Archer-Daniels-Midland Q3 2O21 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2021

There are 12 speakers on the call.

Operator

Hello, and good morning, and welcome to the ADM Third Quarter 2021 Earnings Conference Call. All lines have been placed on a listen only mode to prevent background noise. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Vikram Luther, Senior Vice President, Head of Investor Relations, Chief Financial Officer, Nutrition for ADM. Mr.

Operator

Luther, you may begin.

Speaker 1

Thank you, Emily. Good morning, and welcome to ADM's 3rd quarter earnings webcast. Starting tomorrow, a replay of today's webcast will be available at adm.com. For those following the presentation, please turn to Slide 2, the company's Safe Harbor statement, which says that some of our comments and materials constitute forward looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These statements and materials are based on many assumptions and factors that are subject to risks and uncertainties.

Speaker 1

ADM has provided additional information in its reports And you should carefully review the assumptions and factors in our SEC reports. To the extent permitted under applicable law, ADM assumes No obligation to update any forward looking statements as a result of new information or future events. Our Chief Financial Officer, Ray Young, will review the drivers of our performance as well as corporate results and financial highlights. Then Juan will make some final comments, after which they will take your questions. Please turn to Slide 3.

Speaker 1

I will now turn the call over to Juan.

Speaker 2

Thank you, Vikram. This morning, we reported earnings per share of $0.97 That is a 9% year over year improvement despite a higher tax rate. And our year to date adjusted EPS of $3.69 is already above our full year 2020 adjusted EPS. Adjusted segment operating profit was $1,000,000,000 up 18% versus the Q3 of 2020 and our 8th consecutive quarter of year over year OP growth. Our trailing 4 quarter adjusted EBITDA was about $4,600,000,000 almost $1,000,000,000 more than a year ago.

Speaker 2

And our trailing 4 quarter average adjusted ROIC was 9.6%, significantly higher Versus the year ago period, I remain proud to lead a global team that is delivering robust returns And sustained growth in profits. Our strong quarter and our ongoing upward trajectory Are a testament to our team's execution and agility and the consistent implementation of our strategic plan. I'd like to take a moment now to highlight some of our accomplishments from the quarter. Slide 4, please. I'd like to start by talking about our approach to portfolio management.

Speaker 2

Our starting point is the belief that in order to thrive and create value, The company needs to have a dynamic view of its business portfolio. So when we talked about the dramatic transformation Our portfolio over the last 10 years is not a discrete event. It's a representation of our continuous work To identify opportunities for growth and improvement. Of course, those opportunities maybe the must be the right ones. The enduring trends of food security, health and well-being and sustainability provide unique and And we are focusing our efforts on identifying high growth On prem areas with attractive margins and which are adjacent to our existing capabilities.

Speaker 2

That focus informed the building of our global nutrition business. The acquisition of Wild gave us entry into flavors and a global taste platform. We then used bolt on acquisitions to add adjacent capabilities and build a one stop shop with an industry leading pantry of ingredients We do the same for animal nutrition with the acquisition of Neovia And we continue to do the same today across our business. In order to meet growing demand for sustainable solutions, We have announced a joint venture and offtake agreement with Marathon Oil Company to support the production of renewable diesel. We are continuing to invest in key nutrition categories.

Speaker 2

As demand for alternative protein grows from $10,000,000,000 to $30,000,000,000 Over the next decade, we are further enhancing our capabilities with the acquisition of SOJA Protein. And with global demand for pet food growing to $140,000,000,000 in the coming years, we are continuing our growth with a 75 In the area of microbiome, we've signed an agreement with Veland Biotech To launch a joint venture that we're perfectly positioned to help meet $1,000,000,000 in retail demand for probiotics in China. These are just some examples of how we are dynamically positioned in our portfolio to continue driving growth for years to come. There will be more to come, and you can expect an increased level of investments to support our sustainable earnings growth and further expand our capacity Please turn to Slide 5. As part of our portfolio management approach, We're working to evolve our carbohydrate solutions business, expanding our array of solutions to meet growing customer demand driven by the enduring trend of sustainability.

Speaker 2

We made significant progress recently focused on 2 areas, New opportunities for our alcohol production and our growing biosolutions platform. Let me start with alcohol. Last Thursday, we announced that we'll reach an agreement, which we expect to close at the end of the month to sell our ethanol facility in Peoria. And yesterday, we announced a memorandum of understanding with Gevo to explore potential joint ventures, One of which will include our Columbus and Cedar Rapids dry mills and our ethanol assets indicator, Transitioning 900,000,000 gallons of ethanol production to support growing demand for low carbon sustainable aviation fuel. These actions represent our commitment to a process that we began when we first announced the strategic review of our dry mills.

Speaker 2

Taken together, they will allow us to significantly reduce our exposure to vehicle fuel ethanol, We're using our expertise and assets to capitalize on new opportunities. SAF is one of those opportunities. The U. S. And EU have set goals that together would support almost 4,000,000,000 gallons of annual Sustainable aviation fuel production by 2,030 and more than 45,000,000,000 by 2,050.

Speaker 2

The other focus area for our carbohydrate solutions evolution is our biosolutions growth platform. BIOSOLUTIONS, which we launched out a year ago, is an effort focused on using our product streams to expand our participation sustainable, higher margin solutions for attractive end markets like pharmaceuticals and personal care. This is an area of significant potential, and our team is doing a great job identifying new and exciting opportunities. Earlier this fall, for example, we signed an MoU with LG Chem for the production of lactic and polylactic acid for bioplastics and other plant based products. These efforts are enabling BIOSOLUTIONS to deliver 10% Annualized revenue growth, including more than $80,000,000 in new revenue wins in the 1st 9 months of this year, And we believe there are many new opportunities to come.

Speaker 2

So from the transformation of our dry mills To our growing biosolutions platform, our work to evolve our carbohydrate solutions capabilities It's a perfect example of how we're managing our portfolio and delivering smart, strategic growth. And one of the many reasons we remain convinced on our ability to deliver sustainable earnings growth in the years to come. I'll talk a little bit more about our business outlook at the end of our call. And of course, we'll be going into much more detail at our Global Investor Day on December 10. But in the meantime, I will turn the call over to Ray to talk about our business performance.

Speaker 2

Ray?

Speaker 3

Thanks, Juan. Slide 6, please. The Ag Services and Loyaltys team continued their outstanding year with another quarter of substantial Profit growth. In ag services, we're proud of how the team executed in a challenging environment, including a swift return to operation after Hurricane Ida. Overall results were significantly lower versus the prior year quarter, driven by approximately $50,000,000 in net timing That should reverse in coming quarters as well as $54,000,000 in insurance settlement recorded in the prior year period And lower export volumes caused by hurricane item.

Speaker 3

Global trade continues its strong performance. The crushing team Delivered substantially higher year over year results, executed well, delivering stronger margins in a dynamic environment That includes strong demand for vegetable oils to support our existing food customers as well as the increasing production of renewable diesel. Results were also driven by about $70,000,000 in net positive timing effects in the quarter. Refined products and other results We're significantly higher than prior year period, driven by positive timing effects of approximately $80,000,000 that are expected to reverse in future quarters, Strong execution in EMEA and North American biodiesel and strong refining premiums due to demand for renewable diesel Foodservice Recovery in North America also contributed to the results. Equity earnings from Wilmar were lower year over year.

Speaker 3

Now looking ahead, we expect to see continued fundamental demand strength for ag service and oilseeds products, including from China, As well as solid global soybean crush margin environment in the 4th quarter, partially offset by some higher manufacturing costs. In addition, RPO will be negatively impacted by timing reversals. All told, We expect results in the 4th quarter to be significantly higher than the Q3 of this year. Slide 7 please. Carbohydrate Solutions results were lower year over year.

Speaker 3

The starches and sweetener sub segment, including ethanol production from our wet mills, showed their agility by managing through dynamic market conditions and optimizing mix between sweeteners and ethanol production through the quarter. Year over year results were significantly lower primarily due to higher input costs. Vantage Corn Processor results were much higher versus the Q3 of 2020 supported by the resumption of production at our 2 dry mills And improved fuel ethanol margins, particularly late in the quarter. Looking ahead to the 4th quarter, We expect the solid fundamentals from the end of the third quarter to continue for carbohydrate solutions With good ethanol margins extending through the quarter due to industry supply demand balance and solid demand for Corn oil and starches offset by higher manufacturing costs, particularly in Europe, as well as the absence of the Peoria dry mill. All told, 4th quarter results for the segment should be similar to the previous year Q4.

Speaker 3

On slide 8, the nutrition business remains on its solid growth trajectory With 17% higher revenues and 15% on a constant currency basis and 20% higher profits year over year And continued strong EBITDA margins. The human nutrition team delivered revenue growth of 12% year over year on on a constant currency basis helping to drive 9% higher profits. Higher volume improved product mix, particular strength in beverage drove strong flavor results in EMEA and North America, partially offset by lower results in APAC. Specialty Ingredients continued to benefit from strong demand for alternative proteins, offset by some higher costs. Health and wellness results were higher on robust sales growth in bioactives and fiber.

Speaker 3

Animal nutrition profits were nearly double the year ago period and sales were up 19% on a constant currency basis, Driven primarily by the strength in amino acids as well as feed additives and ingredients, partially offset by higher Looking ahead, we expect nutrition to continue on its impressive growth With strength across the human and animal nutrition, leading to strong year over year earnings expansion in the 4th quarter And a 20% full year growth versus 2020. Slide 9 please. Let me finish up with a few observations from the other segment as well as some of the corporate line items. Other business results were substantially lower In the prior year period, driven primarily by captive insurance underwriting losses, most of which were offset by corresponding recoveries in the other business segments. We expect Q4 to have some additional insurance underwriting losses resulting in a breakeven other Business for the 4th quarter.

Speaker 3

As expected, net interest expense for the quarter decreased year over year on lower interest rates And the favorable liability management actions taken in the prior year. In the corporate lines, unallocated corporate costs of Including net interest, corporate unallocated and other corporate, we are still on track for the calendar year To be overall similar to 2020. The effective tax rate for the Q3 of 2021 was approximately 18%. We anticipate our calendar year adjusted effective tax rate to be the upper end of our previously communicated range of 14% to 16% and potentially a bit higher depending upon the geographic mix in the 4th quarter. Our balance sheet remains solid with a net debt to total capital ratio of about 26% and available With that, I'll turn it back to Juan.

Speaker 2

Thank you, Ray. Slide 10, please. From consistent sustained profit growth to the ongoing management of our business and product portfolio, Our team has a lot to be proud of. And there's one other thing we achieved last quarter that I want to mention. We had many team members impacted when Hurricane Ida hit in late August.

Speaker 2

So we provided temporary housing arrangements, Portable generators, food and water and more. In fact, many ADM colleagues travel to the region And spend time helping repair their co workers' damaged homes. I'm very proud of that. I'm very thankful to our team. I'll keep the rest of my closing short as we plan to go into our outlook in far more depth on our December 10th Global Investor Day.

Speaker 2

As I look back at the Q3 and all of the last 9 months, I continue to see a team and a company that are delivering on our goals and our purpose. We are Closing out 2021 with great momentum. We're on track for a strong 4th quarter and a second And as we look ahead to 2022, we see another strong year for ADM. A robust global demand environment will continue to offer opportunities for us to leverage Our indispensable global origination, processing and logistics capabilities. And Nutrition will continue on its Strong growth trajectory, in line with our 15% per annum trend rate goals and on its way to $1,000,000,000 in operating profit In the coming years, of course, there are things we continue to watch, including energy costs and inflation more widely.

Speaker 2

Thanks to our unique value chain and global footprint, our unmatched abilities to meet needs in the enduring trend areas of Food security, health and well-being and sustainability and a truly unparalleled team of nearly 40 1,000 colleagues around the world will remain very optimistic in a strong year to come. With that, Emily, Please open the line for questions.

Operator

Thank you very much. Our first question today comes from Ben Bienvenu from Stephens. Ben, your line is open.

Speaker 4

Hey, thanks. Good morning, everyone.

Speaker 2

Good morning, Ben. Hey, Ben.

Speaker 4

So I've got one long term question with regards to your announcement yesterday around SAS, and then I want to ask a clarifier on the guidance as well. So on the announcement yesterday, congratulations. A couple of questions. One is, when you think about the total opportunity for SAS, Obviously, the embedded demand is significant given SAF seems like one of the most Waves to reduce greenhouse gas emissions in the jet fuel market. The economics for producers though are unclear at this time.

Speaker 4

So I'm curious as you think about engaging with Gevo on this partnership, one, what got you comfortable to commit These facilities to this end market ultimately. And then help us think about kind of the evolution of how the agreement will Mature, because it's a memorandum of understanding, why did you go with that initially versus A more legally binding agreement. And then if you would just talk just bigger picture about how you feel about the ultimate demand and the implications for the ethanol I know a lot in there, but I'd love to hear you talk about it.

Speaker 2

Thank you, Ben. Yes. Listen, we've been looking at options for the dry mills for a very, very long time. So we've been studying the opportunities For the ADM shareholders to as we try to divest these assets. Certainly, when we look at the sustainability trends And the opportunities, remember, one of the issues with these assets are they are very large, We became a little bit of an issue at the time of divesting them.

Speaker 2

So we were looking for opportunities that are sizable, where that size Turns into a competitive advantage. So certainly, when you look at all industries trying to decarbonize, The aviation industry is a massive industry that contributes to CO2. And we have identified and we have Check with partners, strategic partners, people in the industry that SAF is the solution. And I think we see also concurrently that both The U. S.

Speaker 2

And the European governments are looking at the SAF and are trying to incentivize the demand for that. So you heard President Biden or Secretary Granholm making statements about that. So we see a very positive environment developing for this, a very sizable Addressable market for us. And when you combine our size with our raw material procurements and our costs We've been running since 2017, allows that complex to provide very competitive low CI Fuels for the industry. There's going to be a lot of discussions from here on.

Speaker 2

But this is significant for us, so we decided to announce this. There are many Opportunities and options here. So we have announced what potentially could happen, which is the creation of these 2 joint ventures. In one of those joint ventures, ADM's contribution will be the 2 dry mills as our objective is, as you know, to deconsolidate these 2. So again, but still many discussions to happen and many, many partners to join us into this.

Speaker 2

We are thinking over time to have a minority position in this and having probably strategic or financial partners to join us. So but overall, as you can be assured, this is a better outcome for our shareholders in terms of The realization of value from these 2 drivers. So we're very excited about the opportunity.

Speaker 4

Okay, great. My next question is a clarifier and then a discussion to the extent you can on 1st, Ray, did I hear you say on the Ag Services and Oilseeds for the 4th quarter, you expect To be higher than the Q3, but you didn't say higher than the Q4 last year. Is that are those kind of the goalposts we should be thinking about? That's And then question 2 within that is export demand looks strong for next year. Obviously, renewable diesel is continuing to gain steam.

Speaker 4

How do you feel about Ag Services and Crushing and that broader Ag Services and Oilseeds segment as we go into 2022?

Speaker 2

Yes. So, Ben, listen, as we think about Q4 for ADM and when we say we We look at strong crush margins. Demand is strong for proteins, but also The demand for oil is very strong and tight and then you add RGV on top of that. We are facing an improved ethanol environment As we entered the Q4, we are estimating exports from the U. S.

Speaker 2

In volumes similar to last year. So and if you think about the capacity situation last year, we didn't have reserve this year. Unfortunately, one of our competitors planted down Because of AIGA, so kind of about the same situation. And then we continue to see nutrition growing at 15% to 20%. So of course, we have inflation, we have energy issues that the team is dealing with it and trying to mitigate, But we are coming into Q4 and into Q1 with a strong momentum.

Speaker 2

If you look at Q1, we feel very strong about Crush margins, our export window given that in September we didn't export that much is Probably going to be extended into January February, a little bit like maybe even longer than last year. So we feel very good at the moment. But again, with an environment that there are supply chain issues, there are energy inflation rising. So we will have to

Operator

Our next question comes from Luke Wausch from Bank of America. Luke, your line is now open.

Speaker 5

Thank you. Good morning, team.

Speaker 2

Good morning. Good morning.

Speaker 5

So I just wanted to ask a quick question, follow-up on Ben's. You mentioned that You know, with the Peoria facility and this new MOU with Gevo, you've done a lot with your ethanol assets. So Just a clarifying point, is your strategic review of the ethanol assets completed? Are you still thinking about How you're looking at your fuel ethanol capacities in your wet mills? Or how has your thinking now evolved?

Speaker 2

I would say that The conclusion of the statutory review ended in the best option for Peoria was to divest it, which we're going to Basically, shared about 135,000,000 gallons of our ethanol capacity. And then we are taking about 2 thirds of All our ethanol capacity in this MoU with Gevo, exploring options to transfer that in Sustainable aviation flows and again in the process deconsolidating because we're going to be contributing these 2 Assets to the joint venture. So but of course, we're going to have some exposure to ethanol on a long Because we still own the web mills. But what you have to think about it is that in our analysis, the supply demand fundamentals Change for ethanol, first of all, remember we always said we didn't like the undifferentiated nature of dry mills. In wet mills, have more options to protect margins and to protect returns.

Speaker 2

But second is by taking All this capacity out of the market basically, the 900,000,000 gallons in about 2 years are going to move from We call ethanol to SAF feedstock, then I think we think that supply demand fundamentals and the margin environment of ethanol will change. So we feel that that concludes our strategic assessment. Of course, we need to now execute on this transaction. We still have a lot to be discussed.

Speaker 1

That makes sense. And then just Staying

Speaker 5

on copper hydrate solutions quickly, Ray, I believe you said that operating profit in 4Q will be comparable to 4Q of last year. Now ethanol margins have certainly gotten a lot better, and it looks like you believe that they will continue to be pretty good in 4Q. So when I think about the starches and sweetener side, it would seem that you're seeing quite a bit of maybe margin compression or at least lower operating Is this just a function of you have higher input costs? And then how are you thinking about what you're selling some of your sweeteners at or starches that will

Speaker 3

You're right. We're going to have some higher input costs, which is energy costs, particularly over in Europe. So that's a little bit At the same time, you're right, and the ethanol margins that we're seeing right now in the market are extremely healthy, and that's just reflective of a very tight supply demand Situation right now and industry inventories have fallen down to 20,000,000 barrels right now. And when you take a look at driving miles and gasoline demand, we're Back to pre pandemic levels of demand again. So on the positive side, I would have to say the ethanol margins are pretty robust.

Speaker 3

On the issue of sweeteners and starches, what's interesting is while a

Speaker 5

lot of people kind of focus on

Speaker 3

the HFCS side of the business, The other parts of our business are doing extremely well, the non HFCS business, for example, citric acid demand, Starch's demand, extremely strong. So when we put it all together, that's the reason why we applied the guidance that there are some puts and takes, But we expect our Q4 for carbohydrate solutions to be similar to where we were last year.

Speaker 5

Got it. Very good. Thank you.

Operator

Our next question comes from Ken Zaslow from Bank of Montreal. Ken, please go ahead.

Speaker 6

Hey, good morning, guys.

Speaker 3

Good morning, Ken.

Speaker 6

The investments that you've made, There's several of them, the 75% in the Pet business, the LG Chem, the ACS So how much capital have you deployed to this? What is the return expected on these?

Speaker 5

I'll start there and then I'll ask a follow-up to that.

Speaker 3

Yes. I mean, I think We haven't disclosed the amount of capital in terms of the LG Chem. I mean, that's still being discussed right now in terms of how the partnership will form on Lactic acid and polylactic acid, the access bio is not that significant. The big investment that you mentioned here is really the P4, the pet The pet food company. And again, we decided to invest 75% into it, right?

Speaker 3

So therefore, I think we've kind of managed that capital there. So the total invested capital on these recent announcements actually is far less than $1,000,000,000 far less than 1,000,000,000 This is consistent with the kind of the bolt on type of investment numbers that we've talked about in the past.

Speaker 6

And then also the SOGA protein, but if I take that and then Juan, you said that in 2022 For nutrition, you're still expecting that 15% and then you kind of bled it up a little bit to 15% to 20%, which is always nice to hear. But if you're adding Less than $1,000,000,000 but sounds like more than a bread box a bread basket. Is that number going to start to Celery relative and not that 15% to 20% is a bad number. It just seems like you're starting to put more capital to work. Would we start to see that number accelerate at what And what type of returns are we expected?

Speaker 6

Or is it just not enough to make a difference? I'm just trying to kind of Cement that in my head.

Speaker 2

Yes, certainly, Ken. We will see acceleration based On these investments, when we talked about our plan, our plan of 15%, that plan was not contemplating any significant acquisitions And we were thinking in getting to about $1,000,000,000 OP in a couple of years. So that trajectory continues and will be accelerated for Some of these deals, you have to understand are just bolt ons where we plug some capacity where we don't have like So, yeah, proteins, things like that. And some other ones become more platforms that actually give us a pivot to accelerate even more our growth rate. So But we will continue in an investment phase on nutrition because the opportunities out there, our customers are reacting positively Our value proposition and we see our pipeline and our quarterly wins continue to grow.

Speaker 2

So As long as we can post numbers of revenue growth in the 15% range and OP growth in the 20%, right, we know it's a good deal for the shareholders. So we're very pleased with the direction.

Speaker 6

I have one other big picture question. Juan, you outlined in every year you do it, in your press release, 8 consumer You believe it's going to be the future of where we're going. This one, you laid out 8. When you think of your portfolio, What percentage of your portfolio do you think targets those 8 today? And then when I think about in 3 to 5 years, what percentage of your And then I'll leave it there and I appreciate your time.

Speaker 2

Yes, that's a very good question to which we will provide more granularity at the December 10 Investor Day. But I will say in general terms, And that's where you're seeing us working on the evolution of the carbohydrate solutions portfolio. Probably the carbohydrate solutions portfolio because it has the big assets It's a one more difficult to adjust to some of these. We think that our services and all seeds and nutrition are much more aligned to that. And now that we are evolving the portfolio of car solutions, we feel that the significant percentage of ADMs In couple of years, we'll be aligned to all these trends, which makes us very optimistic about the future.

Speaker 2

We are very well positioned for all these long term

Speaker 6

But in the Analyst Day, you'll provide some level of Percentages are something to give some context to it like, hey, by 5 years, we'll be 25% or 30% or some context to show the progression of that. It sounds like it's an Part of how you're thinking, so I just hope that you do that. We appreciate it. Thank you.

Speaker 2

Yes, we will provide that granularity. Thank you.

Operator

Our next question comes from Michael Piken from Cleveland Research. Michael, your line is open.

Speaker 6

Yes. Just wanted to touch base a little bit and just understand

Speaker 5

a little bit better your outlook for exports. You mentioned that You think the outlook for China and their grain demand is going to be strong. Could you quantify what you think for their corn and soybean

Speaker 2

Yes, Mike. Listen, we still believe that protein demand is very strong. And when we look and we check with our team in China, we still believe that China will need to import about 100,000,000 tons, give or take, of soybeans And about 25,000,000 tons of corn. So of that corn, the majority will come from the U. S, a little bit from Ukraine.

Speaker 2

So we think that the volumes, although maybe slightly in a different way than last year, Right now, consumers are a little bit more short term, more hand to mouth, if you will, because they were expecting from A little bit of a correction in prices as we were hitting the harvest, but we've seen Chinese buyers come to the U. S. In the last few weeks, and we feel very good about this export season. You have to remember that we were in a tight situation from a supply demand perspective given these And then when you add that some of that capacity has been taken out, this will make it for a tight export system that will probably Have rolled forward maybe a month since in October at the beginning of October, All these facilities, we're still trying to recover power.

Speaker 5

Right. And then my follow-up is just It seems like right now there are shortages of fertilizer and maybe glyphosate. What is your expectations for In Brazil or even in the U. S, like, do you think we're going to be able to have enough fertilizer to plant crops around the world? And What does that mean for your fertilizer business?

Speaker 5

But more broadly speaking, are you worried about being able to get enough crop planted around the world? Or What's the workaround from that? Thanks.

Speaker 2

Yes. Listen, at this point in time, it's a matter of price, Of course, natural gas have driven this up. Different situation when you are in Europe than you are in North America, so North America is paying like $5 to $6 for natural gas, Europe to Spain maybe 30. But I will say at this point in time, it continues to be available for farmers only At higher prices, we haven't detected a big shift in acreage from one to the other. It's still a little bit early from the planting Intentions and you could think that potentially could be a shift from corn to soybean, That is not clear yet.

Speaker 2

And probably the numbers today are a little bit of a toss-up for the farmer on what to do. So probably over the next Couple of weeks, we will have more clarity on if there is any shift in acreage for next year.

Speaker 6

Okay, great. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Tom Simunic from JPMorgan. Tom, your line is open.

Speaker 7

Thanks. Good morning, everyone.

Speaker 3

Hey, Tom.

Speaker 7

So you just opened a flavor production facility in China to serve as a supply hub in the region. What is your outlook Nutrition in Asia Pacific compared to other regions. You've called out APAC as an area of weakness in both human and animal nutrition in the last couple of quarters. So how much Relative weakness is down to ADM's current capabilities in the region as opposed to broader market conditions.

Speaker 2

Yes. You are right, Tom. I think that we've been very proud of being of having these growth rates in nutrition. This mainly have been happening on the developed parts of the world, if you will, in which developing markets Exposure is still relatively small for ADM, whether we're talking about South America or Asia Pacific. So in Asia Pacific, we've been players in flavors for a while and this is just an expansion.

Speaker 2

This is at about An hour away from a big, big center of consumption, so we feel very good from a raw material perspective. We feel very good From an access to a big consumption base and this will be very important for our customers. Our participation in Asia was limited to one plant for flavors and about a handful of plants for animal nutrition. And we continue to build that position in animal nutrition. We feel very good about it.

Speaker 2

And then in this opportunity, in flavors, we will So you will see us going and putting more flags on the world in the developing areas, whether it's Asia Pacific Or South America, as we need to go and support our global customers, these are our customers that we do business every day here And some of them are represented there, but also we have a lot of new local customers that are requiring these capabilities. So it's just a natural evolution of the business, if you will.

Speaker 7

Thanks for that, Juan. And just following up on SAF. What is your operating plan for the 2 dry mills between now and 2025 When that SCF production is expected to come online?

Speaker 3

Yes. We expect to continue to operate those I mean, naturally, as you get closer to 2025, there's going to be probably some construction around that area. There'll probably be some But as we kind of look out over the next couple of years, we do expect that driving miles are going to be are coming We're seeing tight S and D right now in terms of our industry. We're seeing, frankly, the rest of the world is starting to Cover from the pandemic. So we expect rest of the world driving miles to start recovering.

Speaker 3

And so therefore, there is a lag in terms of recovery of exports Ethanol from United States to the rest of the world. So I think over the next couple of years, I think you're going to continue to see some level of demand recovery from outside of the United It's for ethanol. And then even China, as we talked about, I mean, they're focused on the environment, on energy. So you could actually see China and you're returning back to the markets. And we've seen a little bit of that already.

Speaker 2

So let me clarify from a Operating perspective, we're not going to be doing anything to these dry mills. The dry mills will produce ethanol And then there is downstream technology and capabilities that Gevo brings to the table to transform them into SIF. But those two plants will continue to produce ethanol as they are. We are not planning to invest capital into that. Our contribution is those two plants And then Gevo takes it from there, from a downstream perspective.

Speaker 7

That's very helpful. Thank you. I'll leave it there and pass it on.

Operator

Our next question comes from Ben Theurer from Ben, please proceed.

Speaker 8

Yes. Good morning, Juan Ray. Congrats on the results. Just Two quick follow-up questions. So one on ex service, and I understand your commentary around the expectation into the 4th quarter, But just trying to maybe get a little bit of a sense differently.

Speaker 8

So clearly, you have some implications in the Q3 because of Hurricane Ida and you expect Some of those effects to reverse in coming quarters. Are you comfortable enough that those are almost immediately reversing and benefiting your 4th So to speak, have a chance to get somewhere close to where it was last year? So that will be my first question.

Speaker 2

Yes, I would say we expect a strong quarter for Ag Services in this year. And You have to understand when we're talking about momentum and fundamentals, sometimes at the end of the year, it becomes complicated because There could be margin expansion, margin contraction here and the accounting rules make sometimes that we need to report some profits Into Q4 or into Q1, and we need to respect that. What we're talking, what we can determine from middle of October, which Today, it's a fundamental from the market and demand is strong and the export capacity was tight Starting into this, we have recovered and we started to see our order book filling up for that. So we feel good about it. But again, it's difficult to call it sometimes Q4 versus Q1 because of the accounting rules and we can determine that now.

Speaker 2

We have to determine that at the end of the day.

Speaker 8

Okay, perfect. And then, if we take a look at the nutrition business, and you've highlighted it In your prepared remarks, obviously, the very strong performance on the Animal Nutrition side, almost doubling operating profit. But then Human Nutrition on the other side, growth was just in the high single digits. Could you explore a little more on the details Of what were the issues for the maybe a little lower than what you would want to see growth in human nutrition? Was it more of an impact because of input cost pressure where you just didn't pass it on significantly in the way you would have wanted to?

Speaker 8

Or are there certain demand issues still in certain areas? Just to understand a little better what's been driving the growth in human nutritional, offsetting of the growth, to

Speaker 3

put it that way, better.

Speaker 2

Yes, well, if you look at the human nutrition for the quarter, We grew about revenue about 12%. I mean, it's actually a pretty good number. And I think if you look at There were EBITDA margin on sales, we were able to maintain that EBITDA margin on sales. So when you grow twice the industry clip, if You will. And you maintained margins.

Speaker 2

So I was pretty satisfied. Of course, it's not a spectacular maybe improvement year over year than Animal Nutrition Hub, but it's because human nutrition has been more stable than doing this. And in human in animal, we're still going through the Neovia And all those things. But no, I don't think it was a weak quarter at all actually. I think as I said, we continue to grow at maybe twice the industry rate and maintaining

Speaker 3

very robust EBITDA

Speaker 2

margins on Great and maintaining very robust EBITDA margins on sales. So EBITDA margins on sales for flavors are north of 20%. And we've been able to maintain despite our pressure in raw materials and all that. So, no, I think it was we're very satisfied with the performance.

Speaker 8

Perfect. It's complaining on the high level, Juan. Well, congrats again. Thank you very much.

Operator

Our next question is from Robert Moskow from Credit Suisse. Robert, please proceed.

Speaker 5

Hi. Just a couple of cleanup questions. Can you talk about your pricing outlook for corn sweeteners? It would appear that corn prices have been on kind of a roller coaster, they're down off their highs. Now how is that impacting negotiations for next year?

Speaker 5

And then I had a follow-up on the pea protein market.

Speaker 3

Hey, Rob. It's Ray here. So the contracting season is underway. And we expect HFCS Volumes and margins for ADM to remain strong in 2022. Clearly, there's been some volatility in terms of corn prices.

Speaker 3

And frankly, the input cost will get reflected in terms of our contract pricing. And we do expect contract pricing to be higher Next year compared to this year. Volume wise, we do expect volumes for 'twenty two to be similar to what we've seen this year. We are seeing recovery in terms of the food service sector. When I look at carbohydrate solutions in Actually, HFCS is one component, but non HFCS is actually a very important component as well.

Speaker 3

And we've seen non HFCS product Pricing being pretty attractive with a good margin upside, and that is reflective of really a strong demand environment For citric acid, for starches, for dextrose and other products. So that's another important factor when you take a look at starches and sweetener results.

Speaker 6

And then when we look

Speaker 3

at Carbohydrates Solutions business in total for 2022, As I indicated earlier, we do think that the biofuel part of the business should be actually quite positive when you compare I know what we think the fundamentals will be for next year compared to this year. So when you put it all together, we do expect Card Solution We have another strong year in 2022.

Speaker 5

Okay. And then the follow-up on key proteins. You mentioned, I think alternative protein briefly. I thought I had heard that the pea crop in Canada It was kind of weak. But my perception is that that doesn't matter that much to processors like yourself.

Speaker 5

But maybe you can help me understand whether it does or it doesn't? And how much volume are you doing in that market for the alternative meat end market.

Speaker 2

Yes, Rob. We have an underlying And we feel very good about that business actually. Specialty Ingredient Systems and P Protein are driving a lot of the upside that we see in some of these new verticals and both businesses are relatively new. They have almost no revenue in 2020 for us, and they are providing alternative solutions to Customers, we have a strong customer interest in these areas and everybody wants to differentiate, so everybody wants their own foundation. So at this point in time, soy is the main driver for us.

Speaker 2

So pea is a little bit like an additive Or a supplementary differentiator. So from a volume perspective, it's not a big impact. So we haven't felt any impact in our plant at all.

Speaker 3

Got it. Okay.

Speaker 6

Thank you.

Speaker 2

Thank you, Rob.

Operator

Our next Question comes from Vincent Andrews from Morgan Stanley. Vincent, your line is open.

Speaker 9

Thank you and good morning everyone. Juan, just wanted to ask you on the LGM LG Chem, excuse me, the LG Chem JVs. Why is it set up in 2 JVs rather than just sort of one integrated production of lactic acid and then into PHA, what's the thought process behind having sort of an upstream and a downstream setup?

Speaker 2

Yes, this is a matter of Where the expertise of each company lies and to be honest also, we want to be as asset light That's possible. So in areas where LG is dominant and they're going to build that downstream capacity, When we think about BIOSOLUTIONS, our objective, Vince, is to make maybe the first derivative. So the first liquid, if you will, and that to have an ownership position. But when we start making chemicals or other products that Required application technology and all that, we cannot become a chemical company. So in that, we let the partner take a predominant position.

Speaker 2

So we make corn grind plus 1, if you will, and then we let our partners take it from there. It's just a matter of optimized capital for us and not investing energies. When we go into these materials, if we're going to produce 1 liquid, That makes sense. And then we have the partner doing the best. Okay.

Speaker 2

I get it. It sounds like

Speaker 7

once we get the full details of the agreement, we'll see

Speaker 9

where the economics Set up and it will make sense that your investments will be in your sort of center of the plate focus and there's some there's. As a follow-up, On the fertilizer issue, obviously, there are availability concerns, but The high prices are deferring fertilizer purchases, particularly in South America and Aperso, which are the big soy groups that are telling their farmers To buy less fertilizer, etcetera. And I see your slide showing that farmer sales are, I guess, at a 5 year average, which is Probably okay, but they're well below last year and probably the year before. So what impact does that have on your origination business? If the farmer is slow to sell the beans or if they buy less fertilizer, then you may hold on to more beans because they want to keep the FX, Keep the dollars.

Speaker 9

So how do you think about that playing out for you moving into next year?

Speaker 2

Yes, I would say, South America, it's always an issue with a little bit more factors in terms Of the farmer selling just because of the currency and the distortion that sometimes the government bring into the market. So At this point in time, we continue to see maybe relatively slow farmer selling In Argentina, and that will probably continue. It's been a little bit better in Brazil But it's still relatively slow versus the accelerated pace at which they sold last year.

Speaker 6

Thank you.

Operator

Our next question comes from Vincent Anderson from Stifel. Vincent, please go ahead.

Speaker 10

Yes, thanks. And I would like to continue, Vincent. Vincent's line of questioning on PLA. Maybe just approaching it from A little bit of a different direction, knowing that the agreement for us to be finalized. But philosophically, it sounds like you're maybe trying to prioritize Getting incremental return out of your core competency in fermentation technology, but maybe limiting direct And I ask just because that is a bit more of a commodity business than it feels like You've pushed more of your investments too recently?

Speaker 2

Yes. I think that, as we said, we're trying to I think as you said, we're trying to optimize our facilities and attach those facilities to demand that has more Growth opportunity. In this issue, again, we don't want to go into making chemicals, That's a heavy capital intensive and intensive industry and we want to make one derivative and then reserve all that capital Continue to grow in food, feed and beverages and health and wellness, that's what we're trying to do. So LG Chem is a great partner. We're very honored to have them.

Speaker 2

They have very good technology. And it's a little bit like the Gevo discussion. We're are going to continue to make ethanol. They will take it from there to make SAF. And with this Partnership, we're going to make Lactic, they're going to take it from there to make PLA.

Speaker 2

So it's kind of the similar

Speaker 10

That's perfect. Thank you. And then just a quick point of clarification. If I understand the phrasing of that MOU announcement, it sounded like you're Talk briefly about the opportunity there as a standalone investment?

Speaker 2

Yes. Listen, part of that is correct. I mean, Lactic It can go to many opportunities. But this is relatively early on. The teams are looking at this.

Speaker 2

There is a lot There are a lot of numbers. There are a lot of things that could still change. There are a lot of discussions. So I wouldn't like to venture That much since the teams are still discussing with LG Chem and we need to create this. But this is a start, if you will.

Speaker 2

All these companies that are promising decarbonization by 2,050, 2,060, 2,040, whatever it is that is, And they are looking back at their portfolio. They need to clean their portfolios, if you will. And one of their ways to do that It's through recycling. The other way to do it is to go in plant based. So we are receiving a lot of inbound requests On that and we're looking at our assets, our ability to produce plant based products and our carbon capture and sequestration That provides an opportunity to make lower CI products.

Speaker 2

And we are trying to maximize the opportunity for ADM on all these. So Some of these things may not be that well defined because we are in the process of optimizing all that value for the ADM shareholder. But it's a great opportunity for us and we will be mindful of returns and we're not going to veer into areas that we shouldn't be putting The capital will be reserved for our main thrust of the strategy, which is to continue to grow in food and feed and beverage.

Speaker 10

Understood. I appreciate the added detail and I look forward to hearing more about it.

Speaker 5

Thank you.

Operator

Our next question comes from Eric Larson from Seaport Research Partners. Eric, your line is open.

Speaker 11

Yes. Thank you, everyone, and congratulations on a good quarter. So, Juan, the one question that I have for you, It's related to Gevo and kind of the whole transaction. And I know that one of your Maybe not to put a bad word in it, one of your dislikes that you've had with ethanol over the years is The extreme volatility of the earnings and some of the factors, your lack of ability to control some of those factors. And When we talked about the dry mills in the past, one of the things was trying to reduce your earnings volatility.

Speaker 11

So In the economics of how you've negotiated we don't know much about the economics that you have here with SAF, but Have you been able to do you think you've been able to ink an agreement that gives you more sustainability or I guess less volatility of earnings on the economics of SaaS going forward Relative to ethanol?

Speaker 2

Yes, Eric, you're correct that returns are important to us, but also dampen the volatility It's in the mind of everything we do. So of course, the team is considering that. I can't disclose that much at this Early on. But I think what you need to also think is that over time, we will try to become a minority partner in all these And the objective of all this is to deconsolidate and take all those assets out of our participation. So to a certain degree, we are acting here as to create this, but in reality, we don't want to be owners long term of this.

Speaker 2

That's why I talked before about strategic partners Financial partners, I think we're going to be able to deconsolidate, we're going to be able to monetize some amounts. And if there is some upside to that, hopefully participate in all that. But you're correct. The objective is not to Participate in things that add to volatility, but actually the dampen volatility. And we've been very consistent in that over the last ten

Speaker 11

Okay. No, that is a lot different clarification. That helped me a lot. So when you look at the size of your Drive Those are relatively new assets, but I guess they're probably 8 to 10 years old already, so you've probably Appreciated them pretty significantly already. Is your contribution to the JV putting those assets In there or would you expect to see maybe a modest capital return as part of that JV agreement as well?

Speaker 2

One of the reasons, Eric, that we landed in this option is that the valuation of our assets, I mean, is better than The alternative that we have. So we are pleased with the value at which we are contributing these two assets. We don't need or we don't plan to add any CapEx to all these two plants. These two plants will be contributed as such And they will operate, as I said, as such. Then the joint venture or Gevo may put money for finishing of these And to convert it into ASF through their technology.

Speaker 2

But our participation stops in the contribution of these two

Speaker 11

Okay, perfect. Thank you, Juan. I know that we're out of time, so I'll leave my questions at that. Thanks,

Operator

Our last question comes from Adam from Goldman Sachs. Adam, your line is open.

Speaker 5

Yes. Thank you. Good morning, everyone. Good morning, Adam.

Speaker 6

Hi. So, Juan, a lot of grounds that

Speaker 5

have been covered, so I'll try to make this quick. On the SAF MOU, can you just maybe clarify just some of the gating factors of what you'd be looking for on the regulatory side To really move ahead here, obviously, SAF doesn't participate today in the RFS or in California programs. So what would you want to see in terms of federal or state action on SAS before you really fully commit to going ahead?

Speaker 2

Yes. Listen, we have experienced in both the U. S. And the European Union A strong desire to make this a reality. There is not another efficient way to decarbonize the Airlines industry, the aviation industry, of course, on the short haul, you can put the battery in a plane, long haul It's something like this.

Speaker 2

So we expect the governments to be a partner to a certain degree in creating some of these markets. Some of those things are too early for me to disclose, but there are commitments both The U. S. Government and the European Union to create the market for that in the 50,000,000,000 gallons type of size. So So there's going to be some help into that, but that's probably to the extent that I can talk about it right now.

Speaker 5

Okay. And then just quickly On the balance sheet, maybe this is for Ray. At the end of the quarter, net debt to EBITDA was sub 2x. You haven't bought back any stock this year. Just help us think about how we should think about stock buyback as part of the capital allocation mix going forward?

Speaker 3

I think that as we we've been monitoring commodity prices very carefully and when you look at our operating working capital, Right now it's still $2,000,000,000 higher than we were last year. So as we think about commodity prices next year, assuming you have a strong South American crop, You have a normal crop in the United States. You see commodity prices coming off again. After we've kind of funded some of the bolt on acquisitions that we've talked about, I expect our balance sheet to be pretty strong. And so there we can probably start looking back at return of capital that we've looked like in the past.

Speaker 3

I think a lot of it is a function of funding the investments that we've talked about but importantly making sure that

Speaker 2

Thank you, Anna.

Operator

This now concludes our Q and A session. I'll now turn the call back to Mr. Luther to conclude.

Speaker 1

Thank you. As Juan mentioned, he, Ray and other ADM leaders will be headlining our December 10th Global Investor Day. We look forward to talking in more detail about our strong growth trajectory and why we are so optimistic about the opportunities ahead. In the meantime, as always, feel free to follow-up with me if you have any other questions. Have a good day and thanks for your time and interest in ADM.

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Earnings Conference Call
Archer-Daniels-Midland Q3 2O21
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