Bunge's (BG) CEO Soren Schroder on Q2 2016 Results - Earnings Call Transcript

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Bunge Ltd. (NYSE:BG)

Q2 2016 Earnings Conference Call

July 28, 2016 8:00 AM ET

Executives

Mark Haden – Director of Investor Relations

Soren Schroder – Chief Executive Officer

Andrew Burke – Chief Financial Officer

Analysts

Sandy Klugman – Vertical Research

Cornell Burnette – Citi

Adam Samuelson – Goldman Sachs

Ann Duignan – JPMorgan

Vincent Andrews – Morgan Stanley

Farha Aslam – Stephens

Kenneth Zaslow – Bank of Montreal

Brett Wong – Piper Jaffray

Operator

Welcome to the Second Quarter 2016 Bunge Earnings Conference Call. My name is Vanessa, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

And I will now turn the call over to Mr. Mark Haden, Director of Investor Relations. Sir, you may begin.

Mark Haden

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 Investors section of 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 Investors section. I'd like to direct you to slide two, and remind you that today's presentation includes forward-looking 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 had 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 Shcroder, Chief Executive Officer; and Drew Burke, Chief Financial Officer. I'll now turn the call over to Soren.

Soren Schroder

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 continue to improve the efficiency and growth potential of our already industry-leading footprint in crush and origination. We [indiscernible] and feel the improvement in soft seeds will come later this year with the new crop. In early June, we inaugurated the state-of-the-art crushing facility in our fourth complex in the Kyiv, Ukraine. And in Vietnam, we recently announced the crush joint venture with Wilmar and Green Feed, which will link our upstream pressing operation to Wilmar's downstream oil refining and consumer products business and Green Feed's marketing activities. And this week in Brazil, we announced the joint venture with AMAGGI, a leading Brazilian farming and agribusiness company. Together we will share the export terminal at Barcarena and transhipment station in Miritituba to ensure the facilities operate at the highest levels of utilization and efficiency.

We have other partnerships such as the SALIC, the Saudi agricultural 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 U.S., our milling footprint is strong and diversified and with many 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 food, our improvement program for delivering a plan was approximately $60 million recorded in the first half. And we're on track for the $125 million for the full year. Global SG&A is down significantly over the last few years, probably helped by foreign exchange, but also as a result of discipline and classes improvement.

Earlier this year, we referred to four areas of focus, Europe and Brazil foods, China crush and U.S. grains. I want to spend a few minute discussing what we're doing. In both U.S. 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 margarines. And in Europe, volumes were also strong.

But retail margins in both regions continued to be pressured and that is why we are focused on building out our B2B capabilities. Given our upstream strength, we have the prerequisites to build strong added value positions in [indiscernible]. And an important step in this direction is our recently announced acquisition of Walter Rau, a highly regarded oil business in Germany.

The company has strong products and capabilities to the B2B customer segment which can be leverage throughout Bunge and fits perfectly into our existing soft sheet crush network. We're on the right track on making good progress.

In China, demand growth continues to 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 cost to remain lean. We also increase in production of full fat soya with diversified [indiscernible] and we are growing our downstream oil business. We expect the profitability of the crush industry in China will improve in the medium term and when it does, you will be in a strong position.

In the U.S., the upcoming grain export season looks very promising compared to last but there are still structural industry overcapacity. We are adjusting, having shutdown 12 interior facilities over the last two years in consolidating volumes in our best locations. And we are continuing to focus on leaner operations and looking for ways to perfect our footprint both on the West Coast and in the U.S. 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 be soon growth with a strong upstream connectivity. Fertilizer is solid and in sugar we will place to profit from the upstream in the cycle.

Now, I'll turn over to Drew with some more details on the financials.

Andrew Burke

Thanks Mark. Let's turn to slide 4 in our earnings highlights. Net income for the second quarter was a $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 is 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, a higher performance was due to our Grains business, which reported an adjusted EBIT of $124 million versus $71 million the prior year. The increase was primarily driven by our Grains trading and distribution business where we benefited from increased volumes and improved risk management results.

Our South American port operations performed well as both volumes and margins were higher within the prior year. Brazil origination was an important contributor to the quarter, our 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 remains under pressure. Argentina was impacted by the April floods, continued concern about inflation and lower prices, which reduced the farmer's willingness to sell. The U.S. is expected to pick up as harvest near later in the year and export demand picks up.

Oilseeds 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 Oilseeds second quarter adjusted EBIT was approximately $16 million. The low result was due to continued weak [indiscernible] 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 remain under pressure. Additionally, our oilseeds trading and distribution business reported lower results.

Our Brazilian and North American Soy processing business has reported stronger results and strong mill and oil demands supported gross margins. Our Food & 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, for all our major businesses, Brazil and Mexico, wheat milling and U.S. Corn Milling reported earnings increases. Brazil Wheat Milling achieved both higher volumes and margins and has successfully integrating the Pacifico acquisition. In Mexico, margins were higher due to improved sales mix and ongoing productivity and cost gains, U.S. 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 reverse. European results showed an improvement from prior year, continue to be impacted by weak economic conditions in Eastern Europe, resulting in lower demand, Asian results were higher as margins improved, and Brazil results were line with prior year as volumes were strong in a pre-economic crisis levels, the margins were weak as an excess supply of domestic soya bean 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 a 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 Milling's 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 & Distribution business performed in line with last year. Results from our Argentine biofuel 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 invested 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, our cash flow highlights. For the six months ended June 30, cash used for operations was $684 million. Funds from operation 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 the increased commodity prices. Our liquidity position remains strong. At June 30, we had $3.4 billion available and unused under our committed credit lines.

Let's turn to slide 7 in 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 from mandatory shareholders, purchase and acquisitions in capital expenditures in a way that maximizes long-term returns for our shareholders.

This year we have returned $324 million to our shareholders with dividend and shared buybacks. We have not used funds for mergers and acquisitions as our recently announced acquisition have brought [indiscernible] and has not yet closed. Both on acquisitions remain a key element of our strategy going forward.

We have spent $275 million in capital expenditures and expect to be at or below our annual target of $850 million.

Let's turn to slide 6 in the outlook. We continue to expect earnings growth in 2016. And oilseeds underlying them in is expected to remain solid. USTA is projecting 7% global consumption growth for both soybean meal and oil. The outlook for U.S. processing margin is positive, and should benefit from a tighter supply situation in South America.

Both Canadian canola and European sunseed margin should benefit from large new crops. Grape Seed will remain under pressure as we file these as the main results in over capacity. Results will be weighted towards the fourth quarter as farmer retention in South America is putting processing margins under newer term pressure. And we will absorb most of the mark-to-mark reversal in the third quarter.

The grains business in the United States in the Black Sea should benefit from the combination of large new crops in the northern hemisphere and reduce crops and farmer retention in South America. But we expect our South American originate in activities remain slower than typical for this time of the year. Any spike in prices or currency could trigger increase selling.

Food & Ingredient results were expected to be in the $200 million to $230 million range as our performance improvement initiatives continues to support profit growth. Milling should continue on its current positive trend. With our cost structure and capabilities continuing 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. Excuse me. Our agricultural productivity efforts are producing positive results. Our Sugar is hedged, and ethanol pricing is expected to remain strong. We forecast an EBIT for the segment of $50 million to $60 million assuming normal weather patterns.

In Fertilizer, 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.

Question-and-Answer Session

Operator

And thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have our first question from Sandy Klugman with Vertical Research.

Sandy Klugman

Good morning. Thank you. Soren, in the U.S., on-farm sewage for both corn and soy remains at pretty elevated levels. Do you have expectations for having environmental sewage evolve going forward and whether or not we'll see more willingness on the part of growers to originate crops at current levels?

Soren Schroder

My impression is that storage increases and stores capacity have peaked. So, whatever we have, we have, and – but it looks like and other record crop in both corn and soybeans this year. It's a little early to talk about soybeans. We still have August to go through. But, it does look like it's 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. So, they will probably hold back while they can. But, the crops are going to be so significant that I think we will have a normal export flow and a normal flow out farm this fall, assuming that crops continue as they currently look.

Sandy Klugman

Okay. Great. And a follow-up. Last week, I was in 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.

Soren Schroder

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

Sandy Klugman

No. I understood entirely. Thank you.

Operator

And thank you. Our next question comes from David Driscoll with Citi.

Cornell Burnette

Good morning, this is Cornell Burnette in with some few questions from David.

Soren Schroder

Good morning, Cornell.

Andrew Burke

Hey, Cornell.

Cornell Burnette

Okay. Great. Just on the quarter, you had mentioned a number of things regarding the Agribusiness segment and the outlook. And it appears from your comments that many of the headwinds encountered in agribusiness in South America from 2Q are expected to carry over into 3Q. So, given that 3Q were also possessed kind of the negative impact of the mark-to-market reversal, should we expect that overall 3Q profits and agribusiness will be down both into what they were in the second quarter?

Soren Schroder

I think you should expect something along the same lines the way things looked at the moment. It moves very quickly. And a lot of it really has to do with the rate, the degree of farmers selling in -particular in Brazil. The third quarter is typically a big quarter for a farmer pricing that new crop in Brazil. And it is rather uncertain how that plays out this year. The look now is going to be less than it was last year. So, we are probably a little bit less optimistic about that element than we were perhaps back in the second – as we had the last call simply because prices have come down both in Chicago and the reais has rallied.

So, I think somewhere around the same level as Q2 is probably a good starting point as things look now, but they can change quickly.

Cornell Burnette

Okay. And then back on the first quarter call in early end of the year. I know there was a bit amount of optimism for kind of crushing results out of Argentina, but it seems like things changed really quickly during the second quarter. And I was wondering if you can go on and sew 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 question?

Soren Schroder

Yeah. We had a very good start of the year. Q1 was very good. And the second quarter was a bit of a disappointment. Some of it was because of the sort of the natural events of rain for three weeks and disruption in the ports and the poor quality of the crop, et cetera. So, it really set us back. The second quarter wasn't nearly working as 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 U.S. was a bit better, as well. So, it almost surround, global demand is strong and so whatever one reason [indiscernible] made up some place else.

As for the outlook, I think the best way to describe Argentina is still a country and industry that is in transition from really some very tough years to something better but it's taking time. And that it looks right now, farmers are holding on to their commodities, soybeans in particular, more so than they would have expected.

There are some reasons for that. The biggest one probably is the expectation of a deduction in the export tax 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 on to his beans, and we actually at the moment expect farmers to carry over about the same amount of soybeans into the export profit they did this year.

So, in some ways, for different reasons, the Argentine farmer is holding on to 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 are so optimistic about the U.S. export season again, picking up the slack.

So, we really do expect that the September or October through February period in North American crops to be quite excellent as a result of that.

Cornell Burnette

That's very good. Thanks a lot.

Operator

Thank you. Our next question comes from Adam Samuelson with Goldman Sachs.

Adam Samuelson

Great. Thanks. Good morning, everyone. Maybe, Soren, I want to kind of follow-up on the thing you just talked about with the third quarter maybe looking similar to 3Q and just taking a step back, I know you've given the guidance for EPS growth. You've given the segmented – the other segments which all are growing year-on-year. Should we take it as there will not be earnings growth in the Agribusiness segment this year? And if so, can you talk about kind of the key areas that are down? I presume it's hard – it's Brazil origination, but maybe talk about the variances within that – what sounds like an EBIT decline for the full year in Agribusiness?

Soren Schroder

Yeah. I think you've 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. It's 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 is right.

So, it's a fairly wide range and a lot of it really is hinging in the pace of farmer pricing in Brazil. It is a major driver of profitability during the third quarter. It has been in the last few years. And, obviously, how Argentina plays out for the balance of the year is very important as well.

So, given the strength of real and the sell-off in Chicago with the outlook for strong – very good crop in the U.S. and prices that were lower perhaps than what 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're a bit cautious of dialing up expectations too much in Agribusiness.

But, I mean, other crops 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 farmers, the U.S. would have a very good crushing season, start off at crushing season and a very strong export pull. So, 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. But, last year's record, I think, at this point, looks too much of a stretch. Obviously, the upside at this point is probably somewhere around $1 billion. For Agribusiness, that is what – that's probably would say. And probably as we speak right now, it's a touch less.

Andrew Burke

I think Adam, just to add a little perspective to that, in the second quarter call, someone mentioned that last year's number would be the upside of what we could achieve. So, even when we enter the year, talking about earnings growth overall, we never really expected to beat last year on Agribusiness. The margin is just – we're in setting up that way.

And – repeating what he said, a little bit. But I just think it is important for everybody to keep it in my mind. A change in the U.S. harvest are changing Brazilian selling patterns can change the opportunities in Agribusiness dramatically and quickly. And that's one reason why we've given guidance for the other segments. We're not comfortable to do so in Agribusiness. We say it more as a range.

Adam Samuelson

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 16%, a lot of that was in Agribusiness. Mitigating some of the gross profit pressures. Can you talk about the sustainability of those reductions. Somewhat – I guess, some of it might be currency related. But, thinking about that SG&A outlook moving forward and the potential earnings lever that gives you in a better farmer selling or crush margin environments in 2017 or 2018.

Soren Schroder

Yeah. Adam, I think we have made a significant structural changes in our SG&A. As Soren said there was a particular focus on the Brazilian food business where we're thinking on a lot of cost to adjust it to the new reality of the market down there.

And throughout our operations there's been a great focus to get a cap on G&A cost. So, we would expect it to continue at a lower trend and it has been historically. It's always an interesting question of how much of it is FX related, some of it certainly is, but usually evaluation of the currency is matched with a pretty high inflation rate.

So, when we get the advantage of that devaluation, our local teams-teams in the countries that's done a very good job of cutting enough cost of the said inflation. But it's been an area of emphasis and we expect to stay in the current trend.

Adam Samuelson

Got it. If I could just have one more quick one in. The [indiscernible] JV, the business in Asia, can you-any financial impact of whether cash inflow or earnings or earnings impact of these JV actions?

Soren Schroder

I mean there will obviously be some cash inflow as a result of this, but the real reason for doing this is to get our assets up to a much higher level of utilization and sort of create the base for the growth. Both of the joint ventures will be in the position to expand down field in the existing locations. And we will be a much leaner, global, total operated with our [indiscernible] and by ourselves. So, I think this is very good for us longer term.

Adam Samuelson

Okay. I'll pass it on. Thanks.

Operator

Thank you. Our next question comes from Ann Duignan with JP Morgan.

Ann Duignan

Yeah. Hi. Good morning. Could you talk a little bit about Brazilian farmer’s access to working capital, what are we hearing down there in terms of their ability to borrow or bank's willingness to lend, just a little bit of color, please.

Soren Schroder

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

Ann Duignan

Okay. And that's helpful. Thank you. And then, Drew, could you address the fact that the wash in wheat and what that might do to demand for corn or other commodities? And can you just give on why wheat has grown around the world? What does that do to your business net-net?

Andrew Burke

Well, I mean when wheat trade is up. So, that's a good thing, we participate in wheat trade particularly on to the Black Sea and wheat in many parts of the world and global trade is substituting corn in feed. And that's – up until, I would say, couple of weeks ago, when the weather changed in the U.S. that is what the market was telling consumers to do that we could have had a problem in corn, and now we don't. But wheat was the substitute in feed.

The more wheat that is said in – under margin probably has a slightly negative impact on the – on protein demand, but the numbers we are talking about at the moment are relatively insignificant in the total scheme of global protein demand. So, for us, it is a shift of trade from one commodity to the other. And as it looks right now, both corn and wheat will be competing in feed rations assuming that we complete the crop in the U.S. as it currently looks.

Ann Duignan

So, net-net, no negative impact on margins or volumes?

Andrew Burke

No. No.

Ann Duignan

Okay.

Andrew Burke

A shift from corn trade to wheat trade. But if you look at the next six months at least, the U.S. is the game in town on corn. So, wherever corn is exported, it is really a U.S. or Ukrainian affair. South America sold out. So, you won't see this as a negative in the upcoming U.S. campaign. They'll have very strong corn exports.

Ann Duignan

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

Operator

And thank you. Our next question comes from Vincent Andrews with Morgan Stanley.

Vincent Andrews

Thanks very much, and good morning, everyone. Just wondering if you can dimensionalize a bit looking at the grains' performance year-over-year. Presumably, a fair amount that has to do with that dislocation you just referenced in terms of South America being short on corn. How much of a driver was that of the grains' performance in the quarter?

Soren Schroder

It was a fair amount. No doubt that our position in Brazilian corn origination helps us in markets like these. But also, our Distribution & Trading businesses of destination did extremely well. So, it really was a full-chain, let's say, success in connecting origin to destinations and reading the markets right.

Vincent Andrews

Okay. And then the Argentina – you referenced the soya export tariff reduction that's supposed to happen over a series of years, but there's been some chatter recently that maybe given the movement in the currency and the commodity price and the resulting impact-favorable impact at farmer income that maybe they're not going to reduce the export tariff, 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 farmers' desire to monetize their crop?

Soren Schroder

Well, so far, I guess farmers in general believe that there will be a reduction in the export tax for about 5% and that was I think, one of the campaign promises. So, they're speaking to that and that is one of the main reasons why, farmer selling soybeans is-could have been slower than we expected. If that changes, and I don't know exactly how that would change other than a key statement by the government. Then, no, I can't [indiscernible] could shift and it could shift quickly.

The soybeans are there, you know that. They're not in particularly good conditions, so storing them for long periods of time is probably not a good thing. So, the situation can change quickly, As it looks right now, the farmer is content on holding on to beans and marketing developments of his corn crop. But as we get into October, November, this can-unless he start making planting decisions for the new crop which will be in September, we could see second flurry of farmer pricing. And it could be more if there's less of the belief in the export tax reduction, but that's not how it looks right now.

Vincent Andrews

Okay. Maybe just lastly, is it related to cash flow? I might have missed it. But did you give a CapEx forecast? And then also, how should we think about cash flow from operations, it's obviously negative year to date with the boom of the commodity prices at this instance, come down. Do you think it will be positive or negative there?

Andrew Burke

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 re-planning. We expect to be at or below that number as the Europe plays out. You'll see that that means we are back and loaded but we are finishing up the wheat mill in Brazil in the second half and we're working on the port and [indiscernible]. So, two really big parts of that satellite 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 more of selling we see, and whether the market is in an inverse or carry. If it's in an inverse, we'll have very 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 demand of the quarter, so you'd expect some improvement. But the pace of selling by the North American and Brazilian farmer will determine where we are at year-end.

Vincent Andrews

Sure. Understood. Appreciate it very much. Thanks.

Operator

And thank you. Our next question comes from Farha Aslam with Stephens.

Farha Aslam

Hi. Good morning.

Soren Schroder

Hi, Farha.

Andrew Burke

Good morning.

Farha Aslam

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'll realize those earnings in later periods or will those earnings opportunities decline if they choose not to sell it in the third quarter?

Soren Schroder

Okay. What we're talking about here is new crop expected [indiscernible] up as pricing. And as you know, we record some of the profit when farmers price. So, that is a trigger for the P&L. If they don't sell in the third quarter, they will likely sell even the fourth or at harvest. So, it is just the deferral of income, it is not foregone.

Farha Aslam

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

Soren Schroder

Yes.

Andrew Burke

Yes. That's correct.

Farha Aslam

Okay. That's helpful. And 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're taking, independent of economy recovery that could help profits going forward. And what kind of profit do you think you can see an improvement of without a full economy recovery? Going into next year?

Andrew Burke

Yeah. So, a lot of the improvement programs that we have in Food & Ingredients are in that. Our refineries and our packaging plants roughly $35 million or $40 million of the $60 million that we have recorded so far this year, are in the Food & Ingredients segment and they're very much to aim that at increasing efficiencies or refineries and packing plants. And that is all about increasing OEE, taking out fixed cost where we can, manning appropriately, not paying over time. Distribution and supply chain, we've made big progress, we've reduced a number of distribution centers in Brazil and we are 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 home with our crushing business so that we don't miss any of opportunities. That's one of the reasons why we've been able to regain market share, so, significantly. But, 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. So, that's one piece of it. The other part of it is in Brazil and in Europe, actually Europe and particularly. We are too skew towards retail. We want to build a presence in oil in Brazil and in Europe. That is more like what we have in the U.S., which is much more heavily weighted towards B2B that takes time. But once you develop that and you connect to some of those global key accounts we were working on, it is a business that is more predictable and speaks more to capabilities, innovation and application.

And so, the acquisition we made with Walter Rau is one example of how we're trying to acquire those types of capabilities. But it takes time to get that done. It's 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 in a little bit more as we get into Q3 and Q4 as that is the seasonal peak in Europe when all the new crop, sunseed oil come into market, et cetera. So, we will certainly have 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. But the real move in oils will come as we build out that B2B capability.

Farha Aslam

That's helpful. And if I can just sneak in one more. It's on the 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?

Soren Schroder

They have improved. They've improved from pretty bad levels, I should say. But they're at least positive gross margin now. And we expect that as we get into the fourth quarter, the third quarter will still be challenging. But the fourth quarter, we would expect margins to get back to covering full cost at least. So, an improvement from [indiscernible] still not where, let's say, it should be. I think that will take probably into next year to get to that situation as demand continues to grow and maybe even to the over capacity which exists there.

Farha Aslam

That's helpful. Thank you.

Soren Schroder

Okay.

Operator

And thank you. [Operator Instructions] And our next question comes from Ken Zaslow with Bank of Montreal.

Kenneth Zaslow

Hey. Good morning, everyone.

Soren Schroder

Hi, Ken. Good morning.

Kenneth Zaslow

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

Soren Schroder

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

Kenneth Zaslow

Okay. I'm thinking about – I know [indiscernible] 2016. When I think about 2017 and beyond, if I take a step back, you will see all these protein production coming online, being chickens, being cattle and hogs online. Is there a structural set-up where your margin structure for crush margins may be actually structurally higher and more sustainable? Is there a case to be made for that? And can you talk to that?

Soren Schroder

I think, that is actually 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, we put China aside. We'll continue to go up and we are – we're very optimistic at both in South America and the U.S. and Europe. Margins have sort of have transitioned into a new level. Now, they are big and very volatile in the last quarter because of the movements in Chicago. But, as a matter of trend, we do believe that soy crush margin 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.

And in China, it is the same, but it will take longer. China, probably could be at four years out before you get into the same sort of level of capacity utilization. 80%, 85% or 85% -- yeah, 80% to 85% when you get the margin part that we are now experiencing everywhere else. So, yes, you're absolutely right. Protein demand is super solid, continues to grow. Same thing for oil demand and that should be reflected in a higher trending global crush margin.

Kenneth Zaslow

So, I don't want to hold you to this, but, how do you think earnings is progressive over the next couple of years? I know, a couple of years, you kind of talked about the $8. I'm not pinning

To be held to that. But do you think you're back on track on that? Do you think there is a setup for you? Do you need more external factors to help you out? Or is there enough internal actions that would be taken? How do you kind of frame it? And again, not just for this year, but kind of a little bit longer-term?

Soren Schroder

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. And we've got close to 40 million tons of soy crush capacity. And you – 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 in the – positive delta in earnings just from that. So, that is really – 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. And I'll say between $150 million and $200 million worth of EBIT growth over the next few years is very likely. And you add that on top of what we believe is a higher trending EBIT in our Food & Ingredients business plus the bump, we are very likely to get in Sugar and Fertilizer. And you start getting some EPSs that are not too far from what we had said earlier.

Kenneth Zaslow

I appreciate. Thank you.

Operator

And thank you. Our next question comes from Brett Wong with Piper Jaffray.

Brett Wong

Hi. Thanks for taking my question. First, I wanted to ask your thoughts on the Brazilian political front and the impact of Agribusiness and Foods in the region, if kind of when a new government has been in place there?

Soren Schroder

It's too early to have much of an idea on this, but it does feel like in general that things have stabilized and some good people are in charge and are taking action, positive action. There's a sense of maybe not optimism at things that bottomed out. And we'll see the next quarters whether that's really the case. But it does feel like the worse is behind. And we'll see what happens once the [indiscernible] progress is – the process is completed, which I think is imminent.

And I think in general, the farm community is in reasonable shape. Brazil is still a little cost producer and farmers – the good farmers will prosper. So, we're very positive about Brazil in general and it does feel like the economy might – getting close to having the worse behind it.

Brett Wong

Great. Thanks. And then on the sugar business, and obviously things improved there, but just wondering – your thoughts on the potential asset sale there, obviously once they've improved there's not a whole lot of pressure on timing, but any progression you're seeing there would be helpful.

Soren Schroder

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

Brett Wong

Okay. Fair enough. Thanks,

Soren Schroder

Okay.

Operator

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

Mark Haden

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 mentioned it would be on December 15. We changed the date to December 13 which is a Tuesday. So, please save that date and I'll be coming out with more information as the date approaches. And lastly, thank you for participating in our call today.

Operator

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

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