Bunge Global SA (BG) 2003 Q1 法說會逐字稿

Thank you, gentlemen. Today's question-and-answer session will be conducted electronically. If you would like to ask a question please press the star key followed by the digit one or your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your question to reach our equipment. Once again please press star one. We will take our first question from John McMillin with Prudential Securities. Please go ahead.

Can you go over again on April seventh you game out with a press release predicting 30 to 35 cents. It's nice to see positive surprises but it's unusual that it happens after the quarter. Can you just go over again, Bill, how numbers came even higher than that range you gave on the seventh?

Certainly. It related to the amounts that we were protecting that we would provision on some tax receivables that we had. We had projected that we would take certain amount of provision during the quarter when we gave that guidance and we in fact received a payment on some tax receivables after the end of the quarter. And this is what's called a type two event in accounting and so we were required to book the effect of that in the quarter. Now let me emphasize that this doesn't mean that we have extraordinary gains in the quarter from release and reserves it's in fact the opposite. We did not constitute a reserve that we had anticipated taking, so actually all of the results that you're seeing, the increase in results is derived from operations.

But you were anticipating getting that reserve in the June quarter, correct?

No, we were anticipating taking a reserve in the first quarter for some tax receivables which had been generated and we ended up not having to take that reserve because we in fact received the payment.

Okay. I think I got it. It's nice to get positive surprises, just kind of unusual to get it after the fact. Your optimism towards a turn around in the North American soy bean processing is nice, but there are some offsets in term of lower animal numbers. Do you think enough capacity has been taken out to ensure your favorable outlook, Alberto?

Look, we believe that the production or the consumption of meat is from the customer side, from the consumers might be flat to see. What we are seeing is a little bit of drop in meat production, so we are optimistic and we had a GDP grew in the first quarter so we believe the meat consumption will continue growing. You remember that meat world wide gross 2 and a half to 3 percent so we are quite confident with that. We have a unique situation where production is a little bit down on broilers and on hogs. So we believe that the capacity that we took down that we are back in balance on our supply and balance to the sale to the meat industry is now right. So we are quite confident about that. You have to also remember that we had a very short crop last year, so when we look at the current situation we feel comfortable.

Can you quantify the accretion that Cereol had in this quarter?

Cereol was actually slightly diluted in this quarter. As you saw, it contributed 20 million to operating income, but it had a slightly negative effect on net income when you consider the financing cost associated with the transaction.

And your full year projection for Cereol is to be accretive?

We continue to believe Cereol will be accretive 8 to 10 percent in the full year.

Great. Thank you.

We'll take our next question from Ken Zazo with Morgan Stanley. Go ahead.

To what extent have you seen competitors increase their penetration in South America and how do you assess the various entry in this market?

The market is growing very fast when you look at the amount of soybean production when you lock at fertilizer, when you look at local edible consumption and look at corn production. So there has been growth. There is space for everyone. Although we believe that we have gained market share in the last time. So I don't know if that's what you were asking.

Have you seen increased capacity being brought on by [inaudible]and DM and does that at all hurt your utilization rates at all?

No. They have announced and some have increased but it is very much in balance. In fact, the export of soybeans has increased, so less of the meat and the oil. So I think the capacity of utilization South America has probably gone up.

The second question I have is can you give a little color on Bunge's markets and performance in the quarter in terms of volumes an profitability?

They have a strong quarter. We saw a good increase in volumes from Bunge's global markets that was in double digits. We also saw solid improvements in their margins in the quarter. In fact, I think this to a certain extent illustrates that when you have an integrated operation and you have all facets et cetera of the chain from originating from farmers processing in the form of crushing, and then marketing to the end customers, sometimes profitability can move around a little bit in that chain. But if you are in all elements of the chain you can pick up the profitability when it shifts in the chain. So we saw a weaker North American environment, but we also saw an expansion in Bunge Global Markets, which helped offset a little bit of that.

Excluding Cereol, what type of internal volume growth was there at Bunge Global Markets?

The Cereol did not really have an impact on Bunge Global Markets growth.

Okay. Thank you.

We will take our next question from David Nelson from Credit Suisse First Boston. Please go ahead.

Congratulations. Good morning. You're holding off on revising, potentially revising your full year guidance until the closure of [Solae], but that would be nonoperating. I guess should we assume that you're not going to revise your operating guidance for the full year at that time?

We will take another lock at it at that time, but I will have to say our current perspective is we would not increase our operating guidance. We are confident in the guidance where it currently is. However, we are looking at a couple of factors that cause us to want to be cautious as we lock forward. The first of those is of course the weakness in the North American market, and so we would like to get a little bit closer to the harvest season to have a better sense of what's happening with the harvest. And the second is this strength in currencies in South America and particularly the Brazilian real. As you know, we have seen restrained strength in those currencies. This does have an effect on our effective tax rate. I talked about that earlier. So we want to be a little bit more cautious as we look forward with these two elements that are out there that potentially could effect our results.

(Inaudible) both against the real and the Argentine peso, right, in reading the nonoperating expense discussion in your release?

We're dollar (inaudible) pretty much neutral in Brazil. However, we do have this effect on tax rates, which is caused by the way in which our Brazilian subsidiary is financed.

Okay. On the fertilizer, the double crop, what are they double crop with, is that wheat?

No, normally it's corn.

Thank you.

Welcome.

We will take our next question from David Driscoll with Smith Barney. Please go ahead.

Thank you. Good morning. I just wanted to follow up on the earnings guidance questions. It seems to me that we have got in a 10 to 15 cent improvement over your early expectations back in January but you are being very cautious on your guidance by not raising it. I know you talked about this a second ago but it seems to me that there is no information whatsoever as to really what the fourth quarter is going to bring, and if my understanding is correct, that's where we're all trying to guesstimate what crush margins in the US are going to do following the next crop. So you know, number one, is that really what we are trying to estimate here why you're being conservative on the full year begins and then a follow-up if I may.

Well, we are I think being cautious with regard to the fourth quarter. US crush margins are clearly a factor in that and we would like to have more visibility with what's going to happen with the US harvest. But I think probably an even bigger issue is the currency issue in South America. If you just do the calculation I think we had said to you on the last call that an appropriate effective tax rate number for the year was between 30 and 35 percent. And today I would revise that, I would tell you an appropriate effective tax rate for the year is probably between 35 and 40 percent. You look at that difference and that difference pretty much consumes the 10 to 15 cent increase in earnings per share. So you know, this is something we need to keep a close eye on.

Okay. And then if we could move over to your SG&A line. This line has been extremely difficult to get a handle on in the model. In the fourth quarter, if I do my calculations right SG&A was about 221 million and that did include I believe approximately 2 months of Cereol, then moving into the first quarter, again if I've done calculations right, we're at an SG&A expense of about 150 million dollars, 70 million dollar change. First off, can you just walk us through where SG&A should come out for the full year and then give us a little color on the difference between AGRI business and food products because I do believe food products after your la sewer sale takes place, then a number of assets will transfer over to those folks and the accounting for that will be different, so SG&A will not be accounted for from LASUR food products. Again, this is a very complicated line, it seems, any help would be appreciated.

Unfortunately, David, I don't have good numbers on that line. I don't have it in my fingertips exactly what the SG&A number should be for the year. However I would say we will expect to see increases related to Cereol because we did have one quarter of Cereol in the results last year, which was the fourth quarter. We expect of course that we will have a full 4 quarters of Cereol's SG&A in this year. Other than that effect, I would expect that we would see SG&A relatively flat, to perhaps declining slightly. And the reason for the decline would be one, synergies, because a number of the synergies with Cereol are related to SG&A, and second, the -- we do have some currency effect. The currency in South America in first quarter of last year, I think the Brazil real was around 240 and today it's around 3, so we would see some currency effect from that and that will roll forward in the next 2 to 3 quarters. However, we need to keep an I eye on the third and fourth quarter, because the effects rates in both Brazil and Argentina are now approaching where they were in the third and fourth quarter of last year, and so there is a possibility that we would in fact see a reverse effect from currencies in third and fourth quarter.

Can you give us a number on the synergies with Cereol?

We had projected in the first 12 months we should be able to realize between 20 and 25 million in synergies from Cereol and that would grow over a 3 year period to a running rate of between 45 to 50 million dollars.

And again most of that is SG&A synergies?

A good portion is SG&A synergies.

Perhaps the last question on SOY margins. Some of your competitors have made comments that the industry is not in balance in the United States, your action yesterday of taking down a plant seems in line with what everybody else is talking about. But what I don't have a perspective on is what percentage of US capacity that plant represented. Can you give us some numbers there?

Yes, David, when you take the information from (inaudible), we had a capacity utilization last year of if I'm not mistaken 88 percent and now we have 85 percent.

That's through March, Dick.

Through March. So when you take our two plants we are taking down three percent to Mayeron.

: Excellent. Thank you very much.

You're welcome.

We will take our next question from Eric Katzman from Deutsche Bank. Please go ahead.

Good morning. A few questions. I think I want to try the easy one first. CAPEX, can you guys say where that was when you announced the Cereol deal and where you expect it to come in for the year and if there's any difference, why there is a difference?

Well, we expect CAPEX to come in between 300 and 400 hundred million, probably in the mid point of that range, about 350 million for the year. When we announced the Cereol transaction, including Cereol, I think it was in roughly the same place.

I think the only difference, Bill, is that it is solely JP, there will be a reduction on the (inaudible) side.

That is correct. We will see a decease from SOLAE, but actually we had factored that in when we were making the CAPEX production.

Is change in SOLAE isn't obviously going to be more than a hundred million dollars swing?

No.

Okay. And so if we walk through the components of cash flow, Bill, can you kind of using the guidance that you have previously given just kind of walk me through where net income if you use your target that you talked about in the past, depreciation, amortization, minus CAPEX, minus dividends. Just kind of walk me through where you expect to be. And also include what kind of money you expect roughly to get from this gain and the SOLAE and how that effects the cash flow.

Okay. I'll do my best. But that's a tough question. Let me perhaps try to summarize it. We do expect to be precash flow positive this year. That would be with a CAPEX level of between 300 and 400 hundred million dollars. And that would be excluding any cash that we would receive from the SOLAE transaction or from the LASUR transaction, because don't forget we have another joint venture that should be closing in the third quarter this year that is also going to generate a significant amount of cash. Between those two transactions we expect to see net debt being reduced by about 450 million dollars. The actual amount of cash that we will receive from the DuPont transaction is approximately 256 million dollars.

All right. And then one of the questions I get a lot is just kind of -- it's obviously difficult for you, it's difficult for us on the sell side and on the buy side is trying to figure out the swings in the currency and you have told us today the tax rates should be different where you see the real and I guess the peso. Could you give us a sense of if the real goes where it is currently at three, up 10 percent or down 10 percent, what that could mean to like the impact on let's say I suppose the best measure would be on your pretax line, because we already -- I don't know, you tell me what's the best way to measure it in terms of the swing.

The primary impact is going to be on the tax line and it's really just the real. And there you can get a sense of it because you have seen the movement from the real from the year end rate of 360, coming down to around 3 at the end of the quarter and you know, I just gave you the effective tax rate change that that implies. However, I would say that we do have the ability to do some hedging on that effect, and we have in fact begun to start doing some hedging on that potential effect. So I don't think that significant further downward movement of the real is going to have as big of an impact as this initial movement did in the first quarter. In the first quarter we were comfortable with just waiting to see where the real went. At this point I think we want to be a little bit more aggressive on the hedging side and so we have started to take some hedge positions. That doesn't mean we will be able to completely neutralize the effect but I think we can significantly diminish it.

Assuming that we all adjust our models to higher tax rate and try to take this first quarter, then from now on with obviously a little bit of flux, assuming something crazy doesn't happen down there, any change should really be due on an operating basis? Is that kind of what you're leaving me with?

Well, I don't want to be as definitive as that. What I would say is that we think that we can diminish some of the more abrupt moves in the currency and the effect it would have on the tax line through some of this hedging that we're starting to do. But I don't want to lead you to believe we can completely neutralize it. And if we see the currency begin devaluing again, we probably will have some positive effects from that. So I think that's just the best way to look at it.

Okay. Thank you.

We'll take our next question from Leonard Teitelbaum from Merrill Lynch. Please go ahead.

Good morning. Just a couple things. On the type 2 tax adjustment. You said you were going to create a receivable for it and you got paid in advance. So I guess I just -- it's been a long time since I had to fool around with that, Bill, but I just -- wouldn't that be a plus, not a minus for you?

We had a receivable which was generated by our normal operations. We were going to reserve that receivable because we thought that was --

Right. And you got cash instead --

And in fact we got paid. And so we were not required to take that reserve. And when we gave guidance, we gave guidance assuming that we were going to be taking that reserve.

So that would have given you a higher tax and you wound up with a lower one, is that your point?

Well, it meant that we did not have to take a reserve which was planned, which meant that our operating results were higher.

Didn't you have an escrow of 75 million set up for the Cereol payment to somebody, whom ever the courts told to you pay it to, and you actually wound up paying 55? Am I wrong in that?

We have funds which were deposited that were guaranteeing the 77 million Euro payment to both minorities and to Edison. The payments, I don't know if the press release is out yet in France --

We got a flash on it while this call was going on. I thought it said 55.

I think that's the US dollar amount which would be received by McCormick. I think the actual you're yes amount was 49.6.

So what happens with the difference?

The difference gets paid to the minorities and to Edison.

So 77 is --

Let me clarify something, Lenny. This is important. The amount which is paid to the minorities an to Edison also has expenses deducted from it, so there will be legal expenses and arbitration expenses and various expenses associated with the transaction that will be deducted from the totals that will be paid to Edison and to the minorities. That exact amount that will be received by Edison in the minorities will be communicated within the next few weeks.

But it will consume the 77, so there's no excess cash; is that correct?

There is no excess cash that comes to Bunge. There's no effect to Bunge whatsoever. That additional 77 Euros was an incremental part of the purchase price. We were never going to get any of that back.

Thank you. Could you tell us on your capital expenditures, to what countries that's going to be allocated, please.

The CAPEX is going to go into the global operation, so it's going to be spent in a number of different locations. We will be continuing to invest in upgrading our activity in South America and both Argentina and in Brazil. We will be investing in North America as well, upgrading our operations paticularly in food products. We will be investing in Canada, upgrading operations there. We will continue to expand our operations in Eastern Europe, and we will be expanding our operations in India. So it is really going to be spent globally.

And one final question, and you touched on it earlier, and that was a currency hedge. Were you -- did you close out any significant dollar hedges in the quarter that would have impacted the SG&A line or in the other income line?

We did not, no.

And your expanded hedging that you might use going forward to stabilize the impact would be reflected primarily in the tax rate, I appreciate the caveat that you're not going to eliminate 100 percent of it, but I don't want to run too far in one direction but if it's going to be less foreign currency in terms of earnings and much more in a operating income, that's got to be a positive and I want to make sure I'm not going to overemphasize that - that I think it's going to be much more operating income than tax related in the quarters going forward if you hedge it correctly?

We're trying to diminish that tax effect and focus more on operations, yes. But as I said I cannot guarantee you we are going to be able to completely eliminate that tax effect. I don't think we will be able to. Hedging is not perfect.

Okay. Thank you very much.

We will take a follow-up question from David Driscoll with Smith Barney, please go ahead.

Thank you. Guys, I just wanted to ask you just to clarify the effect of Cereol. I think if I heard things right basically you said on an operating profit basis Cereol did not contribute anything in the AG business line, overall Cereol contributed 20 million in the operating income line, which meant it was all in edible oil. Is that correct?

Most of it was in edible oils. I think the exact numbers were 19 million in inedible oils and, let me see, 4 million in other. Which is ingredients.

And that was --

And 3 million in unallocated. So we had a net of 20.

And that was fully offset by the higher interest expense if the acquisition which results in the net of zero?

Yes.

Okay. Great. Thank you.

Once again, if you would like to ask a question at this time or if you have a follow-up question, please press star one now. We will go next to Andrew Cash with UBS Warburg. Go ahead.

With the soy meal down, I guess it's a few percent, based on your operating rate, I'm assuming that it's because production of broilers and hogs were down. If those assumptions are correct, why do you think that broilers an hogs are down and why do you think they are going to come back later in the year?

This is only the US. Worldwide obviously the meal demand is probably going to be around 2 percent growth this year.

Right.

In US it's a little bit down. Although the meat demand in broilers and hogs is probably going to be flat so it's more a question for the meat industry adjusting their stock. So hearing from the meat industry we see that productions should start, pick up again soon, so -- and then we will see again increase on the meal demand. But overall we expect this year the meal demand in United States to be slightly down vis-a-vis last year.

Okay. So mostly inventory. Is there a shift in the diet in the United States, that demand for meat will be down this year or flat?

No, we don't see any clear indication. The only indication we have is perhaps because of the reduction in traveling so you have a little bit less consumption on traveling. The only indication we have otherwise is everything as before.

Okay. I have another question if I could. You indicated -- I was wondering about the begin on the SOLAE but you gave us you're expecting about 256 million in cash. I'm wondering if you could tell us roughly what the sales an operating income contribution from Bunge to SOLAE was, perhaps on a whatever is convenient for you, 2002 calendar figures or whatever basis you have.

I can give you the sales number, I think we've communicated that publicly before. Combined Cereol and Bunge's operations would have about a 300 million annual sales level.

Okay. Could you say if it was adding operating profit or not adding operating profit? Can you give any guidance about the range?

Well, when we sell the 2 -- the -- when the two businesses are contributed to the joint venture, we are going to be reducing operating profit.

Okay.

But that is included in the guidance that we have put out for this year for net income.

Okay. Very good. Thank you.

We'll take our next question from Eric Phil from Kappa Capital, please go ahead.

Was there any pull forward demands for seed in South America or was it just a better planning second season altogether?

This quarter we actually think that we saw a net increase in demand for fertilizer because what is driving us is increased planting for the seconds harvest, and so we sometimes do see shifts from quarter to quarter of fertilizer demand. In this case we think this is more a true increase rather than a shift from another quarter.

But we do have to remember that the first quarter fertilizer demand, it's the low part of the season . The real increase, the significant amount of consumption of fertilizer in South America is in the third quarter and in the second quarter.

Thank you.

Gentlemen, at this time there are no additional questions. I will now turn the call back over to Mr. Smith for closing comments.

Thank you for joining us and we look forward to speaking to you again next quarter.