WHITE PLAINS Jul 30, 2015 (Thomson StreetEvents) -- Edited Transcript of Bunge Ltd earnings conference call or presentation Thursday, July 30, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Mark Haden Bunge Limited - IR * Soren Schroder Bunge Limited - CEO * Drew Burke Bunge Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Ann Duignan JPMorgan - Analyst * Vincent Andrews Morgan Stanley - Analyst * Farha Aslam Stephens Inc. - Analyst * Cornell Burnette Citi Research - Analyst * Patrick Chan BMO Capital Markets - Analyst * Adam Samuelson Goldman Sachs - Analyst * Sandy Klugman Vertical Research Partners - Analyst * Evan Morris BofA Merrill Lynch - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Q2 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. Mr. Haden, you may begin. -------------------------------------------------------------------------------- Mark Haden, Bunge Limited - 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 Investors section of our website at bunge.com under Investor Presentation. Reconciliations of non-GAAP measures disclosed verbally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investors section. I would 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 will now turn the call over to Soren. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [3] -------------------------------------------------------------------------------- Thank you, Mark, and good morning to everybody. The second quarter was disappointing. And while we anticipated and communicated weakness, the actual EBIT was lower than we expected. Strong headwinds in our softseed crush and our Brazil foods businesses, as well as end of the quarter price volatility that led to temporary loss in grain positions, were the primary contributors to the lower results. Approximate EBIT variances compared to last year include $90 million lower in softseed crush, $45 million lower in Brazil edible oils and milling, $50 million in oilseed distribution and $50 million from temporary grain position losses mentioned earlier. These grain losses have since been recovered during July. While the second quarter was tough, our year-to-date results and returns are better than 2014 and we expect 2015 to be a year of growth in both. Full year Agribusiness EBIT should exceed $1 billion. Food will be somewhat lower than last year, but supported by ongoing improvements to our operations. Sugar & Bioenergy will be EBIT and cash flow positive, and overall Agri-Foods returns will be approximately 10%, well above our WACC. And we are committed to reaching our 2017 EPS target of $8.50 a share. Let me provide a little more detail on the market and our results, starting with the challenges, which spread across several parts of our business. In Agribusiness, sharply lower energy prices, poor bio-diesel economics and farmer retention led to margin contraction in the softseed complex. Grain origination margins from the [fob] and the US were sharply lower than last year. Argentine origination was constrained by strikes and farmer retention early in the quarter, and Black Sea origination was quiet. Oilseed distribution and trading margins were under pressure, and grain distribution trading positions were impacted as wheat futures spiked during the last days of the month. In Food & Ingredients, we felt the full impact of the recessionary conditions in Brazil. Economic conditions have led consumers to reduce purchases and in many cases trade down in value. B2B customers have reduced inventories and re-priced products in order not to lose market share. The end results in edible oils was an approximate reduction of 15% in volume and a margin contraction of 20%, in addition to currency translation effects. Milling results in Brazil experienced similar volume reductions, but we managed to keep steady margins in local currency. The headwinds were strong, but mostly temporary. While we expect the challenging season in canola processing and continued softness in the Brazilian food and ingredients market, we have already recovered the Q2 distribution and trading losses in Agribusiness and many parts of our business will benefit from favorable conditions and macro trends. Looking at our key markets, we see many positive signs. New crop sunseed margins are looking better with larger crops across most of the Europe and the Black Sea. Soy crush results have been in line with expectations, with a recovery in China offset by reductions in South America and the Europe. And we expect the value of our soy crush capacity for the balance of the year to be at or above last year's levels. Demand for soy mill was strong in the US and Brazil, and world soy mill trading consumption is forecast to expand 3% to 5%. After a slow start, farmer selling in Brazil is at its historical place and we expect continuous brisk pricing of new crop beans and corn on any price or currency rally. Large crops and strong export programs from both the Black Sea and North America and a generally undersold producer should support grain origination and trading in the second half of the year. And in North America we expect solid growth in our refined and packaged oil business, benefiting from ongoing cost and supply chain improvements. And in Mexico we expect a good second half in milling volumes. Given the competitive and economic pressures in several of our markets, we are intensifying our focus on programs to improve operational efficiency. They are well underway and making a meaningful difference, and the rate of impact will increase as we move forward. The programs have yielded $50 million year to date, and here are some examples. In Brazil Foods & Ingredients, we are improving our supply chain costs thoughtfully to increase focus on OEE, supply chain planning, and reduction in logistics cost. In North America, we are consolidating Food & Ingredients volumes as a result of operational improvements with our freed-up capacity. In Agribusiness, we are bringing our crushing plants to new levels of yield and energy efficiency. And in logistics, we have reduced execution costs to the lowest level in years. Our SG&A, while benefiting from weaker currency, continues to fall as this year of gross profit, and we are very conscious about building scale from our current structure. The Sugar & Bioenergy segment saw record quarterly crops of 7.3 million tons, but with slightly lower income from trading and distribution. We continue to drive improvements across all mills in agriculture and explore strategic alternatives. We have all our sugar hedged and we are comfortable with the ethanol price picture for the remainder of the year, which should lead to both positive EBIT and cash flow, with results skewed towards the fourth quarter. In summary, while the second quarter results was a disappointment we are convinced of a full year of growth in both earnings and returns. The foundation of our business is strong and our optimism for significantly better results in the second half of the year is well-founded. And overall, Bunge is a stronger company and better positioned to weather challenges due to the improvements we have made to our operations. Our strong four-quarter trailing returns reflect these changes. There is more work to be done, but the path is clear and our goals unchanged. I will now turn it over to Drew, who will provide some additional detail in the quarter and our outlook. -------------------------------------------------------------------------------- Drew Burke, Bunge Limited - CFO [4] -------------------------------------------------------------------------------- Good morning. Let's turn to page 4 and the earnings highlights. Our total second quarter adjusted EBIT was $152 million, compared to a strong prior year result of $418 million. On a six-month basis, adjusted EBIT was $525 million and higher than the prior year's $493 million. Our earnings per share on a fully diluted and adjusted basis was $0.51 in the second quarter versus $1.76 in the prior year. On a year-to-date basis, our fully diluted and adjusted EPS is higher than the prior year at $2.12 versus $1.67 in 2014. Agribusiness adjusted EBIT in the second quarter was $134 million and below the prior year result of $311 million. The primary shortfall was in oilseeds due to weak performance in our softseed crushing business and our distribution business. Soy crushing results were in line with the prior year. Both Canadian and European softseed results were well below prior year, reflecting high seed costs and lower vegetable oil demand. Canadian margins were significantly weaker than prior year. Both margins and volumes were lower this year than last in our trading and distribution business, primarily in the Middle East and Asia. Soy crush results were in line with prior year, as improvement in our Asian business offset declines in Europe and South America. United States results were slightly higher than prior year. Volumes increased from prior year led by our United States and Asian businesses. Our grains business second quarter EBIT was $71 million versus $82 million in the prior year. Our volumes were down 10% from prior year, reflecting lower origination volumes in North America, in Argentina, and reduced export volumes as margin opportunities were less attractive. Grain origination results were slightly below prior year as an increase in Brazil driven by strong farmer selling late in the quarter was offset by reductions in the United States and Argentina. Distribution results were below prior year due to lower volumes in margins. As Soren mentioned, they were also impacted by mark-to-market charges on our grain positions due to the high volatility of commodity prices at quarter end. Prices corrected in early July and these positions recovered. Our food business reported EBIT of $29 million versus $90 million in the prior year. The major portion of the decline was in Brazil, where deteriorating economic conditions impacted consumer consumption levels and buying patterns led to reduction in both volumes and margins. The decline was primarily strong in our edible oils business. Results in our US corn milling business were below with strong prior year, primarily due to reduce demand from the cereal and brewing industries. Our profit improvement and cost savings programs continue to make progress. We have announced the closure of the United States edible oils facility. We will move the volumes previously supplied by that plant to other Bunge facilities, resulting in more effective capacity utilization and lower cost. Our Brazilian team has been quickly adapting the business model and cost structure to mitigate the effects of the current situation and building a stronger basis for future growth. Our sugar business reported an EBIT loss of $12 million versus a profit of $6 million in the prior year. Our sugar industrial business was near breakeven, and most importantly continues to hit its targets for cost reductions and cash flow generation. Our crop is coming in as expected and our plants are running well. Let's turn to page 5 and our return on invested capital. This continues to be a major point of emphasis for us. We continue to focus on ensuring our investments in capital expenditures and working capital are generating the appropriate rate of return. Our returns continued to be above our cost of capital in 2014 results. For total Bunge, we achieved the return on invested capital of 7.9%. And for our core Agribusiness and food businesses, our return on invested capital was 9.6%, 2.6% above our weighted average cost of capital. Let's turn to Page 6 and our cash flow highlights. For the six months ended June 30, our cash used for operating activities was $300 million versus cash use of $791 million in the prior year. The improvement primarily reflects higher earnings, continued focus on working capital management, and a reduction in commodity prices. We continue to have a strong liquidity position, with $4.2 billion available under committed and unused lines of credit. Let's turn to page 7 and our capital allocation priorities. Our first priority is to maintain an investment grade credit rating with the BBB target. After that, we allocate funds based on the alternative that provides the best long-term value to our shareholders. For the six months ended June, we have returned $316 million to shareholders by repurchasing $200 million of shares and paying $116 million in dividends. We made an acquisition that increases our value added capabilities on our US food business. Our capital expenditures were $222 million. Our target for the year remains $850 million. Spending on our larger projects will step up as the year progresses. Let's turn to page 8 and the outlook. We expect to achieve a 2015 return on invested capital for combined Agribusiness and foods businesses of approximately 10%, which is three points over our cost of capital. Agribusiness should have a strong second half, with full year segment profit exceeding $1 billion. In oilseeds, demand is expected to be strong, with USDA projecting growth in global soymeal consumption of 5% and in soy oil of 4%. Overall crush margins are solid. South America should experience good volumes and margins through the third quarter, with export demand moving back to the US in the fourth quarter. While China margins have come down, they are still well ahead of prior year. The softseed environment is likely to be mixed, with sunseed recovering as new crops become available, but rapeseed margins are likely to remain depressed due to smaller crops and weak vegetable oil demand due to biodiesel consumption. In grains, there is a large safrinha crop in Brazil and farmer selling is increasing with the Brazilian real depreciation. Large US and Black Sea crops should provide origination opportunities and allow us to run our assets at high utilization rates later in the year. Our food business will rebound from the weak second quarter performance, but will still face headwinds from weak economies and the translation impact of translating global earnings into US dollars. We expect second half results to be better than the first half, but below the prior year's second half. We do expect to achieve our 2017 goals as the Brazilian and certain Eastern European economies get back on track. Brazil is the major challenge for us in foods. We will continue to reduce our cost structure, but still invest in our brands to maintain our market share. The immediate outlook is that margins will remain under pressure for the third quarter, but should show improvement as we move into the fourth quarter. Packaged oil should benefit from a more balanced domestic market, as soy crushing seasonally slows and demand stabilizes. Wheat millings have not declined as strongly, and we expect sequential improvement in demand. The Brazil food market continues to be a key area for us and we remain confident that it will provide the appropriate returns and growth opportunities as the Company works through its economic difficulties. It is also important that we have a full value chain business in Brazil, and our Agribusiness results should more than offset the weakness in foods. In Europe, we expect improvement in margins as new crop arrives and raw material costs decline. In North America, we expect our oils business to continue to benefit from the results of our profit improvement programs. Our Mexican wheat milling business continues to perform well. Our industrial sugar business is entering the seasonally stronger second half of the year. We expect to be solidly profitable in the second half and to achieve a full year of profit and generate free cash flow. Ethanol demand remains strong. The crop has developed nicely and normal weather patterns will support achievement of our targets. We will now return the call to the operator to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Ann Duignan, JPMorgan. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [2] -------------------------------------------------------------------------------- Can we talk about Europe a little bit -- way down results this quarter. But given everything we're hearing about weather conditions so variable across the region in Europe, can you talk about the upcoming crop, and how that might end up being smaller than expected and weigh on performance going into next year? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [3] -------------------------------------------------------------------------------- Yes, I think it is very varied. So, we could spend a lot of time going through all the different pieces. I think what's relevant to us is that the Ukrainian and Russian wheat export programs look to be intact -- big crops -- as big as last year, and in some cases, bigger are good for us. Exports should be strong. In fact, we are right in the middle of harvest as we speak, and yields are coming in better than we expected. I think that's also the case in other parts of Europe, in wheat in particular. Where we have, let's say, challenges is in the European, specifically the east European corn crops, where hot weather during pollination has really hurt yield potential. So, that's the downside, not necessarily for us because it might very well mean that you will open the flow of Brazilian corn to Europe that should speak to our strength. So, in general, on the grain side, I think it's mostly positive, strong wheat exports, and potential for some dislocation in corn as the year progresses. Sunseed crops -- we are still looking at sunseed crops that are better than last year, both in Russia and the Ukraine, and most of eastern Europe. On the other hand, rapeseed crops, which have just been harvested or are being harvested is off by 2 or 3 million tons, but that was largely known early on. So, that's pretty much how we see it. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [4] -------------------------------------------------------------------------------- Okay, I appreciate the color. It's good to know that Ukraine/Russia is a net positive. And then switching to Brazil, we understand the consumer, and the weight on the consumer in the region, but can you talk a little bit about farmer sentiment, and whether you would expect an expansion in acres this upcoming year or what are you hearing kind of feet on the street from Brazilian farmers? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [5] -------------------------------------------------------------------------------- Within the Brazilian economy, the agricultural sector is probably faring the best. That is key here, and that is why, on balance, Bunge Brazil will be okay despite the challenges in the domestic consumer side of things. I don't think that we expect a large expansion of acreage, probably a modest one. I think we're talking more about possible future -- further yield improvements in both corn and beans next year. So, we do expect bigger crops in 2016 than in 2015, but I am not sure if we really believe it will be a meaningful acreage expansion. -------------------------------------------------------------------------------- Ann Duignan, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- Okay, I'll leave it there and get back in line. Thank you. -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [7] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Vincent Andrews, Morgan Stanley. -------------------------------------------------------------------------------- Vincent Andrews, Morgan Stanley - Analyst [9] -------------------------------------------------------------------------------- Just want to follow up on Food & Ingredients. I mean, I understand where the weakness is coming from. I guess where I wanted to get more clarity is why it really happened so dramatically this quarter? Like, why didn't it happen a year ago? Why didn't it happen last quarter? And I apologize if you addressed this in the prepared remarks, I was on another call, but what actions you can really take around these issues, and how much of them are structural or secular versus have some cyclicality to it that might improve? -------------------------------------------------------------------------------- Soren Schroder, Bunge Limited - CEO [10] -------------------------------------------------------------------------------- Yes. I mean, we saw early signs, I suppose, in the first quarter. But really, it all came to a screeching halt in terms of consumer off-take in the middle of the second quarter. And that happened particularly in edible oils at the same time as the crushing industry was ramping up its seasonal crush. And so, a combination of excess oil in the market, and companies like ourselves and retailers, who saw demand simply falling off a cliff, led to a re-pricing and the flush-out of inventory, so to speak. And that put tremendous pressure on margins. So, it all did happen really within a very condensed period of time, and compared to what was a good year in the second quarter last year. From what we can tell, the markets are beginning to stabilize. Volumes have stabilized and are creeping back up. And I suspect that, in edible oils, it will probably take us through the third quarter to get margins back to where we historically would be, and probably the fourth quarter, where oil supply in Brazil balances out better as crush rates ramp back down again to put a little bit more balance in supply and demand of the edible oil sector. In milling, the volume drop was almost as much as in edible oils, so reflecting the same trends, but also there we have seen a small pickup in volume as we have gotten into July. So, to me, it feels like the second quarter, at least in our sector, was when there was a shock to the system, and everybody realized that there was a major recessionary issue on the table, and the markets adjusted all at once. So, it will be a slow rebuild, but we are seeing things stabilize and slowly move into better territory. And of course, at the same time, we are hard at work to do what we can to trim cost and improve supply chain efficiencies, making sure that our clients get up to better OEEs that we cut our logistics cost, as we have been successful in doing in other parts of the world. And this just puts a little bit more pressure on us in doing it faster there to adjust. But coming out of this, I suspect that we will be even stronger than we were going into it. |