Archer-Daniels-Midland Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2022

There are 9 speakers on the call.

Operator

As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Vikram Lusa, Senior Vice President, Head of Investor Relations, Chief Financial Officer, Nutrition for ADM. Mr. Lusser, you may begin.

Speaker 1

Thank you, Brika. Good morning, and welcome to ADM's 4th 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, and Company Performance and Financial Results. These statements and materials are based on many assumptions and factors that are Assumptions and Factors that Could Cause Actual Results TO Defer Materially From Those in This Presentation.

Speaker 1

And you should carefully review the assumptions and factors in IRCC reports. To the extent permitted under applicable law, ADM assumes no obligation to update any forward looking statements as a result of new information or future events. On today's webcast, our Chairman and Chief Executive Officer, Juan Luciano, will provide an overview of the quarter and the year. Our Chief Financial Officer, Ray Young, will review the drivers of our performance as well as corporate results and financial highlights. Then Kwan will discuss our outlook, after which they will take your questions.

Speaker 1

Please turn to Slide 3. I will now turn the call over to Juan.

Speaker 2

Thank you, Vikram. Our team delivered a super 4th quarter. This morning, we reported record 4th quarter Earnings per share of $1.50 Adjusted segment operating profit was $1,400,000,000 23% higher than the Q4 of 2020. Our trailing 4 quarter adjusted EBITDA was $4,900,000,000 $1,250,000,000 more than a year ago. And our trailing 4th quarter average adjusted ROIC was 10%, meeting our objective.

Speaker 2

Slide 4, That performance represented a strong finish to an outstanding 2021. For the full year, our adjusted EPS was $5.19 also a record. And full year adjusted segment operating profit was $4,800,000,000 This excellent performance was reflected across the company. The Ag Services and Oilseed team's actions to improve their business portfolio and strengthened their operating model, continued to enable superior performance in a strong market environment. AS and O delivered full year 2021 OP of $2,800,000,000 with each sub segment performing at For near historic highs.

Speaker 2

Carbohydr Solutions executed phenomenally well to deliver full year operating Profits of $1,300,000,000 And the team is continuing the evolution of carbohydrate solutions From the sale of our Peoria dry mill and the announcement of the sustainable aviation fuel MoU, to our agreement with LG Chem and the continued growth of our exciting biosolutions platform, which delivered new revenue wins with an annualized run rate of almost $100,000,000 to the project we announced earlier this month to further decarbonize our operations by connecting 2 other major processing facilities to our Decatur Carbon Capture and Storage Capabilities. The Nutrition team once again delivered industry leading revenue and OP growth with full year revenues up 16% and full year OP of $691,000,000 representing a 20% year over year increase. We also continued to enhance our nutrition business with the strategic investments targeted at growing areas of demand, including Soya Protein, which will expand our participation in alternative proteins PetDyne, which substantially enhanced our presence in bread food and treats Dearland, which continued the expansion of our functional probiotics and enzymes portfolio within our global health and wellness business and Fisa, which enhanced our flavor footprint by opening up new growth opportunities in Latin America and the Caribbean.

Speaker 2

Slide 5, please. Last month, at our Global Investor Day, We unveiled our strategic plan and reiterated our balanced financial framework for value creation, including using our strong cash to deliver both gross investments and distributions to shareholders. We are confident in our plan and Which is why we are pleased to announce an 8% increase in our quarterly dividend to $0.40 per share. We are proud of our record of 90 uninterrupted years of dividends and more than 40 years of consecutive annual dividend increases. And we are pleased to continue to follow through on our commitment to shareholder value creation.

Speaker 2

It's been a great year and we are excited about Our continued actions to build a better ADM and dynamically align it with the global trends of food security, Health and Well-being and Sustainability and the steadfast advancement of our productivity and innovation initiatives will help propel our 2022 results. I will talk in more detail about the upcoming calendar year shortly. But first, I'd like to turn the call over to Ray to review our business performance. Ray?

Speaker 3

Yes. Thanks, Juan. Good morning, good afternoon, everyone. Slide 6, please. The Ag Services and Oilseeds team capped off really a truly impressive year, successfully navigating through Supply chain challenges to deliver results largely in line with the extremely strong prior year quarter.

Speaker 3

The Ag Services team performed well In an environment of continued strong global demand, including significantly increased export volumes for customers outside of China, Global trade was substantially higher year over year, driven by solid risk management and improved results in global ocean freight. Overall, Ag Services delivered strong results, just slightly off the outstanding Q4 of 2020 when we benefit

Speaker 4

from exceptionally high

Speaker 2

export margins.

Speaker 3

Crushing High export margins. Crushing executed well in the continued solid demand environment for both soybean meal and vegetable oil. Lower results in EMEA versus a very strong Q4 of 2020 and approximately $250,000,000 And net negative timing impacts versus negative $125,000,000 in the prior year quarter drove overall results lower year over year. The majority of those negative timing effects are expected to reverse in the first half of twenty twenty two. The refined products and other team delivered substantially higher results versus the prior year period, Driven by strong volumes and margins in North America for refined oils and improved biodiesel of the U.

Speaker 3

S. Market and EMEA, which more than offset weaker South American results due to the reduced biodiesel mandate. Equity earnings from Wilmar were higher year over year. Looking ahead, We expect a strong Q1 from Ag Services and Oilseeds, higher than the Q1 of 2021 and in line with the just ended Q4. Slide 7 please.

Speaker 3

Carbohydrate Solutions 4th quarter results were more than double the prior year quarter. In starches and sweeteners sub segment, including ethanol production from our wet mills, results were lower versus the Q4 of 2020, Driven by higher input costs, including energy costs in EMEA as well as lower wheat milling volumes, Partially offset by continued strong ethanol margins. Volumes for North America sweeteners and starches were largely flat year over year. Vantage Corn Processor results were again substantially higher year over year, driven by Historically strong industry ethanol margins as a result of strong demand relative to supply as well as increased sales volumes due to production at the 2 dry mills that were idle in the previous year period. As we look ahead, we believe the Q1 for carbohydrate solutions should be similar to or slightly above The strong Q1 of 2021.

Speaker 3

Slide 8, please. The Nutrition business closed out a year of consistent and strong growth with 4th quarter revenues 19% higher year over year, Flavors continued its growth trajectory, driven primarily by improved product mix in of America, partially offset by weaker APAC results. In Specialty Ingredients, overall profits of Global Seeds in the Q4 of 2020. Health and wellness was higher versus the prior year quarter as the business continued to deliver growing profits in Bioactives and Fermentation. Animal Nutrition revenue was up 21% on a constant currency basis and offering profit was much higher year over year, driven primarily by continued strength in amino acids.

Speaker 3

Now looking ahead, we expect Nutrition to continue to grow offering profits at a 15% plus rate for calendar year 2022. With the Q1 similar to the Q1 of 2021, with continued revenue growth offset by some higher costs upfront in the year and the absence of the one time benefits we saw in the Q1 of the prior year. Slide 9 as well as some of the corporate line items. Other business results were substantive insurance underwriting results and CEO of Larger Intra Company Insurance Settlements. For calendar year 2022, We expect other business results to be similar to 2021.

Speaker 3

Although for the Q1, we expect a loss of about $25,000,000 due to insurance settlements currently planned. Net interest expense increased year over year on higher short term borrowings. Allocated corporate costs of $276,000,000 were lower year over year due primarily to increased variable performance related compensation of the company's financial performance in the prior year, partially offset by higher IT offering and project related and Transfers of Costs from Business Segments into Centralized Centers of Excellence in Supply Chain and Operations. We anticipate capital expenditures in line with a 1,200,000,000 of Investor Relations and other areas. Consistent with what I discussed at Global Investor Day, with net interest roughly The effective tax rate for the Q4 of 2021 was approximately 21% compared to 8% in the prior year.

Speaker 3

The Calendar year 2021 effective tax rate was approximately 17%, up from 5% in 2020. The increase for the calendar year was due primarily to changes in geographic mix of earnings and current year discrete tax items, primarily valuation allowance and return to provision adjustments. Looking ahead, we're expecting full year 2022 Effective tax rate to be in the range of 16% to 19%. Our balance sheet remains solid With a net debt to total capital ratio of about 28% and available liquidity of about $9,000,000,000

Speaker 2

With that, let

Speaker 3

me turn it back to Juan. Juan?

Speaker 2

Thank you, Ray. Slide 10, please. I hope most of you were able to join us on our Global Investor Day last month. There we show that we have consistently advance our strategy from our work to improve ROIC through capital cost and cash to our strategic growth and margin enhancement Thanks to this work, We are moving into 2022 with a better ADM, a better organization with higher margins and a portfolio that is well positioned to capitalize on the positive structural changes Being driven by the enduring global trends of food security, health and well-being and sustainability. Slide 11, please.

Speaker 2

Let me take a few moments to talk about how we see the 2022 environment. In Ag Services and Oilseeds, we see a continued favorable global demand environment. Due to a short growth in South America, with the magnitude of the short hold still to commodity buyers, we'll rely relatively more on the U. S. Market for their needs, assuming we have a normal U.

Speaker 2

S. Crop later this year. On the oilseeds side, we're starting 2022 with a strong soy crush margins. And as we discussed at Global Investor Day, We believe that increasing demand for meal as well as vegetable oil as a feedstock for renewable green diesel Should continue to support the positive environment this year with our soybean business.

Speaker 3

Assuming this of the business.

Speaker 2

Dynamics play out, we believe that Ag Services and Oilseeds in 2022 has the potential to deliver operating margin. For carbohydrate solutions, We are assuming the demand and margin environment for our starch and sweetener products will be steady versus 2021. We expect the industry ethanol environment to continue to be constructive, supported by the recovery of of Energy Costs, driving clarity on the regulatory landscape. With this in mind, we're assuming higher AGM ethanol volumes and EBITDA margins to average 0 point of $0.05 for the calendar year. In addition, we are expecting our biosolutions platform to deliver and Chief Executive Officer.

Speaker 2

Thank you, Vikram Lusser, another year of solid growth as we continue to evolve. Putting it all together, we expect Carbohydrates and Chief Operating Officer. And CEO of Nutrition. In nutrition, we're expecting continued growth in demand for our unparalleled portfolio of and Systems along with the benefits of accretion from our recent acquisitions. With these dynamics, we expect 15% plus percent OP growth in 2022, Revenue growth about 10% and EBITDA margins about 20% in human nutrition and high single digits in animal nutrition, consistent with targets we set out at our Global Investor Day.

Speaker 2

Slide 12, please. So as we look forward in 2022, we see a positive demand environment across our portfolio. And then we add to that things we can do better. Our execution was great in 2021, but we're always identifying opportunities for improvement. And we intend to do even more to meet this growing demand in 2022.

Speaker 2

Put it all together, And we're optimistic for another very strong performance in 2022 as we progress towards our strategic plan's next earnings milestones for $6 to $7 per share. With that, operator, please open the line for questions.

Operator

Thank you to ask any questions today. And our first question on the phone lines comes from Ben Fyurer Barclays. So Ben, please go ahead.

Speaker 5

Thank you very much, and good morning, Henri. Congrats on those very strong results.

Speaker 3

Thank you, Ben. Thank you, Ben. So

Speaker 5

to start off, maybe just to stay a little bit within the outlook. I mean, clearly, You continue to have a very positive view on the segment side. But could you also share a little bit your assumptions in terms of CapEx needs And where you think investment needs to be put into in order to deliver on the actual supply of these, so a little bit of your CapEx program And how you feel about that then ultimately the results slowing down to net income and what your expectations are for 2022?

Speaker 2

Yes. So many questions wrapped in one pen. Good job. On the CapEx perspective, Yes. As you look at our strategic plan, most of our strategic plan is coming from organic growth and productivity.

Speaker 2

So in order to fund that, we're going to have a little bit higher CapEx this year of about $1,300,000,000 That will be, of course, in some of the projects we need to do to expand like Spiritwood that we announced our JV with Marathon, But also, again, some productivity enhancements to make sure we deliver bigger volumes as we supply that demand. As you know, we are facing 2022 with a very strong perspective for the 1st quarter, we are entering the year with great momentum as we left 2021 also in a big high. So at this point in time, we continue to see a very strong 2022. And I think I described it in In all my commentary, Ag Services and Oilseeds continue to be firing in all cylinders, and we expect the year as good as last year or maybe even better. Carrot Solutions also going very strong with many with a very stable starch and sweeteners and With always some uncertainty on ethanol, but with a favorable environment, and other solutions continue to grow as we grew last And again, Nutrition going up about 15% per year operating profit growth on double digits revenue growth.

Speaker 2

So All in all, we feel very good about all the things that we can control.

Speaker 5

Okay, perfect. Thank you very much. And then just one last question, just a quick one. If you think about your medium term targets, and I remember you've laid out Obviously, as well, the initiatives for share buybacks, etcetera. But in light of the higher CapEx plus The increase in dividend, fair to assume that share buybacks, at least in the short term, aren't going to be a priority yet, correct?

Speaker 2

Yes, I think that the priorities for capital allocation is to deleverage after we had maybe a couple of 1,000,000,000 and investors. Dollars invested in acquisitions, certainly fund the projects that we have in higher CapEx that I described and then the dividend To support the dividend. Of course, cash flow generation is strong in ADN. You know we focus a lot on that. So as cash flow becomes available, We're going to think in the again, in the 5 year plan to have more buybacks in the later periods.

Speaker 2

But if cash flow continues to be as So we might anticipate that a little bit. At this point in time, we don't expect significant M and A as part of our plan. So that will be the capital allocation decision.

Speaker 5

Perfect. Juan, very clear. Thank you very much and congrats again.

Speaker 2

Thank you.

Operator

Thank you, Then we now have the next question from Ben Bensmoo of Stephens. So Ben, please go ahead. Your line is open. Hey,

Speaker 3

Thanks. Good morning and congrats on the strong quarter. I wanted to thank you, Ben. I have a follow-up on the outlook commentary, which was Really helpful and detailed. Of particular interest to us is the bioproducts commentary that you offered.

Speaker 3

I think within the carbohydrate solutions Business, the commentary around touches and sweeteners makes sense. The bioproducts actually benefited from a very strong 4th quarter. And I suspect perhaps you had an opportunity to secure margins into the Q1. But the commentary is pretty positive through the balance of the year, and I realize higher production will help in benefiting Operating profit for that business. Can you talk a little bit about what informs your view for the strength of the ethanol business Sustaining into 2022.

Speaker 3

Hey, Ben. Good morning. It's Ray here. Yes, we finished up very strong In the bioproducts, this is ethanol specifically. The 4th quarter demand environment was very, very constructive.

Speaker 3

And I think that's This is reflective of what was happening in terms of the recovery in driving miles in the United States. The holiday season Gasoline demand was strong. That translates to strong demand for ethanol. And on the supply side, I mean, actually, the industry had some supply And so that translated to a very robust environment. In fact, our EBITDA margins in the Q4 for our ethanol business were Above $1 a gallon, which is very, very on a historical basis, very, very strong.

Speaker 3

We indicated that as we go into 2022, we feel optimistic about ethanol as well. Now while inventories have built up A little bit in January and that's just the seasonal nature of inventory builds. A couple of things give us optimism for 2022. Number 1, we do expect domestic demand for ethanol to be strong. In fact, it will be a growth year over year So we're talking about domestic demand probably in the 14,000,000,000 gallon level.

Speaker 3

Secondly, I think you're going to see a recovery around the world on gasoline demand and hence ethanol demand as well. And as you know, with the movement In general, ethanol is becoming one of the most attractive oxygenates in the world. So we do see the export demand side of the equation In 2022 being also very constructive for ethanol, with ethanol probably recovering to 1,400,000,000 to 1,500,000,000 gallons In terms of export demand, so that's very, very constructive. Thirdly, we do believe that the regulatory landscape has clarified So in the context of small refinery exemptions, I know there's some challenges going on here, but what we see right now is going forward, Small SREs, as they call it, small refinery exemptions will not have an impact in terms of kind of like the supply demand balances. And we talk internally That when they say 15,000,000,000 gallons, it means 15,000,000,000 gallons, right, in terms of what we need to deliver to the marketplace.

Speaker 3

So that's actually a positive also for our industry. And then they've also remanded about 250,000,000 gallons in and then they've also remanded about 250,000,000 gallons in terms of requirements as well going forward. So when you add it all together, the fact That we're starting off the year with a fairly balanced supply demand perspective in terms of U. S. Ethanol inventories 2, a demand environment that's going to be even more constructive versus 2021.

Speaker 3

And 3, a regulatory environment that seems to be supportive of Where we want to go, we're actually having constructive viewpoint. As Juan indicated, directionally, we're assuming $0.15 to $0.25 per as EBITDA margins for 2022. That's lower than the 2021 assumption and maybe we're just being a little bit conservative at this juncture as we start off the year. But nevertheless, we do believe it should be a favorable environment for us as we move forward into 2022. Okay.

Speaker 3

That's great. Very helpful, Ray. Thank you. And my second question is just related to the global operating environment and in particular, Some of the goings on in Ukraine at the moment and tensions there. Is that how is that manifesting itself today In terms of impact to your business, I know from an asset footprint perspective, you guys don't have super heavy exposure there, but they're a major Producer of, you know, raised seeds, corn, wheat, barley.

Speaker 3

So I'm curious, what impact you're seeing in the market And how you think about the potential impact as we look into 2022, recognizing a lot of different scenarios could play out there.

Speaker 2

Yes, Ben. Of course, you realize that supply of many commodities remain at their tightest level in years. So I think any news around the world of disruption, whether it's weather or geopolitics, I mean, it's going to prolong the high prices well into probably 2023. As you described, at this point in time, there are three things. We're all looking at the development of the crops in South America as they need to go through February rains, especially in Argentina and the harvest in Brazil.

Speaker 2

We are looking, of course, at geopolitical conflicts And like the one you described, and also the expectations of the crop in in the U. S, all these in the middle Of a very strong demand. So as you said, Ukraine is the big exporter, especially if you think about corn And the ability to supply China needs, you have the 3 main suppliers, whether it's the U. S. And you have Ukraine and you have Brazil.

Speaker 2

So hopefully, Brazil with this range will have a safrinha crop that this may be

Speaker 3

and the U. S. Market.

Speaker 2

A little bit better than we expected, but among these 3 countries need to cover The supply of corn and corn today is one of the best sources of energy and fat They are one of the cheapest ones. So it's a very demanded product. So we're all paying attention to what happened with that market.

Speaker 3

Okay. Thank you, Juan. Congrats on the quarter and best of luck into 2022.

Speaker 2

Thank you, Ben. Thank you very much.

Operator

Thank you. We now have another question on the phone lines from Adam Samuelson of Goldman Sachs. Adam, Please go ahead when you're ready.

Speaker 3

Yes. Thank you and good morning, everyone. Good morning, Noah. I guess My first question is I want to come back to the outlook in Carbohydrate Solutions and just make sure I'm understanding the moving pieces to Think about a full year 2022 outlook that's only slightly below 2021, where both your 'twenty 2 'twenty one performances was above what you would have expected in 2025 for the unit. And just trying to think about the moving With ethanol, and maybe there's a clarification point on that.

Speaker 3

When you talk about ethanol margins, dollars 0.15 to $0.25 a gallon EBITDA, Is that purely the dry mill gallons within Vantage corn processors? Is that including the wet mill? And I guess In that vein, in the Q4, given the strong ethanol margin environment, I guess I was surprised just to have seen The starches and sweeteners business be down if that would should have also been benefiting from a strong U. S. Ethanol environment.

Speaker 3

Maybe just help us think about Some of the bridges of the pieces within the segment to get you to the 'twenty two outlook. Yes, Adam, it's Ray here. So, it's a $0.15 to $0.25 EBITDA margin represents total ethanol, wet mill and dry mill. So that's a combined basis On that assumption. In the Q4, we had, as you saw, an outstanding quarter, VCP really benefited from the ethanol margins.

Speaker 3

Clearly, starches and sweeteners also benefit as well on the ethanol side of the business. Our net corn cost was a little Higher in the Q4 for starches and sweeteners. And if you recall, when we hedged, when we hedged 2021 for corn, we put on a very attractive hedge In 2020 for a lot of our 2021 requirements, but not all the requirements. And so when we got to the Q4, I I think we were a little bit more exposed on net corn. And so therefore, the higher net corn cost translates maybe a little bit lower margin on the sweetener side of the business there.

Speaker 3

We also had some offering challenges with the start up of Bulgaria in Europe, which again, this is an opportunity, frankly speaking, for us in 2022, right? And we also had some higher energy costs over in Europe as well. As you know, natural gas prices ran up significantly in the back part of the year. So that impacted our energy costs over in Europe and that flowed through in terms of our starches and sweeteners segment. So there were a bunch of puts and takes That moved through the Q4.

Speaker 3

Again, we think a lot of that will be behind us because I think we've put ourselves put in a good hedge position for 20 And then also we believe that we've got the Bulgarian project. We've addressed a lot of those issues and that should be a plus delta for us in 2022 Okay. That color is really helpful. And if I could just switch gears over to the Nutrition segment and Maybe help us think a little bit about the expectations for the business on an organic basis in 2022. I know there was a You did some M and A through the second half of twenty twenty one.

Speaker 3

So you talked to 10% plus revenue growth and 15% plus profit growth. Can you help us think about the M and A contributions within that And any specific parts of the business that you might be more optimistic than the segment average in areas Where the growth might be a little below that. Yes. So

Speaker 2

I think most of 2022 will be on an organic growth basis, if you will. The contribution still of the acquisitions. It's going to happen a little bit later. These acquisitions are not made, To be honest, for the accretion of 2022, as you recall, we are just building the nutrition business. So this is the strategic importance of positioning ourselves in the areas where we've been informing you.

Speaker 2

I think that we always like to have the policy of no And I think you heard me saying health and wellness is an area where we were going to invest and that's why we did deal Pet food and that's the incredible potential of plant based proteins and that's why we did soya protein, which is Making us more international. And I talked about how powerful we are in flavors, but we were underrepresented, if you will, in The emerging markets and that's why we invested in capacity in Pindu, both flavors in China and we also acquired Fisa That gives us a beachhead into Central America, Caribbean and maybe Northern parts of Latin America. So when we look at the business, our confidence in the 15% plus Organic operating profit growth is driven by our pipeline and our win rates, to be honest. That's why we look. Our pipeline continues to increase.

Speaker 2

Our product launches continues to increase and actually accelerate. And our win rates have Almost doubled from 1 year to the other. So the business is operating very well. We guided flat for Q1, just because the way some of the costs fall and they are more front loaded into next year. But this is a business again, it's been growing 34%, 20%.

Speaker 2

I think we're going to stabilize in the long term This rate of 15%, 15% plus with double digit organic growth basically without even touching the M and A for that growth.

Operator

Thank you. We now have a question from Robert Moskow of Credit Suisse. So Robert, I've opened your line.

Speaker 6

Hi. Thanks for the question and congrats on a great year. Thanks, Rob. Maybe you've kind of implied this already, but Your pricing for corn sweeteners in 2022, can you describe how the negotiations went? And it looks like where you're guiding to was kind of flattish profits in North America For corn sweeteners as a result of that pricing.

Speaker 6

Is that a fair assessment?

Speaker 3

Yes, Rob. I mean, our objective is really to maintain margins. And so through the course of the negotiations, I think it's fair to make an assumption that we've been able to maintain margins and offset the higher corn costs Yes, that has occurred recently. So I think we've achieved that objective and that's a fair assumption to assume as we go into 2022.

Speaker 6

Okay. And maybe a follow-up. The expansion of Fine, soybean oil is driven by the growing demand of Renewable Biodiesel. Have you been watching the industry, the planned industry expansion for all those refineries? And what kind of is it achieving what you'd expect?

Speaker 6

Are the is the capacity coming online As expected and is it having the results on demand for oil that you expected?

Speaker 2

Yes. Of course, we keep a close eye into that. You have to understand that At this point in time, demand continues to outpace given the announced capacity expansions. But there is a reality also in this world of Supply shortages and labor issues that projects are not that easy to execute. So I think that when you look at a battery of announcements like the one we have seen, I think it's reasonable to put a percentage That is going to happen, either the reality or that they all are going to happen, but in a little bit longer timeline.

Speaker 2

So we tend to look at that from a long term basis and maybe something like 2 thirds of 75% will happen. At this point in time, we see the volume coming our way. And you have to remember that the original oil story, Rob, it was due to palm oil around the world. And that drove soybean oil and other oils up. And now on top of that, now we have the demand for RGD.

Speaker 2

So that now there is a full confluence of raw materials to be able To supply that oil. And so yes, we are looking at this very closely. And at this point in time, everything is evolving as planned.

Speaker 3

Okay. All right. Well, thank you. You're welcome.

Operator

Thank you, Robert. We now have Tom Palmer of JPMorgan. Sir, Tom, your line is open. Please go ahead.

Speaker 6

Good morning. Thank you for the questions and congratulations on the quarter. Thank you

Speaker 3

so much.

Speaker 6

Maybe I can follow-up Maybe I can follow-up on Rob's question just on the refined products outlook and maybe a little more specific on how you're thinking about the setup For 2022, we do have kind of maybe the 1st larger wave of facilities coming online with pretreatment units, Although that is at least back half weighted, I think. So maybe what's the assumption for refined products this year? And do you think that That will that addition in terms of capacity is going to have much impact? Or as you were kind

Speaker 3

of noting with Rob, maybe

Speaker 6

Just with timing and kind of needs of still sourcing from at least a portion from 3rd parties, it won't be as

Speaker 2

Yes. Listen, We continue to believe we will add around 1,000,000,000 gallons per year of incremental R and D RGD capacity And approach the 5,000,000,000 gallons total capacity by 2025. And as I was Telling Rob, we continually risk rank the announced capacity and analyze the market conditions, so we have several scenarios indeed. We do believe these announced capacity are important to and necessary to keep up with the expected And growth for both vegetable oil, as I explained before, but also global meal demand needs. And at this point, vegetable oil consumption is still growing Faster than supply.

Speaker 2

We got a little bit good news from sun oil availability from the Black Sea that maybe will help Beam Oil Tightness. And so regarding the Petri's comments, in the end, The vegetable oil will be required as a feedstock, and pricing will reflect the value of this feedstock likely based on carbon intensity. So we could see some shift in value between the crude oil and the refining. I think what we need to realize is we are at the early stages of this industry formation. So we're going to see some of those movements.

Speaker 2

And sometimes we're going to capture the value in one place, Sometimes we're going to capture the value in another one. But we are well positioned. Our biodiesel plants are all integrated in refineries and all that. So we are watching it very closely. We feel good about how it's developing so far.

Speaker 6

Great. Thank you for that. And maybe I'll segue with that to the crushing side. It seems like You're starting off the year with quite strong soy crush margins, perhaps higher than maybe you're guiding to for the year. Erbitism embedded, we see headlines around lysine shortage.

Speaker 6

Is that something you're expecting to kind of resolve itself and maybe see Still a very favorable crush environment, but a little more normalized versus to start off the year?

Speaker 2

Yes. There are many of course, it's a large industry, so many puts and takes. When we look at the demand side, the forecasted 2022 poultry production It's going to be a record and near record for beef and hog. So protein demand continues to grow and other important soybean meal. Remember, I mentioned fat is very expensive today and energy as well.

Speaker 2

So corn is the cheapest carbohydrate. That's pulling soybean meal into the Russian. And we expect at one point in and the lysine market come maybe back into balance later in 2022. But still to soybean meal and to crush. So I think also don't forget RGD dynamics for soybean meal, making soybean meal from the U.

Speaker 2

S. Much more competitive and unable to gain And when you have maybe a less than stellar soybean crop in Argentina, Argentina and also in Europe.

Speaker 6

Thank you. Thank you, Tom.

Operator

We now have the next question from Vincent Andrews of Morgan Stanley. So Vincent, please ensure your line is unmuted lately and you may go ahead.

Speaker 7

Hi, this is Steve Haynes on for Vincent. I wanted to ask a question on

Speaker 3

the BIOSolutions business, color on specific end markets where of Investor Relations.

Speaker 2

You're getting those wins and then

Speaker 3

how to think about the size of that going forward?

Speaker 2

Yes. Thank you for the question, Steve. Listen, we are very excited about how that business is developing. I think we recognized in the past that, that business happened almost Well, we were not watching, and it was a customer pull more than our push. And now we have a segment approach to that.

Speaker 2

We have Intentionality in developing that market and that as such the opportunities have flourished. I would say A strong contribution from packaging, a strong contribution from fermentation, just we're helping other people that Creating some of these materials out of plant based. Personal and Home Care, very important segment that is growing. And a growing contribution from pharma, construction and plant treatment. So as you can tell, as we continue to deploy Marketing resources into some of these segments, we continue to have success.

Speaker 2

So there are some segments that are more developed and larger for us and some segments But I think it's going very well. We are working on the product mix as Sometimes the growth is faster than our capacity, so we're trying to accommodate that. And we're going to be having more capacity coming up Soon to be able to sustain this 10% growth rate of revenue that we have.

Speaker 6

Thank you.

Speaker 2

You're welcome.

Operator

Thank you, Vincent. We now have Zhen Zaslow of BMO Capital Markets. So Zhen, please go ahead when you're ready. Ken.

Speaker 7

Hey, good morning, everyone.

Speaker 2

Good morning, Ken. Hey, Ken.

Speaker 7

Let me just take a different approach. When you think about your you talk about all The things that are happening on the demand side. But at your Analyst Day, you kind of did think and that there was going to be some headwinds. As I look forward, these headwinds don't seem to be materializing to the extent or are they? And can you frame How you kind of put it during the Analyst Day And where you see they are going through where you're seeing them now, where you see them through 2022 and are you really seeing them develop the way you thought they were or are they a little bit lower

Speaker 2

Yes. The dynamics here, Kent, Of course, we have forecasted or accounted for some The potential reversion of margins and some inflation, of course, that we were going to have. And That is difficult to estimate the timing. And then we have productivity and innovation that is going to be growing in their impact as some of these projects So when we look at, if you will, at the negative side of the equation, the positive side, we can control. And I would say the biggest manifestation of that at this point in time has been energy inflation and inflation from some smaller products.

Speaker 2

We suffer probably more of these and some supply change disruptions and labor shortages. I would say, From an energy perspective, the impact is probably more on Europe, whether it's on crash or car solutions. That's where we see the impact. And we have our team basically working on energy efficiency and shaving some percentages And also our hedging mechanisms and all that. On the raw material side and the supply chain disruption, and that's probably more the territory of nutrition.

Speaker 2

Nutrition, as you can imagine, have more variety of raw materials and more SKUs. So the complexity of that business and the U. S. Market more exposed to some of these wins. So that's the way we're looking at that.

Speaker 2

It's more the European energy increase and some of the nutrition one offs that is here and there on supply chain.

Speaker 7

My second question is and I appreciate that. On the China side, I think last call and the call before, you kind of outlined how the demand is growing. I know 2021 was an extraordinary year for China demand. How I don't think that's going to play out in 20222023 in terms of Will there be a mix change? Will there be increased demand?

Speaker 7

How do you kind of think about it relative to your business model? And I appreciate your time as always.

Speaker 2

Yes. Thank you, Ken. Listen, we think that China has recovered from the AFS, they recovered their hair. You saw the dynamics in terms of pork prices coming up and down. We still believe that they will import Some you will import soybeans in the high 90s, dollars 96,000,000 to $97,000,000 give Okay.

Speaker 2

And around probably 25,000,000 tons of corn. Again, when We are watching the way they are managing through COVID challenges, but we expect demand will continue to grow. It continues to be supported by improved diets and professional feeding practices. Even if we see some moderation of GDP, we think that we've seen per capita consumption of the top For me, basically, increases. And even if they Correct.

Speaker 2

It's a little bit bit correct versus 2021. They are still much bigger than the pre ASF and pre pandemic. So We can fit it with the numbers here or there, but still it's going to be very strong. And as I said, probably 96,000,000, 97,000,000 of soybeans, 75,000,000 of corn, That will provide a good base for the grain industry and the crushing.

Speaker 7

Great. I appreciate it. Thank you, guys.

Speaker 6

Thank you, Ken.

Operator

Thank you, Ken. We now have a question from Ben Kallo from Baird. Ben, please go ahead when you're ready.

Speaker 8

Hi. Hi, good morning, everyone, and thanks for taking my question. Ray, you touched on the regulatory environment just in your ethanol comments, but maybe it's just on a broader Just maybe around renewable diesel, if you guys could talk about that. And then on the legislative front, I hate to ask because it's anyone's best guess, But how you see maybe the Blender Sachs credit and anything around aviation fuel evolving? Thank you.

Speaker 3

Yes. On the biodiesel, as you know, the current lender's credit continues until the end of 2022 December 30 2022. So we're naturally we're looking at what's happening on the legislative agenda in Washington on the BBB to see whether it gets renewed. But historically, what you've seen is the both frankly, both parties Our supportive of the biodiesel industry. It's important for United States.

Speaker 3

So even if something doesn't occur on BBB, we're optimistic that The lenders credit will get extended in one way or another through some form of legislation as we kind of move through the year. And If you recall, sometimes it happens after you get through the end of the year and then you have a retroactive biodiesel tax credit, which we've seen in the past. So we actually feel confident That something will occur there in order to kind of continue with the blenders credit on the biodiesel tax credit. On the SAF front, As you know, this is something that we're working on right now with different partners. It is going to be an important part Of the fuel industry in the future as we go green in terms of aviation fuel.

Speaker 3

So just based upon, frankly, again, the support We see in terms of the direction of SAF, we're optimistic that some form of legislative Yes. Some form of legislative actions will be taken to support the sustainable aviation field And again, it's a nascent industry right now, right? Very few gallons are being produced, but Projections show that by 2,030, there's going to be a need for about 4,000,000,000 gallons of sustainable aviation fuel in combination of the United States So it's a significant growth industry and probably there's going to be some level of support required in order to start up this industry here.

Speaker 8

And just on the back to the renewable diesel front, could you just talk about any areas you're watching? I know we talked about the Supply side and how you discount incremental demand coming from the regions that we already know out there are new regions. Thank you.

Speaker 3

Demand side is really driven by the different states implementing low carbon fuel standards, LCFS standards, particularly Starting out in the West, but frankly, it's going to get extended across all of the United States and Canada. So the demand side is there, right, as all the states move towards LCFS standards. And frankly, the industry is just simply trying to respond to that opinion by building the supply to meet that particular requirement

Speaker 2

Okay. Thank you.

Operator

Thank you. We now have a question from Steve Byrne from Bank of America. So Steve, please go ahead. I have opened your line.

Speaker 4

Yes. I think, Convene Oil will represent the majority of the feedstock for this 5,000,000,000 gallons of renewable diesel.

Speaker 3

It's going to represent an important part of it. I mean, as Demand grows for renewable green diesel. It's going to require the pull from many sorts of feedstocks. And in fact, it's very likely That even canola will find a pathway eventually to become part of a feedstock for renewable green diesel. But we still believe that maybe about 45% of the production will come from soybean oil, eventually a small production All of the canola oil that I referenced here.

Speaker 3

So it is going to be an important component because there's just insufficient amount of That they use cooking oil and other types of feedstock, fastened renderings. There's just not enough supply in order to meet this growing demand.

Speaker 4

Leaving your 45% is 30,000,000 acres of incremental soybeans, which I don't think is going to happen. Does that mean soybean exports Get squeezed out and instead it gets crushed, the oil goes into RD and you

Speaker 3

We've indicated we believe that a lot of the U. S. Soybean oil exports will actually Come down. You're correct. I think there's going to be a diversion away from exports of soybean oil.

Speaker 3

There's going to be also be Some diversions away from human food applications. There's going to be a daisy chain effect that goes on, which frankly is actually supportive for the entire vegetable oil complex around the world, right. So I think there is going to be some daisy chain effects that are going on in order to kind of meet this type of demand.

Speaker 4

And then what about your Slide 15, where you show forward sales By farmers in South America being kind of below historical averages, do you attribute that to the uncertainty that they are seeing with Their current crop just from either production is lower there in 20 22 or the rest of the world for that matter. Is that a net benefit to you in trading?

Speaker 2

Steve, this is Juan. So what you're seeing from the farmer in South America is reflective of both things. One is the current impact in South America and the second is, as you see, they are looking at what happened with the size of the crop. In terms of whether it's beneficial for ADM or not, our role is to try to Fulfill our mission of providing nutrition around the world and that's where we use our supply chain to make sure that We deliver to our customers and we deliver to the populations around the world. So Sometimes it coincides with margin expansion in some parts of the business, sometimes it may not.

Speaker 2

We like the fact that there is a strong demand around the world, And that tends to be good for India, yes. Thank you. You're welcome.

Operator

Thank you. We now have our next question from Michael Piken of Cleveland Research. Sir Michael, please go ahead.

Speaker 6

Yes, good morning. Just wanted to sort of get your take on kind of the current transportation system and the outlook it supports Both of New Orleans, are we fully recovered from the hurricanes and then kind of the barge system and what's happening over in the ports in China and What sort of the backup and your business kind of flowing normally or how backed up is it?

Speaker 2

Yes, Michael, good question. Let's talk about China. Some slight COVID related challenges in China are impacting ports. But to be honest, situation have improved. Initially, we got the highlights.

Speaker 2

But In general, pork situation continues to improve and maybe we have average waiting about 2, 3 days For bulk cargo in agriculture in most main ports. So I will say China is kind of okay. We've seen lineups or the mortgage time increasing in Brazil. There is still boats exporting corn and importing fertilizers. And since the soybean crop is a little bit delayed, We're seeing more we're seeing waiting times kind of double from maybe 15 days 30 days in Brazil, and that's pushing some volume into North America or maybe March, April deliveries.

Speaker 2

North America export capacity has For the most part, I think there is one plan that was going to have some long term or medium term, if you will, repairments. But for the most part, The export capacity has been recovered to pre idle level, at least for us. And I would say, in terms of the river, the Illinois River, There is a lot of freezing and there is a lot of icy conditions that have slowed down the river movement. And we see that and that probably We'll

Speaker 3

continue. Great. That's helpful. And then just

Speaker 6

as a follow-up, what's the elevation margin Outlook as you guys kind of see it for the year? Thanks.

Speaker 2

We've seen As you know, we have the impact of Ida in the Q4, we had the demand, but we didn't have the ability to supply. So a lot of that volume was Move into Q1 and we have seen the elevation margins increasing in Q1. So a little bit as expected. And so we feel good about how to certify that demand.

Speaker 6

Thank you.

Speaker 2

You're welcome.

Operator

Thank you. Our last question comes from Eric of Seaport Research Partners. So Eric, please go ahead.

Speaker 4

Yes. Thank you. Thanks for squeezing me in, everybody. Congrats on a great quarter, great year, everyone. So I know This has kind of been beaten to death, and it's obviously, it's very important.

Speaker 4

So if you if again on the renewable If you just take the renewable green diesel market, if you just look at the amount Of feedstock that's required to meet to kind of get to that 2025 goal year goal of 5,000,000,000 gallons. It's And I think it was alluded to earlier with that 45% comment, it's 30,000,000 acres of increased It's the equivalent of 30,000,000 acres of soybean production, which it just isn't going to happen. So and I'm sure and I know that Greg and Chris are all over this. Doesn't this if you it's got to be it is a global market, it will be. Doesn't this just feed right into your into A very positive long term outlook for ag services that you're going to have to be able to pull globally A lot of resources in to meet these demand functions, but that's what makes it possible.

Speaker 4

Is that the way to look at this?

Speaker 2

Yes. I think Eric, when you have one explosion of demand in one place of the world, resources from around the world will come. And as Ray was saying, maybe we're going to export less. Certainly, we may import more and there are going to be shifts between the different products. So I would say we continue to be in a world that requires more food And also that requires to help the environment, it has been a structural change in demand for us.

Speaker 2

And for a company that have assets around the world, that probably means better utilization of And better value of those assets as we try to solve these issues, yes?

Speaker 4

Good. Well, thanks. And so the final question I have, a lot of those have been answered already. So When we look at the current year in terms of U. S.

Speaker 4

Crop production, so what are you hearing From your farmer clients, obviously, it looks like we're putting a bid in the corn markets today to get more corn production. There's a lot of uncertainty with input costs and all the other stuff. What is your feel for how And it's early, but it's not so early anymore. It's getting close to the time. What is your feeling how the crop production outlook looks for this year Kind of by crop.

Speaker 2

Yes. We expect a strong U. S. Planting. Of course, some of those decisions, as you said, is it getting the time to make those decisions?

Speaker 2

And a lot of people are looking at the South American weather. South American weather is very strange at the moment. There is very Dry conditions in Parana or the South of Brazil and maybe Argentina, and it was a little bit To wet in the north, numbers in the north are coming strong in terms of yield for Brazil. I think that the recent rains have stopped the deterioration of the crop in Argentina and the South of Brazil. And Probably with Paraguay having already felt the damage.

Speaker 2

So we believe in the U. S, We still believe that probably corn will outpace soybeans in terms of acres. So we probably think about, I don't know, something like 93,000,000 acres of corn, 87,000,000 acres of soybean, give And I understand the dynamics of both fertilizers and all that. But I think given the prices of last year, I think that the prime land will probably maintain the same Yes. No, I would agree with you.

Speaker 4

Thank you, Juan. And again, congratulations on a great year.

Speaker 2

Thank you. Thank you, Eric.

Operator

Thank you. I would like to hand it back to Vikram Luthar for some closing remarks.

Speaker 3

Thank you,

Speaker 1

and Investor events in which we will be participating. As always, please feel free to follow-up with me if you have any other questions. Have a great day, and thanks for your time and interest in India.

Operator

Thank you everyone for joining. That does conclude today's call. You may disconnect your lines and have a lovely day.

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Earnings Conference Call
Archer-Daniels-Midland Q4 2021
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