WHITE PLAINS Oct 29, 2015 (Thomson StreetEvents) -- Edited Transcript of Bunge Ltd earnings conference call or presentation Thursday, October 29, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Mark Haden Bunge Limited - Director of IR * Soren Schroder Bunge Limited - CEO * Drew Burke Bunge Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Adam Samuelson Goldman Sachs - Analyst * Ann Duignan JPMorgan - Analyst * Farha Aslam Stephens Inc. - Analyst * David Driscoll Citi Research - Analyst * Evan Morris BofA Merrill Lynch - Analyst * Robert Moskow Credit Suisse - Analyst * Ken Veslo Bank of Montreal - Analyst * Neil Comart JPMorgan - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning and welcome to the third quarter 2015 Bunge earnings conference call. My name is Vanessa, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Mr. Mark Haden, Director of Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- Mark Haden, Bunge Limited - Director of IR [2] -------------------------------------------------------------------------------- Thank you, Vanessa. And thank you, everyone, for joining us this morning. Before we get started, I want to inform you that we have prepared a slide presentation to accompany our discussion. It can be found in the investor section of our website at bunge.com, under investor presentations. Reconciliations of non-GAAP measures disclosed verbally on this conference call to the most directly comparable GAAP financial measures are posted on our website in the investor section. I'd like to direct you to slide 2, and remind you that today's presentation includes forward-looking statements that reflect Bunge's current views with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Bunge has provided additional information in its reports on file with the SEC, concerning factors that could cause actual results to differ materially from those contained in this presentation, and encourages you to review these factors. Participating on the call this morning are Soren Schroder, Chief Executive Officer; and Drew Burke, Chief Financial Officer. I'll now turn the call over to Soren. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [3] -------------------------------------------------------------------------------- Thank you, Mark, and good morning to everybody. During the third quarter, Bunge delivered a solid EBIT and returns in a challenging market. While some headwinds could persist, we anticipate that our 2015 performance will be stronger than 2014, with growth in earnings, core returns well above WACC, and progress across all aspects of our strategy. The ag and food market environment continues to be a mixed bag. On the positive side, global demand for Bunge's core products is growing solidly. Gross margins are strong, and local farmer selling and a strong export pull have extended the Brazilian agribusiness season, which plays into one of our core strengths. At the same time, farmer retention in the northern hemisphere and spot buying by customers have pressured margins in some places. This is clear in the softseed complex in Canada and in Europe, where margins are down 40% to 50% from 2014. Conditions are unlikely to change in the short term, given the reduced rate in canola crops, so we are adjusting crop rates accordingly. And in the US, a speedy harvest, follow retention and a significantly smaller export book have pressured grain origination and export margins. In addition, the operating environment for food and ingredients in Brazil continues to be extremely weak. Reduced consumer demand, inventory reduction across the value chain, and the domestic oil surplus have pushed edible oil gross margins down 35% to 40%, and volumes about 10% when compared to last year. In the face of all these challenges, our teams delivered higher EBIT than in 2014, and combined returns in Ag and Food of 10.3%, three points above our WACC. We managed risk effectively, recovering from the second quarter price spike. We capitalized on good opportunities, including the significant pick-up in farmer pricing for both old and new crop rate in Brazil, and generated important savings in our efficiency and productivity efforts. In Agribusiness, we're making very good progress on operational improvements in both crush and logistics, with about $35 million realized so far this year. Combined with continued focus on working capital, flow and risk management, especially in regions where margins are weak, our Agribusiness EBIT to exceed $1 billion this year along with strong returns. And despite a somewhat weaker margin structure, we expect to grow EBIT again in 2016. In Foods, Milling is performing best, with solid returns and results in Mexico and stable earnings in the US. In Brazil, we are holding margins steady to higher than local currency, and we are managing costs tightly. However, we have not been able to overcome the 8% drop in volume, driven by the weak environment. As I mentioned before, our oils business, especially in Brazil, is under significant pressure in both margins and volumes because of economic slowdown, and we are accelerating efforts to reduce costs and improve our footprint. Operational improvements are a key part of our Food and Ingredients strategy, and even more important in the face of headwinds as we are experiencing now. So far this year, we have generated approximately $40 million in benefits and now expect an annual run rate of about $50 million, up from earlier estimates of $40 million. Foods should finish the year with EBIT between $200 million and $225 million, which is clearly below our targeted run rate. In 2016, we expect an increase of $50 million from our improvement program, in addition to the gains as Brazil stabilizes and returns to growth. We are commit to our strategy of increasing the share of added value in Bunge. With the wheat milling acquisition of Pacifico in Brazil, Bunge will improve its leading national milling footprint and B2B offerings. In the US, where our integrated oils business is performing well, we added Whole Harvest Foods, which produces specialty oils for the food service and retail segments. This fits well into healthier choices and natural origins--elements of our Food and Ingredients strategy, and expands our ability to address the emerging consumer requirements for health and functionality. In Sugar and Bioenergy, the quarter lower than expected but we continue to improve our milling business and the recent increase in ethanol prices in Brazil will benefit us in Q4. There's always weather risk, but we should end up the year EBIT and cash flow positive. With a recovery in sugar prices and the competitiveness of ethanol next spring, the marginal outlook is favorable. Looking ahead, we'll stay disciplined on cost, capital allocation and focused on execution. We have a strong balance sheet, a clear strategy, a winning footprint and a great team, which will deliver solid earnings this year along with excellent returns on a path for solid growth into 2016. With that, I'll turn it over to Drew for more details on the financials. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [4] -------------------------------------------------------------------------------- Thank you, Soren, and good morning. Let's turn to slide 4 in the earnings highlights. Total third quarter segment EBIT was $414 million versus a prior-year quarter of $316 million. This year's quarter includes a $47 million gain on the sale of certain Canadian grain assets to G3 Global Grain Group. Excluding this gain on sale, adjusted EBIT was $367 million versus a prior year of $316 million, driven by our performance in Agribusiness. On a year-to-date basis, adjusted EBIT is up 10% to $892 million. For the quarter, Agribusiness adjusted EBIT was $322 million versus $186 million in the prior year, due to higher results in both oilseeds and grains. Oilseeds EBIT was $106 million versus $68 million in the prior year. Soy crushing results were strong, with increases in the United States, Argentina and Europe and continued good performance in Brazil. Processing margins were supported by strong global demand for soybean mill. Asian processing margins and results remain depressed. Oilseed margins and profits were down due to farmer retention in both Canada and Europe. Grains' third quarter EBIT was $216 million versus $118 million in the prior year, driven by strong farmer selling in Brazil. Other regions' origination businesses performed at a similar level to last year, but were not significantly contributive to results, due to low levels of farmer selling. Results in our trading and distribution business, which included the recovery of the approximately $50 million of losses on opened positions at the end of the second quarter, were good. And they performed at a level similar to last year. Our global team managed risk well during the quarter as crop prices declined, reflecting good harvests and inventory built in most regions. On a year-to-date basis, Agribusiness adjusted EBIT was $786 million versus $576 million last year, as both Oilseeds and Grains perform well above prior year. Our Foods business quarterly EBIT was $45 million versus $74 million in the prior year, with most of the decline occurring in our operations in Brazil, as a result of a difficult macro economic environment and significant currency devaluation. Edible Oils quarterly EBIT declined from $37 million to $13 million. Performance improve in our North American business due to higher margins in both refining and packaging. Our performance improvement initiatives continued to produce savings. In Brazil, margins and volumes were pressured, due to the rapid contraction of consumer demand and the significant devaluation of the real. While volumes are rebuilding from lower levels, margins will take time to recover. Results in our European operation were also down in the quarter, largely due to the weak economic environment in certain countries, which more than offset the savings from our performance improvement initiatives. Current quarter milling EBIT was $32 million versus $37 million in the prior year. Our Mexican wheat milling business performed well, as higher margins and volumes more than offset the impact of currency devaluations. Our Brazilian wheat milling business was impacted by lower volumes and margins due to the rapid contraction of customer demand, particularly from the food service channel and a significant devaluation of the real. In local currency, our team managed to hold large and similar to last year's levels. US corn milling results were down on lower margins, however, volumes increased in the quarter. Sugar and Bioenergy recorded EBIT of $3 million versus $44 million in the prior year. There was a swing of $19 million in mark-to-market effects, as we recorded a gain of $12 million last year versus a loss of $7 million this year on sugar industrial hedges. The $7 million should reverse into income in the fourth quarter. Milling results were lower year over year, as higher volumes were offset by lower pricing and decreased sugar content in the cane. While production volumes increased, they were below expectations due to more rain days than normal, which reduces milling time. Trading and merchandising results were below a strong prior-year period as margins declined. Our adjusted earnings per share was $1.24 in the third quarter of 2015, versus $1.31 in the prior year. Our EPS was negatively impacted by a higher tax rate, as our earnings mix has shifted towards our Brazilian Agribusiness operation, which has a high marginal tax rate. And away from Asia, where we have lower statutory rates. We have also taken a $15 million valuation allowance against certain tax assets we have in Asia, as our ability to use those assets is uncertain. For the nine-month period, our adjust earnings per share has increased from $3.00 to $3.36 a share. Let's turn to slide 5 and our return on invested capital. This remains a key area of focus for us. Our trailing fourth quarter return, adjusted for certain gains and charges, Bunge overall is 8.3%, which is 1.3% over our cost of capital. For our core Agribusiness and Foods businesses, our return was 10.3%, well over our cost of capital in the 8.4% as of December 31st, 2014. The increase reflects both an increase in earnings and a reduction in asset levels. Moving on to slide 6 and our cash flow highlights. Cash provided by Operating's activities was $633 million year to date in 2015. Funds from Operations were $745 million. Changes in working capital with an outflow of $102 million, due to increases in our advances to farmers and inventories reflecting an increase in our origination activities. We continue to maintain strong liquidity, with $4.3 billion available under committed credit lines. Turning to slide 7 in the capital allocation process. Maintaining a BBB credit rating remains our primary focus, and we always ensure we maintain the appropriate financial and balance sheet strength. After that, we allocate funds between capital expenditures, mergers and acquisitions and returning funds to shareholders, based on the alternative that provides the highest long-term value to our investors. To date we have spent $365 million on capital expenditures, and are projecting an annual spend of approximately $750 million. This is below our original forecast of $875 million and is partly due to the deferral of spend for future years. Key projects under way include the wheat mill in Rio de Janeiro, a port and crushing project in the Ukraine, and a maintenance rebuild of our port in New Orleans. We have spent $97 million on acquisitions this year. One of our priorities is to continue to expand our capabilities in value-added food businesses. To that end, we acquired Heartland Harvest, a US producer of extruded die cut food pellets, earlier this year. And in the fourth quarter, we have closed on the acquisition of Whole Harvest Foods, a leading refiner and packager of expeller pressed commercial cooking oil. In the fourth quarter, we expect to close on the acquisition of Pacifico, a major wheat mill in Santos, Brazil. In the third quarter, we also made a major step forward in our Canadian grains business, as G3 Global Grain Group, our joint venture with Saudi Agricultural and Livestock Investment Company, known as SALIC, acquired the former Canadian Wheat Board business and combined it with Bunge's Canadian grain business to establish a formidable Canadian grains franchise. We have returned $478 million to shareholders this year through dividends and share buybacks. In the third quarter, we purchased $100 million of shares, bringing our year-to-date total to $300 million. Let's turn to slide 8 and the outlook. We expect 2015 return on invested capital of approximately 10%, which is 3 percentage points over our cost of capital. We continue to expect Agribusiness to achieve a full year EBIT of over $1 billion. Demand for soybean meal and oil is strong, with the USDA projecting 6% growth in global meals consumption and 5% in oil. Crush margins have come down a bit from the recent highs in the United States and Brazil, but are still good. In the United States, strong domestic meal demand, increased biodiesel production, and increased exports with the arrival of the harvest are the key drivers. Brazil is benefiting both from increased domestic command from the poultry and hog sectors, as well as strong export demand. Argentina's performance is dependent upon farmer selling, which we do not anticipate to be strong in the fourth quarter. China margins remain depressed, despite good demand growth. Sunseed margins are improving, with the arrival of new crop and increased farmer selling, rape and canola margins remain challenged due to smaller crops and soft demand. Arrival of new crops will bring increased utilization in our United States and Black Sea grain facilities. United States grain margins have been lower than usual and are likely to remain so throughout the quarter. However, our Brazilian grain assets are benefiting from higher utilization and export command, due to the large safrinha corn crop and its low-cost position. Turning to slide 9. In Foods, as Soren indicated, we expect full year EBIT to be in the range of $200 million to $225 million. We continue to place strong emphasis on operational efficiency and supply chain optimization to offset the impact of difficult macro economic and market conditions in Brazil and certain eastern European markets. European margins should see some recovery with the arrival of new crop. Our North American businesses should continue to perform well. In Sugar, we continue to expect to finish 2015 EBIT in cash flow positive, assuming weather cooperates and we can crush our targeted volumes. Brazil is once again the world's low-cost sugar producer and there's strong domestic demand and improving price outlook for ethanol. Our tax rate, excluding notables, is projected at 28% to 30%, given our anticipated earning mix in 2015. Going forward, we would expect this rate to decline. I will now turn it back to the operator to take your questions. Vanessa? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) And we have our first question from Adam Samuelson with Goldman Sachs. -------------------------------------------------------------------------------- Adam Samuelson, Goldman Sachs - Analyst [2] -------------------------------------------------------------------------------- Thank you. Good morning, everyone. So I guess my first question is on the Agribusiness guidance and the outlook. The profit of in excess of $1 billion dollars implies you're going to be above $214 million of profit in the fourth quarter, which seasonally is a bigger quarter, given northern hemisphere harvests. Last year, you were $319 million, but that included an $80 million mark-to-market hedge and a $30 million loss on your Chinese soy crush inventory. I'm wondering if you could think about some of the pieces in the mill you talked about, Soren. Why would the guidance be just better than down 50% on the base business for Q4? And maybe think about what's really better and worse here, year over year? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [3] -------------------------------------------------------------------------------- Thank you for that question. It's a good one in the context of what is clearly a bit of a more mixed environment than what we had at the same time last year. The way we are framing is we bracketed the downside, so when you talk about the gap between the billing and where we are now, that is a conservative number. And we did frame it by saying that the outlook for the year would be at least $1 billion. So in reality, we expect something better than that. How much better is a little hard to tell at the moment, when you look at the mosaic of what makes up Agribusiness. We clearly have the outlook for another good quarter in soy crushing, both in North America, also in Brazil, Southern Europe. Although it is probably not as excellent as it was last year, it's still very favorable. Softseeds, on the other hand, is a headwind, both in Canada and particularly in Western Europe in rapeseed, so that's an offset. And obviously you have to compare Brazilian grain origination and exports, which will be strong throughout the fourth quarter against what is clearly a weaker environment in North America. So on balance, I would say that we will end up better than the downside bracket that we've indicated, but how much I really don't want to get too far ahead of myself on that. But it is likely to be something better than that $214 million difference, but probably a bit shy of the Q4 last year, if you include the $80 million mark-to-market that you just added back in. So somewhere in between. -------------------------------------------------------------------------------- Adam Samuelson, Goldman Sachs - Analyst [4] -------------------------------------------------------------------------------- Okay. That's helpful. And then, you also said that you think Agribusiness EBIT would grow in 2016, despite a weaker margin structure. And I'm hoping you could elaborate on that thought a little bit, both in terms of the areas where the margin structure you think is going to be worse, as well as what you have confidence on, on the growth side. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [5] -------------------------------------------------------------------------------- Yes. We walk into 2016 with a continued pressure on North American grain handling margins. I don't think that will change much, but Brazil should still--should be very good, starting early in the year and then carrying on through the summer. Argentina, of course, is a little bit of a wild card, but it does represent upside. You look back over the last couple of years, Argentina in many ways really has been insulated from participating in the global flows in a big way. And I think almost irrespective of who wins the election at the end of November, Argentina should open back up in a favorable way for us. So I would say Brazil, Argentina, US soy crush are the positives. North American grain handling and softseed crush in Europe and Canada for the first couple quarters will still be the offset. But on balance, I think with discipline on how we manage risk, cost, a lot of our improvement efforts around logistics, and just how we manage flows really carries through to the bottom line as well. Increased volumes. I think we can be pretty confident that we can grow earnings into 2016, even though the margin environment is a bit of a mix. -------------------------------------------------------------------------------- Adam Samuelson, Goldman Sachs - Analyst [6] -------------------------------------------------------------------------------- All right. Great. That's very helpful. I'll pass it along. Thank you. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [7] -------------------------------------------------------------------------------- Thank you, Adam. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Thank you. Our next question comes from Ann Duignan with JPMorgan. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [9] -------------------------------------------------------------------------------- Hello. Good morning. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [10] -------------------------------------------------------------------------------- Good morning, Ann. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [11] -------------------------------------------------------------------------------- Normally you reiterate your target for 2017, $8.50. I don't think I heard it, but I might have miss it. Are you backing away from that, or is that still a target? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [12] -------------------------------------------------------------------------------- I'd say we should break it into the components a bit and say that in Agribusiness, we see the path to the roughly $1.4 billion that is implied in that $8.50, which we put forward in December last year. It'll be incremental improvement over year. Our performance improvement programs will play a big part in this. And in many ways, the footprint we have should get us there. So Agribusiness, we feel comfortable with the path to the $1.4 billion. Where I'd say we probably have a little bit more pause and caution is around how quickly we can ramp up the Food income--Food and Ingredients income to the $4.75 which was implied in the $8.50, given the setback in Brazil in particular this year, but also in the Ukraine and in Russia, Eastern Europe in general. It is probably going to be a little bit short of that $4.75 target. I don't want to give a specific number, but let's put it this way, the $8.50 is intact, but it might take us another year to get there than what we had put forward last year. But the Agribusiness component we feel good about, and as I mentioned, Food in the current context, we probably need another year to get there. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [13] -------------------------------------------------------------------------------- And Ann, that's difficult for us to project. Because once Brazil and those Eastern European economies stabilize, they get some growth back into those markets, we would expect the food margins to return to their historical levels in those markets. If they do come back to their historical levels, we could meet the $8.50 for 2017. I think we are just expressing some caution that we're not so sure how rapid that recovery will be, and it may hold it off for a longer period. But if you look at the base businesses and what we're accomplishing in running those businesses, it feels like we're on track. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [14] -------------------------------------------------------------------------------- Okay. I appreciate that. That's good color. And then secondly, you know, globally the world has adequate burdensome supplies of most commodities. This should be the ideal environment for Bunge to be operating in. What's been the biggest surprise to date in this environment? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [15] -------------------------------------------------------------------------------- It is volume wise a favorable environment--that is correct. And demand is growing at a rate that is at least as big, if not bigger than we had expected. But I would say that the biggest overall surprise is probably the amount of farmer retention we have globally. It's not just North America. It is pretty predominant throughout most of the world. Farmers don't like lower prices. They're putting the grain away, the seeds away and that has had probably more of an impact in compressing margins than we would have expected, despite the big crops. So if you're looking for one surprise, that's probably it. That being said, grain handling volumes are going to be up. Crush volumes, particularly in soy, are very favorable. So there are many aspects of the business that are doing very well, as you can tell from our results and our outlook, despite this circumstance. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [16] -------------------------------------------------------------------------------- Great. I'll leave it there. Thank you. I'll get back in line. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Thank you. Our next question is from Farha Aslam with Stephens Incorporated. -------------------------------------------------------------------------------- Farha Aslam, Stephens Inc. - Analyst [18] -------------------------------------------------------------------------------- Hello. Good morning. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [19] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [20] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Farha Aslam, Stephens Inc. - Analyst [21] -------------------------------------------------------------------------------- Could we talk about your crush margins and profitability in China? How does that look, going out into the fourth quarter and into next year? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [22] -------------------------------------------------------------------------------- China is, I'd say, much improved this year, compared to last year for sure, but I'd say it's still on the road to recovery. Margins have been--they've been on the positive side most of the year, probably something close to full cost, but in reality, most of the time covering variable plus a little more. As we get into the fourth quarter here, we'll be talking margins that are somewhere between variable and fully loaded cost. So better, but still not where they should be. But we have seen a return of more disciplined. You can see it reflected also in the way that the Chinese market in general is buying soybeans. This time last year, we had a phenomenal amount of soybeans pre bought for future shipments. This year, a lot of the demand, which is still very strong, is taking place on a spot basis. So the market in general is a little bit more cautious and disciplined. I would think that as we get into 2016 and 2017, more normal conditions will return into China in terms of crush. In other words, conditions that we saw prior to last year, which means that China should enjoy margins that are full cost plus, and that will obviously help the industry, in Bunge particularly. Also help us with earnings mix, because China has been--or Asia in general has been one of the regions where we under performed this past year, relative to our expectations, but it feels like it is on the right path. -------------------------------------------------------------------------------- Farha Aslam, Stephens Inc. - Analyst [23] -------------------------------------------------------------------------------- My one followup on that one is there's a lot of M&A that's happening in the food space, particularly in potentially Agribusiness. Are you still thinking sub $500 million? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [24] -------------------------------------------------------------------------------- Farha, our main focus has been to look at the bolt-on acquisitions available in our space, particularly as we look to grow out our value-added foods businesses and add capabilities in that area. And that's where you're you've seen us go and where we've had opportunistic chances--not opportunistic, but chances to strengthen our Agribusiness origination footprint. We obviously look at transactions of that nature, which for the most part are in the bolt-on category too, such as the Canadian Wheat Board. So our focus here has really been to build up those two strengths. We continue to look primarily at those type of transactions. And I know there's a lot in the press about our industry and possible transactions, but we don't comment on any speculation around what might happen in the industry, as far as transactions goes. -------------------------------------------------------------------------------- Farha Aslam, Stephens Inc. - Analyst [25] -------------------------------------------------------------------------------- Sure. I was just trying to understand--historically you've said that for now you're just going to stick on to tack-on acquisitions? Is that going to be contained-- -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [26] -------------------------------------------------------------------------------- I would say that is so far still the case, evidenced by what we've done so far. The two positions we mentioned, Pacifico and Whole Harvest Foods, plus what we did with the Canadian Wheat Board. The bottom line is we have in Agribusiness and also in Food a five-year strategy that fills in the gaps, the winning footprint, without having to do big things. You know, the Canadian Wheat Board acquisition with SALIC is clearly a beginning for a bigger play in Canada that we'll build upon over the next couple of years. So we have the plan how to complete Bunge, let's put it that way, without having to reach for bigger deals. -------------------------------------------------------------------------------- Farha Aslam, Stephens Inc. - Analyst [27] -------------------------------------------------------------------------------- That's helpful. Thank you. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Thank you. Our next question is from David Driscoll with Citi Research. -------------------------------------------------------------------------------- David Driscoll, Citi Research - Analyst [29] -------------------------------------------------------------------------------- Great. Thank you a lot. Good morning, everybody. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [30] -------------------------------------------------------------------------------- Good morning, David. -------------------------------------------------------------------------------- David Driscoll, Citi Research - Analyst [31] -------------------------------------------------------------------------------- Wanted to talk a little bit more about food products. You gave a lot of good information, but I want to try to pull a couple things together. So the $200 million to $225 million, correct me if I'm wrong, that's a reiteration of what you told us last quarter. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [32] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- David Driscoll, Citi Research - Analyst [33] -------------------------------------------------------------------------------- So if I'm right about that, if my memory is right, how come--maybe you don't tighten that one up a little bit, given the third quarter performance? it feels okay, it feels good, feels like you should be saying $225 million. But I always get a little nervous when the ranges don't change, and you have a quarter in the bag. What's on the bubble here, as we go into fourth quarter food products? -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [34] -------------------------------------------------------------------------------- I think, David, what's happening there is we've got markets that are recovering and margins that are recovering. And it really has to do with the pace of the recovery and how quickly it comes. And we're just trying to give the range of what it could fall into and be on the conservative side. I don't think we have any big worries, but these are markets that are moving quickly and we've seen them come back. There's nothing in particular, no particular worry. It's just how strong the margins would come in, and I would say we just try to bracket the upside and downside for you, versus being too precise in an environment that's a little bit uncertain. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [35] -------------------------------------------------------------------------------- We said that the fourth quarter should be a sequential improvement to the third quarter, which we believe it will. And the question is, is it a $20 million or $30 million sequential improvement? That we really won't know until the end of the quarter, but it is in that order of magnitude. -------------------------------------------------------------------------------- David Driscoll, Citi Research - Analyst [36] -------------------------------------------------------------------------------- Okay, so I think that math would still put us closer to the upper end of this range than the lower end of the range. And what I really care about here is 2016, but the fourth quarter run rate matters. Food products has never been a business that was crazy seasonal. So if the fourth quarter number is at that $60 million-ish or plus or $70 million type level, I feel like I want to take that one, extend it into 2016, and then add on to it the cost savings that you're going to continue to produce in that business. Again, if my thinking is right, then having a number in $300 million to $330 million for 2016 would be somewhere in the ballpark of what this thing is likely to do. Is my logic at least reasonable? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [37] -------------------------------------------------------------------------------- Your logic is reasonable, but the timing of all this very much depends on Brazil. The way that we are thinking about it here is that the turnaround in Brazil really probably won't happen until the second half of next year. So I think you might be a little bit on the optimistic side with the $300 million to whatever you said, $320 million or $330 million. It's likely to be $300 million on the top side, with a little bit of a bracket to the down. So I don't want to give too much guidance, but wherever we end up this year--pick a number, call it $215 million or $220 million. Add the $50 million, and then some amount for the recovery in some of our East European and Brazilian businesses as the year goes through, and you will probably end up with a--again, I'm giving you a range here--$270 million to $300 million is probably be about right. -------------------------------------------------------------------------------- David Driscoll, Citi Research - Analyst [38] -------------------------------------------------------------------------------- All right. That's really, really helpful. And then on the tax rate, guys. I've been covering this thing here since you became public, and I'll tell you what, the tax rate is like the roller coaster from hell. Can you give us any comments here, Drew, on this tax rate? I mean, a 400 basis point movement here in your full-year tax rate in the new guidance this morning. What happened in the third quarter? It's not too much criticism. I understand the geographies move all around, and this is really brutal. But as hard as it is for you guys, it's like impossible on the outside. I really need to go to 2016 and beyond that for some kind of semblance. Should we be in the 30% zip code, the 25% area? I know it's got--food products recovery is probably very germane to the answer here, but why don't you fill in the details? -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [39] -------------------------------------------------------------------------------- Thank you, David. For this year, we're looking at between 28% and 30%, and I think our guidance back in June was to around 26% or where we were looking forward to be. So as you say, we get a pretty significant jump. I think two things caused that jump in the short term. One is Brazilian Agribusiness has performed very well. We expected it to have a good year, but as the devaluation rolled through and farmer selling has really stepped up, we expect a very strong second half from our Brazilian Agribusiness operations. At the marginal rate, Brazil is a high-tax jurisdiction country at about 34%. So while our overall rate in Brazil is below that, the rate on the incremental extra dollars comes in at a pretty high number. The other thing to remember for Brazil, or just to remind people about Brazil is that we have significant tax assets in Brazil from prior years. The exact amounts are disclosed in our SEC filings, but it means that we pay very little cash taxes in Brazil. We're mainly using net operating loss, carry forwards and tax credits that we have to pay those taxes. On the other side, we did expect Asia to have, particularly China, to have positive margins in the back half of this year. We had thought the soybean excessive of inventories had gone out of the country to a large extent, with the financial players pulling back, in that we would get back to a more historical margin structure where we were actually earning margins above our cost. That didn't happen, and that is a very low tax rate jurisdiction. So while the overall profit numbers, maybe you don't see them from the outside, they moved a tremendous amount between those two places and a couple other places. There has been significant movement. The tax differential in those numbers is up in the 30% range, so it moved it quickly. If we look forward--I mean we started this year saying 25%, and then around June we thought about 26%. That would come out of a model--something in that range would start to come out of a model of a normalized earnings structure for us, in looking at the way we're structured for next year. We still feel comfortable with that range and feel comfortable with a couple years for everything we're doing to be in place for the rate to go a bit lower than that. But you've seen us put out very low rates and very high rates, so it depends on where it goes. But I would think that a rate in that range for the long term or mid term is about right, and then longer term, I think it might trend down from there. -------------------------------------------------------------------------------- David Driscoll, Citi Research - Analyst [40] -------------------------------------------------------------------------------- Really appreciate the guidance, and understand the complexity there. I'll pass it along. Thank you. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [41] -------------------------------------------------------------------------------- Thank you, David. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Thank you. Our next question comes from Evan Morris with Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Evan Morris, BofA Merrill Lynch - Analyst [43] -------------------------------------------------------------------------------- Good morning, everyone. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [44] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Evan Morris, BofA Merrill Lynch - Analyst [45] -------------------------------------------------------------------------------- Just the comments you made on the US market, the weak origination export. Can you just talk a little bit more about that? Is it just a timing issue and things will reverse themselves? Is there something more structural, if it is a timing issue? When do you expect that environment to look a little bit better? If you could just give a little bit more color around that. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [46] -------------------------------------------------------------------------------- It's a bit complex in the sense that we do have on the export side a clear shift of exports away from the US to, for example, Brazil and the Ukraine in the case of corn. A significant shift. You know, Brazil is retaking the world stage in exporting corn here for the next--well, has been and will be for the next several months, and that's probably the biggest single change. Wheat exports, US just hasn't been competitive throughout the entire season, and so it's the Black Sea and Europe that's taking most of that. So there's a clear shift away from the US to some of the more competitive origins, and Brazil really has been that one. A lot of that has had to do with the weaker exchange rate, and the higher prices and local currency that farmers like. So that we will not get back. That being said, you know, soybean exports will remain strong out of the US for the fall and into the beginning of next year. But that extra, that 10 million tons of flow that will go elsewhere for the first three or four months of the season is one of the reasons why export margins have been under pressure, and that is unlikely to change this year. Now, it is possible that as we get into the middle of the second quarter, the corn export demand will swing back to the US, and we'll get a bit of a revival. But for the fourth quarter, I think the stage is set and it won't get much better. The second aspect of this really is the fact that farmers just don't like prices. And they have the capacity and they've invested on farm storage for the last several years, and they're putting their crop away. That has narrowed carries, so earning revenue on storing grain for the industry in a very dramatic way. The fact that we really haven't had much tension in the transportation sector, whether that's cars, freight or rail, so far this harvest--and harvest is all but done--means that the ability to earn big carries on storing grain for the commercial industry is also not there. That is, I believe, also structural for this year. Now next year, all kinds of things can change. But I believe for the 2015-2016 campaign, the stage is set and it's unlikely to recover by a lot. Now next year, we'll see how things turn next year, but for the next couple of quarters that is what we have to look forward to. -------------------------------------------------------------------------------- Evan Morris, BofA Merrill Lynch - Analyst [47] -------------------------------------------------------------------------------- Okay. That was really helpful. And then just shifting back down to Brazil to your Sugar and Bioenergy business, the environment there is certainly an improved a bit. And certainly better than it was a year ago. So sounds like you're getting a little bit incrementally positive, at least on the profit outlook. So I guess, one, could you give us a sense as to how much better things are getting incrementally? And as we look into 2016, based on what you know now versus what it was like six months ago, what that could mean for profits? And then secondly, if the environment is improving, how does it change the outlook or the possibility of a sale of those assets as you continue that process? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [48] -------------------------------------------------------------------------------- You're right, that the environment for Brazilian cane crushing sugar production and ethanol is definitely better now than it was a year ago, and it looks like it's going to get sequentially better in 2016. Of course, a lot of it has to do with the reduced cost of producing sugar in dollars. So the cost of production, if you look into next year now is probably somewhere around $0.12 a pound, maybe a little bit more, depending on location, but well below where you can actually hedge sugar. And so I'd say for the first time when you look into a future campaign, you can actually secure reasonable margins as a sugar producer, and then the question is really to what extent does ethanol follow. But ethanol, if you look into next year's new crop--April, May--Brazilian ethanol is the most competitive ethanol in the world, so you'd think there would be good demand for that as well. So it is different in the sense you actually as a producer look into the following crop and secure margins that are quite reasonable. And in that sense, we're optimistic that we will end up this year positive in EBIT, positive in cash flow, and next year should be a bump up from that. How much of a bump, it's too early to tell, but it'll be sequentially better. In terms of our view on how to position the business, we're still in the mode of finding ways to reduce exposure as we've said. But given the fact that Bunge as a whole now has returns that are well in excess of our cost of capital and the business fundamentals are improving, we'll take our time to find the right solution. And we are working on that, and I can't give you any timing on it. But the business is not a drain to Bunge. We can see signs of improvement and the industry will probably take another year or so to recover. We'll just be keeping a sharp eye out for opportunities, but without feeling pressured into anything in a hurry. -------------------------------------------------------------------------------- Evan Morris, BofA Merrill Lynch - Analyst [49] -------------------------------------------------------------------------------- Perfect. Thank you. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you. Our next question comes from Robert Moskow with Credit Suisse. -------------------------------------------------------------------------------- Robert Moskow, Credit Suisse - Analyst [51] -------------------------------------------------------------------------------- Thank you. I guess you just answered my question I was going to ask on Sugar and how to position it potentially for a sale. But my understanding is that the conditions in the ethanol market are getting much stronger, and you've said yourself that sugar in Brazil is the low-cost producer in a global export market. Is there any--would it be possible for Bunge to consider running the business for more than just break-even? You said you wanted to work on reducing your exposure even further, I think is what you said. But if conditions in the market are good, why reduce it further? Why not try to capture a little bit of the upside? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [52] -------------------------------------------------------------------------------- Well, we are not--that's why we're not putting a timing on this. We'll see how the industry develops over the next year. All the signs are favorable, and so we will be patient in how we essentially optimize and find the best value for shareholders through this path, through this period. And indeed, the market conditions are turning quite favorable. So no date and no timing, but in the long run, a reduced exposure to the milling piece of the business is what we are still seeking, and that can take many shapes and forms. -------------------------------------------------------------------------------- Robert Moskow, Credit Suisse - Analyst [53] -------------------------------------------------------------------------------- Okay. Thank you very much. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [54] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Thank you. Our next question comes from [Ken Veslo] with Bank of Montreal. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [56] -------------------------------------------------------------------------------- Hey. Good morning, everyone. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [57] -------------------------------------------------------------------------------- Good morning, Ken. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [58] -------------------------------------------------------------------------------- Obviously I have a lot of questions to ask. Just to make sure I get an understanding. I know you increased your tax rate. What is the effect on cash? -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [59] -------------------------------------------------------------------------------- Ken, as I said earlier, we pay the majority of our tax, or the most taxes in Brazil by far, and that is a market where we have significant tax attributes from prior years, both in terms of carry forward tax credits, tax receivables, which are all disclosed in our filings, so in the end we would pay very little cash tax in Brazil. So we don't pay a significant amount in cash taxes. Certainly we don't pay the whole portion in cash taxes, but certainly there are jurisdictions where we do pay cash taxes. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [60] -------------------------------------------------------------------------------- So the increase in tax rate really is somewhat meaningless, in the scheme of your operations? Is that fair? -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [61] -------------------------------------------------------------------------------- It's meaningless in terms of the way the cash would flow. I want to be careful say it's meaningless, because eventually it comes around and uses your tax attributes up. So the rate is higher this year. It's higher in a place where we've got tax credits, so we're not having a big impact on cash. But over time, we certainly want to take these steps and have the business structure for the rate to come down. I don't want to imply in any way that it's not an area we're focused on. But the particular driver of the increase this year is not in an area where we pay cash taxes. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [62] -------------------------------------------------------------------------------- Okay. The same question. You talked a lot about farmer retention around the world. I guess what I'm trying to figure out is, so Brazil, they're releasing. Argentina after the election, will they release, you expect? And how long will it take them to release? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [63] -------------------------------------------------------------------------------- Yes. Argentina is the wild card. I think there are various theories as to how the devaluation will take place post election, depending on who the candidate is. I think everybody is in agreement there will be devaluation of the peso in some form. I'm not going to handicap what the election outcome will be. But I think it's fair to say that we all believe that starting sometime in the first quarter, the Argentine farmer will start letting loose on some of the soybeans that are accumulating. And they'll be sitting on over 10 million tons of beans as it looks right now, as we move into the new crop, and some of that should come out first quarter, prior to their new crop harvest. And the pace with which it comes out is really dependent upon the election outcome and so forth. But Argentina will undoubtedly be more of a factor this year than it was last year. In all likelihood, it will impact crush rates and exports of products, in my view, probably on the other side of March. So the US should still have a decent share or its continued share of global meal exports for the first couple of months of the new year. But Argentina will be the one place in which we look for an increase in farmer selling, no doubt. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [64] -------------------------------------------------------------------------------- Okay. So they can't hold it through the whole year? We will see soybeans out of South America come to market? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [65] -------------------------------------------------------------------------------- For sure they will. But, I mean, I think-- -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [66] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [67] -------------------------------------------------------------------------------- But you're probably talking somewhat in Q1. I don't it expect it to be in December necessarily. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [68] -------------------------------------------------------------------------------- Again, I don't think it matters. I mean, 2016 is--I think that's fine. In the US, can the farmer hold soybeans for a year, two years? How long can they hold it for? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [69] -------------------------------------------------------------------------------- I don't know how long they can hold it. Your guess is as good as mine on that. But I would say that this is now the second large crop in the year, in a row. You would expect that some of this will come to market prior new crop plantings, which will be in March and April, so there should be a wave of farmer movement as we get into the end of the first quarter, and then we'll see from there. But so far, the harvest came and went very, very fast. It was over in two weeks, and a lot of the grain got put away. So I would say in general farmers probably surprised the industry by their ability to hold grain longer than we all expect, so I wouldn't handicap it too much. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [70] -------------------------------------------------------------------------------- I guess my point I'm trying to get at, although right now you see farmer retention, the reality is in 2016 we're going to see Brazil, Argentina and the US all really selling soybeans through the year next year? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [71] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [72] -------------------------------------------------------------------------------- Okay. So your caution on next quarter is irrelevant for 2016? Is that a fair assumption? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [73] -------------------------------------------------------------------------------- Every quarter plays out a little differently. I think for the next--for the fourth quarter, the one we're in right now, retention is a clear factor. This can change very quickly with price, with currencies as we get into the first quarter, and it might even change with currencies in the fourth quarter. Brazil, for example, is super sensitive to the foreign exchange movements. The same is true in places like the Ukraine, so I don't think you can make a unilateral statement about how timing a farmer's selling will be throughout next year. The crops will come to market, that's clear, either because farmers--prices will eventually have to get to the point where farmers like them or cash flow will tell them that they have to market their crops. So the timing of that takes--has many facets, and some of them are price, some of them are cash flow, some of them are currency related. But in general, I think it is fair to say that with large crops globally, 2016 should be a year where we all handle ample crops across the geographies. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [74] -------------------------------------------------------------------------------- My final question is on your $8.50 guidance. I get that--I think most people understand that the food products was at risk the whole way. I guess what I'm trying to figure out is when--if there's a way you can bracket the impact you think if we stay at these current levels, how much of that will knock off the $8.50? Is it $0.50, or is it $1.00? Or some kind of parameters to put it in? Because I thought it was $0.50. I didn't know if it was larger or smaller than that? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [75] -------------------------------------------------------------------------------- Your range is right. It's probably $0.50 to $0.75, looking at 2017. That's the order of magnitude, translated into the delta in our Food and Ingredients performance, relative to the $4.75 we indicated to you back in December last year. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [76] -------------------------------------------------------------------------------- Great. I appreciate it. Thank you very much. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [77] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Ken Veslo, Bank of Montreal - Analyst [78] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [79] -------------------------------------------------------------------------------- (Operator Instructions) And we have our next question from Vincent Andrews with JPMorgan. -------------------------------------------------------------------------------- Neil Comart, JPMorgan - Analyst [80] -------------------------------------------------------------------------------- This is Neil [Comart], calling in for Vincent. I was just wondering if you could elaborate a little bit more on the timing of your CapEx spend changes. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [81] -------------------------------------------------------------------------------- We've extended things out for two reasons. In a couple cases, as we look at the markets and when the capacity is needed, we don't want to get ahead of that, so we've deferred some projects a little bit. In a couple of other projects, we've deferred just as a normal spending time of when it makes the most sense to do the construction for engineering reasons. So you've had two deferrals for those reasons that will reduce our spend by about $125 million this year. Some of that will come back into next year as those projects ramp up and we go ahead and do that. -------------------------------------------------------------------------------- Neil Comart, JPMorgan - Analyst [82] -------------------------------------------------------------------------------- Got it. And my second question was, could you just talk a little bit more about the impact of the Brazilian farmers needing less credits. Does that mean you will have to barter more, and is that what we're seeing in the changes of working capital? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [83] -------------------------------------------------------------------------------- No. These are minor amounts, but it is true that we will probably have to be--we already are, stepping up our--either bartering or lending to very select farmers. And so it's not a full-fledged program, but we are selectively helping farmers expand their production, where the credit is warranted as banks in particular in Brazil have stepped back from extending credit. We are filling part of that void, but in a very, very selective way. -------------------------------------------------------------------------------- Neil Comart, JPMorgan - Analyst [84] -------------------------------------------------------------------------------- Got it. Thank you. -------------------------------------------------------------------------------- Operator [85] -------------------------------------------------------------------------------- Thank you. We have no further questions at this time. I will now turn the call back over to Mark Haden for a closing remark. -------------------------------------------------------------------------------- Mark Haden, Bunge Limited - Director of IR [86] -------------------------------------------------------------------------------- Thank you. If there's no more further questions, then we'll close the call now. Thank you, everyone, for joining us. -------------------------------------------------------------------------------- Operator [87] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating and you may now disconnect.
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