Bunge Limited BG CEO Greg Heckman on Q4 2019 Results

Thank you, Ruth Ann, and good morning, everyone. We're happy to be joining the call from our new headquarters in St. Louis this morning. Let's start on slide three. You can see the agenda for today's call. I'll start with some thoughts on our 2019 accomplishments through the lens of our key priorities, and then I'll provide an overview of the fourth quarter before handing it over to John who'll go into more depth on our performance. I'll conclude with our outlook for 2020, and then we'll open up the line for your questions. With that, let's turn to slide four. In 2019, the team did an excellent job executing in the face of great complexity and many moving parts, both internally and externally. We effectively managed the things under our control and made substantial progress against our key priorities. We drove improved operational performance, we took action to optimize the portfolio, and we increased our financial discipline and rigor, especially around capital allocation. On operational performance, our total oilseed crush volume and capacity utilization rates were the highest in the past five years. Our soy and sunseed crushing operations achieved the lowest industrial unit costs in that same time frame. These improvements helped us weather the difficult markets in 2019 and allowed us to capture more margin when we had the opportunity. We moved from a regional structure to a global operating model, simplifying how we operate and aligning incentives to the whole rather than the parts. With that, we reduced the number of bonus pools dramatically, incentivizing teams to work together toward the common goals of Bunge. We've received positive internal feedback about our headquarters move, with clear evidence of improved efficiency, collaboration, and shared insights. As a result, we'll be fully moved into St. Louis by the end of 2020. Our new operating model allows us to focus on what's most important: our business relationships on both ends of the value chain with farmers and customers, while facing fewer internal distractions. In short, we're working as one team, better able to focus on driving results and operating the business with better visibility and more accountability. Moving to slide five, while we've made substantial improvements to our portfolio, we continue to execute against other identified opportunities with the goal to be substantially finished by the end of the second quarter. We completed our sugar and bioenergy 50/50 joint venture with BP and announced an agreement to also sell our margarine and mayonnaise assets in Brazil. Recently, the U.S. ethanol producer repurchased our stake in that business. We also completed several smaller transactions, selling several idle grain facilities in Eastern Europe and two idled wheat milling sites in Brazil, while also optimizing our South American grain footprint to improve capacity utilization by closing seven other grain facilities.

Turning to slide six, we've increased our financial discipline and rigor, continuing our work to identify and capture cost savings opportunities. In 2019, we achieved approximately $50 million in savings from our previously established global competitiveness program and are driving additional savings opportunities from our more recent efforts. Combined with the operational and portfolio actions we took in 2019, Bunge is getting more streamlined with line of sight to additional improvement opportunities. We also changed our approach to risk management with a focus on taking risk appropriate for the earnings power of Bunge and the environment we're operating in. This approach allows us to better capture the earnings power available in the physical and financial flows provided by our global asset base. This is especially true when market conditions change, as they did during the fourth quarter. We're committed to pursuing a disciplined capital allocation strategy. Capital deployment decisions will be the result of a deliberate process anchored by high-quality analysis and stress testing on the front end, as well as performing post-project reviews. Moving to the next slide, because we're managing risk better while running our assets harder, when margins in certain markets improved in Q4, we delivered better earnings than we had earlier anticipated. Looking ahead to 2020, we feel good about our transformation and our ability to adapt to what we expect to remain a challenging and volatile environment. We have a lot of momentum coming out of Q4 that will help us move ahead. Taking into account the current margin environment and lack of visibility into the back half of the year, we expect 2020 EPS to be broadly in line with what we earned in 2019 when excluding notable items, our gain on Beyond Meat, and the depreciation benefit of the sugar and bioenergy segment. With that, I'll hand it over to John to walk us through our financial results and the 2020 outlook in greater detail.

Thank you, John. As John noted, we're still faced with uncertainty in 2020. We expect markets to remain volatile. U.S. and China trade tensions and ASF continue to create uncertainty. It's too early to tell what, if any, impact the coronavirus situation will have on our markets or how developments in Argentina may affect the industry this year. So you can see why it's important that our team remains nimble. We'll continue to focus on improving industrial operations, honing our approach to risk management, being disciplined about capital deployment, and working in ways that allow us to quickly adjust to changing market dynamics to maximize the earnings potential of our global platforms. I want to reiterate how impressed and appreciative I am by the team's ability to navigate a challenging external environment this year while also implementing significant internal change. We've got a tremendous foundation of processing and distributing assets and a great team who's improving our execution with them. We're already seeing the benefits of those changes and we expect them to continue. I look forward to sharing more with you as we continue our work. We'll also provide more detail on our strategy and earnings power at our Investor Day which we're planning to hold in late second quarter. More detail to come on that. And with that, I'll open the call to questions.

Yeah, Adam, I'm sorry, can you repeat your question around the cost side?

Yeah, yeah. First, I think it's probably important to know the first half of the year, you know, we still got some redundant costs associated with our transfer of employees to St. Louis and some of the execution we're doing around the rewiring. We will continue to have some higher cost probably the first half of the year; those programs run out. We do expect a measurable reduction next year in SG&A, particularly at the corporate level. From a dis-synergy overhead standpoint, you know, we saved about $50 million this last year from the beginning of the year to the end of the year of additional costs. And I think heading into 2020, we should have a comparable — hopefully a comparable number going throughout the year next year, maybe a little bit less than that because as we cut deeper and deeper into the organization, it's just a little bit tougher. But we are expecting somewhere probably in the neighborhood of $25 to $50 million of additional cost savings next year. The other thing, Ruth Ann mentioned, John mentioned all the rewire work that continues to go on in the first half, but also the resources around all the portfolio work we're doing here in the first half. So some of that has been announced, that hasn't closed yet, and some of the ongoing work. And with our target of getting the majority of that wrapped up or in a position to at least be able to speak to what we're doing by the end of the second quarter, which will then get us in a position as John said to make the balance of those changes and kind of come out of 2020 with the run rates that we're looking to go forward. And of course, that's the kind of thing we'll also drill into more detail during Investor Day.

Yeah, as we look at 2020, we got pretty good momentum coming out of Q4 here and we've got pretty good visibility into the first half. And you know, we did say that the first half looks positive. I think that the challenge is really very little visibility into the second half. And then you've got the big flags around China trade, the Argentine economic situation, coronavirus's possible effect on demand, you've got the margin curves in crush outside of the U.S. are heavily inverted and the second-half replacement margins definitely not attractive. And then of course the U.S. soy crush margins are significantly below last year. What we've seen, so I think that's really the drivers inside of the agribusiness, which is the big piece. And then of course around the distribution is the timing of the phase one and we're lacking the details really about timing and products and then already some talk about maybe a delay due to coronavirus. So that's kind of the key drivers as we put this together.

Yeah, let me frame that up. One thing that I want to be really clear about is we definitely believe in the value of that platform. That was a wonderful opportunity. This is the kind of asset that only trades once and we were glad to get that opportunity. We've continued to deliver on all of our cost targets. We fully integrated the team. We're going to market as one company and able to continue to benefit from the combined legacy Bunge business and legacy Loders business. The gap we have had has been on the timing of delivering the top-line synergy and those are not coming as fast as we had planned. We do love the business because the fats and oils is definitely on trend. It's right in our wheelhouse. It's an adjacent space as that value allows us to value up our fats and oils platform and we definitely are at the table with customers having conversations and working on projects. I was just with the senior sales team last week and they said we wouldn't have been in this position a couple years ago. And it's the global presence, it's the end-product and technical capabilities, and frankly it's the record on sustainability, which Bunge has done a really fantastic job. And while we're on Loders, we've got some important product launches this year. In our infant nutrition, we've extended our award-winning Betapol with new high-concentration formulas. In the confection space, we're launching a reduced-sugar fat system, and we did that work with one of our venture companies, and this allows less sugar to be used for the same sweetness. We're really excited about where that can go. And then the plant-based area, which has garnered so much activity and investment, we've got a line of fats to replace animal fats in a range of products from nuggets and burgers to beverages, and we're working with over a handful of global customers and getting some traction there. So while we were slow on delivering the top line, this is a great property and is going to create a lot of value for shareholders long term.

Yeah, it's always a trade-off. I agree. And I'd like to think between now and June to provide you better clarity on what our capital allocation plan will be. We hear from shareholders and investors — some like share buyback and some don't. And so for us, we really have to just look at it and say we kind of hit the reset here with the company and develop a go-forward strategy. I would say it will get an equal airtime discussion with anything else we have for capital. I just can't sit here today and commit to you that we're going to purchase shares or how many we're going to purchase. But certainly if it becomes clear that's the best alternative for our capital, then we'd be foolish not to take that into consideration and make it part of our allocation. So look, our order of business is continue to execute, to get the cash in the house, then continue to execute operationally, and continue the balance of our portfolio work, and then to be able to have that strong debate in the boardroom.

Sure. I think one of the keys — the last time we were all together, if you remember, crush margins were pretty tough. Crush had slowed in some regions, that had tightened up oil a bit. And then with the lower palm production, we saw the palm market rally at the same time that oil supplies tightened into the end of the year, and some of those dynamics is also what helped us deliver Q4. We believe that could tighten further coming into 2020. Soft seed margins continue to be good outside the EU, and then we've got biodiesel creating a lot of demand for refining capacity and that's a net positive for the oil outlook as well. You look at the mandate in the U.S. going from 2.1 billion gallons to 2.43 here in 2020. So there are a lot of things driving. I think the big overlay is global demand, but that remains to be seen.

Thank you.

I'm not sure there's a way to quantify it. You know, in China, on ASF, we do think that about 40% of the herd was liquidated. It looks like we think that's done as long as we don't get ASF to come back, a resurgence of it. And some of the demand has improved and some of the small people have been able to switch over to poultry, to chicken, quickly. And then we've seen sales rebound two percent. So I hope that the worst is in there. As far as the U.S.-China trade, no doubt we're always a big fan of markets that are economic and clear and concise and open, fair, and free trade. But regardless of that, I'm glad we've got a global platform and this great team running it, and so we'll continue to stay in position for a number of outcomes and not try to over-guess what's going to happen. And if you really kind of tried to frame up the drivers as you look at 2020, we took our outlook — we based that visibility on the curves and we didn't give any adjustments plus or minus versus what you can look through today around trade, ASF, or the coronavirus. If you looked at the challenges, things you don't want to see happen — you wouldn't want to see ASF return to China or spread, you wouldn't want to see coronavirus continue to grow which would be a tough on oil and meal demand, and you wouldn't want to see these trade disruptions continue in a way that's bad for margins on crushing as well as distributing, and then you wouldn't want to see animal numbers decline overall. You also probably don't want to see Argentine crush run at high volumes. On the flip side, what you do want to root for would be seeing oil demand continue to tighten as we just talked about, animal numbers grow which means no spread of ASF, Argentina remain slow as it is now, see us continue to remain tight and the outlook right now is less wheat fed and that means it's not competing with soybean meal, it's better for soybean meal demand, and then the coronavirus ends up being a flash and goes away. We see a little bit of improvement in the Brazilian economy — the pension reform last year was definitely positive, and so we would like to see that Brazilian economy continue to improve, it would be good for really all of our businesses. And then see U.S. meat exports improve which would be constructive to prices and that would continue to keep the animal numbers high in the U.S. and be good for demand. So if there's a list of things to root for, you need me to email them to you.

Yeah, but demand growing — the S&D picture tightening.

That's correct.

There are so many moving pieces in this business. The one thing we've seen, which is being seasonal and cyclical, and the fact that we do operate across the value chain — the one thing we know is that margin can move from one area of our business to another and it can move from one quarter to another. So I'm really hesitant to try to put the specificity really around the quarters. That's why we kind of like to talk to the full year and where we're trending. So as we talked about, momentum out of Q4 — we feel that momentum and what we've been able to do to protect margins in the first half and kind of the outlook as we look through — we feel good about the momentum coming in. If you look first half year-over-year, Q2 was pretty big prior year.

Well, the flip side would maybe be some of the things that we've seen — what has probably been a little bit challenging for Food and Ingredients. So there are a number of puts and takes across the portfolio. I think we are concerned overall with just the number of unknowns in the marketplace — between ASF, the coronavirus, the Argentine situation. And I don't know if I have a better, more specific look than that.

Well, I think what we tried to do is look through and tell you what we can see and not what we hope is going to happen.

Yeah, I think if you think about the things we've actually taken or that have been announced — so I'll go that way because we've got a couple they're going to close here shortly and one of those of course is the larger mayo businesses we sold announced in South America. We would — just other things that we've announced or executed — we would expect EBIT, even adjusted, $10 to $15 million, but probably more important, they should be an accretion on the share price around 25 cents driven by both EBIT accretion and lower interest cost going forward from proceeds. So that would of course include sugar, and that's assuming our sugar maybe performs on what we expect it to on the downside. So we do expect some reasonable amount of accretion here based on what we've done already, and then of course we're continuing to look at other opportunities.

Yeah, and some of that is really the operating model and how the commercial teams and the industrial teams are really working hand in glove about getting the assets one, in shape to run when the margins are there, and then getting us positioned to capture the earnings that exist in that asset base so that we can run our assets harder and not have any unscheduled downtime, whether it's for maintenance or whether it's for commercial things. So I think the team has been much more nimble, and especially in this environment being able to flex our global system and keep our assets full when the margins are there. So that's been a result of some footprint but a lot of operating model and the team, and then as John talked about some of the portfolio changes that we've made — as those things close and we unwire them from the organization, then work to get the stranded cost out. So those are things that are in flight; they're not an overnight flip the switch.

What we're going to try to do is prove it by delivering a quarter at a time and then being real transparent about how we deliver it.

Yeah, we've been talking about internally — we had going to be an initial portfolio review and put our target list together, and the things that you've seen done and the things that we have teams working against today and that are underway — those we're pushing to be able, as we said, to have finished or in a position to announce our intentions by the end of the second quarter when we do the Investor Day. Because what our goal is to be clear about what asset base we continue to run going forward and be able to talk about the earnings power of that and our growth plans. That doesn't mean — and as we told the team — running a great business is constantly challenging the things that aren't making the return hurdles. They either have a plan to get there on a very short timeline or they have exit plans. And that never stops. That's continuous improvement. That's like GCP is a muscle memory. And now we are challenging and chasing our best metrics across our global platform to continue to drive cost out in a continuous improvement mode. And just like risk management, we're never going to be perfect. It's always trying to get better. It's continuous improvement. So this just becomes the culture how we're running the company, so that it's not an event, it's an everyday event.