Bunge Global SA Q1 FY2022 Earnings Call

Good morning, and welcome to the Bunge Limited First Quarter 2022 Earnings Release and Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Ruth Ann Wisener. Please go ahead.

Thank you, operator, and thank you for joining us this morning for our first quarter earnings call. Before we get started, I want to let you know that we have slides to accompany our discussion. These can be found in the Investors section of our website at bunge.com under Events and Presentations. Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are posted on our website as well. I'd like to direct you to Slide 2 and remind you that today's presentation includes forward-looking statements that reflect Bunge's current view 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 we encourage you to review these factors. On the call this morning are Greg Heckman, Bunge's Chief Executive Officer; and John Neppl, Chief Financial Officer. I'll now turn the call over to Greg.

Thank you, Ruth Ann, and good morning, everyone. I want to start by thanking our team for their continued dedication and strong execution as we navigate volatile commodity markets that have been further disrupted by the war in Ukraine. The team has done a great job remaining focused on our highest priority, the safety of our employees. We are actively supporting our colleagues and their families to provide what resources we can to help them through this terrible crisis. Last year at this time, we were talking about a different shock to the markets, the impact of COVID. And here we are a year later, and the lingering effects of COVID are still with us. And now we face the interrelated headwinds of continuing supply chain issues, challenging weather patterns that have reduced the production of palm, canola, and soy and government policy reactions, which are now further complicated by the war in Ukraine. These market disruptions are rerouting many traditional trade flows and contributing to crop price inflation. Our team continues to manage through these challenges with great agility and a shared sense of purpose—to connect farmers to consumers, delivering essential commodities and food to communities around the world in a safe and sustainable way. Our ability to improve our day-to-day execution while delivering on significant growth projects is a credit to the hard work of the team to transform Bunge into a more global integrated company. Working together with a collaborative approach has improved our ability to use our extensive global platform and collective expertise to help customers on both ends of the supply chain effectively respond to the additional market pressures that have increased their operating risk. Turning to first quarter numbers, we continue to build on our positive momentum, delivering year-over-year earnings growth for the tenth consecutive quarter, with all segments of the business contributing to the strong performance. While we incurred losses in our Black Sea operations, our team effectively responded to the situation when industry margins spiked globally due to the combination of continued strong demand and an even tighter supply outlook. In Refined & Specialty Oils, strong results were largely driven by North America refining. Our team used the optionality of our complete portfolio of oils, our global network, and our technical expertise to help customers solve their supply challenges. Results in milling were also higher, with our team effectively managing the supply chain and input cost volatility. Furthering our strategy, this quarter, we made an important step in our effort to identify opportunities to reduce carbon in our value chains through our recently announced commercial partnership with CoverCress. Expanding the support for this new winter oilseed crop is an ideal way to produce a lower carbon intensity feedstock that can help meet the growing demand for renewable fuels. We believe rotational cover crops can play a key role in our joint venture with Chevron to supply inputs to the renewable fuels industry. Along those same lines, we continue to make progress in simultaneously advancing our commercial and sustainability approach in South America. We've expanded our soy origination network through minority investments in resellers that purchase from smaller farms. This business strategy has also allowed Bunge to accelerate traceability efforts to support our progress toward our commitment to be deforestation-free by 2025. Before handing the call over to John, I want to spend a moment on our outlook for 2022. Back in January, we said we expected to deliver adjusted EPS of at least $9.50 for the full year. Based on what we can see today, we're now expecting to deliver adjusted EPS of at least $11.50 for the full year 2022. As usual, this outlook is based upon our current visibility and the forward curves for the balance of the year. I'll hand the call over to John now to walk through our financial results in detail. And then we'll close with some additional thoughts.

Thanks, Greg, and good morning, everyone. Before I get started, a few additional comments about the situation in Ukraine. We have over 1,000 employees there and are thankful that as of this date, there have been no reported casualties or injuries among our team. Within the country, we have two oilseed processing facilities, a port, several grain elevators, and an administrative office in Kiev. As has been previously reported, our port facility sustained damage. However, based on initial visual inspections, the damage does not appear to be significant. Beginning late March, we restarted certain commercial and operational activities, primarily exporting grain via rail and truck. However, these activities have been extremely limited. While the region is an important part of our global footprint, the total value of the assets is about 2% of Bunge's consolidated asset base. Now let's turn to the earnings highlights on Slide 5. Our reported first quarter earnings per share was $4.48 compared to $5.52 in the first quarter of 2021. Our reported results included a positive mark-to-market timing difference of $0.40 per share and a negative impact of $0.18 per share related to one-time items. Adjusted EPS was $4.26 in the first quarter versus $3.13 in the prior year. Adjusted core segment earnings before interest and taxes, or EBIT, was $858 million in the quarter versus $737 million last year, reflecting higher results in all segments. Agribusiness started the year strong. In processing, the U.S., Europe, and Brazil reported higher soy crush results, benefiting from improved margins due to strong demand. Those results were partially offset by lower results in softseed crush in Europe and China, which were negatively impacted by tight seed supplies and higher costs. Merchandising had a good quarter. However, results were down compared to a very strong prior year, reflecting lower results in our global grains and financial services operations. In Refined and Specialty Oils, higher results in the quarter were largely driven by improved margins and volumes in North America, which benefited from strong food and fuel demand. Results in the other regions were slightly lower compared to the prior year. In Milling, higher results in the quarter were driven by South America, which benefited from higher milling and upstream origination margins, partially offset by increased industrial costs. Higher margins and volumes in the U.S. also contributed to the improved performance. The decrease in corporate expenses during the quarter was primarily related to the timing of performance-based compensation accruals. The loss and other was related to our Bunge Ventures investment in Benson Hill. Results in our noncore Sugar and Bioenergy joint venture were primarily driven by higher ethanol prices. For the quarter, income tax expense was $108 million compared to $192 million for the prior year. The decrease in income tax expense was primarily due to lower unadjusted pretax income, releases of valuation allowances in Europe and Asia, and tax benefits associated with equity compensation payments. Excluding a $47 million one-time expense related to the make whole on the early extinguishment of our 2024 bonds, interest expense was $64 million, down from last year, which primarily due to lower average debt levels. Let's turn to Slide 6, where you can see our positive EPS and EBIT for the past five years. Not only does this validate the resilience of our global platform but also demonstrates continuing strong performance by our team to successfully manage numerous transformation initiatives in different market environments over the past three years. As shown on Slide 7, addressable SG&A was relatively flat year-over-year. However, similar to other companies, we too are experiencing inflation, and we are working to mitigate it where we can. After two years of COVID-related impact, we do expect higher addressable SG&A in 2022, reflecting increased travel, investments in our people, processes, technology, and growth initiatives to strengthen our capability to drive future value. While our investments in technology should bring productivity gains over time, we do expect net incremental spending in the near term. Slide 8 details our capital allocation of the nearly $700 million of adjusted funds from operations that we generated in the first quarter. After allocating $49 million to sustaining CapEx, which includes maintenance, environmental, health and safety, and $8 million of preferred dividends, we had approximately $639 million of discretionary cash flow available. Of this amount, we paid $74 million in common dividends, invested $56 million in growth and productivity CapEx, leaving approximately $510 million of retained cash flow, which was invested in additional working capital. In March, due to the strong performance of our share price, our 4.875% perpetual preferred share converted to common shares. This conversion simplified and strengthened our capital structure. Leading up to our May Shareholders Meeting, we will again review our common dividend, giving strong consideration for a higher baseline, given the success in strengthening our balance sheet and our improved earnings outlook. With our strong balance sheet and cash flow generation, our credit metrics stand at our target levels of BBB with Fitch and S&P and Baa2 with Moody's, putting us in a position to allocate capital to the best opportunities. As we have demonstrated in the past, we will continue to maintain a disciplined and balanced approach. As you can see on Slide 9, at the quarter end, readily marketable inventories, or RMI, exceeded our net debt by approximately $2.8 billion, a significant change from a year ago. This reflects the positive trend of our underlying cash flow that's allowed us to invest significantly in inventory with only a small increase in debt. Slide 10 highlights our liquidity position, which remains strong. At quarter end, we had approximately $5 billion of our committed credit facilities unused and available. This provides us ample flexibility to manage our ongoing working capital needs in this volatile commodity price environment. As shown on Slide 11, our trailing 12-month adjusted ROIC was 21%, 14.4 percentage points over our RMI adjusted weighted average cost of capital of 6.6%. ROIC was 14.4% or 8.4 percentage points over our weighted average cost of capital of 6%. The spread between these return metrics reflects how we use RMI in our operations as a tool to generate incremental profit. Slide 12. For the trailing 12 months, we produced discretionary cash flow of approximately $1.9 billion and a cash flow yield of 20.2%. Please turn to Slide 13 and our 2022 outlook. As Greg mentioned in his remarks, taking into account the current margin environment and forward curves, we've increased our full year 2022 adjusted EPS outlook to at least $11.50 per share, a $2 increase. In Agribusiness, full year results are expected to be higher than our previous outlook but still forecasted to be down from last year due to lower results in merchandising, which had a particularly strong prior year. While we are not forecasting the same magnitude of margin-enhancing opportunities that we captured in the past year, we do see potential upside to our outlook as strong demand and tight commodity supplies continue. In Refined and Specialty Oils, full year results are expected to be up from our previous outlook and higher than last year, driven by strong demand from food and fuel in our North American and European businesses. In Milling, full year results are expected to be up from our previous outlook and significantly higher than last year, primarily due to our better-than-expected first quarter results. In Corporate and Other, results are expected to be favorable compared to last year. Additionally, we now expect the following for 2022: an adjusted annual effective tax rate of 16% to 18%; net interest expense in the range of $250 million to $270 million; capital expenditures in the range of $650 million to $750 million; and depreciation and amortization of approximately $420 million. In non-core, full year results in the Sugar and Bioenergy joint venture are expected to be in line with last year. With that, I'll turn things back over to Greg for closing comments.

Thanks, John. So before turning to Q&A, I just want to offer a few thoughts. I know I've said this many times, but I want to reiterate again how incredibly proud I am of our team. We often say that markets are dynamic, but the past three years have been unlike anything I've experienced in my career. Our team has shown great resiliency, discipline, and a strong commitment to helping solve problems for our customers at both ends of the supply chain. As we look ahead, we know that markets will continue to be volatile as questions around the war in Ukraine, the eventual crop production levels, supply chain challenges, government policy reactions, and COVID all have yet to be answered. Regardless, I'm confident that our Bunge team is prepared to execute in the face of these and the other challenges that lie ahead. So now let's open the line for questions.

We will now begin the question-and-answer session. Our first question will come from Adam Samuelson with Goldman Sachs. You may now go ahead.

Yes. Greg, John, my first question is about the performance in the first quarter and over the last two years. I know you only introduced this last July, but it seems we're significantly exceeding the $7 baseline right now. The market environment suggests this can continue for a while. I would like to hear your thoughts on aspects that may not be included in that baseline, such as capital allocation related to the soy crush environment and any potential structural advantages. How are you viewing the $7 baseline today in light of the demonstrated performance, balance sheet flexibility, and the current cyclical environment?

Sure. Thanks, Adam. Yes. Let's remember, first of all, the $7 baseline was creating an earnings framework. And as we spoke about last time, the environment currently globally, we believe we're going to be well in excess of that for the next couple of years. And I think what we've seen with the tightening supply situation around the world, continued strong demand, and now what's developing in Ukraine and the Black Sea with that being an important supply area, that's really an elongation of that trend. We continue to have well above what was in that earnings framework in crush margins for our soy operation, for our soft operation. We have seen, of course, refining and premiums improve in North America, backed by renewable diesel demand, but we also have not seen a drop-off. Here post-COVID, we're seeing food demand at five-year levels as well. So, we saw that improve in North America, and that gave us the confidence, as we talked about, we expect that to continue for at least a couple of years here. And now with higher energy prices, which is also supportive for biofuels globally, and with what has happened with the war in Ukraine, we're seeing refining premiums improve in Europe and really globally. So, we're really seeing good participation everywhere. And then of course, the merchandising segment where we talked about it's the hardest to predict, but really seeing benefit across the full chain as we are helping manage this volatility and helping solve problems. I might let John put a finer point on some of the things that aren't in the model around capital.

Yes. Thanks, Greg. Adam, as we've mentioned before, the $7 baseline didn't include any growth CapEx. And so obviously, we've got a pretty robust pipeline of opportunities today in the range of $2 billion of projects that are in the pipeline. Maybe not all those will get done. We'll see. We may identify other opportunities as well. But we're very confident that with prudent capital allocation over the next couple of years, if and when the environment wanes a bit, we will have improved the baseline of this company by investing capital in good projects. So, we certainly feel like at some point here, we'll need to address the $7 baseline and give a better update on what we think it should be.

That's all really helpful. If I could follow up on the balance sheet, how do you view your committed credit capacity, credit rating, and current liquidity? It appears there will be M&A opportunities that weren't available a couple of years ago, and you seem well-positioned to take advantage of these opportunities while others may face liquidity constraints. Can you provide any insights on your current capacity and liquidity?

Yes. I think we are currently comfortable with over $2 billion in capacity. For the right opportunity, we would be willing to extend that in the near term. We believe we are in a very strong position right now with all of our metrics, and our leverage ratio is at a historically low level. Additionally, we have the right people and processes in place to manage some significant opportunities.

Our next question will come from Ben Bienvenu with Stephens. You may now go ahead.

So I want to ask a little bit about the outlook. I know you guys have historically guided with what you can see, the curves, not necessarily a sustaining of what we're currently experiencing. But I guess if I think about the environment as we move through the year, what is there on the outlook, just thinking conceptually through things, that you think could potentially either further tighten or loosen the backdrop from where we're now? And if you could rank order those, both in terms of likelihood and magnitude, that would be helpful for us to think about.

Let me start by saying that you are correct. We always focus on the forward curves to shape our outlook instead of trying to predict their final outcomes. As we gain more clarity, we've communicated that to you. Now, regarding the supply side and weather, these will be crucial factors, especially given how tight the marketplace is. It's essential to plant the U.S. crop in North America and we need favorable weather for a substantial crop, which will be a key indicator of the market's tightness. We also need to monitor the Canadian crop's development closely. Last year, Canadian canola, primarily, as well as wheat, faced weather-related issues, so we expect to remain tight until the new crop arrives. Supply chain disruptions related to the war continue to force us to adjust origin-destination pairings worldwide in order to meet demand. On the supply side, Brazil is another important factor, especially as the weather has slightly impacted soybean sales, and we'll need to observe how that impacts sales patterns as the year progresses. Foreign exchange rates are always a concern for farmers, and with the political climate and election cycle, farmers tend to be more cautious. Argentina is also in a tight position due to a slight reduction in the crops from Paraguay and Argentina, which we expect to keep farmers constrained. These are the main factors on the supply side, with the U.S. crop being the most significant. On the demand side, the situation is extremely tight for oil, mill products, and wheat, while corn is less affected. Any factor influencing that could lead to demand destruction, particularly if we experience a significant price spike due to weather conditions. Currently, we haven't observed any substantial demand destruction, but it remains something to monitor closely. Additionally, we need to keep an eye on consumer reactions. COVID continues to be a wildcard for demand, and China remains a significant driver, especially in the current context. Is there anything you'd like to add, John?

I think you covered it pretty well.

All right. Yes. Very helpful. My second question is revisiting your comment on the U.S. crop. I know it's very early. And I can think back to years where, even in having bad weather, yields were largely un-impacted, 2019 comes to mind. As you look at kind of the key milestones as we move through the summer, what are dates in your mind for moments of visibility? So kind of a plant by date and in prevent plant dates are important, and then kind of monitoring weather once the crop is harvested, thinking about what the ultimate impact to yield is. Just kind of help us think through a critical path through the summer?

Yes. I think you're correct, right? That over time, as the technology and the seed has gotten better, as farming practices have gotten better and practice around nutrients have all gotten better, it seems like it doesn't mute the yields. There's not the same volatility of yields we saw in the past. And that's a good thing, right? But the first one is watching the weather. And while there's concern, we're not concerned yet. But everyone is watching the weather patterns closely because we've got to get it in the ground and then make sure that how the mix of what gets planted between corn and soy is kind of as predicted or if that changes. And the weather can switch that a little, but not a lot. So we'll watch the planted acres, the dates that it gets in the ground and the crop mix. And then based on when it gets in the ground, then you start looking at the pollination and the weather cycles for that time of year. In watching the pollination, both crops in kind of those key developmental stages that affect yield. And then from there, we'll start watching harvest, right? And again, depending on when it got planted, when it matured, then where the harvesting is and what we believe the weather cycles are and what that does to the percent of harvested acres as well as the quality of the crop that we're bringing in. So, those are kind of the drama that we live every year in each region around the world. And I don't think it will be a lot different this year.

Our next question will come from Steve Byrne with Bank of America. You may now go ahead.

Yes. I have a couple of questions about the forward strip in soybean oil. It looks to moderate a little bit over this next year, but then stay kind of near $0.70 over the next couple of years. Two questions on that. One being, would you say there's more risk that that strip moves up or down from here? And then secondly, if it's up or even it stays where it's at, do you have any concern about basically the cost compatibility competitiveness of using soybean oil as feedstock for renewable diesel? Is that a concern for all that capacity under construction in your view?

Yes. The two main factors the market is watching are palm production, which has been disappointing lately, and expectations for a rebound in that area. The market appears to be reflecting this potential rebound. If it doesn't occur, it could create challenges. Additionally, the situation regarding the Black Sea and its impact on sunflower oil production remains critical for global supply and demand. The market's outlook is evolving daily. In terms of competitiveness, energy companies are showing their commitment to the green transition and decarbonization by investing in large-scale initiatives. We see ourselves as a crucial part of this transition, particularly with vegetable oil as a renewable feedstock, and through the development of cover crops and other technologies. Our partnership with Chevron is vital as we work together to innovate and leverage our respective expertise in agriculture and energy. Lastly, high energy costs seem to be a lasting factor affecting food and renewable feedstock pricing. Overall, we are optimistic about our positioning in the coming years.

And regarding your agreement with CoverCress, have you estimated the benefits to the economics of producing RD from CoverCress-derived oil? Presumably the lower CI score would generate more credits? And for your own participation in that, do you intend to maybe get directly involved in directly funding for contract growers to start producing this cover crop starting this fall after the corn harvest?

We are very enthusiastic about our partnership with CoverCress and Chevron and how it all integrates. As we move closer to our future plans, we will start to implement them. You are correct in pointing out that this presents a great additional revenue stream for producers once we activate it. If everything goes as planned, it will have a very low CI score and serve as another excellent source of feedstock. This is one of the reasons we are excited and invested in this venture. There is still work to be done, but this is truly an exciting development in the industry. I believe we will see significant changes moving forward, and I feel confident in Bunge's position to engage in these opportunities and adapt to the evolving landscape.

Our next question will come from Vincent Andrews with Morgan Stanley. You may now go ahead.

Greg, could you talk a little about your guidance and how it relates to the futures curves? Specifically, how far out are you able to book with those curves, and how far out have you chosen to book at this point?

Yes. Typically, the first 90 days is where we observe the most liquidity. After that, liquidity tends to decrease in the second and third quarters. We remain cautious about securing margins where we think they should be and where there's potential for growth. These are the areas we prefer to wait before hedging. Overall, considering the strong demand for oil and mills, and looking ahead regardless of what the curves show—part of which is due to uncertainty around when certain products will enter the market—we trust that the market will adjust itself and necessitate the operations with higher margins. However, the timing and extent of this are uncertain. We analyze the curves and acknowledge that we're not more knowledgeable than the market. Nevertheless, we believe that our team will maximize every possible dollar, and as we gain clarity on this, we will continue to communicate it.

I have a follow-up regarding the earlier comments on excess liquidity. Greg, you mentioned that you would be willing to allocate around $2 billion. I wanted to link that to your expectations for GAAP cash flow based on the lower end of your full-year guidance. Are we done with the working capital builds if commodity prices remain stable? What cash generation do you anticipate? Additionally, when you consider deploying an extra $2 billion, what metrics or ratios are you looking at to ensure that this amount is appropriate? How do you see it?

Yes, Vincent, this is John. I can take that. In terms of working capital levels, they are primarily driven by price levels. Typically, for us, Q1 and Q2 are usually peak periods, with Q2 often being the highest quarter. This is influenced by volume, but price also plays a significant role. We are monitoring pricing closely. Currently, our working capital levels are historically high. However, we have found that during periods of high volatility, high prices, and high volume, we have the opportunity to earn significant profits. We have positioned our balance sheet to navigate this current environment, and we feel confident regardless of what transpires in the upcoming quarters. From a cash flow perspective, we generated nearly $3 billion of EBITDA last year. While this year's forecast suggests we may be slightly lower at 1150, we still anticipate generating a solid amount of cash. Regarding capital allocation, we've discussed a $2 billion pipeline, and we will continue to generate cash as we progress. We believe that our current level of available cash is aligned with our comfort regarding our leverage ratio, which is currently between the low end of 1 and 1.5. To maintain our comfort with our rating, we could consider going up to a maximum of 2.5, in addition to the cash flow we are producing. Overall, we feel good about our cash flow situation. We've been fortunate to invest in working capital without needing to significantly increase our debt. However, as working capital decreases over time—which is cyclical—prices will eventually decline, and we expect to see more cash flow returning to the balance sheet.

Yes. I may just put one finer point on that. I'd just say, overall, one of the things that we are excited about is we've got the best pipeline of organic projects and the best pipeline of acquisitive targets that we've had put together since we're here at the Company. So, we know what we want to do. We're going to be disciplined about it and be very careful how we execute, but excited to be in this position.

Our next question will come from Thomas Palmer with JPMorgan. You may now go ahead.

I want to revisit the guidance because there have been some questions about it. I want to clarify what the $2 increase in your outlook was based on. Does it suggest that you performed stronger than expected in the first quarter, and that the second quarter is also off to a solid start? Are you maintaining your expectations for the latter half of the year, even though you've mentioned reasons it could improve more than you anticipated? Or are you expecting a stronger second half in your guidance as well?

No, you're correct. We are reflecting our Q1 performance and what we anticipate for Q2, along with our projections for the latter half of the year. For example, in our refining specialty oils business, we initially estimated around 600 for the year with a quarterly variation of plus or minus 150. In Q1, we came in around 180. As we look ahead, we have the highest bookings for the rest of the year, which gives us clarity and confidence. Interestingly, while food volumes remain stable, fuel customers have a higher booking percentage for the remainder of the year. Although food customers are lagging a bit, we expect that segment to pick up. This visibility boosts our confidence. Additionally, we are observing tightness in supply and demand and positive momentum in both the crushing and distribution aspects of our business. Despite the ongoing conflict and challenges that required us to adjust our supply lines as a global company, we have maintained our strong regional presence. Our extensive origination and distribution systems, along with our insights into supply and demand, enable us to execute effectively. This is particularly notable given the losses in the Black Sea region during Q1 and all the adjustments we had to make, yet the performance of Bunge in Q1 and our outlook remain strong.

I would just add to that, Greg. From a crush perspective, in the first half year, we've seen probably better-than-expected crush margins in North America versus our prior forecast. And then they've come down a bit in Asia and South America, especially out on the curve. But that's where the most opportunity will lie as we go forward here. And so when we say at least 11 50, I think our upside if there is some there will be in the forward curves as we progress through the year and also in our merchandising business, where we have a pretty modest forecast in for the year because that one is always a little bit difficult to predict. But certainly, when the opportunity is there, the team does a great job with it.

Thanks for that detail. I appreciate that you're not ready to discuss financial specifics on CoverCress at this time. Can you tell me if this business can utilize your existing crush infrastructure for processing, or will investments be necessary? Additionally, I believe this year marks its first commercial rollout, so what is the rough timeline? Are we still a few years away from seeing a meaningful contribution?

Yes, yes. It's out into the future before any meaningful contribution. But yes, we'd be involved in commercializing it. There would need to be some investment in the plants, but it's incremental.

Yes. I would just add that we've got planned projects in place today that have been approved and are underway to be able to accommodate processing CoverCress at our selected facilities, especially those related to the Chevron JV. So it does take time for farmer adoption, obviously. And we've been very active in working with CoverCress on that, and feel very comfortable with where we're headed, and very optimistic that this is long-term going to be a great addition to the portfolio.

Our next question will come from Ben Theurer with Barclays. You may now go ahead.

Perfect. And results. Just two questions. One is a quick one on your increased guidance on the finance cost. That's really just a reflection of that $39 million redemption fee, correct? It's not that you have higher capital needs for the working capital that's been discussed. It's just that fee, correct?

In terms of the higher interest cost, yes. We've considered our expectations for working capital levels this year. Without that cost, it will be influenced by an increase in working capital, which is part of the reason we mentioned it.

Okay. Perfect. My second question, although it may be less relevant as time goes on, still concerns the recent strength of the Brazilian real. We've noticed that Brazilian farmers are generally more hesitant to sell when the currency is strong. How have you observed the effects of this strong real over the past couple of weeks? There has been a depreciation in the last two days, which could change the situation more quickly than we anticipated a week ago. Still, how do you assess the selling activity of Brazilian farmers, which seems to be lagging behind their usual patterns? I want to understand how this might influence the supply coming from Brazil and its role in the global supply-demand dynamics you have mentioned.

Certainly. While it is uncertain how much weight to place on the real currency itself, the trends indicate that margins are not as favorable in the second half, particularly in Brazil. This raises concerns about farmers and their selling rates and how they market the remainder of their crops. There are issues with foreign exchange volatility, uncertainties regarding the upcoming election, and a slightly smaller crop. Additionally, they are closely monitoring the U.S. crop, as they typically do. There may be challenges with temperature fluctuations affecting planting, which could lead to market instability. However, farmers have shown prudence this time of year in their marketing decisions, likely due to the ongoing foreign exchange volatility.

I would add to that, Greg. Our team in South America has dedicated a significant amount of time and effort over the past few years to expanding our origination presence, particularly in Brazil. We are confident that we will capture our fair share of the market. When farmers are ready to sell, we will be there, and even when they are not ready, we will be working to encourage them to sell. We feel very optimistic about our position in the region and believe we will secure at least our fair share, if not more.

Our next question will come from Rob Moskow with Credit Suisse. You may now go ahead.

Two quick ones. I just want to make sure I understand that the comments that you made and also your competitor made about how crush margins need to move higher in order to encourage processors. Can I assume that margins are already high enough in the U.S. in the back half to justify crushing, that really your comments are related to South America and Asia? And then the second question is, can you just remind us the hurdle rate on the $2 billion of projects that you have in the pipeline organically, 10%, 15%, like if we wanted to try to put an EPS number on it?

Yes. On the curve, yes, you're correct. We're speaking to the curves in South America and Asia. If you look at that, it says, we're probably going to have to see some improvement if demand stays where it is for oil and mill, which we believe it will. And that's where we think the market will have to do its work and call for that volume. And it's just not clear exactly when and where, but that you're correct on those comments. And then I'll let John take the second one.

Yes. Rob, regarding the hurdle rate for large strategic projects, we aim for a minimum return of 10%. In more challenging business environments or when projects are further from our core operations, we may increase that hurdle rate. Using 10% as a guideline, possibly with a slight increase, is a reasonable approach. However, it's important to note that many of these projects will take two to three years to develop. Therefore, we won't see returns during the initial years of construction. We expect to start seeing significant contributions from some of these projects by 2025.

Just a follow-up, John. Can you provide an estimate of what percentage of that $2 billion is associated with alternative proteins? Additionally, is there already capital invested in that area?

We've done some. We've invested in a few opportunities. We talked about Merit earlier. I think sometime last year when we announced that. And we've got a few other investments in JV positions and some existing facilities. But the real big capital projects we have on the slate are still in development. But we talked about somewhere between $500 million and $1 billion over the next few years, if all those get approved. Now, I'm not suggesting all of them are going to get approved. They all have to stand on their own as we take them through the process, but it could be a substantial amount of investment if the opportunities continue to look good.

Our next question will come from Ken Zaslow with Bank of Montreal. You may now go ahead.

My first question is, look, if I think about the Ukraine-Russia issue and obviously devastating and something that you don't want to capitalize on. But how long do you think this will create a void in the global supplies? And what is the process for which that we would recover? And the follow-on to that is, if it extends that long, longer than the year or so, is there extra cash or opportunities where you can actually deploy quicker than you may have anticipated given the unfortunate but true windfall of extra money?

It's a very difficult situation. Our thoughts are with everyone in the affected region, and we hope for a quick resolution. However, we lack insight into the eventual outcome. I believe that regardless of the timeline we consider, any resolution will be accompanied by significant challenges due to damaged infrastructure. There are logistical issues that need to be addressed, and areas requiring demining. This will likely prolong the recovery process, affecting not only production but also our ability to distribute that production to markets in need. Therefore, we are being cautious with our investments and the speed at which we deploy funds. We continuously engage in scenario analysis and develop contingency plans. Our robust global platform, particularly in South America, must play a crucial role in addressing global food security challenges. We are committed to strengthening the connection between our South American network and our global operations and will continue to make investments to drive progress.

Yes, we believe it's beneficial in both aspects. It extends the duration and we think it increases the magnitude.

This concludes our question-and-answer session. I would like to turn the conference back over to the management team for any closing remarks.

Thank you, everyone, for your interest. And we look forward to speaking with you in the future.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.