Bunge Global SA (BG) 2009 Q2 法說會逐字稿

Good day everyone and welcome to Bunge Limited's second quarter 2009 conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Mark Haden. Please go ahead sir.

Great, thank you James. And think everyone for joining us this morning. Welcome to Bungee Limited second quarter 2009 earnings conference call. Before we get started, I wanted to inform those of you who may not have seen it in the press release this morning that we have prepared a slide presentation to accompany our discussion on the second-quarter results. It can be found in the investor information section of our website, www.bunge.com., under investor presentation.

Reconciliations of non-GAAP measures disclosed [quarterly] on this conference call to the most directly comparable GAAP financial measure are posted on our website in the investor information section. I would like to direct you to slide two 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 to discuss our second-quarter results are Alberto Weisser, Bunge's Chairman and CEO; and Jackie Fouse, Bunge's Chief Financial Officer. And now I will turn the call over to Alberto.

Good morning everyone. While the second quarter was somewhat volatile, our skilled team leveraged our integrated global asset network to generate better than expected agribusiness returns, offsetting weak fertilizer results. Though some agribusiness results were pulled forward from the third quarter into the second, this is not uncommon and is why we look at earnings on a yearly rather than quarterly basis.

Looking ahead, we remain optimistic for a solid second half of the year. Lower soybean production in South America has limited oilseed processing utilization in Argentina. While challenging locally, this should continue to support gross margins on the global level. A large North American harvest, which according to early indicators is likely, should provide us with ample volumes for our agribusiness operations.

To rebuild global stocks, crop prices will need to stay at levels that encourage good planting and fertilizer use by South American farmers in the coming months. We continue to work through some remaining high-cost raw material inventory in our fertilizer sector but good demand and improved international phosphate pricing should benefit our fertilizer margins.

We also continue to follow our strategy of investing in our core businesses. During the second quarter, we continued -- we announced the creation of a joint venture to build and operate a state-of-the-art export grain terminal in the US Port of Longview in Washington state.

This investment will improve the balanced global asset network that is a key driver of value for our company. We also announced an agreement to acquire rescue Raisio, a European margarine producer. The transaction encompasses margarine plants in Finland and Poland as well as several brands. This will expand our food and ingredients business and enhance our efficiency. I will now turn the call over to Jackie who will discuss our second-quarter results.

Good morning. Thank you for joining us on the call this morning.

Starting with some highlights from the income statement, overall volume growth for both the quarter and year to date was driven by agribusiness and came from sugar, expansion of our European grain origination and new plants that are now fully operational in Eastern Europe and Asia. These more than offset lower volumes in fertilizer.

Solid earnings before interest and taxes from agribusiness resulted from good margins with grain origination and distribution benefiting from strong soybean demand from China and oilseed processing supported by the soybean crop shortages in Argentina. Soy meal demand was also somewhat stronger and in than we previously expected.

Fertilizer results remained weak during the quarter. International prices fell more than did our inventory costs.

These results include the impact of $183 million of foreign exchange gains on US dollar denominated financing of working capital as the Brazilian real appreciated quarter to quarter. Most of these gains were offset in gross margin during the quarter via both sales and inventory writedowns.

So the carryforward foreign-exchange balance is relatively small. The inventory writedown was $120 million in the quarter.

In our foods and ingredients business, total edible oils suffered from aggressive competition in Brazil though results in Europe and North America improved and wheat milling results were negatively impacted by margins though volumes were up. SG&A expenses were well-managed in all segments and fertilizer SG&A was favorably impacted by the $32 million transactional tax credit taken in the quarter.

Moving on to slide four and the balance sheet, operating working capital balances at quarter end were higher than at the end of December 2008 but are in line with seasonal patterns and were lower than June of 2008 mainly due to lower prices. Regarding the components of working capital, agribusiness inventories are seasonally up but lower than June of 2008 and are driven by higher commodity prices this year.

Fertilizer inventories are down due to both volume and prices. Trade receivables are lower due to tight management of credit and payables are down, driven by fertilizer as we significantly reduced purchasing and paid down balances related to higher priced purchases in earlier periods.

In terms of efficiency, the cash cycle for fertilizer is negatively impacted by the decline in payables balances, while fertilizer inventory has come down only slowly. But the agribusiness cash cycle is better than last year and the overall Bunge group 12 months rolling average cash cycle has improved by 1.4 days on a June to June comparison.

Consistent with the above, gross debt is up versus year end 2008 but lower than June of 2008. With respect to cash flow, cash flow from operations was negative for the first six months of 2009 followed by negative funds from operations and working capital increases.

The two main drivers of higher working capital are higher agribusiness inventories and lower fertilizer accounts payable. We expect the working capital situation in fertilizers to improve by year-end as we sell inventory and as our purchasing activity there normalizes.

We continue to manage capital expenditures prudently and spending has been slightly lower than 2008 despite the incremental expansion of our sugar business. On liquidity, our liquidity position remains strong.

In the second quarter we were able to replace two revolving credit facilities and maintain our total of $3.5 billion in committed funds of which only about $900 million was drawn at June 30. We also issued $600 million of 10 year senior notes during the quarter and in doing so lengthened the maturity profile of our debt portfolio.

Now with respect to the outlook. In light of our performance in Q2 and given our outlook for the remaining six months of the year, we are maintaining our full-year earnings guidance of $4.90 to $5.40 per share.

We see second-half agribusiness structural margins as well supported given the current supply and demand situation and we see a better environment for fertilizer as farmer economics are good, especially for soybean, and we think demand in Brazil will be solid. We expect the second-half results to be somewhat more weighted to Q4 partly because we saw soy meal demand recover a bit earlier than we had anticipated in Q2 as buyers began to replenish pipelines and pull some volume from Q3 to Q2. In addition, the North American harvest will also be in full swing in Q4.

The presently stronger real should not have a significant impact on the remainder of 2009 because we have some hedges in place. But it does keep the pressure on us for continuous efficiency improvements in our operations. And with that, I'll open up the call to Q&A.

(Operator Instructions) Christine McCracken, Cleveland Research.

Alberto, we have seen a pretty healthy I think rebound in the health of the Brazilian farmer and yet they continue to be fairly reluctant to buy fertilizer. I am wondering if you could characterize this situation. Is this really a credit issue still despite the fact that banks claim to have a lot more money or is it just a general reluctance on their part to take risk?

I would characterize it more as a difficulty in comparisons because last year and in '07, we had much more anticipation in the first half and this year we have a more normal pattern where something like 40% or 35 to 40% of the fertilizer demand is in the first half and two-thirds in the second half. So I think it is more normal.

We feel that the demand should be fine. We are seeing also that there is enough credit. The governments have increased their offer of credit by at least another $20 [billion] through Bank of Brazil. So we have the impression that from the demand side, the picture is relatively normal if there is a normal picture.

Okay, there's not a problem though with the banks actually getting the money to the farmer. That was I think one of the constraints we heard about earlier that the government made the funds available but they didn't actually get to the farmers?

Yes, that has been traditionally an issue. But this year should be the same as last year or a little bit better. So that is why we are comfortable.

So we are not increasing -- the whole industry, the whole agribusiness industry is not increasing significantly if at all their credit. So who jumped in are the banks and the government. So I do not see it as a major constraint this year.

Okay and when you look by nutrient, just looking at the difference between phosphate and potash, I'm just wondering have you seen demand for phosphates maybe pick up a little bit more quickly than potash given the price disparity between the two or is it fairly balanced?

Now comes the -- now we are in the time of the year with the phosphate really picks up because it is mostly used for soybeans. So this is the time of the year where phosphate picks up. It's also one of the reasons you saw a slight increase in prices.

And then just one final question just on sulfur cost. Are you seeing now the full benefit of the lower sulfur cost in terms of your phosphate mining business or is that still lagged into the third quarter?

It's still lagged and it will be with us even through the third quarter and slightly into the fourth quarter. But obviously, we adjusted as much as we could through the lower cost of market but we will have issues into the beginning of the fourth quarter.

I will leave it there and follow up. Thanks.

Christina McGlone, Deutsche Bank.

Alberto, can you just go through your -- kind of what you are thinking about agribusiness over the next few quarters as we are in a tight supply situation now? And like you mentioned, some soybean meal pipelines have been refilled and then we will get the new US crop.

But if we get a very big South American crop, it looks like Argentina is gearing up to plant a lot more beans and Brazilian soybean plantings may be up. What does it look like in terms of the first half '10 in terms of the crush margin environment?

It's a little bit early to think in these kind of situations because Brazil does need much more fertilizer. They cannot save like in the US, reduce the consumption of fertilizer and still have a good yield. In Brazil that's not possible because the soil is so poor and we do not expect an increase in demand this year.

So we expect Brazil to be perhaps the same or slightly up. Argentina should be better because we should not have the drought.

But that should be only with a good crop in the Northern Hemisphere, a normal crop in the southern hemisphere. We probably still are going to be tight by the end of September of next year, have a tight situation on ending stocks because demand is picking up.

We already see that this calendar year it should be up 1%. Soybean meal demand and vegetable oils should be up 4% and USDA is estimating an increase next year of 3%. So our outlook for '10 is probably at this stage a normal type of environment.

Just to follow on to soybean meal outlook, so if we get a large liquidation of [hogs] in the US and in Canada and potentially in China, is that incorporated in that view of an increase in soybean meal demand next year?

Yes, it is included. Obviously over the next 10 months, we are going to have all the production for the hog industry. These piglets are -- they are in need to be fed and the hog industry is relatively healthy in Europe. So this is using USDA numbers, this is more or less all included.

And then just my last question. On fertilizer, I know you don't give quarterly guidance but it's been really difficult to model. For the third quarter, given still the high cost sulfur but the fact that sales should be picking up seasonally, are we looking at -- and you had that writedown -- are we looking at breakeven to positive? How can we think about fertilizer for the third quarter?

It should be positive because we are selling -- it's now the more normal pattern. It should be positive.

Robert Moskow, Credit Suisse.

I wanted to know, are you done taking write-offs in your fertilizer business or have the recent price movements in potash -- will that play a role in future quarters?

No, per definition, we are done because that's exactly what we do with a lower cost for market. Now obviously if the prices continue to go down, there is always a risk. But we are there exactly where the market is.

Okay, and you said that phosphate prices are starting to improve again and it's probably related to I guess the pent-up demand that had been building. You are saying that in July it's starting to accelerate again because of the soybean meal or because of the soybean plantings that are going on?

We are seeing -- there are a couple of reasons why we are seeing an increase in prices. First of all, we have to remember that phosphate prices have to be in the neighborhood of $400 to $500 per ton to allow expansion of opening of mines and investment and having the right returns.

So the prices we have been seeing were just too low. So they have to converge back to a more normal environment, something between 400 and $500 depending on where you (inaudible). That is number one.

Number two is farmers are obviously seeing that inventories are quite low in Brazil and there is some nervousness that they want to have access to the products. And thirdly, the farm economics are very strong. Where the commodity prices are, you know, in the -- soybeans in the neighborhood of $10 per bushel and breakeven in Brazil is between Parana 520 and Mato Grosso 750, 760. So the farm economics are very strong and farmers are more capitalized and so there is -- the environment is shaping up allowing the prices to normalize at a little bit higher level.

One last question, Alberto. My understanding is that the financing, the tight financing environment makes it very difficult to make the case for more acreage in kind of undeveloped land in Brazil. Does that have any influence on how you look at 2010 or even 2011? If new acreage isn't being developed, does that hurt the volume growth algorithm for fertilizer or is there volume growth just on existing acreage that you can expect growth on?

I would say that from the financing point of view and from the economics, there would be room for expansion already this year. And probably the more limiting factor this year is going to be the lack of availability of fertilizer.

Because when you do the more or less a simple calculation, Brazil bought 8.5 million tons in the first half. If we sell the same amount as we sold last year, the whole industry would be 22.5 million tons.

Production is something like 7 to 8 million. So the imports will have to be 6 to 7 million tons, this over the next two or three months. It will be very, very difficult.

So I think it is more a question of logistics and availability of fertilizer which again is another support for normalization of pricing. But when we look at next year, farmers are being capitalized with good prices last year, this year.

So I think we will see a much more normal pattern of growth back to what we saw before the 5, 6% expansion in production. The yield or acreage as well, a mixture of the two.

You really think that like in Mato Grosso for example that you could see acreage expansion?

Probably not the next -- I don't think the next -- it's early to say, but the next harvest, probably not. I would say that it's probably the same acreage.

So you're talking about like 12 months from now, we might be looking at that.

Yes, exactly. And one year from now, we might see expansion.

David Driscoll, Citi Investment Research.

This is Cornell with a question on behalf of David Driscoll. Just looking at what's been happening on the foreign currencies, we have seen the real began to strengthen a bit since the first quarter.

It's my understanding that given that you buy a lot of your inputs in your fertilizer division during the first half of the year, would we have negative impacts on margins in the fertilizer division over the second half if we continue to see an appreciation in the Brazilian real? And furthermore, you talked about phosphate prices.

I understand that they are up modestly over the last week or so but still down about 20% from where we were at the end of the first quarter. So it would be my understanding that we would need a bit more improvement on those in order to kind of get fertilizer margins moving in the right direction. Just wanted to hear your thoughts on that. Thank you.

On the FX, I mean you are correct in your observation. But what you saw during the quarter was a negative impact in gross margins for exactly the reason that you have highlighted.

And based on where we are now, how much product we sold and then the pattern of that appreciation during the quarter, including the fact that some currency impact flows through that lower cost to market calculation and therefore in the inventory write-off number, there's an element of that, right now where rates are pretty close to -- if they stay there, not having much of an impact on the fertilizer gross margins from currency. Obviously if it moves one way or the other, there will be the corresponding usual impact.

Also the side effect of the test of lower cost of market also adjusts this because it's done in local currency and therefore the new price in dollars have a double negative effect in Brazil and that's why the lower cost of market charge of [$131] million covers part of that. In terms of phosphate, we have to think about two business units inside Bunge.

One is the retail business which is the buying and reselling and the other ones are the phosphate mines. So the prices where they are at the moment, they're fine. So we are quite profitable in that area with the exception that we still have to walk our way through the high sulfur costs. But [once they were where they are] the mines are profitable.

Ken Zaslow, BMO Capital Markets.

Jackie, I have two questions for you. One is in terms of the soy crush hedging and how you are looking at it, how are you guys positioning for the soy crush environment going forward in terms of -- I know spot has been a little weaker than the futures. Are you guys positioned to be able to capitalize on that? How does that work?

The environment, the crush margins for the fourth quarter, third quarter, they are quite solid and at the moment it's a little bit -- you know when you look at the futures market, it's not exactly the reflection of how the physical is.

But obviously the end of the third quarter is always a time where the Northern Hemisphere, the US plants start to prepare for maintenance. So some of the business moves, it's more like in July and then June, the feed millers, the meat industry anticipates some of the buying. So I would say the margins are a little bit more normal now but physically they are probably a little bit better than the futures is indicating.

Ken, just one thing maybe to keep in mind from a timing standpoint is we expect for them to improve from here towards the end of the year. So you might want to keep that in mind when you think about how the profits will flow through Q3 and Q4.

So wait, you're telling me that physical margins are good?

Physical margins are good.

Okay.

And you also have to remember that because of the short crop in South America and because of the high exports of soybeans to China, there's very, very little supply from South America, what we normally would see; unusually low. So as of September, the only important player in the market is North America.

Okay, but you're saying that soybean meal demand, soybean oil demand, less soybean prices is good?

Yes, when you look at the year, let's first talk USDA. The crop year in soybean meal demand should be down 3%. But when we look at the calendar year, we expect it to be up 1%.

And when we look at next year, the USDA is estimating an increase of 3%. So what we are seeing is a stabilization in the meat industry. Obviously we still have an issue on the hog industry on margins. But poultry margins are good and the [egg sets] are low. So the outlook for the poultry industry is positive.

Ken, it's Mark. Just want to add that the margins have come down probably from what you have seen in the second quarter.

Okay.

And that is that kind of transition period between old crop and new crop where the market is kind of waiting. They're incented to wait once the harvest begins to do more of a purchasing and then you would start to see them, as Jackie was saying; kind of full back, kind of ramp back up towards the end and into the fourth at much stronger levels. They have come -- they're good, but they have come down from where they were.

Okay, Alberto, you said that 2010 would be -- I think you used the word normal year. I think historically you said base year 750. Is that normal? Or is that base? Or am I mixing up normal and bass? Is that what you are trying to say?

What we are saying now, we got so much into trouble, what is normal, what is base, what is what. What we'd like to say is what Jackie introduced two or three quarters ago. It's the 2 percent points above cost of capital.

So we think next year is a 2% point above cost of capital type of year. All indications are we think there's still going to be tight inventories. So commodity prices should be positive for the farmers to buy fertilizer.

So we should see expansion on the fertilizer side. But we should have enough grains to process. So when we look at the whole picture, we have a good feeling. Also with more normalized prices, the food and ingredients sector should not suffer so much as it did this year and last year because of the volatility of the prices.

Okay, and my last question is when you say that phosphate prices have improved, I'm assuming you mean import parity has improved within Brazil more than the international prices have risen. Is that a fair assumption?

Well Brazil is now at import parity for a couple of months already. But number two, also in Brazil, phosphate prices have gone up.

But I think they also have gone up slightly on international prices on phosphate. This is now the key one for us. Potash, it's coming down or came down. But phosphate is going up and in Brazil, it's also going up.

But phosphate prices, as you said, internationally have gone up a smidge and then the recovery has really been internal, Brazil specific. Is that fair?

Yes.

Don Carson, UBS.

Question on -- a couple questions on Brazil. One, now that potash pricing has come down with the India contract, what is sort of the new marker for the import price into Brazil? And you mentioned phosphate demand has picked up. Have you seen that happen on potash yet? And then just to follow up on cost of production for Mato Grosso soybean farmers. You mentioned the 750, 760. That's down somewhat. Is it just due to lower fertilizer costs?

In terms of pricing, Brazil is following exactly the international prices, so also on potash. So what we are seeing is -- the movements we are seeing is very similar prices for everyone, no different than the international prices.

Now in terms of the breakeven for Mato Grosso and Parana, it is -- the main reason is the reduction in fertilizer prices. But also, you know, some interest rates have come down in Brazil. Energy has come down. So it is an accumulation of a couple of things. But fertilizer has a big impact.

Just to clarify, so are you sourcing now at sort of that 460 global prices into Brazil in potash?

We would not comment on what we are doing. You have to remember, we are a large buyer. But what I can tell you is in line with what is out there at the international prices.

Vincent Andrews, Morgan Stanley.

Jackie, I apologize if you discussed this in your prepared remarks. I was on another call at the time. But could you characterize the cash flow generation in the quarter or the use of cash in the quarter and just help us understand what happened?

Yes, I mean the main driver obviously is the increase in working capital plus just the FFO generation is weak or slightly negative for the six months. But the two impacts in working capital are seasonally higher agribusiness inventory and somewhat impacted by price as well.

But then in addition, the fertilizer working capital situation has not yet normalized. The cash cycle has been negatively impacted by lower payables as we stopped purchasing, importing product and then have had to pay down those payables balances that came from previous purchases and those were at higher prices.

So fertilizer working capital has been very negative for the first six months of this year versus last year and more so than a normal environment, whatever that is. We expect that to improve pretty significantly in the second half of the year.

Do you expect to have positive cash flow from the year, all else equal?

I think at the cash flow from operations line, we will be nicely positive.

Great and then, Alberto, maybe two questions for you. The first is it seems like the [basis] in soybeans in Brazil has gotten pretty wide. Am I reading that correctly?

It has improved, yes.

What do you characterize that -- or how would you explain that and do you think the current basis level is indicative of where it will be in the future or what do you see happening?

I think it is more a question of the market becoming tighter as it comes to the end of the crop and the farmer is being capitalized. They don't need to sell it. So it's more the seasonal situation.

Okay and then maybe lastly, Alberto, when you talk about kind of the breakeven price necessary from a greenfield phosphate perspective and you talk about $400 to $500 a ton; what type of sulfur and ammonia prices are you assuming there and is that for somebody who isn't vertically integrated in rock or how does that come together?

This is opening up the mines and having all the chemical plants, but not having sulfur. So having phosphoric acid, sulfuric acid production; a traditional -- way we have it in our mines where we don't have the sulfur from 1 to 2 million tons production; a very traditional one, nothing special.

That's all the time we have for questions today. I'll turn the conference over to Mr. Hayden for any additional closing remarks.

James, thank you very much and think you everyone for joining us today. Have a nice afternoon. Bye.

That does conclude today's conference call. Thank you for your participation.