Archer-Daniels-Midland Company

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 Lothar, CEO, Vice President, Head of Investor Relations, Chief Financial Officer, Nutrition for ADM. Mr. Lothar, you may begin.

Thank you, Emily. Good morning, and welcome to ADM's third 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 two, the company's safe harbor statement, which says that some of our comments and materials constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. These statements and materials are based on many assumptions and factors that are subject to risk 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 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 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 $0.97. That is a 9% year-over-year improvement despite a higher tax rate. And our year-to-date adjusted EPS of $3.69 is already above our full-year 2020 adjusted EPS. Adjusted segment operating profit was $1 billion. up 18% versus the third quarter of 2020, and our eighth consecutive quarter of year-over-year OP growth. Our trading four-quarter adjusted EBITDA was about $4.6 billion, almost a billion more than a year ago. And our trading four-quarter average adjusted ROIC was 9.6%. significantly higher versus the year-ago period. I remain proud to lead a global team that is delivering robust returns and sustained growth in profits. Our strong quarters and our ongoing upward trajectory are a testament to our team's execution and agility and the consistent implementation of our strategic plan. I'd like to take a moment now to highlight some of our accomplishments from the quarter. Slide 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, is not a discrete event. It's a representation of our continuous work to identify opportunities for growth and improvement. Of course, those opportunities must be the right ones. The enduring trends of food security, health and well-being, and sustainability provide 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 adjacent to our existing capabilities. That focus informed the building of our global nutrition business. The acquisition of Wild gave us entry into flavors and a global taste platform. We then use Bolton 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 Neovia. And we continue to do the same today across our business. In order to meet growing demand for sustainable solutions, we have announced a joint venture and offtake agreement with Marathon Oil Company to support the production of renewable diesel. We are continuing to invest in key nutrition categories. As 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 soya protein. And with global demand for pet food growing to $140 billion in the coming years, We are continuing our growth with a 75% ownership stake in PetDyn. In the area of microbiome, we've signed an agreement with VLAN Biotech to launch a joint venture that we 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 in our portfolio to continue driving growth for years to come. There will be more to come, and you can expect an increased level of investments to support our sustainable earnings growth and further expand our capacity and capabilities. Please turn to slide five. As part of our portfolio management approach, we're working to evolve our carbohydrate solutions business. expanding our array of solutions to meet growing customer demand driven by the enduring trend of sustainability. We made significant progress recently focused on two areas, new opportunities for our alcohol production and our growing bio solutions platform. Let me start with alcohol. Last Thursday, we announced that we'll reach an agreement which we expect to close at the end of the month to sell our ethanol facility in Peoria. And yesterday, we announced a memorandum of understanding with GEVO to explore potential joint ventures, one of which would include our Columbus and Cedar Rapids dry mills and our ethanol asset indicator, transitioning 900 million gallons of ethanol production to support growing demand for low-carbon, sustainable aviation fuel. These actions represent our commitment to a process that we began when we first announced the strategic review of our dry mills. 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. SAF is one of those opportunities. The U.S. and E.U. have set goals that together which support almost 4 billion gallons of annual sustainable aviation fuel production by 2030, and more than 45 billion by 2050. The other focus area for our carbohydrate solutions evolution is our biosolutions growth platform. Biosolutions, which we launched about 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 identifying new and exciting opportunities. Earlier this fall, for example, we signed an MOU with LG Chem for the production of lactic and polylactic acid for bioplastic and other plant-based products. These efforts are enabling BioSolutions to deliver 10% annualized revenue growth, including more than $80 million in new revenue wins in the first nine months of this year. And we believe there are many new opportunities to come. So from the transformation of our dry mills to our growing BioSolutions platforms, Our work to evolve our carbohydrate solutions capabilities is a perfect example of how we're managing our portfolio and delivering smart, strategic growth. And one of the many reasons we remain convinced on our ability to deliver sustainable earnings growth in the years to come. I'll talk a little bit more about our business outlook at the end of our call. And, of course, we'll be going into much more detail at our Global Investor Day on December 10th. But in the meantime, I will turn the call over to Ray to talk about our business performance. Ray?

Yeah, thanks, Juan. Slide six, please. The Ag Services and Oilseeds team continued their outstanding year with another quarter of substantial profit growth. And Ag Services were 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 in net timing effects that should reverse in coming quarters, as well as $54 million in insurance settlement recorded in the prior year period and lower export volumes caused by Hurricane Ida. global trade continues its strong performance. The crushing team delivered substantially higher year-over-year results, executed well, delivering stronger margins in a dynamic environment that includes strong demand for vegetable oils to support our existing food customers, as well as the increasing production of renewable diesel. Results were also driven by about $70 million in net positive timing effects in the quarter. Refined products and other results were significantly higher than prior year period, driven by positive timing effects of approximately $80 million that are expected to reverse in future quarters, strong execution in EMEA and North American biodiesel, and strong refining premiums due to demand for renewable diesel and food service recovery in North America also contributed to the results. Equity earnings from Wilmar were lower year over year. Now, looking ahead, we expect to see continued fundamental demand strength for ag service and oilseeds products, including from China, as well as solid global soybean crush margin environment in the fourth quarter, partially offset by some higher manufacturing costs. In addition, RPO will be negatively impacted by timing reversals. All told, we expect results in the fourth quarter to be significantly higher than the third quarter of this year. Slide seven, please. Carbohydrate solution results were lower year over year. The starches and sweeteners subsegment, including ethanol production from our wet mills, showed their agility by managing through dynamic market conditions and optimizing mix between sweeteners and ethanol production through the quarter. Year-over-year results were significantly lower, primarily due to higher input costs. Vantage corn processor results were much higher versus the third quarter of 2020, supported by the 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 the solid fundamentals from the end of the third quarter to continue for carbohydrate solutions with good ethanol margins extending through the quarter due to industry supply-demand balance and solid demand for corn oil and starches offset by higher manufacturing costs, particularly in Europe, as well as the absence of the peoria dry milk. All told, fourth quarter results for the segment should be similar to the previous year fourth quarter. On slide eight, the nutrition business remains on its solid growth trajectory with 17% higher revenues and 15% on a constant currency basis and 20% higher profits year over year and continued strong EBITDA margins. The human nutrition team delivered revenue growth of 12% year over year on a constant currency basis, helping to drive 9% higher profits. Higher volume, improved product mix, particular strength in beverage drove strong flavor results in EMEA and North America, partially offset by lower results in APAC. Specialty ingredients continued to benefit from strong demand for alternative proteins, offset by some higher costs. Health and wellness results were higher on robust sales growth in bioactives and fiber. Animal nutrition profits were nearly double the year-ago period, and sales were up 19% on a constant currency basis, driven primarily by the strength in amino acids, as well as feed additives and ingredients, partially offset by higher costs in LATAM and slower demand recovery in APAC. 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 in the fourth quarter 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 captive insurance underlying losses most of which were offset by corresponding recoveries in the other business segments. We expect fourth quarter to have some additional insurance underlying losses, resulting in a break-even other business for the fourth quarter. As expected, net interest expense for the quarter decreased year-over-year on lower interest rates and the favorable liability management actions taken in the prior year. In the corporate lines, Unallocated corporate costs of $230 million were driven primarily by higher IT offering and project-related costs and transfers of costs from business segments into the centralized centers of excellence in supply chain and operations. Looking at total corporate costs, including net interest, corporate unallocated, and other corporate, we are still on track for the calendar year to be overall similar to 2020. The effective tax rate for the 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 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'll turn it back to Juan.

Thank you, Ray. Slide 10, please. From consistent, sustained profit growth to the ongoing management of our business and product portfolio, our team has a lot to be proud of. And there's one other thing we achieved last quarter that I want to mention. We had many team members impacted when Hurricane Ida hit in late August. So we provided temporary housing arrangements, portable generators, food and water, and more. In fact, many ADM colleagues traveled to the region and spent time helping repair their coworkers' damaged homes. I'm very proud of that. I'm very thankful to our team. I'll keep the rest of my closing short as we plan to go into our outlook in far more depth on our December 10th Global Investor Day. As I look back at the third quarter and all of the last nine months, I continue to see a team and a company that are delivering on our goals and our purpose. We're closing out 2021 with great momentum. We're on track for a strong fourth quarter, and a second consecutive year of record earnings per share. And as we look ahead to 2022, we see another strong year for ADM. A robust global demand environment will continue to offer opportunities for us to leverage our indispensable global origination, processing, and logistics capabilities. And nutrition will continue on its strong growth trajectory. in line with our 15% per annum trend rate goals and on its way to a billion dollars in operating profit in the coming years. Of course, there are things we continue to watch, including energy costs and inflation more widely. But thanks to our unique value chain and global footprint, our unmatched abilities to meet needs in the enduring trend areas of food security, health and well-being, and sustainability, and a truly unparalleled team of nearly 40,000 colleagues around the world, we remain very optimistic in a strong year to come. With that, Emily, please open the line for questions.

Thank you very much. To register your questions, please press Start followed by 1 on your telephone keypads now. If you change your mind, please press Start followed by 2. When preparing to ask your questions, please ensure that your device is unmuted locally. Our first question today comes from Ben Bienvenue from Stevens. Ben, your line is open.

Hey, thanks. Good morning, everyone. Morning, Ben. Hey, Ben. So I've got one long-term question with regards to your announcement yesterday around SAF, and then I want to ask a clarifier on the guidance as well. So on the announcement yesterday, congratulations. A couple of questions. One is, you know, when you think about the total opportunity for SAF, obviously the embedded demand is significant given, you know, pertinent ways to reduce greenhouse gas emissions in the jet fuel market. The economics for producers, though, are unclear at this time. So I'm curious, as you think about engaging with GEVO on this partnership, one, what got you comfortable to commit these facilities to this end market ultimately? And then help us think about kind of the evolution of how the agreement will mature because it's a memorandum of understanding. Why did you go with that initially versus a more legally binding agreement? And then if you would just talk just bigger picture about how you feel about the ultimate demand and the implications for the ethanol markets, that would be helpful. I know a lot in there, but I'd love to hear you talk about it.

Thank you, Ben. Yeah, listen, you know, we've been looking at options for the dry mills for a very, very long time. So, we've been studying the opportunities for the ADM shareholders as we try to divest these assets. Certainly, when we look at the sustainability trends and the opportunities, remember one of the issues with these assets are they are very large, which became a little bit of an issue at the time of divesting them. So we were looking for opportunities that are sizable, where that size turns into a competitive advantage. So certainly when you look at all industries trying to decarbonize, the aviation industry is a massive industry that contributes to CO2. And we have identified and we have checked with partners, strategic partners, people in the industry that SAF is the solution. And I think we see also concurrently that both the U.S. and the European governments are looking at the SAF and are trying to incentivize the demand for that. So you heard President Biden or Secretary Granholm making statements about that. So we see a very positive environment developing for this, a very sizable, addressable market for us. And when you combine our size with our raw material procurements and our costs, and the ability to decarbonize based on our carbon capture and sequestration that, as you recall, we've been running since 2017, allows that complex to provide very competitive low CI fuels for the industry. There are going to be a lot of discussions from here on, but this is significant for us, so we decided to announce this. There are many opportunities and options here, so we have announced what potentially could happen, which is the creation of these two joint ventures. In one of those joint ventures, ADM's contribution will be the two dry mills, as our objective is, as you know, to deconsolidate these two. So again, but still, many discussions to happen and many, many partners to join us into this. We are thinking over time to have a minority position in this and having probably strategic or financial partners to join us. But overall, as you can be assured, this is a better outcome for our shareholders in terms of the realization of value from these two dry mills. So we're very excited about the opportunity.

Okay, great. My next question is a clarifier and then a discussion to the extent you can on kind of 2022. First, Ray, did I hear you say on the ag services and oil seeds for the fourth quarter, you expect it to be higher than the third quarter, but you didn't say higher than the fourth quarter last year. Are those kind of the goalposts we should be thinking about? That's part one. And then question two within that is, You know, export demand looks strong for next year. Obviously, renewable diesel is continuing to gain steam. How do you feel about ag services and crushing in that broader ag services and oilseed segment as we go into 2022?

Yeah, so, Ben, listen, as we think about Q4 for ADM and when we say we expect a strong Q4, we look at strong crash margins. Demand is strong for proteins, but also demand for oils is very strong and tight, and then you add RGD on top of that. We are facing an improved ethanol environment as we enter the Q4. We are estimating exports from the U.S. in volume similar to last year. And if you think about the capacity situation last year, we didn't have reserve this year. Unfortunately, one of our competitors' plant is down because of IDA. So kind of about the same situation. And then we continue to see nutrition growing at, you know, 15% to 20%. So, of course, we have inflation. We have energy issues that, you know, the team is dealing with it and trying to mitigate. But we are coming into Q4 and into Q1 with a strong momentum. If you look at Q1, we feel very strong about crash margins. Our export window, given that in September we didn't export that much, is 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 there are supply chain issues, there are energy issues, So we will have to manage all that. But from a demand perspective, we feel very good about it.

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

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

I would say that the conclusion of the review ended in the best option for peoria was to divest it, which was when I basically shed about 135 million gallons of our ethanol capacity. And then we are taking about two-thirds of all our ethanol capacity in this MOU with GEVO, exploring options to transfer that into sustainable aviation fluids. And, again, in the process, deconsolidating, because we're going to be contributing these two assets to the joint venture. But, of course, we're going to have some exposure to ethanol on a long-term basis because we still own the wet mills. But what you have to think about it is that in our analysis, the supply-demand fundamentals change for ethanol. First of all, remember we always said we didn't like the undifferentiated nature of dry mills. In wet mills, we have more options to protect margins and to protect returns. But second is by taking, you know, all this capacity out of – out of the market, basically, because 900 million gallons in about two years are going to move from vehicle ethanol to SAF feedstock, then I think we think that the supply demand fundamentals and the margin environment of ethanol will change. So we feel that that concludes our strategic assessment. Of course, we need to now execute on this transaction. We still have a lot to be discussed.

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

No, you're right. We're going to have some higher input costs, which is energy costs, particularly over in Europe. So that's a little bit of a headwind. At the same time, you're right. And the ethanol margins that we're seeing right now in the market are extremely healthy. And that's just reflective of a very tight supply-demand situation right now. And industry – inventories have fallen down to 20 million barrels right now. And when you take a look at driving miles and gasoline demand, we're basically back to pre-pandemic levels of demand again. And so on the positive side, I would have to say the ethanol margins are pretty robust. On the issue of sweeteners and starches, what's interesting is while a lot of people kind of focus on the HFCS side of the business, The other parts of our business are doing extremely well. The non-HFCS business, for example, citric acid demand is extremely strong. Starches demand is extremely strong. So when we put it all together, that's the reason why we provide the guidance that there are some puts and takes, but we expect our fourth quarter for carbohydrate solutions to be similar to where we were last year.

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, the several of them, the 75% in the pet business, the LG Chem, the ACS Bio, so how much capital have you deployed to this? What is the return expected on these? I'll start there, and then I'll ask to follow up to that.

Yeah, I mean, I think we haven't disclosed the amount of capital in terms of the LG Chem. I mean, that's still being discussed right now in terms of how the partnership will form on lactic acid and polylactic acid. The Axis Bio is not that significant. You know, the big investment that you mentioned here is really the P4, the pet down investment, the pet food company. And, again, we decided to invest 75% into it, right? So, therefore, I think we've kind of managed that capital there. So the total invested capital on these recent announcements actually is far less than a billion dollars, far less than a billion dollars. This is consistent with kind of the bolt-on type of investment numbers that we've talked about in the past. Ken?

And then also the soja protein. But if I take that and then, Juan, you said that in 2022 for nutrition, you're still expecting that 15, and then you kind of bled it up a little bit to 15 to 20 percent, which is always nice to hear. But if you're adding less than a billion, but sounds like more than a bread box, a bread basket, is that number going to start to accelerate? Not that 15 to 20 percent is a bad number. It just seems like you're starting to put more capital to work. Would we start to see that number accelerate at what year and what type of returns are we expected, or is it just not enough to make a difference? I'm just trying to kind of cement that in my head.

Yeah, certainly, Ken. We will see acceleration based on these investments. When we talked about our plan, our plan of 15%, that plan was not contemplating any significant acquisitions. And we were thinking in getting to about a billion dollar OP in a couple of years. So that trajectory continues and will be accelerated for some of these deals. Some of these deals, you have to understand, are just bolt-ons where we plug some capacity where we don't have, like in soya protein, things like that. And some other ones become more platforms that actually give us the people to accelerate even more our growth rate. But we will continue in an investment phase on nutrition because the opportunities are there. Our customers are reacting positively to our value proposition, and we see our pipeline and our quarterly wins continue to grow. So as long as we can post numbers of revenue growth, you know, in the 15% range and OP growth in the 20% range, we know it's a good deal for the shareholders. So we're very pleased with the direction.

I have one other big picture question. Juan, you outline, and every year you do it, in your press release, eight consumer trends that you believe is going to be the future of where we're going. This one, you laid out eight. When you think of your portfolio, what percentage of your portfolio do 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.

Yeah, that's a very good question to which we will provide more granularity at the December 10th investor day. But I would say in general terms, and that's where you're seeing us working on the evolution of the carbohydrate solutions portfolio. Probably the carbohydrate solutions portfolio, because it has the big assets, is the one more difficult to adjust to some of these. We think that, you know, our services and all seats and nutrition are much more aligned to that. And now that we are evolving the portfolio of car solutions, we feel that the significant percentage of ADMs in a couple of years will be aligned to all these trends, which makes us very, very optimistic about the future. We are very well positioned for all these long-term trends.

But in the end, I'll say you'll provide some level of percentages or something to give some context to it, like, hey, by five years we'll be at 25% or 30% or some context that shows the progression of that. It sounds like an important part of how you're thinking. So I just hope that you do that. We appreciate it. Thank you.

Yeah, we will provide that granularity. Thank you.

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

Yeah, just wanted to touch base a little bit, you know, just understand a little bit better your outlook for exports. You know, you mentioned that you think the outlook for China and their grain demand is going to be strong. Could you quantify what you think for their corn and soybean exports for the next year? And then, you know, also the U.S. share of what's going to go to China?

Yeah, Mike, listen, we still believe that protein demand is very strong. And when we look and we check with our team in China, we still believe that China will need to import about 100 million tons, give or take, of soybeans and about 25 million tons of corn. 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 slightly in a different way than last year, right now consumers are a little bit more short-term, more hand-to-mouth, if you will, because they were expecting from a little bit of a correction in prices as we were hitting the harvest. But we've seen Chinese buyers come to the U.S. in the last few weeks, and we feel very good about that. this export season. You have to remember that we were in a tight situation from a supply-demand perspective, given these import numbers. And then when you add that some of that capacity has been taken out, this will make it for a tight export season that will probably have rolled forward maybe a month. since in October, at the beginning of October, all these facilities were still trying to recover power.

Right. And then my follow-up is, you know, just it seems like right now there's shortages of fertilizer and, you know, maybe glyphosate. You know, what is your expectation for in Brazil or even in the U.S.? Like, do you think we're going to be able to you know, have enough fertilizer to plant crops around the world? And, you know, what does that mean for your fertilizer business? But more broadly speaking, you know, are you worried about being able to, you know, get enough crop planted around the world or what's the workaround from that? Thanks.

Yeah. Listen, at this point in time, it's a matter of price, of course. Natural gas have driven this up. different situation when you are in Europe than you are in North America. North America is paying like five to six bucks for natural gas. Europe and 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 a big shift in acreage from one to the other. It's still a little bit early from the planting intentions. You could think that potentially it could be a shift from corn to soybeans, that is not clear yet. And probably the numbers today are a little bit of a toss-up for the farmer on what to go. So probably over the next couple of weeks, we will have more clarity on if there is any shift in acreage for next year.

Okay, great. Thank you.

Thank you.

Our next question comes from Tom Simonich from JP Morgan. Tom, 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 weakness is down to ADM's current capabilities in the region as opposed to broader market conditions?

Yes. You are right, Tom. I think that we've been very proud of having these growth rates in nutrition. but it's mainly have been happening on the developed part of the world, if you will, in which developing markets exposure is still relatively small for ADM, whether we're talking about South America or Asia Pacific. So in Asia Pacific, we've been players in flavors for a while, and this is just an expansion. This is about... an hour away from a big center of consumption so we feel very good from a raw material perspective. We feel very good from an access to a big consumption base and this will be very important for our customers. Our participation in Asia was limited to one plant for flavors and about a handful of plants for animal nutrition. And we continue to build that position in animal nutrition. We feel very good about it. And then with this opportunity in flavors, we will enhance our capabilities, not just production, but also market development capabilities of customer innovation centers. So you will see us going and putting more flags on the world in the developing areas, whether it's Asia Pacific or Europe. or South America, as we need to go and support our global customers. These are our customers that we do business every day here, and some of them are represented there. But also we have a lot of new local customers that are requiring these capabilities. So it's just a natural evolution of the business, if you will.

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

Yeah, we expect to continue to operate those plants. I mean, naturally, as you get closer to 2025, there's going to be probably some construction around that area. There'll probably be some transition. But as we kind of look over the next couple of years, we do expect that You know, driving miles are coming back. We're seeing tight S&D right now in terms of our industry. We're seeing, frankly, the rest of the world is starting to recover from the pandemic. So we expect the rest of the 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 to the rest of the world. So I think over the next couple of years, I think you're going to continue to see some level of demand recovery from outside of the United States for ethanol. And then even China, as we talked about, I mean, their focus on the environment, on energy, you could actually see China and you're returning back to the markets. And we've seen a little bit of that already.

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

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

Our next question comes from Ben Ferrer from Barclays. Ben, please proceed.

Good morning, Juan Rey. Congrats on the results. Just two quick follow-up questions. So one on ex-service, and I understand your commentary around the expectation into the fourth quarter, but just trying to maybe get a little bit of a sense differently. So clearly you had some implications in the third quarter because of Hurricane Ida, and you expect some of those effects to reverse in coming quarters. Are you comfortable enough that those are almost immediately reversing and benefiting your fourth quarter, so to speak, have a chance to get somewhere close to where it was last year? So that would be my first question.

Yeah, I would say we expect a strong quarter for our services in this year. You have to understand, sometimes at the end of the year, it becomes complicated because there could be margin expansion, margin contraction here, and the accounting rules into Q1, and we need to respect that. What we're talking, what we can determine from, you know, middle of October, which is today, is the fundamentals from the market. And demand is strong. And the export capacity was tight starting into this, and we started to see our, so we feel good about it. But again, it's difficult to call it sometimes Q4 versus Q1 because of the accounting rules, and we can detect at the end of the day.

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

Or are there certain demand issues still in certain areas?

Just to understand a little better what's been driving the growth in human nutrition or offsetting some of the growth, let's put it that way, better.

Yeah, well, if you look at the human nutrition for the quarter,

we grew about a revenue about 12%. I mean, it's actually a pretty good number. And I think if you look at where a bit of margin on sales, we were able to maintain that a bit of margin on sales. 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 than animal nutrition has, But it's because human nutrition has been more stable in doing this. And, you know, in human, in animal, we're still going through the Neovia integration and all those things. But, no, I don't think it was a weak quarter at all, actually. I think, as I said, we continue to grow maybe twice the industry rate and maintaining very robust EBITDA margins on sales. So EBITDA margins on sales for flavors are north of 20%. and we've been able to maintain, despite that we're pressuring raw materials and all that. So, no, I think it was, we're very satisfied with the performance. Very satisfied.

Perfect. It's complaining at the high level, Juan. Well, congrats again.

Thank you very much.

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

Hi, just a couple of cleanup questions. Can you talk about your pricing outlook for corn sweeteners? You know, it would appear that corn prices have been on kind of a roller coaster. They're down off their highs. How is that impacting negotiations for next year? And then I had a follow-up on the pea protein market.

Hey, Rob, it's Ray here. So the contracting season is underway. And we expect HFCS volumes and margins for ADM to remain strong in 2022. Clearly, there's been some volatility in terms of corn prices. And frankly, the input cost will get reflected in terms of our contract pricing. And we do expect contract pricing to be higher next year compared to this year. Volume-wise, we do expect volumes for 2022 to be similar to what we've seen this year. We are seeing recovery in terms of solutions in total. I mean, actually, HSVS is one component, but non-HSVS is pretty attractive with a good margin upside. And that's just reflective of really a strong demand environment for citric acid, for starches, for dextrose and other products. So that's another important factor when you take a look. And when you look at carbohydrate solutions, this is in total for 2022. As I indicated earlier, we do think that the biofuel part of the business should be actually quite positive when you compare kind of this year compared to this year. So when you put it all together, we do expect Carb Solutions to have another strong. Okay.

And then the follow-up on pea proteins, you know, you mentioned I think alternative protein briefly. I thought I had heard that the pea crop in Canada was kind of weak, but my perception is that 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 the alternative meat end market?

And we feel very good about that business, actually.

And systems and pea protein that we see in some of these new verticals. And those businesses are relatively new. They have almost no revenue. new in 2020 for us.

And they are providing alternative solutions. So at this point in time, soy is the main driver for us.

So pea is a supplementary different perspective. It's not a big impact. So We haven't felt any impact in our plans at all.

Got it. OK, thank you. Thank you, Rob.

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

Thank you, and good morning, everyone. One, just wanted to ask you on the LG Chem, excuse me, the LG Chem JVs.

Why is it set up in two JVs rather than just sort of one integrated production of lactate acid and then into PHA? What's the thought process behind having sort of an upstream and a downstream setup?

Yeah, this is a matter of where the expertise of each company lies. And to be honest, also, We want to be as asset-light as possible, so in areas where LG is dominant and they're going to build that downstream capacity. When we think about bio-solutions, our objective is to make maybe an ownership position, but when we start making chemicals or application technology and all that, we cannot become a chemical company. So in that, we let the partner take a predominant position. So we make 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 and not invest in areas that are not core for us.

Core areas for us will continue to be food and feed and beverages.

When we go into these materials, we're going to produce one liquid that makes sense, and then we have the partner doing the rest.

Once we get the full details of the agreement, we'll see where the economics are set up, and it will make sense that your investments will be in your sort of center of the plate focus and this and this. As a follow-up, on the fertilizer issue, obviously there's availability concerns, but the problem What seems like it's happening is that the high prices are deferring fertilizer purchases, particularly in South America, and the big soy groups are telling their farmers to buy less fertilizer, et cetera. And I see your slide showing that farmer sales are I guess it's a 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 if the farmer is slow to sell the beans or if they buy less fertilizer, then you may hold on to more beans because they want to keep the FX, keep their dollars?

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

Yeah, I would say... South America, you know, it's always an issue with a little bit more factors in terms of the farmer selling just because of the currency and the distortion that sometimes the government brings into the market. We continue to see maybe relatively slow farmer selling in Argentina, and that will probably continue.

It's been a little bit better in

in Brazil recently, but still relatively slow versus the accelerated pace at which they sold last year.

Thank you. Our next question comes from Vincent Anderson from Stiefel.

...from a little bit of a different direction, knowing that the agreement... for us to be finalized.

But philosophically, it sounds like you're maybe trying to prioritize getting incremental return out of your core competency in fermentation technology, but maybe limiting direct participation in the PLA market. And I ask just because that is a bit more of a commodity business than it feels like you've pushed more of your investments to recently.

Yeah, I think that, as we said, we're trying to, I think as you said, we're trying to optimize our facilities and attach those facilities to demand that has more growth opportunity. In this issue, again, we don't want to go into making chemicals. That's a heavy capital intensive industry, and we want to make one derivative. and then reserve 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 LG Chem is a great partner. We're very honored to have them. They have very good technology. And it's a little bit like the GEVO discussion. You know, we're going to continue to make ethanol. They will take it from there to make SAF. And with this partnership, we're going to make lactic, they're going to take it from there to make PLA. So 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 you're 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?

Yeah. Listen, part of that is correct. I mean, LACTIC, it can go to many, many opportunities.

But this is relatively early on. The teams are looking at this.

There are a lot of numbers. There are a lot of things that could still change. There are a lot of discussions. So I wouldn't like to venture that much since the teams are still discussing with LG Chem and by 2050, 2060, 2040, whatever that is, and they are looking back at their portfolios. They need to clean their portfolios, 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 inbound requests on that, and we're looking at our assets, our ability to produce plant-based products, and our carbon capture and sequestration. that provides an opportunity to make lower CI products. And we are trying to maximize the opportunity for ADM on all these. So some of these things may not be that well-defined because that value for the ADM shareholder. But it's a great opportunity for us, and we will be mindful of returns, and we're not going to veer into areas that we shouldn't be putting capital there. The capital will be reserved for our main thrust of the strategy, which is to continue to grow in food and feed and beverage.

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

Thank you.

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

Yeah, and kind of the whole transaction.

And I know that one of your dislikes that you've had with ethanol over the years is the extreme volatility of some of those factors. And

When we talked about the dry mills in the past, one of the things was trying to reduce your earnings volatility. So in the economics of how you've negotiated, we don't know much about the economics that you have here with SAF, but have you been able to, do you think you've been able to you know, income agreement that actually gives you more sustainability or I guess less volatility of earnings on the economics of SAF going forward relative to ethanol?

Yeah, you're correct that returns are important to us, but also dampening the volatility is in the mind of everything we do. So, of course, the team is considering that. I can't disclose that much at this early on, but I think what you need to also think is that over time, we will try to become a minority partner in all this, and the objective of all this is to deconsolidate and take all those assets out of our participation. So to a certain degree, we are acting long-term of this. That's why I talked before about strategic partners or financial partners. I think we're going to be able to deconsolidate. We're going to be able to monetize some of it. If there is some upside to that, hopefully participate in all that. But you are correct. The objective is to participate in things that add to volatility, but

actually the dumping volatility, and we've been very consistent in that over the last 10 years.

Okay, a lot. So when you look at the size of your dry mill investments, you know, those are relatively new assets, but I guess they're probably 8 to 10 years old already, so you've probably depreciated them pretty significantly already. Is your contribution to the JV putting those assets in there, or would you expect to see maybe a modest capital return as part of that JV agreement as well?

One of the reasons, Eric, that we landed in this option is that the valuation of our assets is better than the alternative that we have. So we are pleased with the value at which we are contributing these two assets. We don't need or we don't plan to add assets as such. Then the joint venture or Jibo may put money for finishing of these and to convert it into assets. But our participation stops in the contribution of these two driving

Okay, perfect. Thank you, Juan, for my questions at that. Thanks, everybody. Thank you, Ernie.

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

Hey, everyone.

Morning, Adam. Hi.

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

Yeah, listen, we have experience in both the U.S. and the European Union, a strong desire to make this a reality. There's not another efficient way to decarbonize the gas. the airlines industry, the aviation industry. Of course, only short holds you can put the battery in a plane. Long holds is something like this. So we expect the governments to be a partner to a certain degree in creating some of these markets. Some of those things are too early for me to disclose, but there are commitments both of the U.S. government and the European Union to create the market for that in the 50 billion gallons type of size. So there's going to be some help into that. But that's probably to the extent that I can talk about it right now.

Okay. And then just quickly on the balance sheet, maybe this is for Ray. At the end of the quarter, net debt to EBITDA was sub 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 mix going forward. I think that as we've been monitoring commodity prices very carefully, and when you look at our operating working capital right now, it's 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 have a normal crop in the United States, you see commodity prices coming off again. After we've kind of funded some of the Bolton acquisitions that we've talked about, I expect our balance sheet to be pretty strong. And so there we can probably start looking back at return of capital that we've looked like in the past. 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 ascends. 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, Oda.

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

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

Thank you everyone for joining us today. This now concludes today's conference call. Please now disconnect your lines.