Bunge Global SA (BG) 2016 Q3 法說會逐字稿

Welcome to the third-quarter 2016 Bunge earnings conference call. My name is Vanessa, and I will 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, Vice President Investor Relations.

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 measure 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 encourage 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.

Thank you, Mark, and good morning, everyone, and thank you for joining us. Expected improvement in foods, sugar, and Fertilizer came through loud and clear in the third quarter. A combination of constant footprint improvements and a stabilizing economic environment in Brazil drove higher earnings in Food & Ingredients. And our sugar milling operation is benefiting from better pricing and lower costs.

However, these better performances could only partially offset earnings reductions in Agribusiness where we felt the impact of historically low levels of farmer pricing in Brazil and weaker-than-expected soy crush. Significantly increased wheat feeding following the second-quarter spike in soy meal prices contributed to a weak crush environment overall.

While it has been a challenging period in Agribusiness, our balanced footprint has helped mitigate some of the volatility. We have held returns above cost of capital, and demonstrated that our business portfolio can withstand temporary market pressures.

Improving what we can control and executing on our strategy is paying dividends, and positions us well for generating upside earnings moving forward. With over $90 million in cost savings and efficiencies achieved year to date, we are on pace to exceed our 2016 target of $125 million.

Acquisitions including new soy crush plants in northern Europe, the Grupo Minsa corn milling business in Mexico, and Walter Rau Neusser in Germany are strengthening our core Agribusiness operations, improving our capabilities, and extending our global value chains to the doorstep of our global feed ingredient customers.

A solid fourth quarter is in sight. And we expect significant growth in 2017. Our foods and sugar businesses should show year-over-year improvement. And Agribusiness should return to normalized conditions as South American farmers, who were largely undersold, priced their crop with the arrival of record harvests. And soy mill inclusion rates in feed should return to normal levels, pulling on capacity.

We look forward to providing a deeper dive into the growth drivers and positive near- and long-term prospects at our upcoming investor day in December. I'll now turn it over to Drew for more details on our third-quarter financials and the outlook for the balance of the year.

Thanks, Soren. Let's turn to slide 4 and the earnings highlights. Earnings per share from continuing operations for the third quarter were $0.79 versus $1.42 in the prior year.

As expected, Q3 results were negatively impacted by a difficult Agribusiness environment. Our Food & Ingredients and Sugar & Bioenergy businesses had strong quarters, outperforming prior year as we benefited from the actions taken under our performance improvement program and market conditions turned more favorable.

Our total segment EBIT in the quarter was $213 million versus $414 million in the prior year. On an adjusted basis, EBIT was $199 million versus $367 million in 2015. 2016 is adjusted for a favorable ruling in our Brazilian court case related to prior years' wheat import taxes. 2015 is adjusted for the gain on the sale of assets in Canada.

Agribusiness third-quarter adjusted EBIT declined from $322 million in 2015 to $83 million in 2016. The majority of the decline was in the grains business, where 2016 adjusted EBIT was $4 million versus $216 million in 2015. This decline was primarily attributed to low farmer selling in South America due to a combination of the impact of adverse weather condition on the current year crop and the willingness of the Brazilian farmer to sell their 2017 crops.

Normally, the Brazilian farmer sells a portion of their new crop in the third quarter, prior to planting, to lock in a portion of their margins. That did not happen this year due to declining crop prices on a local-currency basis. They will eventually come to market with their 2017 crops, but the timing is uncertain. Contributions from risk management in grains were lower in the quarter as the prior year benefited from the recovery of approximately $50 million in losses on open positions from the prior quarter.

In oilseeds, adjusted EBIT was $79 million versus $106 million in the prior year. South American results were impacted by the low farmer selling. And US and European results were below a strong prior-year quarter.

Margins globally were impacted by softer-than-anticipated meal demand, as low-quality, low-price wheat replaced corn and soy meal in feed formulations. Underlying protein demand remains strong. And we expect soy meal inclusion rates to return to more normal levels as the US harvest starts coming to market. Mark-to-market movements did not have a significant impact on results in the quarter.

In Food & Ingredients, 2016 adjusted third-quarter EBIT was $72 million versus $45 million in the prior year, as both edible oils and milling product posted increased profits. The strong increase was the result of the impact of our performance improvement programs on margins and costs, and an improving environment in Brazil.

Edible oils third-quarter EBIT was $34 million versus $13 million in the prior year. The improvement was primarily driven by our Brazilian and European businesses. In Brazil, both volumes and margins improved as we gained market share, reduced costs, and benefited from the close integration of our Agribusiness business and foods business. European results increased due to a more favorable product mix and lower costs.

Milling products adjusted EBIT was $38 million versus $32 million in the prior year, primarily due to increased results in our Brazilian business. Volumes and margins were both higher, benefiting from market share gains, raw material sourcing strategies, improved product mix, and increased efficiencies. Both margins and volumes are back to levels achieved in 2014 before the country's economic crisis.

The integration of the recently acquired Pacifico Mill has gone well. And our new mill in Rio de Janeiro has recently started productions. Results in Mexico declined, reflecting increased competitive pressures and the devaluation of the peso.

Sugar & Bioenergy quarterly EBIT was $35 million versus $3 million in the prior year, led by strong performance in our industrial business, which benefited from higher sugar and ethanol prices. Our cost saving and agriculture improvement programs continue to make progress and support results. Trading and distribution results also improved in the quarter. The higher results in our Fertilizer business reflect higher purchases by Argentine farmers to support increased planting of wheat and corn brought upon by the change in government policy to eliminate export tariffs.

At September 30, our year-to-date tax rate, including $39 million of favorable tax notables, is 19%. Excluding the notable tax items, our year-to-date tax rate is 26%.

Let's turn to slide 5 and our Return on Invested Capital. Our trailing four-quarter average return on invested capital, adjusted for certain gains and charges, is 7% in [add our] cost of capital. Our core Agribusiness and foods return on invested capital, which excludes our sugar business, is 8.2%, 1.2% above our cost of capital. Our goal for our core Agribusiness and foods return on invested capital is to earn 2 points over cost of capital. The decline from prior year primarily reflects lower EBIT in our Agribusiness segment, which is performing below historical levels due to the difficult market environment.

Let's turn to slide 6 and our cash flow highlights. Our cash provided by operating activities was $635 million for the nine months ended September 30, 2016, versus $527 million in 2015. A key component of the increase was a reduction of secured advances to farmers, reflecting the slower pace of farmer selling in Brazil. The increase in inventories primarily reflects the significant increase in sugar prices. Our liquidity position remains strong, as we had $4.6 billion of credit available under committed lines.

Let's turn to slide 7 and our capital allocation process. Our first priority is to maintain an investment grade credit rating with a target of BBB. We are currently rated as BBB with all three agencies. After that, we allocate funds amongst returning capital to shareholders, mergers and acquisitions, and capital expenditures in the manner that provides the most long-term value to shareholders.

This year, we have prioritized mergers and acquisitions, as we have had opportunities to advance our strategic initiatives in a value-accretive manner. In early October, we closed on the acquisition of Walter Rau Neusser, which will advance our business-to-business capabilities in our edible oils business. And as Soren mentioned in his remarks, we recently announced the acquisitions of Grupo Minsa and two northern European soy crush plants. These transactions should close in the first half of 2017. Year to date, we have returned $391 million to shareholders through dividends and share repurchases.

Capital expenditures year to date are $488 million. Main projects have been the completion of the Rio wheat mill and the Ukrainian port with a co-located crushing plant, and the upgrade of our New Orleans port facility. It also includes costs for sugar planting, which is counted as capital expenditure.

Let's turn to slide 8 and the outlook. In Agribusiness, fourth-quarter results will be driven by our North American and European businesses. Our northern hemisphere facilities should run at capacity with good margins, and US port elevations are benefiting from the record large crops. China is also seeing improved margins.

Soy bean meal demand should increase, reflecting robust underlying demand for proteins, as feed formulations normalize during the quarter. Slow farmer selling in South America is likely to persist through the end of the year, as farmers delay their selling until next year, closer to harvest.

In Food & Ingredients, we've increased our outlook to $230 million to $240 million for the year, as the positive volume and margin trends seen in the third quarter are expected to continue. Our Brazilian business should continue its upward trajectory. And our Eastern Europe business should benefit from the large sunseed crop.

Turning to slide 9, we're also increasing our outlook for Sugar & Bioenergy to $60 million to $70 million, driven by higher-than-expected ethanol pricing. It will be dependent on normal weather patterns holding to allow us to reach our targeted crush volume. With respect to our full-year tax rate, excluding notables, we now expect it to be slightly more favorable than our previous expectation, and fall in the lower end of our 25% to 29% range.

Let's turn to slide 10. We would like to give you an early preview of our outlook for 2017. We expect an improved environment and normalized results for Agribusiness in 2017. 2016 results were negatively impacted by the previous year's small sunseed crops, lower-than-expected meal demand due to higher-than-usual inclusion of wheat and feed formulations, and low forward sales of the 2017 crop by the Brazilian farmer.

Looking forward to 2017, the sunseed crop is large, soy bean meal demand should reflect the strong underlying demand for protein as feed formulations normalize, and the Brazilian farmer should bring the 2017 crop to market and sell a portion of their 2018 crop. This would imply a return to historical profit levels. As the chart shows, Agribusiness EBIT ranged from $895 million to $1.054 billion in the 2011 to 2015 period.

As is our practice, we do not give guidance in Agribusiness. We have two crops to grow, margin can move quickly, and mark-to-market impacts can move results between periods.

Our Food & Ingredients business should continue its upward momentum. Our operational and commercial actions over the last two years have resulted in a leaner, more efficient business model that continues to improve. Additionally, our focus on developing higher value added, higher-margin products is producing results and should lead to margin expansion going forward. We've also had full-year contributions from our new wheat mill in Rio de Janeiro and synergies from our Pacifico mill.

In Sugar & Bioenergy, the results of our improvements in the agricultural part of the business should start to come through in profits. And the pricing environment should remain supportive. We have already hedged much of our 2017 sugar sales at prices well above our 2016 level. And with the price premium of sugar versus Brazilian ethanol, mills in Brazil should prioritize sugar production, keeping supply of ethanol in balance with demand. I will now turn the call back over to the operator to take your questions.

(Operator Instructions)

Adam Samuelson, Goldman Sachs.

Maybe first, digging into that 4Q 2017 outlook for agribusiness. Actually you talked about a return to more normal ranges of profitability. I'm wondering, given the fact you have merchandised little, if any, of the South American crop at this point. We've got robust conditions in North America, given the size of the crop. Oilseed crush margins remain generally healthy. And you have some benefits from cost actions you've taken over the last couple of years.

Would be possible to think about exceeding that historical range of profitability? Other than maybe 4Q and the size of the next year's US crop, some of the things that you would think that could drive upside or limit the upside potential in the outlook.

Thanks Adam. There's no reason why that couldn't happen. We are trying to provide some reasonable guidance. But conditions next year look good. The biggest driver of the returns are more normalized profitability in agribusiness for us will be the returned to normal pricing in Brazil.

As you mentioned. But, we are not assuming any outsized margins. So we're assuming the volume effect of higher pricing, but not necessarily a margin expansion. The environment has become more competitive. The other major factor that's impacting this year, but should be a positive next year, is the return to more normal pull on soy crushing capacity.

We did see in the third and also in the fourth quarter, heavy traction in meal demand because of the spike in prices earlier this year. That will return to normal in 2017. And given our size and exposure to soy crush, and the additional capacity we've added, that really is the key to returning to more normalized or maybe even exceeding the range going into next year.

I think it's too early to talk about how much above, but the potential is clearly there. I think for us, painting the picture of earnings growth overall for Bunge next year does not require an outsized agribusiness result. It suggests a return to normal.

That on top of the growth that we see coming in both food and sugar should give us a pretty nice bump in EPS. So we do not need an outsized agribusiness result, although it is entirely possible that we might get it.

Adam, the two real factors to watch are obviously weather and how crops develop, when we talk about a year this early. And Soren covered soy crush perfectly.

And the other issue will be, we are quite confident the Brazilian farmer will sell their 2017 crop. That will come to market probably in the first half, but at least throughout next year. How good next year can be will depend in part on what that Brazilian farmer does with his 2018 crop. Does go back to normal, forward selling, or does he stay at the lower level we have seen this year?

That's helpful. And then maybe just touching on something you alluded to in your comments, talked about a more competitive environment in Brazil origination. Maybe elaborate on that.

I would think you guys would be in a better position because you've got more control of your logistics than maybe some newer entrants there. Talk about some of the competitive intensity in Brazilian origination that you've seen this year and how you're thinking that playing field shakes out into next year.

First of all, you're absolutely right. The footprint we have in Brazil and the way we bring the crops to market, definitely gives us a competitive advantage from an overall supply chain cost perspective. That advantage is maintained and we continue to perfect the way we operate every year. We have a starting advantage that I think will play out next year, as well as this past couple of years.

The increased level of competition is really more about the same phenomenon as we've seen in the US where farmers just don't like prices. And they can't make returns based on the current combination of ForEX and futures, and therefore are more hesitant to commit to forward selling, as well as holding back what they can, in order to hope for better times.

That is a negative effect of a very low priced environment. It's not as if there is a number of new entrants in Brazil for that matter. So I think it's more a matter of behavior from the farmer, which is a consequence of current pricing.

But I think as we get into 2017, you will have big crops. We will have a return to normal in terms of Safrinha corn. So we will have that continued pull on the capacity as we get into the summer, our summer of next year. Given our footprint, that should give us a very good base for earnings growth or continued let's say contribution in grain origination and exports from Brazil as we have seen in the last couple of years.

That's helpful. If I can squeeze one more in. There was a nice improvement in the margin in edible oils this quarter after what had been a pretty challenging year or so. Can you talk about your confidence that we have maybe found a new floor on that business? And this is not a one quarter aberration and the macro remains choppy. Do you think you've reset the margins appropriately and we can build from here?

I think we've done a lot of work internally over the last 12 to 18 months to put ourselves in a better position. Particularly in Brazil, but also in Europe. Which is really where all the improvement is coming from. Our North American businesses are solid. Canada and the US solid performing businesses and they will continue.

So the improvement is really in Brazil and Europe. A lot of it is driven by the way we operate. It's not as if the environment facing the consumer in Brazil has gotten suddenly better. I think that is still to come. I think we feel that bottoming out effect, I think the anticipation of the market is ahead of the reality in terms of consumer behavior.

So, the benefit you see in the quarter is really not because of changed consumer behaviors. It's really a reflection of the improvements we have made. In Brazil, it's been around reducing supply chain costs, closing consolidating distribution centers. It's a much tighter integration with our agribusiness footprint, as a big change from how we've operated in the past. And a regain of market share. We're about 30% of the retail bottled oil market in Brazil, which is where we should be. But we've come from the low 20%s over the last 12 months.

It is improving efficiency across the chain in Brazil. And in Europe, we now have two good crops in the bin, so to speak. And very last sunseed crop is coming in Eastern Europe. And all-time record, which is helping that whole supply chain. And the retailed bottled oil we have coming out of that. Expand margins. And with the acquisition of Walter Rau, although it's early to tell exactly what the impact will be, quarter on quarter following. There is no doubt that is opening doors for us in the B2B segment that will be meaningful going forward. I don't think this is a quarterly blip. I think it's a result of hard work over the last several quarters. And I would expect it to continue.

Great, I appreciate the color.

Sandy Klugman, Vertical Research Partners.

Just wanted to follow up on your commentary on food and ingredients. What I was looking to gauge was whether or not you could provide an update on whether the buildout of your business-to-business capabilities in both Brazil and in Eastern Europe currently stand.

Well, in Europe it is the acquisition of Walter Rau in many ways is a catalyst that will get us more focused on B2B. Our business traditionally has been very B2C focused. I think we are making very quick early progress.

Whether that is through key account actions that have come with the acquisitions, turning and increased amount of our sunseed crushing capacity from generics sun crush into higher lake sun, for example, that serves the foodservice business. And a number of blends that go into the bakery business that we can now apply across a larger geographic area in Europe.

So I think we are making very quick progress and the acquisition of Walter Rau was one of the good business for sure. It was as much about acquiring capabilities in that particular area that we are now rolling out through the rest of Bunge. In Brazil our business is still predominantly a B2C business. But it's changing along with the evolution of the Brazilian economy. There will be more B2B coming. Most of it initially will be in the area of shortenings, bakery fats where we already have a starting advantage in that we are a supplier of flour to many of the big bakeries.

I think we're early stages in Brazil and Europe in building out, the type of structure and system that we have benefited from in North America over the last couple of years. It is still to come a lot of it. But we have very clear plans on how we get there. And the acquisition of Walter Rau plus the way we are now focusing in Brazil will get us there over the next 6 to 12 months.

And you and mentioned improved margins in China. I hoping you could discuss how you see the outlook for crush margins evolving going forward. Utilization rates have obviously been pretty weak. But there are some expectations that the market could tighten if the government takes an active role in consolidating the industry.

China is one of the bright spots in soy crush this year. The rest of the world has suffered a bit in terms of overall margins. And that's reflected in partly now Q3 results. But China is a bright spot. Has come from margins that barely covered variable cost, to now covering full cost plus a little bit. That has come as a consequence of more disciplined, let's say, imports of soybeans that reduced meal stocks in China. And which has now allowed for meal premiums to grow to the point where we are now earning a reasonable margin, $25 give and take.

Consolidation in China is probably still to come, but you're right. The government and others, I think, see the need for that. There is excess capacity and a lot of inefficient capacity that has run over the last few years for reasons that were not necessarily related to the economics of crush. We have talked about financial players being in the mix for number of years.

That is mostly behind us, I think. So it's back to, the basic calculation of what makes a crush margin. As you probably know, China does have a duty differential in soy crush favoring domestic crush. You would think that over the next year or two that will play through. So China will become a region in the world with some of the best margins in the world, having come from the opposite just six months ago.

Underlying demand in China is strong. We know that. Soybean yield demand continues to grow at 5%, 6% per year. Oil demand is also strong. The outlook, although we are cautious given the volatility we've seen in China over the last few years, is decidedly a better one. And we will be entering 2017 in a much better position than I think we did this year.

Thank you very much.

Ann Duignan, JPMorgan.

On the agribusiness and the outlook for 2017, if we look at where ending stocks to you are for wheat and the DDG problems in China, why wouldn't we expect margins for crush for meal to continue to be under pressure in 2017?

If you look at the forward curve in pricing meal and corn versus wheat and feed, corn is back. It was really the aberration that we saw back in the second quarter where soybeans, meal and corn, which followed, got completely out of whack compared to wheat. And that created this surge in wheat feeding. Particularly in Europe, which was also compounded by the poor crop in France and other places. Where there was an usual amount of feed wheat available. I think it was an unusual period.

The wheat market is in a steep carry. And the market will pay for wheat to be carried. And that means that as you go out six months from now, wheat prices are significantly more expensive than they are in the spot. I think that will most likely mean that wheat will have a hard time finding its way back into feed.

On the DGD situation, it's very fluid for China. It's on and off it has been for the last several years. DGDs seem to be finding their ways into feed formulations outside of China, but also outside of the US. So we don't expect a major impact in the domestic soybean meal demand going into next year. And in general, we just expect that soy meal inclusion will return to the levels we saw earlier this year. We are not looking for anything, let's say, unusual in terms of soy bean inclusion. Just a return to normal. And wheat will be carried and the market will pay for that.

On the European, as well. Thank you. Or the European governments will, through intervention.

Yes. That could be.

Secondly, a more strategic question. Purdue recently announced that it was going to source some of its inputs directly from Brazilian farmers. Can you talk about whether you're seeing more of this or talk of more this? We hear about that from the Chinese now and again also. Is there any risk to Bunge's footprint in Brazil from companies or customers going direct to farmers?

You know, I think, one thing is to source directly in a country; another thing is to go direct to the farmer. That is another step of complexity where you have to be able to manage credit risk and logistics and many other things. I don't know exactly how far Purdue is intending on moving their value chain upstream.

I think the competitive advantage that we have in Brazil in terms of logistics, knowledge, and relationship to farmers that span decades is going to be hard to marginalize. Let's put it that way. And I don't know exactly what the reference was with Purdue importing directly. I presume they are referring to the occasional imports of meal or corn to the East Coast. But I don't know more about it than that frankly. But I do think that the position we have in Brazil is one that's very strong and we will continue to show that.

What would you say, Soren, is the one key barrier to entry from somebody going direct? Is it your ability to take on credit risk, or is it the fiscal logistics? I am just curious what the barriers are that they would have to overcome.

I think it's a long list of things, but it is clearly the local knowledge, how to deal with customers, how to evaluate credit risk, how to build relationships and trust in a foreign place, which is not easy. It's all the local regulations and the financial system in Brazil is nothing but complicated. So a lot of things you have to be able to do starting out, let alone access to efficient logistics and scale.

What we do really only works in large volumes. It's very hard to imagine you can compete effectively with a small footprint. But everybody has their own view on that.

Thank you. I appreciate the color. I'll get back in queue.

David Driscoll, Citi.

Can you guys quantify the impact of the lack of farmers selling in the third quarter?

Yes, we can. For us in Brazil, it amounted to about $100 million.

Okay. Because that was going to lead into my next question. Your competitor yesterday reported better than unexpected numbers. There was a good offset on the geographic balances. Bad South America, really good North America. Your number here is one of the lowest numbers you produced in agribusiness in years.

Would it be fair to say that your North American operations, if we could see the detail, the North American operations really performed extremely well and Brazil is just that challenged? Is that fair?

I think it is, not exactly. The number I gave you in Brazil is what it is. So it's a significant part of the gap to last year's earnings. Don't forget another piece of the gap to last year's earnings was the $50 million worth of risk reversal income from the second quarter of 2015.

In the US, I think it's fair to say that our footprint is unique. In some years, it gives us outsized earnings early in the harvest, for example 2014 was one of those years. But it is a very concentrated footprint in the Delta, in the southern part of the Mississippi River system. And in that part of the world, early in the harvest this year, competition was intense and the size of the crop relative to the overall size of the crop in the US didn't see the same growth.

So we did not experience the early margin improvement that maybe others did. But we are seeing now, through our export facility in New Orleans, and also on the West Coast with [ETT], we are seeing the effect of the significantly expanded export elevations and export margins, and they will come through in the fourth quarter. But the uniqueness of our footprint in the third quarter in the US just didn't give us the same boost in earnings that maybe others experienced. We will see a very good fourth quarter coming now.

Thanks for that color. On 2017, I'd like to follow-up on a question that was asked earlier. Can you just compare the conditions you see today in agribusiness versus the previous peak number, which I believe was 2015? Can you just compare and contrast what we have as a set of conditions right now as we move into 2017 agribusiness?

I think it is going to be an environment which is one with low prices, very strong downstream profitability whether it's in food, in feed, meat production. We should see a nice growth in underlying both protein demand and global trade. That is similar, and that is what we look forward to.

Most of our improvement in earnings going into 2017 will come from increased capacity utilization, particularly in crush. And to put some flavor on that, you're talking probably about a Delta of $100 million to $150 million of improvement in soy crops in particular as we move into 2017 as feed formulation normalizes.

That's one thing. 2015 was also a year that we saw more normalized farmer pricing in Brazil. The same quarter last year, saw one of the better quarters in terms of farmer pricing. Their new crop in Brazil combinations of futures and a relatively weak currency. We expect we will get back to not quite the same, but something like that next year. And of course the volumes that aren't being priced now, we will price when we get there.

So I think it is really the two big factors that will get us back to that type of earnings in agribusiness is a return to normal in inclusion rates in meal and therefore [pull and crush] capacity that gets us back to utilization rates as we had them in 2015. The second one is simply return to normal in terms of the pricing patterns. We think we'll see that.

At the same quarter next year we will be talking about how much of the 2018 crop is going to be priced. And we're not assuming anything outsized in that regard. As you have seen from the past, that can have a major positive effect on results in any given quarter.

Can you just make one fast comment on Argentina? You mentioned Brazil nicely in the US nicely, but Argentina was unbelievably volatile this year. 4Q, 1Q expectations went to the moon, then everything fell apart on us. I just would like to hear what's happening in Argentina, your view on 2017 crushed margins business climate. Thank you.

You're right. I think the best way to describe Argentina this year was a very bumpy road. Return to some kind of normal from several years of difficult conditions. I think as we move into 2017, there are a number of things that look a bit better, starting with the wheat crop, which we will be harvesting in a month or two time.

A big increase in wheat production in Argentina will certainly help origination and export of wheat. And in the case of Bunge, that is a complete tie-in to our wheat milling operations in Brazil. And in fact the Pacifico Wheat Mill was acquired for one of those reasons. It was the most efficient port-based mill in Brazil.

Wheat looks good. We know we will get a big bump in corn production in Argentina. Which means that Bunge will, in all likelihood get back to our traditional market shares after several years of being, let's say, squeezed out because of the export quotas. Corn looks like a good story for us next year.

And in crush, as we return to more normalized let's say, meal inclusions in feed, we will need Argentine crush capacity more or less at capacity for most of the year. So we expect a nice pull on Argentine crush capacity going into next year, as well, starting with the very beginning of the new crop.

So, overall I think this is the year where the system is settling after several years of difficulty. Next year, weather and crops permitting, should be a good year to operate in Argentina.

Thank you.

Farha Aslam, Stephens.

Could you commented bit on sugar? I think you mentioned that next year you've hedged at better levels. Any color on how much improvement we can expect?

You're right, we don't exact details of how we've hedged. But we have hedged a meaningful portion of our sugar production, which is approximately 40% of our overall exposure to cane. A nice chunk has been locked in at levels well above this year's combination of currency and futures. As it looks right now, we would expect an improvement in EBIT based on that of somewhere around $50 million.

$50 million above this year's level?

Correct.

That's helpful. Are you still looking to sell the sugar business? Could you give us your thoughts on sugar?

Our intent to reduce exposure or generate liquidity for Bunge and the shareholders, fluid action in sugar action is unchanged. That hasn't changed.

The environment has obviously not been conducive to that over the last couple of years. But that's changing now, and we do look forward to another few years of positive in the sugar cycle. And so we're active.

We are discussing various options of how we do reach that ultimate goal of creating liquidity and taking some cash out at what we would expect to be favorable prices. But I can't really give you much more flavor than that, at this stage. Other than our intent is unchanged.

That's helpful. Since you've been CEO, you haven't done any big major transactions. But you've done a number of these sort of sub $500 million transactions. Assume a significant commitment of shareholder capital, would you happen to have a composite of what earnings you expect from actions such as Walter Rau, Grupo Minsa, the two facilities in Europe, Pacifico, the Canadian JV, the Vietnam JV? Is there a number we can kind think of, around?

I think it might be better to think of it in pieces than try to give you and overall number, because a lot goes into those calculations. As Pacifico hits full run rates and moves forward, we would see them contributing about $30 million a year in EBIT. Again, they are already contributing significantly this year. So they're in place at the moment.

The more recent acquisitions we announced, if you look at the Northern European crush plants, that's probably in the $20 million range when they come into the first year full-year of operation. And if we look at Minsa, that's probably where they are: in their first full year of operation. Walter Rau was a smaller acquisition as you know. The expenditure was around the $50 million range.

The benefit of Walter Rau is not in the profits in Walter Rau, which are there, but at a smaller level. It's really in what's it's going to let us take the capabilities to globally. And Alltechs, I would say, is in the same range of others we have talked about, which is the one we did in Mexico a couple of years ago.

And when would you expect them to hit their run rate?

Some of them already are. Let's be clear. The Alltech acquisition in Mexico, which we concluded a year and a half ago is fully integrated, working well.

Pacifico, which we bought exactly a year ago, has now fully integrated in your seen the impact run rate already now. It's about a $10 million contribution to this year's billing number. Next year is another step up.

And the ones that Drew referred to, so the crush in Europe, Minsa and Walter Rau, first of all, those two have not closed yet. They're closing in the first quarter of next year in all likelihood. We'll run into, sometime next year, whether that is in Q2 or Q3, we will start getting the run rates annualized as Drew mentioned.

So there is a fairly significant amount of incremental EBIT coming once these things close. And get fully integrated. They are not considered in what we just said about what we just said about the outlook for 2017. They would be in Kaboff.

Pacifico was in 2017. The others are not.

Pacifico is, but the crush in Europe and Minsa is not. That's all to come.

Let me just step back a bit. The reason why we have been so focused on bolts ons rather than something bigger than that is simply to remain disciplined. We have a very strong process for evaluating projects.

We have talked about our return expectations being somewhere around 1.5 times our cost of our capital, as it relates to Internal Rate of Return as a threshold, plus the synergies that you that you would expect to get from having these acquisition plug-in to our existing value chains. So none of these acquisitions are standalone.

They are all acquisitions that will somehow another complement other parts of Bunge, whether it's agribusiness in the case of European crush, or whether it's grain origination in the case of wheat milling acquisitions, or Minsa for that matter. So there are acquisitions that will make the whole system better over time as they get integrated.

Given our priority of making sure that our balance sheet stays in a triple D condition, this is a safer way of getting to earnings growth then something bigger and more experimental. But over time that can change. For now, it's about getting these very nice bolt ons that have strong energies the rest of Bunge integrated. That will happen throughout 2017.

Evan Morris, Bank of America.

I just wanted to circle back on the farmer selling in South America. I've heard, anecdotally that the farmers down there aren't in as bad of shape as maybe the environment would suggest. I would just love to hear your assessment of the shape the farmers are in. And within the context of your confidence that you think they are going to sell, obviously, you pointed out to David's question about $100 million impact from lack of farmer selling.

Are there certain triggers in terms of crop prices, FX that these farmers are going to try to sell at? Really trying to figure out how important that farmer's selling returning is to your outlook of getting back to that middle to the upper end, or possibly exceeding the upper end of your agribusiness range.

I think in the case of farmer selling as it relates to this year, it's really a matter of timing; it's a deferral. It's not that it won't happen.

So combination of futures and ForEX, and the price objectives in local currency that the farmers has, that is what drives his decision to commit earlier, or to commit late. And with the strength in the real and the weakness in overall futures, there's been no reason for him or her to commit beyond the spot.

That can change quickly. Brazil is a volatile place and a change in the exchange rate coupled with a short-term spike in futures can quickly accelerate pricing. We've seen that before.

But for us it's really about deferring pricing. So the Brazilian farmer today probably has sold about 20% of his new crop beans. That is in contrast to 35% or 40% historically. It is a larger crop. Weather permitting, you would have 100 million tons of more soybeans in Brazil this coming year, a nice step up from even this year.

That difference in what's been priced will come to market either right before harvest or likely during the harvest. And we will then recognize margins as that happens. And then the same time, next year we will be discussing how much of the 2018 crop will be priced in advance.

At that point, there are two crops we have to go through to determine what prices are. I wouldn't dare to speculate on that. So at this point, it's really more about timing effects than anything else. But it is true that the current weak commodity environment, neither farmers frankly, nor end consumers, have much incentive to do anything beyond the near-term.

That is likely to persist so long as prices remain where they are. We will see how it plays out in the second half of next year.

And if that persists, again, does that really change your outlook for agribusiness the next year?

We are not assuming anything, let's say, out of the ordinary, in terms of how much of the following year's crop we would price next year. We're assuming normal levels.

Okay. And then just a question on 4Q agribusiness. You mentioned that it was going to be improved significantly sequentially. Which makes sense. But can you frame it within a year-over-year, how much should it be up versus last year? Should it not? If you could help frame that?

Let me start with a caution that to the extent we elect to hedge our crush margins forward, there's room for mark-to-market volatility. They could shift any forecast we made.

At this point, we would expect the agribusiness number to be somewhat below last year's agribusiness numbers. We think the environment is better, but it won't quite get to where it is last year. The other thing, not to keep, not to keep harping on it that we flag, if farmer selling habits in South America change, that can move numbers.

And then just a last question for you, Soren. You are definitely talking with a fair amount of confidence into next year, which, understandably given the environment, if you just look at how this year has played out, it's been pretty volatile. It's been almost three different, four different years in one.

I think just getting a sense as to how much visibility do you have into next year? As you look at food and ingredients and you look at some of your other businesses, versus agribusiness. I'm really trying to understand if you're wrong anywhere, where you think you could be wrong?

You are right. We started out this year saying exactly what you just said. We felt strong about food and ingredients and sugar and fertilizer, how this year would play out. It's turning out a little bit better than what we expected back earlier in the year. We knew that agribusiness would be a volatile period. And it turned out to be exactly that.

I think if we look into next year, I would say we feel very good about the smaller segments and how they will grow. So food, sugar, and fertilizer in total should be about a $400 million contribution next year. And the nice growth based on where we end up this year.

And agribusiness, there really are two things that gets us back to normal. One is an increase in crush margins. We did see a setback in the second half of this year, from the effect of increased wheat feeding coming out of the second quarter and returning to normal. I mean an improvement of $3.00 to $5.00 a ton across our soil crush, origin soy crush fleet. That is not an unreasonable expectation, and should get us a nice delta in earnings of $100 million to $150 million.

And then it is the return to more normalized pricing patterns. In other words, catching up first in Brazil with the amount of grain that has not been priced so far. That will happen as a natural cost of harvest and time. And then of course, what happens in Q3 next year. But we are not assuming anything out of the ordinary to get to a normalized pricing environment in agribusiness next year.

Crop conditions and weather and so forth which we can't predict. But the two variables, the two factors or areas in agribusiness gets us back to normal is the improvement in crush margins and return to more normal pricing in South America. And I would say at this point, there's no reason to expect that won't happen. I feel very good about that.

I feel very strongly about the soy crush. We are committed to that. We have a very strong view on how utilization rates and crush will evolve over the next 2 to 3 years. We are very positive and bullish on that and we'll see some of that play through next year.

For the farmer, at least this portion of the crop that has not been priced this year, we will get that next year. And then it's a matter of what we think about 2018, by the time we get to the third quarter of next year. But I feel very good about the prospects of that agribusiness returning to a more normalized, within the range that Drew described type of performance.

Brett Wong, Piper Jaffray.

Thanks for taking my question. I know I'm at the end of the call here. And you have talked about this, Soren, specifically the last question. Again on the farmer selling, you touched on 2017, selling increasing because it's light now and you're going to have a bigger crop. But with the bigger crop, you should be pressure on pricing. And if the macro is improving, you should see a stronger Brazil real against the dollar.

Is there any risk that impacts not as much 2017 crop selling as you currently expect? And then also the same factors, doesn't that impact 2018 selling. Where you are kind of considering a normal selling season right now?

I think the impact would be, under the scenario that your painting. Low dollar prices and a stronger real would come again in the amount of the 2018 crop. We would expect to price in the third quarter. We're not assuming a lot. I think that the Delta on that is fairly small. The big thing is the commercialization of the crop that's currently being planted. I think that will happen as a matter of harvest and the time moving by in the first and second quarter of 2017.

Okay.

And you spoke about improved crush in Argentina. Is there any risk to that with soft selling there? It seems we don't really gain an the improvement in soybean export taxes until 2018 for those key central farmers. If that is true, and they continue to hold does that impact your impact for crush?

I don't think that would be any unusual in activity so to speak in terms of farmers selling the first half of the next year. The Argentine farmer will carry out a fair amount of soy beans again this year as he did last year. But with the last crop coming, we will have normal commercialization of the Argentine bean crop through the first half of next year. And then depending on the expectations of the adjustment to the export tax, that's announced in 2018, the Argentine farmer might hold back some of his crop towards the end of next year. That would in all likelihood, if that happens in any kind of magnitude, would benefit other origins crush such as the US or Brazil. But that, I think, is more of a Q4 question for next year.

Okay. Thanks. And then just one last one from me. China continues to be active in buying global AG assets. Just wondering if you expect that's going to continue in the near term as basic to your food availability.

I can't really comment on that. But what I do think is happening in China, is that there is a freeing up of the price support system for grains. And the recognition that improvement domestically in China is the more important way to secure food in the long-term. I think that's something we will be reading more about. But in terms of expansion overseas, I don't really have a strong view on that.

Great. Thanks so much.

Vincent Andrews, Morgan Stanley.

I actually have two questions.

The first, I think we've established that the farmer selling thing is a timing issue for when you recognize this revenue and income. You mentioned it was $100 million out of 3Q. My question is, does it matter when the farmer sells to you? In other words, are you going to get the $100 million back in 2017? Or if they choose a different time, a less advantageous time for you does it turn into $75 million? Just to use a number? Or is it possible that it could wind up being more advantageous to you in the terms of $125 million? What difference does it make when they sell as it relates to your opportunity to monetize their crop?

That's a good question. It depends. You probably expect that answer. It depends very much under the circumstance.

If it is under circumstances in Brazil, where you have extremely strong export pull and stress on logistics and so forth, chances are that margins will reflect that. I.e., they will be better, so maybe it can turn into be more than the $100 million. Conversely, if it is a benign environment into harvest could be a little less.

It's just hard to tell. I would say it's probably generally true that the more you buy far in advance, because of the added element of managing risk around it, margins are typically a little bit better.

And just a separate question for Drew. Last year free cash flow was barely positive. This year with less farmers selling, I'm assuming less working capital. Your CFO is ahead year-over-year. Should we expect good free cash flow this year? But the next year be just more volume through the system? Do we maybe have less cash flow?

I don't think that's necessarily the case, Vincent. In concept, it could work that way. What I would say is in contrasting the environments, we are down this year from year end about $200 million, and how much we've advanced the Brazilian farmers.

So if you went back to a typical year you may have another $200 million of outflow for that. And the other big thing in the working capital it affects, our year-end balances is how the North American farmer behaves in terms of how much he sells and when he wants payment for his own tax purposes.

So those would be the two factors that would determine it. Maybe it's crop prices, everything held the same the farmer comes back, figure $200 million less cash flow would be reasonable.

Okay. Thanks very much guys.

Rob Moskow, Credit Suisse.

I think everything that's possibly to be asked has been asked. But I guess I'll ask about your CFO search. Where are you at in that? Are you looking more to the outside at sitting CFOs? Thanks.

We have been active in the search ever since early this year when Drew announced his retirement. And I think we are getting toward the end of it. We have had a very good slate of both internal and external candidates that we have reviewed. I'll say we are nearing the end of the decision-making process, and we will be forthcoming with an announcement within the next short while.

Soren, do you think that Drew's replacement would have to have a working understanding of the grain markets or commodity markets, or does it not matter?

I think it is an advantage probably, but I think it's something you can also learn. I think what's very important is that the person has a good understanding of how the commodity markets work in general. And is very comfortable with the complexity of the financials around that. But I don't think it has to be a grain expert, so to speak.

Okay. Thank you very much.

Ken Zaslow, Bank of Montreal.

Soren, my question is, look, over the last several years you have gone through some bolt on acquisitions, you've done some cost savings initiatives. Next year you have a reasonably normal environment, a little puts and takes. Half of when I think about 2017, I can't think about a normal year say $100 million $150 million, of profit from food.

Think back to when you put together that $800 million to $850 million number, why are you not progressing as aggressively toward that number?

I'm sorry. I didn't understand the reference to the $150 million.

If I remember correctly, your food business was supposed to be about $400 million, $450 million and now you are looking for like $280 million. Or something like that for next year. So again, I'll X that out. But why isn't everything else in that range of moving towards that longer-term EPS number?

I think next year will be. We won't hit the $850 million, obviously, next year. That was a reach too far back in 2014. But many of the things we talked about back then are coming true, albeit at a slower pace.

We have absolutely changed how we do business at Bunge. The savings, the $92 million so far this year, the $100 million last year, are all real. The $125 million we will save totally this year will, in some form or fashion hit either margins or the bottom line, or help with [fan] competitive pressures.

We've made big improvements on our global SG&A. We're down $100 million compared to last year. Industrial costs were down. Many of the operational improvements that we talked about back in [2017] (sic, speaker talking about a previous year), we are absolutely delivering on and they will benefit us from the future.

One thing that turned out to be not as I had hoped, was the overall margin environment. Margins across pretty much all sectors of our business, agribusiness as well as food and ingredients, has gone through a period of contraction.

Yes, but I'm thinking about next year. To me, elevation margins seem to be in good shape. Right?

The crush environment in China is far better than what you would have expected. US is probably above average. Argentina, depending on selling, and I get the Brazil. Again, when I put the composites together, plus all of the internal activities, I wouldn't think that you would get to an average number. I think you would be progressing above the average.

I agree with that. I was just trying to give you the context of why we feel comfortable that despite what has been a very difficult overall market environment, headwinds in places like Brazil, which we are not through with yet, Brazil has not recovered, that we feel comfortable about significant earnings growth going into 2017.

Drew mentioned in his comments and I did as well. And you can do the math. $400 million coming out of our smaller segments plus a normalized agribusiness result will get you a significant bump in earnings, whether it's EBIT or whether it's EPS in 2017. And then we'll go from there. I think we are absolutely looking at a significant uptick in earnings in 2017. I think it's rooted in the improvements we've made ourselves. And not an environment where there is wind in the back from all sides, but a normalized environment. The confidence with which we talk about earnings growth next year is very high.

My final question is, with the stock price where it is, why not activate a more aggressive share repurchase program?

We agree with you that our share price is very undervalued, no doubt about it. But we also have to keep in mind our commitment to a triple B credit rating and the ratios that implies. We have a couple of sizable bolts ons that we will be executing on, closing on in the first quarter of next year, that we want to get through first and then we will have another look.

But the crush acquisitions in Europe and the Grupo Minsa should both close in the first quarter of next year. And will obviously require some cash. And then we will have another look beyond that. I agree with your statement about the valuation of our stock.

Great. Thank you.

We have no further questions. I will now turn the call back over to Mr. Haden for closing remarks.

Thank you, Vanessa. Thank you everyone for joining us today. I want to also remind you that we will be hosting an investor day on December 13 in New York City.

The event will be an opportunity to meet more of our executives than you have in the past and also learn more about our Company. Thank you again for joining us.

And thank you ladies and gentlemen. This concludes today's conference. We thank you for participating. And you may now disconnect.