Q3 2021 Archer-Daniels-Midland Co Earnings Call
Hello, and good morning, and welcome to the Adm's 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, Nathan <unk> Senior Vice President head of Investor Relations.
<unk> financial officer nutrition for ADM, Mr. Nathan you may begin.
Thank you Emily good morning, and welcome to Aam's third quarter earnings webcast, starting tomorrow, a replay of today's webcast will be available at ADM Dot com.
For those following the presentation. Please turn to slide the Companys 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 fine.
Actual results. These statements and materials are based on many assumptions and factors that are subject to risks and uncertainties. ADM has provided additional information in its reports on file with the SEC concerning assumptions and factors that could cause actual results to differ materially from those in this presentation 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 statement 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 highlight some of our accomplishments 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 three I will now turn the call over to Juan.
Thank you Vikram.
This morning, we reported third quarter adjusted earnings per share of 97.
That is a 9% year over year improvement, despite a higher tax rate.
And our year to date adjusted EPS of $3 69.
It's already above our full year 2020 adjusted EPS.
Adjusted segment operating profit was $1 billion.
Up 18% versus the third quarter of 2020.
And our eighth consecutive quarter of year over year <unk> growth.
Our trailing fourth quarter adjusted EBITDA was about $4 6 billion almost.
Almost 1 billion more than a year ago.
And our trailing four quarter average adjusted ROIC was nine 6%.
Significantly higher versus the year ago period.
I remain proud to lead a global team that is delivering robust returns a sustained growth and profit.
Our strong order and our ongoing upward trajectory.
Estimate to our team's execution and agility.
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 four please.
I'd like to start by talking about our approach to portfolio management.
Our starting point is the belief that in order to thrive and create value a company needs to have a dynamic view of its business portfolio.
So when we talked about the dramatic transformation of our portfolio over the last 10 years.
It's not a discrete event.
Is a representation of our continuous work to identify opportunities for growth and improvement.
Of course, those opportunities maybe the market is the right one.
The enduring trends of food security health and wellbeing and sustainability.
The unique and stable opportunities for ADM to expand our existing capabilities.
And we are focusing our efforts on identifying high growth on trend areas with attractive margins and which are the adjacent to our existing capabilities.
Thus focusing form the building of our global nutrition business.
The acquisition of Wild gave us entry into flavors on a global platform.
We then used bolt on acquisitions to add adjacent capabilities and build a one stop shop with an industry, leading pantry of ingredients and solutions for human nutrition.
We do the same for animal nutrition with the acquisition of <unk>.
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 an offtake agreement with marathon oil company.
Support the production of renewable diesel.
We are continuing to invest in key nutrition categories.
As the demand for alternative protein grows from $10 billion to $30 billion over the next decade.
We are further enhancing our capabilities with the acquisition of <unk> protein.
And with global demand for pet foods growing to the $140 billion in the coming years.
We're continuing our growth with a 75% ownership stake in paradigm.
In the area of microbiome, we've signed an agreement with Valens biotech to launch a joint venture that we are perfectly positioned to help meet $1 billion in retail demand for probiotics in China.
These are just some examples of how we are dynamically positioned our portfolio to continue driving growth for years to come.
We'll be more to come.
And you can expect an increased level of investments to support our sustainable earnings growth and sort of that expand our capacity and capabilities.
Please turn to slide five.
As part of our portfolio management approach, where we're looking to evolve our carbohydrate solutions business.
Expanding our already of solutions to meet growing customer demand driven by the enduring strength of sustainability.
We've made significant progress recently.
Just on two areas.
New opportunities for our Oklahoma production and our growing via solutions platform.
Let me start with alcohol.
Last Thursday, we announced that we've reached 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 <unk> to explore potential joint ventures, one of which would include our Columbus, Cedar Rapids, dry mills, and our ethanol assets indicator.
Transitioning 900 million gallons of ethanol production to support growing demand for low carnival sustainable aviation fuel.
These actions represent our commitment to a process that we began when we first analysis third tissue review of our dry mills.
Taken together, they will allow us to significantly reduce our exposure to vehicle fuel ethanol.
While using our expertise and assets to capitalize on new opportunities.
SaaS is one of those opportunities.
U S and EU have set goals that together would support almost 4 billion gallons of annual sustainable aviation fuel production by 2030 and.
And more than 45 billion by 2015.
The other focus area for our carbohydrate solutions evolution is our bio solutions growth platform.
By your solutions, which we launched a year ago is an effort focused on using our product streams to expand our participation in 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 of identifying new and exciting opportunities.
Earlier this fall for example.
We signed an Mou with LG Chem for the production of lactic poly lactic acid for Bioplastics and other plant based products.
These efforts are enabling bio solutions to deliver a 10% annualized revenue growth.
Including more than $80 million in new revenue wins in the first nine months of this year and.
And we believe that our many new opportunities to come.
So from the transformation of our dry mills to our growing bio solutions platform.
Our work to evolve our carbohydrate solutions capabilities.
Perfect example of how we're managing our portfolio.
In delivering this smart strategic growth.
And one of the many reasons we remain convinced.
Our ability to deliver sustainable earnings growth in the years to come.
Let's 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 to over to Ray to talk about with our business performance.
Yeah. Thanks Juan.
Slide six please.
The AG services and Oilseeds team continued their outstanding year with another quarter of substantial profit growth.
In AG services, we are 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 million and net timing effects that should reverse in coming quarters, as well as $54 million and insurance settlement recorded in the prior year period, and lower export volumes caused by Hurricane Ike.
Global trade continued its strong performance.
The crushing team delivered substantially higher year over year results executed well delivering stronger margins and a dynamic environment that includes strong demand for vegetable oils to support our existing fleet customers as well as the increasing production of renewable diesel.
Results were also driven by about $70 million and net positive timing effects in.
In the quarter.
Refined products and other results were significantly higher than prior year period, driven by positive timing effects of approximately $80 million are expected to reverse in future quarters.
Strong execution in EMEA, North American biodiesel and strong refining premiums due to demand for renewable diesel and foodservice recovery in North America.
Also contributed to the results.
Equity earnings from Walmart were lower year over year.
Looking ahead, we expect to see continued fundamental demand strength for AG services, and oilseeds products, including from China, as well as solid global soybean crush margin environment in the fourth quarter.
Partially offset by some higher manufacturing costs.
In addition, our appeal will be negatively impacted by timing reversals.
All told we expect results in the fourth quarter to be significantly higher in the third quarter of this year.
Slide seven please.
Carbohydrate solutions results were lower year over year.
The starches and sweeteners subsegment, including ethanol production from our wet mills she'll dairy agility by managing through dynamic market conditions, and optimizing mix between sweeteners in ethanol production through the quarter.
Year over year results were significantly lower primarily due to higher input costs.
Vantage corn processors or results were much higher versus the third quarter of 2020.
Supported by there.
Resumption of production at our two dry mills.
And improved fuel ethanol margins, particularly late in the quarter.
Looking ahead to the fourth quarter, we expect a 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 in starches.
Set by higher manufacturing costs, particularly in Europe as.
As well as the absence of the Peoria dry mill.
All told.
Fourth quarter results for this segment should be similar to the previous year fourth quarter.
On slide eight.
The nutrition business remains on its solid growth trajectory was 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 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.
In North America.
Partially offset by lower results in APAC.
Specialty ingredients continues to benefit from strong demand for alternative proteins.
Set by some higher costs.
Health and wellness results were higher on robust skills rule and bioactive and fiber.
Animal nutrition profits were nearly basis, driven primarily by the strengthened immuno assets as well as feed ads.
Looking ahead.
We expect nutrition to continue on its impressive growth path with strength across the human and animal nutrition, leading to strong year over year earnings expansion.
And a 20% full year growth versus 2020.
Slide nine 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 than the prior year period, driven primarily by our captive insurance underwriting loss.
Most of which were offset by corresponding recoveries in the other business segments.
We expect fourth quarter to have some additional insurance underwriting losses.
<unk> and our breakeven other business for the fourth quarter.
As expected net interest expense for the quarter decreased year over year on lower interest rates and a favorable liability management actions taken in the prior year.
In the corporate lines unallocated corporate costs of $230 million were driven primarily by higher offering and project related costs through the centralized centers of excellence.
Two months in supply chain.
Yes.
Including net interest.
And other corporate we are still on track fourth calendar year to be overall similar to 2020.
The effective tax rate for the third quarter 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.
And potentially a bit higher depending upon the geographic mix in the fourth quarter.
Our balance sheet remains solid with a net debt to total capital ratio of about 26%.
And available liquidity of about 11 5 billion.
With that I will turn it back to Mike.
Thank you Ray.
Tim Please.
From consistent sustained profit growth through 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.
Late August.
So we provided temporary housing arrangement.
First of all generators, food and water and more in <unk>.
Many ADM colleagues travel to the region.
<unk> time, helping repair their coworkers damage homes.
I am very proud of that.
Whose insured as we plan to grow into.
Well, what I would look in far more depth on our December 10th Global Investor Day.
As I look back at the third quarter.
And all of the last nine months.
<unk> to see a team and a company that started with.
Delivering on our goals and our purpose.
Yeah.
We are closing out 2021 with great momentum.
We are on track for a strong fourth quarter and the second consecutive year of record earnings per share.
And as we look ahead to 2022, we see another strong year for ADM.
Our robust global demand environment will continue to look for opportunities for us to leverage our in defense of our global origination processing and logistics capabilities.
In nutrition, we will continue on its strong growth trajectory in line with and on its way to $1 billion in <unk>.
Operating profit in the <unk>.
Of course, there are things we continue.
These awards, including energy costs and inflation more wisely.
But a much ability to meet needs in the enduring trend areas and welding and sustainability.
And it's truly unparalleled team of nearly 4%.
It was 2000 colleagues around the world we remain very optimistic.
In our strong year to come.
With that Emily <unk>.
I'd like to hear your question. Please press star followed by one on your kind of thank you. Perhaps now if you change your mind. Please press star followed by Chase and you asked.
Your questions. Please ensure that youll devices, Amit it lightly.
Our first question today comes from Ben <unk> from Stephens.
Your line is open.
Hey, Thanks, good morning, everyone.
Good morning, Hey, Ben So I've got one long term question with regards to your announcement yesterday around SaaS and then I want to ask a clarifier on the guidance.
Yesterday congratulations.
Couple of questions one is.
When you think about the total opportunity.
For SaaS, obviously that.
Embedded demand is significant given.
It seems like one of them.
Pertinent ways to reduce greenhouse gas emissions are unclear at this time, so I'm curious as you think about engaging.
And with G. Though on this partnership.
<unk>.
What got you comfortable to commit.
Good about kind of the evolution of how.
The agreement will mature.
And then understanding why does.
Did you go with that initially versus more legally binding agreements.
And then if you could just talk just bigger picture.
The ethanol markets that would be helpful.
I know a lot in there, but I'd love to hear your thoughts.
Got it.
Thank you Ben.
Listen.
You know we've been looking at the options for the dry mills for a very very long time. So we have been studying the opportunities for the AGM shareholders too. So we try to divert us.
Certainly when we look at the sustainability trends.
The opportunities.
Remember one of the issues with these assets are they are very large with become with became a little bit of an issue of the timing of divesting them. So we were looking for opportunities that are sizable that size turns into a competitive advantage.
So certainly when you look at all the industry is trying to decarbonize.
The aviation industry.
Lastly, the industry does that contribute to <unk>.
Sure.
We have identified and we have checked with borrowing other strategic partners people in the industry that.
Is the solution and I think we see also concurrently that both the U S and the European governments are looking at this for now.
Trying to incentivize the demand for that so you heard put us into the by then or.
Already growing cold, making the statements about that so we see a very.
Very positive environment developing for these very sizable addressable market for us and when you combine our size with ironwood raw material procurements on our cost and the ability to <unk> thousand 17 allows that complex to provide very competitive low lows.
Fuels for the for the industry.
<unk>.
So we decided to.
Sure.
There are many.
Opportunities and options here, so we have announced what potentially could happen.
<unk>, which is the creation of these two joint ventures in one of those joint ventures Avm's contribution will be the two dry mills as our objective is as Youll note to be consolidated.
So again, but the field too many discussions to happen in many many partners to join US in disease, we are thinking over time to have them.
Minority position in decent housing, probably strategic or financial partners to join us. So but overall you can be sure. This is a better outcome for our shareholders I think in terms of <unk>.
The realization of value from.
Our guidance. So we're very excited about the opportunities.
Okay great.
My next question is a clarifier and then.
<unk>.
The discussion today you can on kind of 2022 first did I hear you say on the AG services and oilseeds for the fourth quarter.
It to be higher than the third quarter, but you didn't say higher than the fourth quarter last year is that are those kind of the goalposts, we should be thinking about that's part one and then question two.
Within that is.
Export demand looks strong for next year.
Obviously renewable diesel is continuing to gain steam how do you feel about AG services and crushing and that broader at services oilseeds segments as we go into 2022.
Yes, so Ben listen.
As we think about Q4.
For ADM and when we say we expect a strong Q4, we look at strong crush margins.
Demand is strong for proteins, but also demand for oil is pretty strong and tight and then RGD on top of that.
We are facing and improve ethanol environment as we as we entered Q4.
We are estimating exports from the U S in volumes similar to last year.
51 plant is down because of.
Same situation and then we can.
Continue to see nutrition growing up.
15% to 20% so of course, we have inflation we have.
But in the energy issues.
The team is dealing with it and trying to mitigate but we're coming into Q4 and into Q1 with a strong momentum. If you look at Q1, we feel very strong.
Strong about crush margins.
Our export window, given that in September with either an export that much.
Probably going to be extended into January and 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 our supply chain issues that are energy inflation rising. So we will have some minor shows up but from a demand perspective, we feel very good advisors.
From Bank of America, Nick Your line is now open.
Thank you and good morning team.
Good morning, good morning, Luke.
So I just wanted to ask a quick question and follow up on <unk>, you mentioned that.
At Peoria facility and this new Mou with <unk>, though you have done a lot with your ethanol assets.
Just a clarifying point in your strategic review of the <unk>.
No assets completed are you still thinking about.
Now how youre looking at your fuel ethanol capacity evening of wet mills or how is your thinking now evolve.
No I would say that.
The conclusion of interpretation, we review and the being the best option for priority of lift the divestiture, which was again.
Basically.
Sure the 135 million gallons of our ethylene capacity and then we're taking about two thirds of all our ethanol capacity in this in this the Mou with Jabil exploring options holiday theme, because we wouldnt be contributing to.
<unk> joined a tool.
With arm basis because.
We still own the revenues, but you have to think about it.
Yes.
In our analysis.
So it's changed for ethanol first of all remember we always said, we did analyze data the undifferentiated nature of volume sales in wet mills, we have more options to protect margins.
The returns but second.
By taking.
All of this capacity out of out of.
Out of the market basically 900 million gallons in about two years are going to move from vehicle ethanol to SaaS feedstock.
Then we think that supply demand fundamentals and the margin environment.
That concludes our <unk>.
So now execute on dissatisfaction with still have a lot to be discussed.
Yes, It makes sense and then just staying in carbohydrate solutions quickly Ray I believe you said that operating profit in <unk> last year ethanol margins.
And it looks like we believe that they will continue.
Seem to be pretty good in <unk>.
So when I think about the starches and sweeteners side, it would seem that youre seeing quite a bit of margin compression or at least lower operating profit.
Is this just.
It's a function of you have higher input costs and then how are you thinking about what you.
We're selling some of your sweeteners and starches that will offset some of that margin pressure.
No Youre right were particularly over in Europe. So that's a little bit of headwind at the same time you are right in the ethanol margins that we're seeing right now in the market are extremely healthy and that's just reflective of a verbal fallen down to 20 million barrels right.
And when you take a look at driving miles in gasoline demand.
<unk> back to pre pandemic levels of demand again.
So on the positive side I would have to say the ethanol margins.
On the issue.
Sweeteners and starches, what's interesting is while a lot of people kind of focus on hfcs Hfcs F&I business. The other parts of our business are doing extremely well and the non hfcs business for example, citric acid demand.
<unk> strong start just demand extremely strong so when we put it altogether, which Mike will provide the guidance that there was some.
Puts and takes but we expect our fourth quarter for carbohydrate solutions should be similar to where we were last year.
Okay.
Got it very good thank you.
Our next question.
Comes from Ken Zaslow from Bank of Montreal, Ken. Please go ahead.
Hey, good morning, guys.
Morning, Ken.
The investments that you've made.
Several of them 75%.
In the pet business.
LG Chem.
Hi.
So.
How much capital have you deployed to them what is the return expected on the.
Outlook I'll start there and then I'll ask a follow up to that.
Yes, I mean, I think we havent disclosed the amount of capital in terms of the LG Chem.
Still being discussed right now in terms of how the partnership with form on lactic acid and poly lactic acid.
<unk> bio is not that significant.
The big investments that you mentioned here is really the peak for the investment the pet food company and again.
75% into it right. So therefore, I think we kind of manage that capital there. So.
So the total invested capital on these recent announcements actually is far less than $1 billion far less than that.
$1 billion. This is consistent with the kind of the bolt on type of investment numbers that we've talked about in the past.
Ken.
And then so.
But if I take that and then.
One you said that.
In 2022 for nutrition.
Second at 15, and then you kind of blend it up a little bit the 15% to 20%, which is always nice to hear.
But if you are adding less than 1 billion, but it sounds like more than.
Bread box.
Is that number going to start to capital to work when we start to see that number accelerate at what year and what type of returns that we expected or is it just not enough to make a difference I'm just trying to kind of.
Cement that in my head.
Yes, certainly can.
We will see acceleration based on these.
These investments when we talked about our plan our plan of 15% that plan was not contemplating any significant acquisitions, and we were thinking and get into about $1 billion.
In a couple of years, so that trajectory continues.
We'll be accelerated but some of these deals some of these deals that you have to understand or just a bolt ons, where we flagstone capacity, where we don't have the right team soya proteins things like that and some other ones become more platforms that actually gave us the people 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 to our value proposition and we see our pipeline on our quarterly wins continue to be growth in the 20% range.
We know it's a good deal for us.
The shareholder settlement.
We're very pleased with the direction.
One of the Big picture question.
Yes.
You're outlining and consumer trends better you believe.
He was going to be the future of where we're going.
This one because your portfolio.
The percentage of your portfolio, you think targets those eight today and then when I think about it in three to five years, what percentage of your portfolio will target those eight.
Items, and then I'll leave it there.
And I appreciate your time.
Yes.
Very good question towards the December.
<unk>.
So today, but I would say in general terms industrial or do you see us working on the evolution of the carbohydrate solutions portfolio portfolio, because the cost of the big assets is there one more difficult.
To adjust for some of these we think that.
Our services in oilseeds and nutrition market.
Two more aligned to that and now that we are evolving the portfolio of car solutions, we feel that a significant percentage of adm's in couple of years will be aligned towards these trends, which make us very optimistic about the future.
We are very well positioned for all of these long term trends.
But in this in the analyst day.
Percentages or something to give some context like hey by five years will be.
30% or something some context this is Joe.
Part of how Youre thinking so I just hope that you do that.
We appreciate it. Thank you, yes, we will provide that granularity. Thank you.
Our next question comes from Michael <unk> from <unk>.
Your line is open.
Yes, just to understand a little bit better your outlook for <unk>.
Exports you mentioned.
You think.
The outlook for China, and we're growing demand that can be strong could you quantify what you think.
Requirement soybean exports for the next.
Yes, Mike.
Yes.
I think we still believe that.
Protein demand is very strong.
And when we look and we checked with our our team in China, We still believe that China will need to important about it.
100 million tons give or take of soybeans.
About 25 million tons of core.
So of that corn, the majority will come from the U S a little bit from Ukraine.
So we think that the volumes, although maybe a slightly in a different way than last year right.
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 hit in the heart of it.
But.
We've seen we've seen Chinese buyers come to the U S. In the last.
A few weeks in and we feel very good about.
This.
Export system, you have to remember that.
We were.
We were in a tight situation from a supply demand perspective, given these important numbers and then when you add that.
Some of that capacity has been taken out.
This will make it for a type export season that will probably have rolled forward maybe a month.
In October of the beginning of October.
All of these facilities were still trying to recover power.
Okay.
Great and then my follow up is just it seems like right now there are shortages of fertilizer and maybe glyphosate.
What are your expectation for in Brazil, or even in the U S. But do you think we're going to be able to.
Have enough fertilizer to plant crops around the world.
What does that mean for your.
<unk> business more broadly speaking.
Worried about being able to.
Get enough crop plant that around the world.
Work around from that thanks.
Yes.
At this point in time.
It's a matter of price of course, the natural gas side.
Driven this up.
Different situation when Youre already in Europe that you're already in North America as a North America thing like five to six Bucks.
Fox for natural gas in Europe in Spain, maybe 30.
But I would say at this point in time it continues to be available for farmers only at higher prices.
We haven't detected the big shift in acreage from one to the other is a theater with a little bit early from a planting intentions.
You could things that potentially could be a shift from corn to soybeans, but it's not clear yet in priority. The numbers today are a little bit the footpath hub for the farm, but on what to go so acreage for next year.
Okay, great. Thank you.
Thank you.
Our next question comes from Tom <unk> from JP Morgan.
Your line is open.
Thanks, Good morning, everyone.
Hey, Tom.
So you just opened a flavor production facility in China to serve as a supply hub in the region. What is your outlook for 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 of that relative weaknesses Thomas Adm's current capabilities.
The region as opposed to.
Yes.
Right, So I think that.
We've been very proud of being or having decent growth rates in nutrition.
But it's mainly have been happening.
On the developed parts of the world, if youre willing which developing markets exposure is still is.
Is it 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 this is just an expansion. This is about an hour away from.
Big Center of consumption. So we feel pretty good from a raw material perspective, we feel very good.
<unk>.
Access to consumption.
Consumption basin, and this will be very important for our customers.
Our participation in Asia was limited to one planned.
Four flavors.
About a handful of plans for animal nutrition, and we continue to build that position in 19 months nutrition, we feel very good about it and when this opportunity.
In flavors, we will enhance our capabilities not just putting more flags on the world in the developing areas, whether it's Asia Pacific or or.
Or South America, as we need to go and support our global customers. These are our customers that we do business everyday here.
Some of them are represented there.
New local customers that are required in this case.
So it's.
<unk>.
Just the natural evolution of the business if you will.
Thanks for that and then just following up on SaaS.
What is your operating plan for the two dry in those between now and 2025 when that SaaS production is expected to come online.
We expect construction around that area.
So there'll probably be some transition.
But as we kind of look out over the next couple of years.
We do expect that driving miles R. R.
Some are coming back.
You're seeing tight F&B right now in terms of our industry, we're seeing frankly, the rest of the world is starting to.
Rest of world driving miles to start recovering and so therefore, there is a lag in terms of recovery of exports of ethanol from the United States for 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 the United States for ethanol.
And then I mean, they're at their focus on the environment on energy.
You could actually see China, and you're returning back to the markets and we've seen we've seen a little bit of that already.
Let me clarify from it from the operating perspective, we're not going to be doing anything to this dry mills, so dry mills will produce ethanol.
Then there is downstream technology and capabilities that <unk> brings to the table.
Form them into SaaS, 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 plans and then <unk> takes it from there from a downstream perspective.
That's very helpful.
Thank you I will leave at that and pass it off.
Our next question comes from Anthony <unk> from Barclays.
Please proceed.
Yes, hi, good morning, Congrats on the results.
Two quick follow up questions. So one on X service and I understand your commentary around the expectation that the fourth quarter.
But just trying to maybe get a little bit of a sense differently. So clearly you have some implications in the third quarter because of Hurricane Ida and do you expect some of those.
To reverse in coming quarters are you comfortable enough that those are almost immediately reversing and benefiting your fourth quarters for two so to speak.
The chance to get some more close to where it was last year. So that would be my first question.
Yes, I would say, we expect a strong quarter for AG services in this year.
You have to understand.
Sometimes at the end of the year it becomes complicated.
Because that could be margin expansion market in June contraction here in the accounting rules.
Turning to Q1, and we need to respect that what were talking what we can determine from middle of October which is today is the fundamentals from the market demand is strong.
And the export capacity was tight starting in cities, we have recovered and we started to see our our order book filling up for that so we feel good about.
But again, it's difficult to call it sometimes Q4 versus Q1 because of the accounting groups and we can determine that now we have to determine that at the end of the.
Okay, Perfect and then if we take a look at the at the nutrition business and you've highlighted it in your in your prepared remarks, obviously, the very strong performance.
The animal nutrition side, almost doubling operating profit.
Human nutrition on the other side growth.
Just in the high single digits.
Could you explore a little more on the details.
Noteworthy issues for the maybe a little lower than what you would want to see growth in human nutrition was it was it more of an impact because of input man issues still in certain areas just to understand a little better what's been driving the growth.
And human nutritional offsetting some of the growth in it that way.
Yes.
If you look at human nutrition for them.
For the quarter.
We grew about revenue about 12%.
It's actually a pretty good number and I think if you look at where EBITDA margin on sales, we were able to maintain debt to EBITDA margin will say so when you grow twice the industry clip. If you will and you maintain margins. So I was pretty satisfied of course, it's not a spectacular maybe improvement year over year.
Animal nutrition pack.
This is because human nutrition has been more stable and doing these in human and animal we're still going through the <unk> integration and all those things, but no I don't think he was quoted at all actually I think as I said, we continue to grow at maybe twice the industry rate and maintaining very robust.
Our margins on sales so the EBITDA margin on sales for flavors are north of 20% and we've been able to maintain this part of our pressure in raw materials and all of that so.
I think we're very satisfied with the performance.
Okay, perfect that's complaining of the high level, one well congrats again.
Thank you very much.
Okay.
Our next question is from Robert Moskow from Credit Suisse. Please proceed.
Hi, just a couple of.
Cleanup question.
Can you talk about your pricing outlook for corn sweeteners.
Okay.
It would appear that corn prices have been kind of a roller coaster.
Down off their highs now how is that impacting negotiations for for next year.
And then I had a follow up on the Pea protein market.
Hey, Rob it's very here so the COO.
Contracting season is underway.
And we expect hfcs volumes and margins for AAM to remains strong in 2022.
Clearly there has been some volatility in terms of corn prices.
And that's 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 didn't expect volumes for 'twenty two to be similar to what we've seen this year.
We are seeing recovery interconnect solutions in total I mean actually hfcs is one component, but non agency.
Pretty attractive with a good margin.
Side, and that's just reflective of 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.
And then when we look at carbohydrate solutions business in total for 2022 as I indicated earlier, we do think that the the biofuel part of the business should be actually quite positive when you compare.
Sure compared with this year. So when you put it all together, we do expect Carb solutions you have now.
It is strong.
Okay, and then a follow up on.
Key proteins you mentioned.
I think alternative protein.
Briefly.
Sure.
I thought I had heard that the pea crop in Canada, which was kind of weak.
But my perception is that doesn't matter that much to processors like yourself.
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 for the alternative meat and market facility.
We feel very good about that business actually.
<unk>.
Consistent Pea protein.
That we see in some of these new verticals.
Both businesses are relatively new they have almost no revenue.
In 2020 for us.
And they are providing.
Suddenly octave solutions.
Nation.
So.
At this point in time.
<unk> is the main driver for us.
Is it.
Or a supplementary.
Perspective, it's not a big impact.
We haven't felt any impacting our planned vessel.
Got it okay. Thank you.
Thank you Rob.
Yes.
Our next question comes from Vincent Andrews from Morgan Stanley.
Your line is open.
Thank you and good morning, everyone.
Just wanted to ask you on the LTM LG Chem excuse me the LG Chem Jv's.
Why is it set up in two jv's, 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 downstream setup.
Yes. This is a matter of.
Where the expertise of each company lives and listen to <unk> and its also we want to be us asset life as possible. So.
In areas, where LG is dominant and theyre going to build that downstream.
<unk> extreme capacity.
When we think about bio solutions, our objective is to make maybe.
Ownership position.
We start making chemicals or.
Application technology, and all that we cannot become a chemical company. So in that will lift the partner.
Take a pretty dominant position so.
So we make.
Corn corn grind plus one if you will and then we let our partners take it from there.
It's just a matter of optimized capital for us.
Investing entity, that's where.
We are not that are not core for us.
Areas for US we continue to be.
Within food and beverage is when we go into these materials. If you will we're going to produce one liquid.
And then we have the partner during the rest of it once we get the full details of the agreement we will see where the economics are setup that will make sense that your investments will be.
Okay.
Yes.
Just a follow up.
On the fertilizer issue.
Obviously availability concerns, but the but it seems like is happening is that the high prices are different fertilizer purchases, particularly in South America, a percentage of the big soy groups, our China farmers to buy less fertilizer et cetera.
<unk> showing that.
Farmer sales.
I guess at the five 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 as the farmers slowed and found it to be certainly violence fertilizer may hold onto more dealers because they want to keep the FX.
Keep the dollars.
How is that playing out for you.
Moving into next year.
Yes, I would say.
South America is.
As always.
<unk>.
In Asia with a little bit more factors in terms of the farmers selling just because of the currency.
On the distortions that sometimes the government bringing to the market.
We continue to see may be relatively slow farmer selling.
In.
In Argentina, and that would probably continue it's been a little bit better.
In Brazil, recently, but they're still relatively slow versus the accelerated pace at which they sold last year.
Thank you.
Our next question comes from Vincent Anderson from Stifel from a little bit of a different <unk>.
<unk> knowing that the agreement.
So as to be finalized, but philosophically it sounds like you're maybe trying to priority.
Alright ties.
Getting incremental return out of your core competency and fermentation technology, but.
Maybe limiting direct participation in the pls market.
Can I ask just because that is a bit more of a commodity business then it feels like you've pushed more of your investments to recently.
Yes, I think that.
As we said we're trying to think as you said, we're trying to optimize our facilities.
I'll touch that would those facilities to demand at cost.
Lord gross opportunity.
In this issue again, we don't want to go into making chemicals.
Heavy capital intense and intensive industry and we wanted to make one derivative and then we serve all that capital to continue to grow in food feed and beverages and health and wellness. That's what we're trying to do so.
<unk> is a great partner, we're very honored to have them. They have very good technology.
And it's a little bit like the Jabil discussion.
<unk> continued to make ethanol they will take it from there to make it saf.
With this.
A partnership we're going to make lactic theyre going to take it from there to make BLA.
It's kind of a similar mindset.
No. That's perfect. Thank you and then just a quick point of clarification, if I understand the phrasing of the Mou announcement, it sounded like youre, considering investing in lactic acid capacity that would maybe exceed lg's needs and then you would market. The remaining product yourself is that correct and could you just talk briefly about the opportunity there as a standalone investment.
Yes.
Listen.
Part of that is correct.
It can go through many many opportunities but this is relatively early.
Following that the teams are looking at these there is a lot. There are lots of numbers. There are lots of things that could still change, but a lot of discussion so I will.
With that I'd like to venture that much since the teams are still discussing with LG Chem.
By $2050 $60 2040, whatever it is that is and theyre looking bucket their portfolios.
I need to clean their portfolio, if you will and one of their ways to do that is through recycling. The other way to do it is to go in plant based.
So we are receiving a lot of impact.
While on the request on that and we're looking at our office our ability to produce plant based products in our carbon capture and sequestration that provides an opportunity to make lower Ci products.
We are trying to maximize the opportunity for <unk> when all these so some of these things may not be that well defined because we're in the process of optimizing all of that value for the AGM shareholder, but this is a great opportunity for us and we will be mindful of returns and we know going to build into areas that we shouldnt be putting capital.
Yeah.
Okay.
Capital will be.
We're reserved for our main thrust of the strategy, which is to continue to grow food and food and beverage.
Understood I appreciate the added deep.
Detail look forward to hearing more about it.
Okay.
Thank you.
Our next question comes from Eric Larson from Seaport Research Partners, Eric Your line is open.
You are achievable.
And kind of the whole.
Full transaction.
I know that one of your.
Maybe not.
Put a bad word, but what are your dislike.
Quality of the earnings.
And some of the factual from all those factors.
When we talked about the dry.
No.
The past one of the thing was was trying to reduce your earnings volatility so Ian.
And your economics.
How you negotiate we don't know but.
Have you been able to do thank you.
We've been able to.
Inc, and <unk>, Inc.
Inked an agreement that actually gives you more sustainability alright, I guess the volatility of earnings on the economics of SaaS going forward relative to ethanol.
Yes.
Correct.
Returns are important to us, but also dump in the volatility.
Is in the mind of everything we do.
So of course, the team is considering that I can disclose that much at this early early on.
But I think what you need to also thing is.
Over time, we will try to become a minority partner in all the from the objective all Dcs to de consolidate and take all those assets out of our participation. So to a certain degree we are acting.
<unk> long term.
That's why I talked before about strategic partners for our financial filings.
I think.
We're going to be able to be consolidated but we wouldn't be able to monetize some of them.
If there is some upside to that hopefully participate in all of that but you are correct. The objective.
Participating thinks that as the volatility, but actually that dumped and volatility and we have been.
Very consistent in size over the last 10 years.
Okay, a lot so when you.
Look at the size of your dry mill investments those are relatively new assets.
I guess I guess, we're probably eight to 10 years older Maggie so you've probably depreciated pretty significantly already.
Got it.
Or 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.
One of the reasons, Eric that we landed in this option is the valuation of our assets.
It's better than the alternative that we have so.
We are pleased with the with the value of which we are contributing these two assets with a need for we don't plan to us.
Are there any capex to all these two plants. These two plants will be contributed as such and they will operate as I said as such.
But our our participation.
Sure stops in the contribution of these two.
Yes.
Sure.
Thank you Juan I know, though right.
Taking my questions at that thanks, everybody.
Thank you Eric.
Our last question comes from Adam Samuelson from Goldman Sachs.
Your line is open.
Yes, Thank you and good morning, everyone.
Good morning.
Hi.
A lot of ground.
Been covered so I'll try to make this quick.
On the DSA.
Mou.
Can you just maybe clarify just wanted the gating factors of what you'd be looking for.
On the regulatory side.
So as it relates to really move ahead here, obviously SaaS doesn't participate today and.
The RFS RFS or in California programs.
So what would you want to see in terms of.
Federal or state action.
On SaaS before your ability fully commit to going ahead.
Yes.
We have experienced in both the U S.
The European Union, the strong desire to make this a reality there is not another.
Efficient way to Decarbonize the.
Airlines industry.
Aviation industry of course on the short holes, we can put a battery in a plane long hauls.
Something like this so we expect the government to be a partner to a certain degree in creating some of these markets.
Some of those things.
Too early for me to disclose but there are commitments both.
U S government and the European Union to create the market towards us.
2 billion gallons.
Type of size so.
So they're going to be some help into that.
That's probably to the extent that I can talk about it right now.
Okay, and then just quickly on the balance sheet, maybe this is for ray.
At the end of the quarter net debt to EBITDA.
Sub with sub.
Two times.
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 next going forward.
I think that as we and we've been monitoring commodity prices very carefully.
When you look at our operating working capital right now.
Still $2 billion higher than we were last year. So as we think about commodity prices next year, assuming you have a strong south American crop you can have a normal crop in United States, you see commodity prices coming off again.
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 start looking back at return of capital that we have looked like in the past. So I think a lot of it is a function of funding the investments that we've talked about but importantly, making sure that the working capital environment.
Reverts back to normalized levels, which I think.
Assuming a normal south American crop a normal U S crop next year I see opportunities to look at return of capital.
Okay, all right I'll leave it there thanks so much.
Thank you Ed.
This now concludes our Q&A session I will now turn the call back to Mr. Nathan to conclude.
Thank you as Juan mentioned E rate and other ADM leaders will be headlining 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 asked a good day and thanks for your time and interest in <unk>.
Yes.
Thank you everyone for joining us today. This now concludes today's conference call. Please now disconnect your lines.
Okay.
[music].
Okay.
Yes.
Okay.