They will probably hold back where they can. The crops are going to be so significant that I think we will have a -- you will have a normal expert flow and a normal flow off farm this fall, assuming that crops continue as they currently look.

Great. A follow-up. Last week I was at an industry conference. There's a lot of focus on which presidential candidate is more likely to support the passage of the Transpacific Partnership. I was wondering if you had any views on which candidate might be more likely to support the passage of the Bill? And whether or not you view that as being a potential driver for Bunge going forward?

I don't think it has a meaningful impact on our business, to be honest. I have really not much of a comment on which candidate is likely to go either way. There's plenty of confusion at the moment. I'm going to hold back on that one.

No, understand entirely. Thank you.

David Driscoll, Citi.

This is Cornell Burnette in with a few questions for David.

Morning, Cornell.

Great. Just on the quarter, you had mentioned a number of things regarding the agribusiness segment and the outlook. It appears from your comments that many of the headwinds encountered in agribusiness in South America from Q2 are expected to carry over into 3Q. Given that Q3 also possess the negative impact of the mark-to-market reversal, should we expect that overall 3Q profits in agribusiness will be down relative to what they were in the second quarter?

I think you could expect something along the same lines, the way things look at the moment. It moves very quickly. And a lot of it really has to do with the rate, the degree of farmers selling, and particularly in Brazil. The third quarter is typically a big quarter for farmer pricing of new crop in Brazil. It is rather uncertain how that plays out this year.

As a looks now, it's going to be less than it was last year. We're probably a little bit less optimistic about that element than we were, perhaps, back in the second. And we had -- as we had the last call, simply because prices have come down both in Chicago and the real has rallied. So I think somewhere around the same level as Q2 is probably a good starting point, as things look now. They can change quickly.

Okay. And then back on the first-quarter call and earlier in the year I know there was a good amount of optimism for crushing results out of Argentina. It seems like things changed really quickly during the second quarter. I was wondering if you go into it a little bit deeper and just explaining kind of what are some of the pieces that moved in the second quarter that basically changed the outlook for Argentine crushing?

We had a very good start to the year. Q1 was very good. The second quarter, yes, was a bit of a disappointment. Some of it was because of the natural events of rain for three weeks and the disruption in the ports and the poor quality of the crop, et cetera. It really set us back. The second quarter wasn't nearly what we had expected in Argentina relative to where we were when we spoke last.

On the flip side, Brazil had a very good quarter in crushing and the US was a bit better as well. It all moves around. Global demand is strong. So whatever one region doesn't supply is made up someplace else.

As for the outlook, I think the best way to describe Argentina is still a country and an industry that is in transition from really some very tough years to something better. It's taking time. And as it looks right now, farmers are holding onto their commodities, soybeans in particular, more so than we would have expected. There's some reasons for that. The biggest one probably is the expectation of a reduction in the export taxes of soybeans, which has been announced by the government. Timing is a bit uncertain. But it's enough of an incentive for the farmer to hold onto his beans. And we actually at the moment expect farmers to carry over about the same amount of soybeans into next new crop as they did this year.

In some ways, for different reasons, the Argentine farmer's holding onto his beans, letting go of his corn. But the result is that the pace of crush in Argentina for the balance of the year is likely to be lower than what we had initially expected. And that is one of the reasons why we're so optimistic about the US exports season again picking up the slack. We really do expect that the September/October through February period in North American crush to be quite excellent as a result of that.

Okay. Very good. Thanks a lot.

Adam Samuelson, Goldman Sachs.

Great. Thanks. Good morning, everyone. Soren, I want follow up on some things you talked about with the third quarter maybe looking similar to 3Q (sic). Just taking a step back, I know you've given the guidance for EPS growth. You've given the segment -- the other segments, which all are growing year on year. Should we take it that there will not be earnings growth in the agribusiness segment this year? If so, can you talk about the key areas that are down? I presume it is Brazil origination, but maybe talk about the variances within what sounds like an EBIT decline for the full year in agribusiness?

I think you framed it right. We don't expect at this point to reach last year's record in agribusiness. It's too early to call it, to be honest. The third and the fourth quarters do have wide ranges historically in terms of agribusiness contribution, anywhere from $400 million to $700 million. Last year we were at $590 million, if my memory's right. It's a fairly wide range. And a lot of it really is hinging on the pace of farmer pricing in Brazil. It is a major driver of profitability during the third quarter. Has been the last few years. Obviously how Argentina plays out for the balance of the year is very important as well.

Given the strength of real and the sell-off in Chicago, the outlook for a strong -- very, very good crop in the US and prices that were lower, perhaps, than we expected back a month or two ago, we do expect that pricing from the Brazilian farmer will remain subdued. There will be some, but it will be less than last year. And therefore we are a bit cautious of dialing up expectations too much in agribusiness.

Other parts of Bunge will do extremely well. We do expect that Brazil will have a good second half in crushing. Despite the reduction in pricing from Congress, the US should have a very good crushing season -- start of a crushing season and a very strong export pull. Terminals, grain origination, all that should be very strong. And Europe should have a very nice second half as well.

I don't want to get pegged to a number too much. Last year's record, I think at this point looks too much of a stretch. I'll say the upside at this point is somewhere around $1 billion for agribusiness. That's probably what we say. And probably as we speak right now, it's just a touch less.

I think, Adam, just to add a little perspective to that. In the second-quarter call, Soren mentioned that last year's number would be the upside of what we could achieve. Even when we entered the year talking about earnings growth overall, we never really expected to beat last year in agribusiness. The markets just weren't setting up that way.

Repeating what he said a little bit, but I just think it is important for everybody to keep it in mind. A change in the US harvest or a change in Brazilian selling patterns can change the opportunities in agribusiness dramatically and quickly. That is one reason why we've given guidance for the other segments. We're not comfortable to do so in agribusiness. We see it more as a range.

Okay. And then maybe a separate but somewhat related question. You had some pretty sharp reductions year to date on the SG&A line. Second quarter notably was down 16%. A lot of that was in agribusiness, mitigating some of the gross profit pressures. Can you talk about the sustainability of those reductions? I guess some of it might be currency related. But thinking about that SG&A outlook moving forward and the potential earnings leverage it gives you in a better farmer selling or crush margin environment in 2017 or 2018.

Adam, I think we have made significant structural changes in our SG&A. As Soren said, there was a particular focus on the Brazilian foods business where we've taken out an awful lot of costs to adjust to the new reality of the market down there. And throughout our operations there has been a great focus to get a cap on G&A costs. We would expect it to continue at a lower trend than it's been historically.

It's always an interesting question of how much of it is FX related. Some of it certainly is. But usually the valuation of a currency is matched with a pretty high inflation rate. When we get the advantage of that devaluation, our local teams or teams in the countries have done a very good job of cutting enough costs to offset inflation. It's been an area of emphasis. We expect to stay on the current trend lines.

Got it. If I could just squeeze one more quick one in. The AMAGGI port JV, the business in Asia. Can you -- any financial impact of -- whether cash inflow our earnings impact of these JV actions?

There will obviously be some cash inflow as a result of this. The real reason for doing this is to get our assets up to a too much higher level of utilization and create the base for the growth. Both of the joint ventures will be in the position to expand brown field in the existing locations. And we will be a much leaner global total operator with our partners than by ourselves. This is very good for us longer term.

Okay. I'll pass it on. Thanks.

Ann Duignan, JPMorgan.

Hi. Good morning. Could you talk a little bit about Brazilian farmers' access to working capital? What are we hearing down there in terms of their ability to borrow or banks' willingness to lend? Just a little bit of color, please.

It is a constraint for many farmers to obtain working capital for their crop finance, without a doubt. We are seeing that by the number of requests that we get for helping the crop pre-finance. We are engaging with those farmers we know well who pass our credit tests. And we take a very portfolio-like approach to how we distribute credit throughout the regions. We see that very much so. And I think it is one of the reasons why we probably won't see much of an expansion in acreage going into next year. We do expect to see better yields, but not much of an increase in acreage.

Okay. That's helpful. Thank you. Could you address the fact that the world is awash in wheat and what that might do to demand for corn or other commodities? Given where wheat is grown around the world, what does to your business net/net?

Wheat trade is up. That is a good thing. We participate in the wheat trade, particularly out of the Black Sea. Wheat in many parts of the world and in global trade is substituting court and feed. That's -- up until, I would say, a couple of weeks ago when the weather changed in the US, that is what the market was telling consumers to do. That we could of had a problem in corn and now we don't. Wheat was a substitute in feed.

The more wheat that is fed in an -- on the margin probably has a slightly negative impact on protein demand. The numbers we are talking about at the moment are relative insignificant in the totals scheme of global protein demand. For us it is just a shift of trade from one commodity to the other. As it looks right now, both corn and wheat will be competing in feed rations, assuming that we complete the crop in the US as it currently looks.

So net/net no negative impact on margins or volumes?

No. A shift from corn trade to wheat trade. If you look at the next six months at least, the US is the game in town on corn. So whatever corn is exported, it is really a US or Ukrainian affair. South America is sold out. You will not see this as a negative in the upcoming US campaign. You will have very strong corn exports.

Okay. That's helpful. I leave it there. Thank you.

Vincent Andrews, Morgan Stanley.

Good morning, everyone. Just wondering if you could dimensionalize, looking at the grains performance year over year. Presumably a fair amount of that has to do with that dislocation you just referenced in terms of South America being short corn. How much of a driver was that of the grains performance in the quarter?

It was a fair amount. No doubt that our position in Brazilian corn origination helps us in markets like these. Also our distribution and trading businesses at destination did extremely well. It really was a full chain, let's say, success in connecting origin to destinations and reading the markets right.

Okay. And then in Argentina, your reference to (inaudible) export tariff reductions, supposed to happen over a series of years. There's been some chatter recently that maybe given the movement in the currency and the commodity price and the resulting impact, favorable impact on farmer income, that maybe they're not going to reduce the export tariff as fast because the government needs the money. Do you have any thoughts on that just in general? And is that something you're hearing is impacting the farmers' desire to monetize their crop?

So far I guess farmers in general believe that there will be a reduction in the export tax of about 5%. And that was, I think, one of the campaign promises. They are sticking to that. And that is one of the main reasons why farmers selling soybeans has been slower than we expected. If that changes, and I don't know exactly how that would change other than a clear statement by the government. Then often time farmer selling could shift, and it could shift quickly. The soybeans are there, we know that. They're not in particularly good condition. Storing them for long periods of time is probably not a good thing.

The situation can change quickly. As it looks right now, the farmer is content on holding onto beans and marketing the balance of his corn crop. As we get into October/November, this can -- unless they start making planting decisions for the new crop, which will be in September, we could see a second flurry of farmer pricing. And it could be more if there's less of a belief in the export tax reduction. But that's now how it looks right now.

Okay. Maybe just lastly as it relates to cash flow. I might have missed it, but did you give a CapEx forecast? Also, how should we be thinking about cash flow from operations? It is obviously negative year to date, but with the move in the commodity prices, with they since come down. Do think we will be positive or negative there?

On the two parts. On CapEx our guidance for the year was $850 million. We'd expect to be -- and that includes $150 million for sugar, roughly, that is mainly replanting. We expect to be at or below that number as the year plays out. You'll see that that means we are backend-loaded, but we are finishing up the wheat mill in Brazil in the second half and we are working on the port in New Orleans. So two really big projects outlay. Have some decent spending on the back half of the year.

On cash flow, working capital in our business is always very hard to project. It is a combination. It is mainly going to be inventory driven. And it will be a combination of where commodity prices settle, how much farmer selling we see, and whether the market is in an inverse or a carry. If it's an inverse, we'll have a little inventories. If it's in a carry, depending on the profit opportunity in the carry, we may elect to carry more inventories. So very hard to give a precise projection on where the working capital will come out. Right now prices are off from the end of the quarter. So you would expect some improvement. The pace of selling by the North American and Brazilian farmer will determine where we are at year and.

Sure. Understood. Appreciate it very much. Thanks.

Farha Aslam, Stephens.

Good morning. Could you just share with us, farmer selling in Brazil. If they choose not to sell it in the third quarter, is it simply a timing issue where you will realize those earnings in later periods? Or will those earnings opportunities decline if they choose not to sell it in the third quarter?

What we're talking about here is new crop. Is next year's crop's pricing. And as you know, we record some of the profit when farmers price. That is a trigger for the P&L. If they don't sell in the third quarter, they will likely sell either in the fourth or at harvest. So it just a deferral of income. It is not foregone.

Okay. So it's just an issue of timing?

Yes, that's correct.

Okay, that's helpful. The second one is on Brazil and Eastern Europe. Your businesses there in oils and -- are struggling. Could you share with us kind of actions that you are taking, independent of economic recovery, that could help profits going forward? What kind of profits do think you can see an improvement of without a full economic recovery going into next year?

A lot of the improvement programs that we have in food and ingredients are aimed at our refineries and our packaging plants. Roughly $35 million or $40 million of the $62 million that we have recorded so far this year are in the food and ingredient segment. And they are very much aimed at increasing efficiencies or refineries and packaging plants. That is all about increasing OEE, taking out fixed costs where we can, manning appropriately, not paying overtime. Distribution and supply chains, we've made big progress. We've reduced a number of distribution centers in Brazil. And we're negotiating, I think, more effectively freight to those centers.

At headquarters we have become leaner. And we are now running the business much more as an integrated whole with our crushing business so that we don't miss any opportunities. That is one of the reasons why we've been able to regain market share so significantly. The bottom line is that at the shelf in places like Brazil, consumers are still trading down and sort of valuable brands don't get the mark-up they historically deserve. That is one piece of it.

The other part of it is in Brazil and in Europe, I'll say Europe in particularly, we are to skewed towards retail. We want to build a presence in oil in Brazil and in Europe that is more like what we have in the US, which is much more heavily weighted towards B2B. That takes time. Once you develop that and you connect with some of those global key accounts we're working on, it is a business that is more predictable and speaks more to capabilities and innovation and application. And so the acquisition we made with Walter Reu is one example of how we're trying to acquire those types of capabilities. It takes time to get that done. It is a change that will take probably several quarters to be complete with.

Without that, necessarily we would expect that oils should get to a quarterly profit of somewhere around $30 million as we get into -- well, maybe even a little bit more as we get into Q3 and Q4 as that is the seasonal peak in Europe when all of the new crop soft seed oils come on the market, et cetera. We will certainly get improved from where we were in the second quarter, even adjusted from the $12 million mark-to-market. And should be in a good spot by the end of the year. The real move in oils will come as we build out that B2Bcapability.

That's helpful. If I could sneak in one more. It's on Chinese crush margins. Have you seen any improvement coming into the third quarter on the Chinese crush? And what's your outlook for Chinese crush?

They have improved. They've improved from pretty bad levels, I should say. They're at least a positive gross margin now. We expect that as we get into the fourth quarter -- the third quarter will still be challenging. The fourth quarter, we would expect margins to get back to covering full cost, at least. An improvement from where we've been, but still not where, let's say, we should be. I think that'll take probably until next year to get to that situation as demand continues to grow and we [lean] even into the over-capacity which exist there.

That's helpful. Thank you.

(Operator Instructions)

Ken Zaslow, Bank of Montreal.

Hey, Good morning everyone.

Hi, Ken. Morning.

Just two or three questions. The first one is, this is the second quarter in a row that you've cited risk management as a contributor to your earnings. I'm curious. Are you seeing things that are getting better there? Are you guys doing anything different? Because there has been several years that maybe you didn't cite that as the opportunity. Can you just talk to that a little bit?

I don't think that there's anything meant by that. We feel we manage risk well, and have been for a while. The process is the same, although we always try to perfect it. It's the same team, it's the same process. Risk income in the second quarter was not significant. We did manage margins and volatility well. It was, as you know, a very, very volatile quarter and our teams helped us sort of stay on the right side of things. It's not an indication of a change in trend. I think we've handled this well over the last many periods.

Okay. My second question. I know where -- everybody's talking about 2016. When I think about 2017 and beyond, if I take a step back you see all of this protein production coming online, be it chickens, being cattle and hogs come online. Is there a structural set up where your margin structure for crush margins maybe actually structurally higher and more sustainable? Is there case to be made for that, and can you talk to that?

I think that that is actually at the core of our, let's say, belief that we can grow earnings over the next years in a structural way. Soy crush capacity utilization, let's say, outside of China, put China aside, will continue to go up. We are very optimistic that both in South America and the US and in Europe, margins have transitioned into a new level. Now, they have been very volatile in the last quarter because of the movements in Chicago. As a matter of trend, we do believe that soy crush margins will continue to edge higher. And ultimately get to levels where we will have to encourage new capacity to be built. And that should be a story that is reasonably predictable for the next several years.

In China, it is the same but it will take longer. China, you're probably 3 or 4 years out before you get into the same sort of level of capacity utilization, 85% -- 80% to 85% where you get the margin pop that we're now experiencing everywhere else. Yes, you are actually right. Protein demand is super solid, continues to grow. Same thing for oil demand. That should be reflected in a higher trending global crush margin.

I don't want to hold you to this, but how do think earnings progress over the next couple of years? I know couple of years ago you kind of talked about the $8. And I'm not saying that you're going to be held to that. But do you think you're back on track on that? Do think there's a set up for you? Do you need more external factors to help you out, or is there enough internal actions that are being taken? How do you frame it? Again, not just for this year but a little bit longer term?

I think we are on the trend towards that, but without giving a date. And I think the crush piece of it should be meaningful, both soy but also soft. We have close to 40 million tons of soy crush capacity. If you expect margins to improve over the next couple of years on average by $3 to $5 a ton and the same thing in soft seeds, you can get to a nice delta, positive delta in earnings just from that. That is where we think the earnings growth will be in agribusiness.

Grain handling is going to be dictated by things we can't always control such as pace of farmer selling and foreign exchange, et cetera, et cetera. We're not really dialing in much growth there. But we are in the soy crush. I'll say between $150 million and $250 million worth of EBIT growth over the next few years is very likely. You add that on top of what we believe is a higher trending EBIT in our food and ingredients business plus the bump we are very likely to get in sugar and fertilizer, you start getting some EPS's that are not too far from what we had said earlier.

I appreciate it. Thank you.

Brett Wong, Piper Jeffrey.

Hi. Thanks, guys, for taking my question. First, I wanted to ask your thoughts on the Brazilian political front and the impact to agribusiness and foods in the region if, kind of when the new government's going to place there?

It is too early to have much of an idea on this. It does feel like in general that things have stabilized. Some good people are in charge and are taking action, positive action. There's a sense of maybe not optimism but that things have bottomed out. And we will see the next quarters whether that's the case or not. It does feel like the worst is behind. And we'll see what happens once the impeachment progress -- process is completed, which I think is imminent. I think in general the farm community is in reasonable shape. Brazil is still a low-cost producer. And farmers, the good farmers, will prosper. We are very positive about Brazil in general. And it does feel like the economy might -- is getting close to having the worst behind it.

Great. Thanks. On the sugar business, obviously things have improved there. Just wondering your thoughts on the potential asset there. Obviously since they've improved, there's not a lot of pressure on timing. But any progression you've seen there is helpful.

It is absolutely true that things have improved. As Drew mentioned, this will be a good year for us in sugar, $50 million or $60 million EBIT will be the best we've had. Next year looks like a nice jump up from there. I think within the next year, 1.5 years as the profitability of the sector becomes evident and as we deliver the numbers, the environment for somehow reducing exposure to the milling piece will become more positive. And we will take appropriate action when opportunities present themselves. It is too early to talk about anything concrete.

Okay. Fair enough. Thanks a lot, Soren.

We have no further questions at this time. I will now turn the call back over to Mr. Haden for closing remarks.

Great. Thank you, Vanessa. I want to announce that we will be hosting an Investor Day in New York City in December. On the last call I had mentioned it would be on December 15. We've change the date to December 13, which is a Tuesday. Please save that day. And I will be coming out with more information as the date approaches. Lastly, thank you for participating on our call today.

Thank you, ladies and gentlemen. This concludes the conference. We thank you for participating. And you may now disconnect.