Hello, and good morning, and welcome to the ADM third quarter 2021 earnings conference call. All lines have been placed on a listen-only mode to prevent background noise. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Vikram Luthar, CEO, Vice President, Head of Investor Relations, Chief Financial Officer, Nutrition for ADM. Mr. Luthar, 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. 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. 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 trailing fourth quarter adjusted EBITDA was about $4.6 billion, almost $1 billion more than a year ago. Our trailing fourth quarter average adjusted ROIC was 9.6%, significantly higher versus the year ago period. I remain proud to lead a global team that is delivering robust returns and sustained growth in profits.
Our strong quarter and our ongoing upward trajectory are a testament to our team's execution and agility and the consistent implementation of our strategic plan. I'd like to take a moment now to highlight some of our accomplishments from the quarter. Slide 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. When we talked about the dramatic transformation of our portfolio over the last 10 years, it's 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. 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 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 did 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 Sojaprotein. 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 PetDine. In the area of microbiome, we've signed an agreement with Vland Biotech to launch a joint venture that will perfectly position to help meet $1 billion in retail demand for probiotics in China. These are just some examples of how we are dynamically positioning 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 BioSolutions platform. Let me start with alcohol. Last Thursday, we announced that we reached an agreement which we expect to close at the end of the month to sell our ethanol facility in Peoria.
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 assets in Decatur, 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 EU have set goals that together would 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 bioplastics 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. We believe there are many new opportunities to come.
From the transformation of our dry mills to our growing BioSolutions platform, our work to evolve our Carbohydrate Solutions capabilities is a perfect example of how we're managing our portfolio and delivering smart strategic growth. 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 tenth. 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. In Ag Services, we're proud of how the team executed in a challenging environment, including a swift return to operation after Hurricane Ida. Overall results were significantly lower versus the prior year quarter, driven by approximately $50 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 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, 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 Solutions results were lower year-over-year. The starches and sweeteners sub-segment, including ethanol production from our wet mills, showed their agility by managing through dynamic market conditions and optimizing mix between sweeteners and ethanol production through the quarter. Year-over-year results were significantly lower, primarily due to higher input costs. Vantage Corn Processors 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 mill. 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 underwriting losses, most of which were offset by corresponding recoveries in the other business segments. We expect fourth quarter to have some additional insurance underwriting 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 operating 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 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%-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. 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. 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 tenth 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 are 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. 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. Nutrition will continue on its strong growth trajectory in line with our 15% per annum trend rate goals and on its way to $1 billion in operating profit in the coming years. Of course, there are things we continue to watch, including energy costs and inflation more widely.
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 star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your questions, please ensure that your device is unmuted locally. Our first question today comes from Ben Bienvenu from Stephens. Ben, your line is open.
Hey, thanks. Good morning, everyone.
Morning, Ben.
Hey, Ben.
I've got one long-term question with regards to your announcement yesterday around SAF, and then I wanna ask a clarifier on the guidance as well. 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, SAF seems like one of the most pertinent ways to reduce greenhouse gas emissions in the jet fuel market. The economics for producers though are unclear at this time. 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? If you would just talk 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 long time. We've been studying the opportunities for the ADM shareholders to as we try to divest these assets. Certainly, when we look at the sustainability trends and the opportunities, remember, one of the issues with these assets are they are very large, which became a little bit of an issue at the time of divesting them. We were looking for opportunities that are sizable, where that size turns into a competitive advantage. Certainly, when you look at all industries trying to decarbonize, the aviation industry is a massive industry that contributes to CO2. We have identified, and we have checked with partners, strategic partners, people in the industry that SAF is the solution.
I think we see also concurrently that both the U.S. and the European governments are looking at SAF and are trying to incentivize the demand for that. You heard President Biden or Secretary Granholm m aking statements about that. We see a very very positive environment developing for this, a very sizable addressable market for us. When you combine our size with our raw material procurements and our cost 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 gonna 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. 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. Many discussions to happen and 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. 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. We're very excited about the opportunities.
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 Oilseeds 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 and that broader Ag Services and Oilseeds segment as we go into 2022?
Yeah. 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 oils is very strong and tight, and then you add RD 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 volumes similar to last year. 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. Kind of about the same situation. We continue to see Nutrition growing at, you know, 15%-20%.
Of course, we have inflation, we have energy issues that, you know, the team is dealing with it and trying to mitigate. We are coming into Q4 and into Q1 with a strong momentum. If you look at Q1, we feel very strong about crush margins. Our export window, given that in September we didn't export that much, is probably gonna be extended into January and February, a little bit like maybe even longer than last year. We feel very good at the moment. Again, with an environment that there are supply chain issues, there are energy, inflation rising, so we will have to manage all that. From a demand perspective, we feel very good about it.
Our next question comes from Luke Washer f rom Bank of America. Luke, your line is now open.
Thank you. Good morning, team.
Good morning.
Good morning, Luke.
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. 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 even in your wet mills? Or how has your thinking now evolved?
Yeah, no. I would say that the conclusion of the strategic review ended in the best option for Peoria was to divest it, which we're gonna basically shed about 135 million gallons of our ethanol capacity. 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 fuel. Again, in the process, deconsolidating because we're gonna be contributing these two assets to the joint venture. But of course, we're gonna have some exposure to ethanol on a long-term basis because we still own the wet mills. 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. Second is by taking you know all this capacity out of the market, basically, 900 million gallons in about two years are gonna move from vehicle ethanol to SAF feedstock. Then we think that the supply-demand fundamentals and the margin environment of ethanol will change. We feel that concludes our strategic assessment. Of course, we need to now execute on the transaction. We still have a lot to be discussed.
That makes sense. 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 you believe that they will continue to be pretty good in 4Q. When I think about the starches and sweetener side, it's, 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? How are you thinking about, you know, 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 gonna have some higher input costs, which is energy costs, and particularly over in Europe. That's a little bit of a headwind. At the same time, you're right. I mean, 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. Industry inventories have fallen down to 20 million barrels right now. When you take a look at driving miles and gasoline demand, we're basically back to pre-pandemic levels of demand again. On the positive side, I would have to say the ethanol margins are pretty robust.
You know, 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, extremely strong. 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.
Ken.
The investments that you've made, there's several of them, the 75% in the pet business, the LG Chem, the Acies 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 a follow-up to that.
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 Acies Bio is not that significant. You know, the big investment that you mentioned here is really the P4, the PetDine 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 $1 billion. And this is consistent with the kind of bolt-on type of investment numbers that we've talked about in the past, Ken.
Then also the Sojaprotein, 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 bump it up a little bit to 15%-20%, which is always nice to hear. But if you're adding less than $1 billion, but sounds like more than, you know, a breadbox, a breadbasket, you know, is that number going to start to accelerate relative to? Not that 16%-20% is a bad number. It just seems like you're starting to put more capital to work. Would we start to see that number accelerate? At what year and what type of returns are we expecting? Or is it just not enough to make a difference?
I'm just trying to kind of, you know, 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 and getting to about a billion-dollar OP in a couple of years. 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 soy proteins, things like that. Some other ones become more platforms that actually give us a pivot to accelerate even more our growth rate. We will continue in an investment phase on Nutrition because the opportunities out there, our customers are reacting positively to our value proposition.
We see our pipeline and our quarterly wins continue to grow. 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. We're very pleased with the direction.
I have one other big picture question.
Yeah.
Juan, you outline, and every year you do it, the in your press release, eight consumer trends that you believe is gonna 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? When I think about in three to five years, what percentage of your portfolio will target those eight items? I'll leave it there, and I appreciate your time.
Yeah, that's a very good question to which we'll provide more granularity at the December 10 Investor Day. 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 Oilseeds and Nutrition are much more aligned to that. Now that we are evolving the portfolio of carb solutions, we feel that a significant percentage of ADM's in a couple of years will be aligned to all these trends, which make us very, very optimistic about the future. We are very well positioned for all these long-term trends.
In the Analyst Day, you'll provide some level of percentages or something to give some context to it like, "Hey, by five years, we'll be at, you know, 25% or 30%," or some context to show the progression of that. It sounds like an important part of how you're thinking. 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 gonna be strong. Could you know, 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 gonna go to China?
Yeah, Mike. Listen, we still believe that protein demand is very strong. When we look and 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. Of that corn, the majority will come from the U.S., a little bit from Ukraine. We think that the volumes, although maybe slightly in a different way than last year, right now consumers are a little bit more shorter, 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.
We've seen Chinese buyers come to the U.S. in the last few weeks and we feel very good about this export season. You have to remember that we were in a tight situation from a supply-demand perspective given these import numbers. Then when you add that some of that capacity has been taken out, this will make 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. 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 gonna be able to, you know, have enough fertilizer to plant crops around the world? 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 crops 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 $5-$6 for natural gas. Europe is paying 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 for planting intentions. You know, you could think that potentially could be a shift from corn to soybeans, but that is not clear yet. Probably the numbers today are a little bit of a toss-up for the farmer on what to grow.
Probably over the next, you know, 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 Simonitsch from JP Morgan. Tom, your line is open.
Thanks. Good morning, everyone.
Hey, Tom.
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. 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 being or having these growth rates in Nutrition, but it's mainly have been happening on the developed parts of the world, if you will, in which developing markets exposure is still relatively small for ADM, whether we're talking about South America or Asia Pacific. In Asia Pacific, we've been players in flavors for a while, and this is just an expansion. This is at about an hour away from a big center of consumption. We feel very good from a raw material perspective. We feel very good from an access to a big consumption base. This will be very important for our customers.
Our participation in Asia was limited to one plant for flavors and about, you know, a handful of plants for animal nutrition. We continue to build that position in animal nutrition. We feel very good about it. With this opportunity in flavors, we will enhance our capabilities, not just production, but also market development capabilities with customer innovation centers. You will see us going and putting more flags on the world in the developing areas, whether it's Asia Pacific or South America, as we need to go and support our global customers. These are our customers that we do business every day here, and some of them are represented there. We have a lot of new local customers that are requiring these capabilities.
It's just a natural evolution of the business, if you will.
Thanks for that, Juan. 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 gonna be probably some construction around that area. You know, there'll probably be some transition. But as we kind of look out over the next couple of years, we do expect that, you know, dry mills are gonna be, you know, 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. We expect rest of the world dry mills to start recovering. Therefore, there is a lag in terms of recovery of exports of ethanol from the United States to the rest of the world.
I think over the next couple of years, I think you're gonna continue to see some level of demand recovery from outside of the United States for ethanol. Then even China, as we talked about, I mean, they're focused on the environment, on energy. You could actually see China, you know, returning back to the markets. We've seen a little bit of that already.
Let me clarify from an operations perspective. We're not gonna be doing anything to these dry mills. The dry mills will produce ethanol, and then there is downstream technology and capabilities that Gevo brings to the table to transform them into SAF. Those two plants will continue to produce ethanol as they are. We are not planning to invest capital into that. Our contribution is those two plants, and then Gevo takes it from there from a downstream perspective.
That's very helpful. Thank you. I'll leave it there and pass it on.
Our next question comes from Ben Theurer from Barclays. Ben, please proceed.
Yeah. Good morning, Juan, Ray. Congrats on the results. Just two quick follow-up questions. One on Ag Services, 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. 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? That would be my first question.
Yeah, I would say, we expect a strong quarter for our services in this year. You know, you have to understand, when we're talking about momentum and fundamentals, sometimes at the end of the year, it becomes complicated because there could be margin expansion, margin contraction here, and the accounting rules make sometimes that we need to report some profits into Q4 or into Q1, and we need to respect that. When we're talking, what we can determine from, you know, middle of October, which is today, is the fundamentals on the market, and demand is strong and the export capacity was tight starting into this. We have recovered and we started to see our order book filling up for that, so we feel good about it.
Again, it's difficult to call it sometimes Q4 versus Q1 because of the accounting rules. We can't determine that now. We have to determine that at the end of the year.
Okay. Perfect. 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. Then Human Nutrition on the other side, growth was just in the high single digits. Could you explore a little more on the details of what were the issues for the maybe a little lower than what you would want to see growth in Human Nutrition? Was it more of an impact because of input cost pressure, where you just didn't pass that 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, 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 revenue about 12%. I mean, it's actually a pretty good number. I think if you look at our EBITDA margin on sales, we were able to maintain that EBITDA margin on sales. When you grow twice the industry clip, if you will, and you maintain margins. I was pretty satisfied. Of course, it's not the spectacular maybe improvement year-over-year than animal nutrition had, but it's because Human Nutrition has been more stable than doing this. You know, 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 at maybe twice the industry rate and maintaining very robust EBITDA margins on sales. EBITDA margins on sales for flavors are north of 20%, and we've been able to maintain despite our pressure in raw materials and all that. No, I think we're very satisfied with the performance. Very satisfied.
Yeah. Perfect. It's compelling at a high level, Juan. Well, congrats again. Thank you very much.
Our next question is from Robert Moskow 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 rollercoaster. They're down off their highs. Now, 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. The contracting season's underway, and, you know, we expect HFCS volumes and margins for EMEAI to remain strong in 2022. Clearly, there's been some volatility in terms of corn prices, and that, you know, frankly, you know, the input costs will get reflected in terms of our contract pricing. 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 the, you know, the food service sector. You know, when I look at Carbohydrate Solutions in total, I mean, actually HFCS is one component, but non-HFCS is actually a very important component as well.
We've seen non-HFCS product pricing being pretty attractive with a good margin upside. That's just reflective of really a strong demand environment for citric acid, for starches, for dextrose and other products. That's another important factor when you take a look at starches and sweetener results. When we look at Carbohydrate Solutions business in total for 2022, as I indicated earlier, we do think that the biofuel part of the business should be actually quite positive when you compare kind of what we think the fundamentals will be for next year compared to this year. When you put it all together, we do expect Carb Solutions to have another strong year in 2022.
Okay. 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. 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, you know, for the alternative meat end market.
Yeah, Rob. You know, we have a handling facility and we feel very good about that business actually. The specialty ingredient systems and pea protein are driving a lot of the upside that we see in some of these new verticals. Both businesses are relatively new. They have almost no revenue in 2020 for us. They are providing alternative solutions to customers. We have a strong customer interest in these areas, and everybody wants to differentiate, so everybody wants their own formulation. At this point in time, soy is the main driver for us. Pea is, it's a little bit like an additive or a supplement or a differentiator.
From a volume perspective, it's not a big impact, so we haven't felt any impact in our plant at all.
Got it. Okay. 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. Juan, just wanted to ask you on the LG Chem JVs, you know, why is it set up in two JVs rather than just sort of one integrated production of lactic acid and then into PHA? What's the thought process behind having sort of an upstream and a downstream setup?
Yeah. This is a matter of where the expertise of each company lies. Then to be honest, also, we want to be as asset light as possible. In areas where LG is dominant and they're gonna build that downstream capacity. When we think about BioSolutions, our objective, Vince, is to make maybe the first derivative, so the first liquid, if you will, and that to have an ownership position. When we start making chemicals or other products that require application technology and all that, we cannot become a chemical company. In that, we let the partner take a predominant position. 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 R&Ds. When we go into these materials, if we're gonna produce one liquid that makes sense, and then we have the partner doing the rest.
Okay. I get it. It sounds like once we get the full details of the agreement, we'll see where the economics are set up, and it'll make sense that your investments will be in your sort of general plate focus and theirs. As a follow-up on the fertilizer issue, you know, obviously there's availability concerns, but what seems like is happening is that the high prices are deferring fertilizer purchases, particularly in South America. Aprosoja, the big soy group, is out telling their farmers to buy less fertilizer, et cetera. I see your slide showing that, you know, farmer sales are you know, I guess at a five-year average, which is probably okay, but they're well below last year and probably the year before.
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 they may hold on to more beans because they wanna keep the FX, you know, keep the dollars? How do you think about that playing out for you moving into next year?
Yeah, I would say South America, you know, is always an issue with a little bit more factors in terms of the farmer selling, just because of the currency and the distortion that sometimes the government bring into the market. At this point in time, we continue to see maybe a relatively slow farmer selling in Argentina, and that will probably continue. It's been a little bit better 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 Stifel. Vincent, please go ahead.
I would like to continue Vincent's line of questioning on PLA. Maybe just approaching it from a little bit of a different direction, knowing that the agreement still has to be finalized. Philosophically, it sounds like you're maybe trying to prioritize, you know, getting incremental return out of your core competency in fermentation technology, but maybe limiting direct participation in the PLA market. I ask just because, you know, that is a bit more of a commodity business, than it feels like you've pushed more of your investments to recently.
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. 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 gonna continue to make ethanol. They will take it from there to make SAF.
With this partnership, we're gonna make lactic. They're gonna take it from there to make PLA. It's kind of a similar mindset.
No, that's perfect. Thank you. 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? Could you just talk briefly about the opportunity there as a standalone investment?
Part of that is correct. I mean, lactic, it can go to many opportunities. 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. I wouldn't like to venture that much since the teams are still discussing with LG Chem and we need to create this. This is a start, if you will. All these companies that are promising decarbonization by 2050, 2060, 2040, whatever the date is, and they are looking back at their portfolios. They need to clean their portfolios, if you will. One of the ways to do that is through recycling.
The other way to do it is to go in plant-based. We are receiving a lot of inbound requests on that. 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. We are trying to maximize the opportunity for ADM on all these. Some of these things may not be that well-defined because we're in the process of optimizing all that value for the ADM shareholder. It's a great opportunity for us, and we will be mindful of returns, and we're not gonna veer into areas that we shouldn't be putting capital. 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, and 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. Thank you, everyone, and congratulations on a good quarter. Juan, the one question I have for you is related to Gevo and kind of the whole, you know, the whole transaction. I know that one of your, you know, maybe not to put a bad word in it. One of your dislikes that you've had with ethanol over the years is the extreme volatility of the earnings and some of the factors, your lack of ability to control some of those factors. When we talked about the dry mills in the past, one of the things was trying to reduce your earnings volatility. In the economics of how you've negotiated, we don't know much about the economics that you have here with SAF. Have you been able to...
Do you think you've been able to, you know, ink an 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, Eric, you're correct that returns are important to us, but also dampen the volatility is in the mind of everything we do. Of course, the team is considering that. I can't disclose that much at this early on. I think what you need to also think is that over time, we will try to become a minority partner in all this. The objective of all this is to deconsolidate and take all those assets out of our participation. To a certain degree, we are acting here as a facilitator to create this, but in reality, we don't want to be owners long-term of this. That's why I talked before about strategic partners or financial partners. I think we're gonna be able to deconsolidate. We're gonna be able to monetize some amounts.
If there is some upside to that, hopefully participate in all that. But you are correct, the objective is not to participate in things that add to volatility, but actually that dampen volatility. We've been very consistent in that over the last 10 years.
Okay. No, that is a lot different clarification. That helped me a lot. When you look at the size of your dry mill investments, you know, those are relatively new assets. But I guess they're probably 8-10 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, I mean, it's better than the alternative that we have. We are pleased with the value at which we are contributing these two assets. We don't need or we don't plan to add any CapEx to all these two plants. These two plants will be contributed as such, and they will operate, as I said, as such. The joint venture or JV may put money for finishing of these and to convert it into SAF through their technology. Our participation stops in the contribution of these two dry mills as they are.
Okay, perfect. Thank you, Juan. I know that we're out of time, so I'll leave my questions at that. Thanks, everybody.
Thank you, Eric.
Our last question comes from Adam Samuelson from Goldman Sachs. Adam, your line is open.
Hi. Yes, thank you. Good morning, everyone.
Morning, Adam.
Hi. Juan, a lot of ground has been covered, so I'll try to make this quick. On the SAF MOU, can you just maybe clarify 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. What would you wanna see in terms of federal or state action on SAF before you'd 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 is not another efficient way to decarbonize the airlines industry or the aviation industry. Of course, only short haul you can put a battery in a plane. Long haul it is something like this. 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 a market for that in the 60 billion gallons type of size. There are gonna be some help into that.
That's probably to the extent that I can talk about it right now.
Okay. Just quickly, on the balance sheet, maybe this is for Ray. At the end of the quarter, net debt to EBITDA was sub 2x. You haven't bought back any stock this year. Just help us think about how we should think about stock buyback as part of the capital allocation mix going forward.
I think that as we've been monitoring commodity prices very carefully. When you look at our operating working capital right now, it's still $2 billion higher than we were last year. As we think about commodity prices next year, assuming you have a strong South American crop, you have a normal crop in the United States, you see commodity prices coming off again. After we've kind of funded some of the bolt-on acquisitions that we've talked about, I expect our balance sheet to be pretty strong. There we can probably start looking back at return of capital that we've looked like in the past.
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 makes sense. 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, Adam.
This now concludes our Q and A session. I'll now turn the call back to Mr. Luthar to conclude.
Thank you. As Juan mentioned, he, Ray, and other ADM leaders will be headlining our December 10 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.