Earnings Call Transcript - ADM Q3 2023

Megan Britt, Vice President, Investor Relations

Good morning, and welcome to the ADM Third Quarter 2023 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'd now like to introduce your host for today's call, Megan Britt, Vice President, Investor Relations for ADM. Ms. Britt, you may begin. Thank you, Alex. Hello, and welcome to the third quarter earnings webcast for ADM. Starting tomorrow, a replay of this webcast will be available on our Investor Relations website. Please turn to Slide 2. Some of our comments and materials may constitute forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance, and financial results. These statements and materials are based on many assumptions and factors that are subject to risks and uncertainties. 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. 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 discuss our third-quarter results and share some recent accomplishments on our strategic priorities. Our Chief Financial Officer, Vikram Luthar will review segment-level performance and provide an update on our cash generation and capital allocation actions. Juan will have some closing remarks, and then, he and Vikram will take your questions. Please turn to Slide 3. I'll now turn the call over to Juan.

Juan Luciano, CEO

Thank you, Megan and good morning to all who have joined for today's call. Today, ADM reported third quarter adjusted earnings per share of $1.63 with an adjusted segment operating profit of $1.5 billion. Year-to-date, this equates to an adjusted earnings per share of $5.62, which represents ADM's second-best EPS year achieved in just the first nine months and an adjusted operating profit of $4.8 billion. Our trailing four-quarter average adjusted ROIC was 13.2%. This result reflects yet another strong quarter for ADM. I'm proud of the team's nimble execution against our strategic plan while adjusting our business model in light of both global macro trends and the evolving needs of our customers. The global market is increasingly dynamic with factors that create both opportunities and challenges for ADM to address. Consumer behavior has shown growing variability, spending more in some categories while slowing in spending in others. Our team has a proven ability to manage through these impacts of geopolitical tensions, inflationary pressures, and the constantly adjusting balances of commodity supply and demand. Within each business, we are focused on navigating these external factors carefully while we're also building on the momentum we've seen through the year-to-date. As we look ahead, we are on track to exceed our 2023 previous expectations for the total company. In Ag Services & Oilseeds, we saw the accelerated energy transition support strong demand for vegetable oil, leading to a solid crush environment. We leveraged our flexible logistics footprint to manage Brazil's record crop and our Global Trade franchise to best match supply to demand worldwide. In Carb Solutions, we delivered a record third quarter on the strength of solid margins in starches, sweeteners, and flour, as well as robust ethanol demand that helped us drive strong volumes and margins. In Nutrition, flavors growth continued to outpace the market, while we both grew and executed on our revenue opportunity pipeline. The deliberate productivity and cost management actions we have taken in Animal Nutrition are enabling improved performance as we also see market volume recovery and we continue to navigate pockets of soft demand in certain categories of the Nutrition portfolio. Next slide, please. One of ADM's greatest competitive advantages is the breadth and integration of our business model, reaching from farm to fork. 2023 has offered several examples of how we are creating new areas of growth in each business unit. On the farm, ADM has one of the largest and most sophisticated global origination networks, connecting with hundreds of thousands of farmer partners worldwide. We have unique and deep relationships with the people and technologies that are shaping the future of agriculture. So as more of our customers are looking for traceable, sustainable crop sources in their own supply chains, we are a natural connector and influencer. We are proud to have announced partnerships with PepsiCo, Nestlé, and Carlsberg, and have a target of 4 million regenerative acres by 2025, which is the carbon equivalent of powering more than 100,000 homes a year. Moving into production, as the pace of energy transition accelerates, demand for renewable fuel sources is growing rapidly, and ADM is in a leading position to capitalize on this trend. With our Spiritwood JV with Marathon currently being commissioned, we are ready to fit the production of a targeted 75 million gallons of renewable green diesel per year. We have announced the Broadwing Energy Project, which delivers lower emission power sources and is a critical part of lowering our carbon emissions used to power Decatur operations. We are innovating to deliver new low-carbon intensity products within the fast-growing BioSolutions portfolio. As we connect to consumers, we're working closely with our customers to address their challenges, whether it's sustainable solutions, the latest flavor or a cost-effective ingredient replacement, or exploring the future of nutrition through work with ADM Ventures partners like Air Protein and Nourished. We have differentiated our offerings with the next generation of evidence-based health and wellness solutions, with the world's largest probiotic manufacturing facility in Valencia, more than 50 clinical trials underway, and a growing team of deep scientific experts, we are well positioned for the expanding demand for functional foods and personalized nutrition. To efficiently execute on all areas of growth while maintaining an efficient cost structure, we continue to vigilantly focus on productivity, as well as the culture that allows our ADM colleagues to bring their best every day. Across our global organization, we're standardizing processes and systems through One ADM and modernizing our operations through digital transformation, which drives greater efficiencies while enabling the best use of our workforce and production capacity. Our planned modernization program continues to deliver impressive operational benefits, including advanced analytics and safety improvements across the 17 operations facilities currently in the implementation phase. With more than 70 plants in the scope, the planned recurring cost savings associated with automation across our footprint in 2024 is already nearing $20 million per year. Our cultural efforts are the critical foundation for all of these strategic initiatives. We have ramped up our focus on a culture of caring, specifically regarding the safety of our colleagues. This is our top priority. However, our recent performance in this area has not lived up to our expectations. We are committed to taking action to improve and have already begun with the assistance of both internal and external experts. We will do better. By actively managing productivity, innovation, and culture, and aligning work to the interconnected trends in food security, health and wellness, and sustainability, ADM is well positioned for sustainable long-term profit growth across new and adjacent avenues. With the strong performance in 2023 and a constructive expectation for the remainder of the year, we are again raising our full-year earnings outlook. For a deeper look at our Q3 performance, let me hand over to Vikram, who will cover results of operations.

Vikram Luthar, CFO

Thank you, Juan. Please turn to Slide 5. The Ag Services and Oilseeds team once again delivered solid results in an increasingly dynamic environment by leveraging our experience, scale, and integrated global footprint. Ag Services results were lower than the strong third quarter of 2022. South American origination results were higher year-over-year as our team delivered significantly higher volumes and margins on strong export demand. Prior investments in port capabilities have enabled us to structurally grow our earnings while capitalizing on a stronger margin environment across the region. North American results were lower year-over-year as a result of the shift of export demand to Brazil due to the large crop there, as well as low water levels in the U.S. river system, which limited volume and barge capacity. Effective risk management, combined with higher volumes and margins in Global trade led to strong results. However, much lower than the record quarter last year. The current quarter also included a $48 million insurance settlement related to damages from Hurricane Ida. In Crushing, we delivered another strong quarter, but lower than the prior year as global crush margins remained healthy, but lower than the very strong levels of a year ago. Our strong results were led by North America, as the crush margin environment remains well supported by structurally higher demand for vegetable oils. We officially opened our new crush facility in Spiritwood, North Dakota, to meet growing demand. We are currently in the commissioning process and expected to be running at full rates in early November, adding an additional 1.5 million metric tons of crush capacity per year. In EMEA, we continue to optimize our flex capacity to prioritize crush of higher margin softseed, in line with market opportunities. In the quarter, there were large net positive mark-to-market timing effects which were lower than the net positive impacts in the prior year quarter. Refined Products and other posted another strong quarter, higher than the prior year period, results were led by solid volumes and margins in North America. In EMEA, robust export demand for biodiesel and domestic demand for food oil drove higher results versus the prior year. In the quarter, there were large net positive mark-to-market timing effects, which are expected to reverse as contracts execute in future periods. Equity earnings from Wilmar were significantly lower versus the third quarter of 2022. Looking ahead, for the fourth quarter in Ag Services and Oilseeds, we anticipate strong results that are slightly lower than last year, excluding the $110 million legal settlement in the ag services subsegment from the fourth quarter of 2022. We expect Ag Services results to be in line with the prior year, excluding the legal settlement. We anticipate similar year-over-year North American export volumes, a competitive South American export program, and continued strong performance from global trade. We forecast our crushing subsegment will deliver strong results similar to the prior year. We expect robust soy and canola crush margins, and with the ramping of our Spiritwood operations, higher volumes. We expect RPO to perform well, but be significantly below last year as positive timing impacts from prior quarters are expected to reverse. Slide 6, please. Carbohydrate Solutions delivered an outstanding quarter that was significantly higher than the prior year, enabled by the ongoing optimization of our production and supply chain network. The starches and sweeteners subsegment were higher year-over-year on healthy demand and strong margin environment across starches, sweeteners, wheat flour, and ethanol. Our team generated new customer wins and delivered double-digit growth year-to-date in our BioSolutions platform. As Juan touched on earlier, we also signed a formal agreement with Broadwing Energy to provide lower emissions power to the Decatur facility, extending our ability to provide low carbon solutions across the value chain. In the Vantage Corn Processors subsegment, our team executed well in a strong ethanol demand and margin environment, leading to significantly higher year-over-year results. Looking ahead for the fourth quarter, we expect steady demand and margins for our starches, sweeteners, and wheat flour products. We remain constructive on ethanol margins driven by solid domestic demand and healthy U.S. exports, supported by lower competing exports from Brazil due to higher sugar prices. We anticipate results to be similar to the prior year period, but with upside potential if the current ethanol margin structure holds. On Slide 7. In Nutrition, strong results in flavors, health, and wellness and recovery in the base Animal Nutrition business were more than offset by continued lower demand for plant-based proteins and persistent demand fulfillment challenges in pet solutions. Flavors reported impressive results in a complex operating environment, delivering a 29% growth in operating profit on a constant currency basis. Results were led by pricing actions in EMEA and strong win rates in North America. During the quarter, we also implemented a successful go-live of our One ADM project in the EMEA region across 18 locations in 12 countries. This represents a significant milestone as we continue to harness digital across the enterprise to drive productivity gains. In Specialty Ingredients, weak market demand, particularly in the alternate meat category, inventory adjustments and unplanned downtime resulting from the recent Decatur incident led to significantly lower year-over-year results. The plant-based protein market has been experiencing destocking and consumer demand softness over the course of the year that will likely persist into next year. Given these recent market dynamics, we have re-scoped our Decatur protein modernization investment project to better match the expected lower growth demand environment. Also, we are leveraging our expertise in creation, design, and development to differentiate our product offerings to serve evolving consumer needs. These adjustments will enable a faster pivot to higher growth and more resilient categories such as specialized nutrition, which have synergies across the nutrition portfolio, and we are rapidly building this revenue pipeline. Health & Wellness results were higher year-over-year due to double-digit bioactives sales and a favorable impact related to the revised commercial agreement with Spiber. During the quarter, we realized a significant expansion in our revenue pipeline, reinforcing the demand for evidence-based solutions. In Animal Nutrition, we are beginning to see the cost optimization actions and the expansion of offerings in the specialty feed and ingredient space from earlier this year driving improved performance. However, the recovery in the base business was more than offset by normalized year-over-year amino acids margins, as well as lower profit contribution from the Pet Solutions business. Looking forward, we anticipate flavors to finish the year strong, driven by growth in EMEA and North America. Health & wellness operating profit is expected to finish similar to last year. Animal Nutrition operating profit is expected to continue to recover sequentially quarter-over-quarter, while Specialty Ingredients operating profit is expected to be down significantly, impacted by the recent Decatur East incident and demand softness. All in all, we now expect the full year 2023 operating profit for Nutrition to be around $600 million. While our results in 2023 have been below our expectations, we expect Nutrition to return to growth in 2024. We will continue to build on the Flavors momentum from 2023. Health & wellness should maintain its steady performance. The cost actions in the shift to higher-margin products will enable Animal Nutrition to drive growth, further reinforced by improved go-to-market capabilities. Lastly, for Specialty Ingredients, we will work aggressively to restart operational capabilities at Decatur East to minimize the impact in 2024. Slide 8, please. Other business results were significantly higher than the prior year quarter due to improved ADM investor services earnings on higher net interest income. Captive insurance results were slightly lower on higher claim settlements, partially offset by premiums from new programs. In corporate results, net interest expense for the quarter increased year-over-year, primarily on higher short-term interest rates. Unallocated corporate costs of $298 million were higher versus the prior year on higher global technology spend to support our digital transformation efforts. Other corporate was favorable versus the prior year, primarily due to foreign currency hedges. We still forecast corporate costs to be approximately $1.5 billion for the year. The effective tax rate for the third quarter of 2023 was approximately 20% higher than the prior year, primarily due to a change in the geographic mix of earnings. For the full year, we still expect our effective tax rate to be between 16% and 19%. Next slide, please. Through the third quarter, we had strong operating cash flows before working capital of $3.8 billion. We continue to invest in the business, allocating $1.1 billion to capital expenditures and have returned $1.9 billion to shareholders through share repurchases and dividends. We have ample liquidity with over $13 billion of cash and available credit, and our balance sheet is very strong, with an adjusted net debt-to-EBITDA leverage ratio of 0.9. Our fortress balance sheet gives us the financial flexibility to drive our long-term strategic agenda while also returning capital to shareholders, which is also a competitive advantage, particularly in a higher-for-longer interest rate environment. We have completed $1.1 billion of share repurchases through Q3 and expect to increase the pace of repurchases in Q4. Even with the softness in nutrition and lower-than-expected profit contributions from Wilmar, we are raising our 2023 earnings outlook again and now anticipate full year EPS in excess of $7 per share.

Juan Luciano, CEO

Thank you, Vikram. As we close today's call, let me share a few thoughts about how we're seeing our efforts in 2023 position ADM to continue solid progression into 2024. External factors that influence ADM's forward look are closely aligned to the enduring macro trends we have positioned ourselves to be nimble in managing. We continue to see the interconnectivity across food security, health and well-being, and sustainability having an amplifying effect across the industries we serve. More frequent extreme weather, geopolitical events, and the recent pandemic have all highlighted the criticality of food security within those geographies and for the regions served by their agricultural exports. Connected to this, we see areas of supply abundance growing as evidenced by Brazil's record recent crop cycles and areas of need shifting. In some cases, this has resulted in either more domestic consumption in countries like the U.S. or elevated import demand situations where our unparalleled global asset base and deep experience are critical. Government policies beginning to support new demand patterns, whether based on a move to more renewable energy sources or an effort to increase regenerative agriculture supply. Science continues to accelerate innovation in Nutrition with an ever-present consumer interest in turning their food, beverage, and supplement consumption to their personal health and dietary needs. Beyond the challenges and opportunities connected to these external factors, we believe ADM is positioned to leverage productivity and innovation to build momentum in the coming year, a continuation of the strategic efforts we have been driving throughout 2023. We anticipate our Services and Oilseeds will continue to leverage its extended value chain and deliver structural changes to demand. We anticipate that crush margins will remain healthy while our productivity measures enable us to have a more efficient cost structure. We continue to drive opportunistic extension of our destination marketing scope, grow our regenerative agriculture acres and partnerships, and expand our renewable fuels feedstock production. In Carb Solutions, the compounding effects of our transformative investments coupled with early contracting for starches and sweeteners and what we believe to be a positive ethanol environment are setting up for another strong year in 2024. For Nutrition, we expect continued growth in our revenue opportunity pipeline with significant conversions continuing as we move past some near-term demand weakness. Our expanding results in flavors continue to signal acceleration across our broader portfolio. We expect the positive revenue growth trends in Health & Wellness to drive into next year, and we're already pivoting Specialty Ingredients towards high-potential areas like alternative dairy and specialized nutrition. Our actions in Animal Nutrition are delivering a positive impact and sustained opportunity growth, which we believe will expand further through the segment in the coming year. And by applying our commercial excellence efforts to this portfolio, we are focusing on the value of innovation in the specialty parts of the business. In closing, I want to express my gratitude to the ADM team for their dedication, hard work, and resourcefulness. With the momentum we have been building upon the foundation for growth we have established, I am confident in our ability to continue to deliver solid results as we move into 2024 and continue to pave a path for long-term profit growth. Thank you. Operator, please open the line for questions.

Operator, Operator

Thank you. Our first question for today comes from Andrew Strelzik of BMO Capital Markets. Andrew, your line is now open. Please go ahead.

Andrew Strelzik, Analyst

Good morning. Thanks for taking the question. I guess I wanted to ask about the U.S. crush margin outlook. You commented that you expect crush margins to remain healthy. And I guess this is really a question about 2024 where the U.S. broadcast features have come down. What's your perspective on what's going on there? Do you think that the crush capacity that's coming on is having an impact, or how is that being absorbed? I guess, just trying to frame your commentary around momentum with what's going on in crush? Thanks.

Juan Luciano, CEO

Yeah. Thank you, Andrew. Listen, our perspective has not changed. If anything, the perspective that we have for the market has been confirmed by what we're seeing. Of course, it's a very dynamic environment with the market trying to balance many issues, whether it's more availability of products, more demand, or the Argentine situation. We have seen board crush explode back to near the highs recently. This is just a reflection of the incredible demand that is coming for soybean meal into the U.S. This drives the board crush which was mill-driven maybe before and is now oil-driven. You see the Argentina situation, and they are getting to the end of their inventory. There are probably enough beans at this point for crushers to run until November. So what we see in the export book of the U.S. for soybean meal is a record export book over the last 10 years. I think that will continue well into Q1 of 2024. Fundamentally, what has changed, and you have seen that, if you were to isolate strong crush margins in the U.S., is this demand for oil. We see crush margins have been a little bit lower for soybean, certainly in Brazil or in Europe, and it’s because some of the oil prices have declined. However, in the U.S. with the new demand for renewable green diesel and all the new capacity coming, we expect that to remain strong for years to come. We will continue to be very constructive about our crush margins in the U.S.

Andrew Strelzik, Analyst

Great. Thank you very much.

Operator, Operator

Thank you. Our next question comes from Ben Theurer of Barclays. Ben, your line is now open. Please go ahead.

Ben Theurer, Analyst

Yeah. Good morning. Juan, Vikram, thanks for taking my question. Wanted to follow up on Nutrition and the updated guidance calling that roughly $600 million op income for the year. Help us understand if you can, putting that into context to what just a while ago, we talked about the path to make this business a $1 billion operating income business. What has gone in the wrong direction and what do you still need to correct to bring this business back on track to make it a $1 billion contributor? Thank you.

Vikram Luthar, CFO

Yeah. Thanks for the question, Ben. So let's take it by different business lines. In flavors, as I mentioned, Q3 had a very strong performance. If you actually look year-to-date, Flavors operating profit is up 16%. I think that's been a very important growth engine, and typically, the sales cycle in Flavors tends to be shorter than some of our other product portfolios. So just keep that in mind, that momentum is building and we see that momentum through our revenue pipeline, which is increasing month-over-month, and we anticipate momentum in Q4 and continuing into 2024. The other aspect is EBITDA margins for Flavors are also increasing. It's not just revenue growth; the profit is also as a consequence of EBITDA margin expansion. Flavors contribution year-to-date overall as a part of nutrition profitability is a little over 50%. It's important to keep that in the back of your mind as we think about the future. The second part of the Human Nutrition business, Health & Wellness. Health & Wellness has been steady. Actually, the dietary supplements market, which was a little bit of a headwind, has been seeing demand destocking. However, we are optimistic about the outlook for next year. The other thing that Juan mentioned is the evidence-based portfolio of ingredients is expanding, and our ability to apply that to functional food and solutions gives us confidence in that business's growth moving into next year and beyond. Specialty Ingredients. It's a tale of two cities within Specialty Ingredients. There's the texturants portfolio that has performed exceptionally well because of margin expansion. We don't talk much about that, but because it's a smaller part of the business, it has performed exceptionally well this year. The challenge has been in the plant-based protein market and the softness of that market. Our revenues have declined as a consequence of what's happening in the broader market. What we are doing is pivoting the portfolio into the more resilient categories like specialized nutrition. This transition doesn't happen overnight, but through our capabilities, we are in the process of doing that. What happened in the interim was the Decatur East incident. This created a challenge in terms of white flake production for specialty proteins in North America. That's been a drag that we had not foreseen, and that drag is going to continue into 2024. Look, in Human Nutrition, Flavors are performing well, outpacing the market; Health & Wellness is steady; SI is in line with the market, further impacted by the recent Decatur East incident. In Animal Nutrition, amino acid margins have normalized coming off very high margins in 2022. The good news is we are resetting to much more normalized margin levels in 2023. Therefore, from 2024 onwards, we won’t have that lapping impact of higher amino acid margins. Excluding amino acid margins, the base Animal Nutrition business, excluding pet solutions, is beginning to see benefits from the cost optimization actions and the focus on Specialty Ingredients. You’ll see growth sequentially quarter-over-quarter. Ag Solutions' demand creation remains solid, that category has been fantastic. We faced challenges in demand fulfillment in North America, particularly regarding the acquisition we made in 2021. Those are still lingering, but we have clear action plans and feel confident that by the end of this year and early next year, we will be able to offset that. So all in all, combined with the new innovation, we feel confident that nutrition will return to growth in 2024, albeit maybe at a slightly lower growth rate than we had anticipated before. However, getting to $1 billion is definitely within the horizon. It may not happen next year or the year following, but certainly in the near or medium term.

Ben Theurer, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Tom Palmer of JPMorgan. Tom, your line is now open. Please go ahead.

Tom Palmer, Analyst

Good morning and thanks for the question. The details on the crush moves, I think Andrew's question was helpful. But maybe we could dig a little bit more into what's happening on the oil side. I mean we have seen soybean oil prices come down over the past couple of months. The futures curve does suggest some continued pressure as we move into '24. It sounds like you have plenty of visibility that demand is very strong on this side, but maybe just some color on what might have caused this downward price move and whether it's more temporary in nature in your view?

Juan Luciano, CEO

Yeah. Thank you, Tom. Listen, North American refining margins are lower in this quarter. If you look at last year, the high-priced oils were impacted by supply chain disruptions from the Russia-Ukraine war. I would say this is a more normalized environment. We have also seen some positive timing impacts due to the pronounced RIN and HVO market movements, pulling forward some of those gains. When we look at the forward quarter, we expect refining margins to remain strong but may decline from the elevated highs we saw in 2022 and early this year. Biodiesel margins are also coming off their highs, as maybe the RIN value component of margin has declined as the industry builds up a bank of rings. We haven’t seen significant pull from the RD demand that has been developing, but we maintain our expectation of how much demand is building there. We think that is coming. The other thing to consider about oil is that the demand for food oil is very strong and has rebounded. There are expectations now that with El Niño and the natural maturity of plantations in Southeast Asia, we might see a little less supply of palm oil. While we are coming off the highs, we continue to be constructive about margin stabilizing at strong levels in the RPO area.

Tom Palmer, Analyst

Right. Thank you.

Operator, Operator

Thank you. Our next question comes from Adam Samuelson of Goldman Sachs. Your line is open. Please go ahead.

Adam Samuelson, Analyst

Yes. Thank you. Good morning, everyone. I was hoping to dig in on the Carb Solutions outlook and maybe if you could just parse the non-ethanol pieces a little bit more. I think in the prepared remarks, you alluded to a favorable start to contracting in North America sweeteners and starches and maybe elaborate on what you are actually seeing there. Perhaps better frame the incremental capital investments to come in that business. Obviously, there's a lot of transformation work happening in that business, but not all of it is expected to materialize in the near term. Also, can I ask for a clarifying question on the last point on RPO? How much was the timing benefit in the third quarter?

Vikram Luthar, CFO

About $95 million. So on the Carb Solutions question, Adam, I think it's important to frame the liquid sweetener volumes as having been steady throughout this year. That has been consistent. So the demand has been pretty resilient, and the margin structure has been strong. The other thing that helps us is strong exports to Mexico, as well as higher sugar prices. The specialty volumes in North America have been a bit soft, but with the improved mix and pricing, our margins have actually expanded. The BioSolutions market is extending into new applications, and that revenue growth year-to-date is 23%. Wheat flour demand has been resilient. The optimization I referred to in my comments has helped improve the cost structure and expand margins. As you all know what's going on in ethanol, it has a supportive margin structure given domestic demand, blend economics, strong U.S. exports, as well as a significant increase in domestic driving miles. When you think about next year, we're set up for Q4 '23 and I already talked about that. It's a little early to say, but based on a strong finish that we anticipate in 2023, early '24 contracting in North America for sweeteners and starches makes us optimistic for solid volumes and our ability to maintain and potentially expand margins in our core starches and sweeteners portfolio. We will tell you more in our February call, but going in, the outlook is constructive for both our sweeteners and starches.

Adam Samuelson, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Ben Bienvenu of Stephens. Ben, your line is now open. Please go ahead.

Ben Bienvenu, Analyst

Thanks so much. Good morning, everybody. I have kind of a two-pronged question. One is you've kind of hit bits and pieces and Vikram as well with the nutrition commentary of the overall business outlook into 2024. The kind of implicit takeaway is we should still expect very strong and above what I guess we would think of as mid-cycle earnings power in 2024, albeit it's early to make that call in 2024. So correct me if I'm wrong there. But two, when you think about allocating capital at this point in the cycle, how does that change, if at all, with what you've been doing over the last several years, and you've been picking up your buyback activity? How should we be thinking about that as we move through this period of time as well? Thank you.

Juan Luciano, CEO

Yeah. Thank you, Ben. Good question. Listen, we see 2024 with a lot of optimism. We're working through the plan right now, as you can imagine at this time of the year. We continue to see the strength of Ag Services and Oilseeds and Carb Solutions continuing. Ag Services and Oilseeds have structural changes that I believe are multiyear trends. We will see higher crush margins in the United States for quite a while. Our Ag Services business will continue to grow around the world with the strength of destination marketing and enhanced margins due to concerns about food security exacerbated by geopolitics and weather events from the pandemic. So we see that business as being a strong contributor. In Carb Solutions, Vikram touched on the dynamics of contracting for next year. Beyond that, we are finding new demand for our products which will do two things: grow our revenue into new categories, as we're seeing in BioSolutions growing double-digits while tightening the supply for the existing products. So, those will be constructive to margins over time, and we've seen that already. Nutrition, I think Vikram went into detail about that and all the different pieces. We are very confident we will return to growth next year. This year can be seen as a short pause. The fundamental innovation engine we have is our differentiation and continues to resonate strongly with Health & Wellness, Flavors, and the specialty parts of Animal Nutrition. We are winning more than our fair share, and we're growing faster than competitors. We see 2024 with a lot of optimism. When we think about how that correlates to our capital deployment strategy, our priority is to keep funding our investment plan, both in OpEx and CapEx. Unfortunately, CapEx continues to be higher, based on inflationary pressures on both non-power supply and raw materials. Sadly, we need to reassess a lot of capital projects. In reviewing capital discipline, Vikram has reflected on some adjustments we made to Specialty Ingredients and elsewhere. Still, we have many opportunities in front of us, and we'll continue to fund them. We have increased our return to shareholders. Our cash flow generation is very strong. When we see some of the pivot we are doing even in Carb Solutions with these opportunities, they are not heavily taxing our CapEx. Many of these engagements, such as decarbonization, are with partners, whether LG Chem or others in joint ventures, so it won’t be a heavy burden on our CapEx budget. We expect to continue returning capital to shareholders. We have been opportunistic in M&A. To be candid, we participate in many discussions, but valuations have not come down. We plan to maintain our discipline in that regard, whilst remaining opportunistic.

Vikram Luthar, CFO

Yeah. It's also good to remind everyone that at our 2021 Investor Day, we talked about $5 billion of buybacks over the next four years through 2025. If you consider what we've done in the last two years, we've deployed around $2.6 billion, so we are ahead of the pace. As Juan said, if we don't see compelling valuations and given our discipline, we will probably buy back more aggressively at these trading levels. You will likely see a stronger pace of buybacks in Q4 as a consequence of these factors.

Ben Bienvenu, Analyst

Okay. Very good. Thanks so much.

Operator, Operator

Thank you. Our next question comes from Salvator Tiano from Bank of America. Your line is open. Please go ahead.

Salvator Tiano, Analyst

Thank you very much. I want to ask a little bit about the carbonization work you're doing at Decatur. I think you were talking about the 7 million tons of CO2 you’re trying to sequester per year. The idea is that some of these will come from other facilities where you probably need to build pipelines. I'm just wondering, we're seeing a lot of issues with permitting and other issues with CO2 pipelines in other regions. Could you face similar issues, and could this affect the total amount you will be able to sequester at Decatur? Or could this actually be an opportunity where people that were relying on other pipelines, like Navigator, may come to you and use your Decatur wells for sequestration?

Juan Luciano, CEO

Yeah. Thank you, Salvator for the question. This is a very important initiative for ADM, and it's something that we have begun like 10 years ago, so it's something we have a lot of experience in. We're leveraging that experience and our ability to inject carbon into the lower surfaces at our facility in Decatur. We have a couple of wells there, and we're planning to create five more injection wells over the next few years. It is true that part of that will be bringing biogenic CO2 generated by our ethanol plants through pipelines. We are already working on two of those pipelines, we have submitted permits for them, and those permits have been accepted. They are currently in the process of being reviewed and we are also consulting with our partners regarding the right of way and acquisition agreements. As any pioneering industry, we may face regulatory hurdles during our process to align the regulatory framework with the needs of decarbonization and the desires of the Department of Energy and Agriculture for smart agriculture and U.S. decarbonization. We are making steady progress, and we do not have any bad news to report at this time. We will provide updates during our next call.

Operator, Operator

Thank you. Our next question comes from Davis Sunderland of Baird. Davis, your line is now open. Please go ahead.

Davis Sunderland, Analyst

Hey. Good morning, team. Thank you for the time and thank you for taking my question.

Juan Luciano, CEO

You’re welcome.

Davis Sunderland, Analyst

Juan, you already talked about it a little bit, but I just wanted to ask if you could expand a little bit more on the ethanol and renewable diesel supply and demand environment, maybe what you're seeing for '24 and beyond? And if you anticipate any incremental changes in consumer behavior over that time? Thank you very much.

Juan Luciano, CEO

Yeah, Davis. Listen, in ethanol, we believe the environment for ethanol will be very supportive. Very high sugar prices are pushing Brazilians to produce more sugar than ethanol; thus, we will have less input for ethanol. Biofuels mandates are growing globally, whether it's more ethanol or more biodiesel. We expect Brazil’s output to increase by 1% per year. Ethanol continues to have strong export demand - it’s a very valued commodity around the world. For those wanting to increase the octane in gasoline, ethanol presents a very cheap solution. The U.S. is the leading producer and will continue to increase production. Therefore, we’re expecting exports to maintain a floor of 1.4 billion gallons, potentially reaching 1.5 billion in 2024. Renewable green diesel has no changes in our medium-term growth outlook, which expects around 5 billion gallons in the U.S. by 2025 and 2026. At a broader global level, we anticipate reaching somewhere between 7 to 8 billion gallons of renewable green diesel and SAF by 2026 and 2027. We are at the early stages of developing this industry, and we’re excited about it.

Davis Sunderland, Analyst

Thank you very much.

Juan Luciano, CEO

You’re welcome.

Operator, Operator

Thank you. Our next question comes from Steven Haynes of Morgan Stanley. Steven, your line is now open. Please go ahead.

Steven Haynes, Analyst

Hey. Thank you for taking my question. I wanted to just ask a question on the guidance. I think previously, you were saying around $7 with some upside, and now you're saying in excess of $7. So maybe if you could just quantify the difference in the two guidances and size the upside piece would be helpful. Thank you.

Vikram Luthar, CFO

So I think the first thing to note is, when in Q2, we said around $7 with potential for more upside. What we have seen now is that potential upside is coming through, and that's why we're raising our guidance to in excess of $7. If you step back, Steven, think about what's happened between Q2 and Q3. One is, clearly, nutrition has been softer. We had guided to it being similar in Q2; now we are guiding to around $600 million. So by definition, there's compensation in other parts of the business. The compensation relative to our Q2 will come somewhat from AS&O and somewhat from CS. We provided guidance on AS&O for Q4 and some guidance for CS. In Ag Services, it’s going to be generally flat excluding the legal settlement we had in Q4 last year, and we expect that to be similar. The crush is expected to be strong. Juan talked about optimism for crush margins in the U.S. going forward. So there’s some clear visibility on performance in Ag Services. In CS, we expect our RPO performance to decrease relative to last year due to rollbacks of positive timing impacts realized in Q3. In summary, we’re raising guidance because we see all compensation dynamics and feel confident in our ability to exceed $7.

Steven Haynes, Analyst

Thank you.

Operator, Operator

Thank you. At this time, we currently have no further questions. So I'll hand back to Ms. Britt for any further remarks.

Megan Britt, Vice President, Investor Relations

Thank you for joining us today. Please 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.

Operator, Operator

Thank you for joining today's call. You may now disconnect your lines.