Bunge Ltd BG CEO Gregory Heckman on Q1 2020 Results

Good morning and welcome to the Bunge first quarter 2020 earnings release and conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ruth Ann Wiseman. Please go ahead.

Thank you, Robert, and thank you for joining us this morning for our first quarter earnings call. Before we get started, I want to let you know that we have slides to accompany our discussion. These can be found in the Investor section of our website at bunge.com under Investor Presentations. Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are posted on our website as well. 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 view 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 we encourage you to review these factors. On the call this morning are Greg Heckman, Bunge's Chief Executive Officer, and John Nicklisch, Chief Financial Officer. I'll now turn the call over to Greg.

Thanks, Greg, and good morning everyone. You may have seen our announcement a few weeks ago that we have changed our segment reporting to separately disclose Corporate and Other activities from our reportable segments. This change more closely reflects how we manage our business and review financial information, and builds upon our previously stated strategic priorities by providing enhanced visibility to segment performance while also improving the comparability of our segment results and Corporate and Other activities with those of our industry peers. Now let's turn to Slide 7, the earnings highlights. On a reported basis, first quarter earnings per share was a loss of $1.46 compared to income of $0.26 in the first quarter of 2019. Adjusted EPS was a loss of $1.34 in the first quarter versus income of $0.36 in the prior year. Reported results included 12 cents of charges, of which 10 cents related to an adjustment to the 30% redeemable non-controlling interest in our Loders Croklaan JV and 2 cents related to our corporate office move to St. Louis. Total segment earnings before interest and taxes, or EBIT, was a loss of $170 million in the quarter versus EBIT of $151 million in the prior year. On an adjusted basis, total segment EBIT was a loss of $165 million in the quarter versus EBIT of $166 million in the prior year, primarily driven by results in Agribusiness where adjusted EBIT was a loss of $127 million compared to adjusted EBIT of $149 million last year. In total, Agribusiness results in the quarter were impacted by $385 million of mark-to-market losses on forward hedging contracts, of which a majority is expected to reverse over the course of the year. Oilseed average soy processing margins were lower in all regions compared to a strong prior year, with the exception of China which benefited from tight soy meal supply and reduced bean availability. Average softseed processing margins were higher in all regions versus a year ago. As COVID-19 began to spread globally, concerns about soybean meal availability caused global oilseed processing margins to spike toward the end of the quarter. As a result, we incurred approximately $100 million of mark-to-market losses related to forward oilseed crushing contracts. In addition, as vegetable oil values declined during the quarter, we recorded a mark-to-market loss of $195 million on forward hedges held against fixed-price sales to our downstream edible oil customers. As we execute on these contracts in the coming quarters, we expect these timing losses to reverse. As Greg noted, results in our Grain business were primarily driven by origination in Brazil as the pace of farmer selling accelerated in response to an increase in local prices caused by the devaluation of the Brazilian real. Ocean Freight also had a strong quarter, benefiting from excellent execution. However, results were impacted by approximately $90 million in mark-to-market losses, primarily related to forward bunker fuel hedges driven by the decline in global energy prices. These hedges are held against forward fixed-price sales commitments, which we expect to reverse in the coming quarters as we execute on these contracts. In Edible Oils, improved results in North America, Europe, and Argentina were more than offset by lower results in Brazil and Asia. Excluding approximately $20 million of net unfavorable timing differences, $6 million of which will reverse in future periods, results were higher than prior year. Recall that in the fourth quarter of 2019, we benefited from $13 million of favorable timing differences which reversed during Q1. While the COVID impact was relatively limited to the segment in total, as lockdowns and restrictions varied by region, we started to see reduced demand from both foodservice and biodiesel channels toward the latter part of the quarter. We expect to see a more pronounced negative impact in Edible Oils in the second quarter. In Milling, improved performance in Brazil, which benefited from higher volumes from food processors, was more than offset by lower results in North America due to a decrease in U.S. margins and lower corn yields. In Sugar and Bioenergy, segment results for this quarter reflect our share of earnings in our 50/50 joint venture with BP that we formed in December 2019. By contrast, first quarter results in 2019 reflect our 100% ownership of the Brazilian sugar and bioenergy operations. Additionally, results of the joint venture are reported on a one-month lag. The $50 million loss in the quarter reflects the seasonally slow intercrop period where the business is selling inventory from the previous season, as well as approximately $25 million of foreign exchange translation loss on U.S. dollar-denominated debt at the joint venture through the depreciation of the Brazilian real during the quarter. With the continued devaluation of the Brazilian real during the second quarter, we expect JV results to be further negatively impacted by foreign exchange translation losses, unless the Brazilian real were to recover a large portion of its recent decline. In Fertilizer, higher segment results reflected improved performance in our Argentinian operation, which benefited from higher margins more than offsetting lower volume. For the quarter, we recognized an income tax benefit of $55 million. Based on our current outlook, we expect our full-year effective tax rate to be toward the upper end of our 19% to 23% guided range. Interest expense was up slightly during the quarter compared to last year due to interest charged on settlement of an arbitration matter in Brazil as well as foreign currency borrowings in certain countries where interest rates were high. However, the incremental higher borrowing costs were fully offset in gross margin from currency hedges on underlying working capital being funded with those borrowings. We continue to expect full-year net interest of approximately $230 million. Let's turn to Slide 8, cash flow highlights. Due to the approximate $410 million mark-to-market losses incurred during the first quarter, our trailing 12-month adjusted funds from operations was considerably down from where we ended 2019. Excluding both 2019 and the trailing 12-months for these mark-to-market timing differences, results would be comparable. As shown in the chart on the right, as you can see on Slide 9, at the end of the first quarter, approximately 90% of our debt was used to finance readily marketable inventories. Our net debt excluding readily marketable inventories was approximately $500 million. Turning to Slide 10, we have committed working capital facilities of approximately $4.3 billion, all of which was available at the end of the quarter, and we had a cash balance of $193 million. Moving to Slide 11, in our summary of capital allocation, as I discussed earlier, Q1 adjusted funds from operations is distorted through the impact of large mark-to-market losses on forward hedges that will reverse during the course of the year. CapEx spending was $55 million, of which $38 million was invested in maintenance and environmental, health, and safety standards. We paid $79 million in dividends to shareholders. Please turn to Slide 12 and our return on invested capital. Our trailing four-quarter average adjusted return on invested capital was 6.5%, up approximately one percentage point from the prior year. With that, I'll turn things back over to Greg for some closing comments.

Ladies and gentlemen, at this time we'll begin the question and answer session. To ask a question, please press the star and then one on your touch-tone telephone. To withdraw your questions, you may press star and two. We do ask you to please pick up the handset before pressing the numbers to ensure the best sound quality. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. Our first question today comes from Vincent from Bank of Montreal. Please go ahead with your question.

Yeah, just a couple of questions. One is, does COVID-19 affect Bunge's earnings power beyond 2020? And then what will you be doing with the $300 million of proceeds? And my last question would be, when I think about foodservice, it seems like it's starting to kind of come back a little bit. Is that in your expectations for the Edible Oils business, or did you kind of include the Edible Oils business at the time of the press release? I'll leave it there.

And then John on the proceeds. Yeah, so Greg mentioned in his remarks we have gross proceeds of $300 million coming from the green assets. That's not expected to be closed until late Q4, probably early Q1 of next year, just given regulatory timing. But at this point, we don't have any specific plans other than initially we'll reduce any revolver debt that we have outstanding, and then we will look at what our alternatives are. We have a bond coming due in November, and depending on timing of this and how we feel about capital markets at the time and our liquidity, we may very well just pay that off at the time. We'll keep an eye on markets between now and then and determine if refinancing makes sense. But other than that, we will put it basically back at the top of the house and back in our capital allocation to see what alternatives are. But nothing specific right now.

Okay, just to be clear, as you assess over the next few years, do you think that there could either be positive or negative residual effects, or do you think that once it settles down, you will emerge similar, better, or worse? Is there a way to just kind of think about that in terms of your earnings power or your return on invested capital? Will you have to reconfigure how you're thinking about your return on invested capital? I will really leave it there.

No, I think I'd agree with that.

Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.

Yes, thanks. Good morning, everyone. Just trying to think concisely and quantify the change in outlook. Is there any way to frame the magnitude of impact in Edible Oils and especially in Sugar relative to what you thought previously in February? Well, in Agribusiness, no change. Yeah, it's happening a little differently and in a more challenging way than we thought, but in our biggest business, we're really unchanged and think we'll be able to deliver the same as our earlier outlook.

Okay. And then just thinking about the portfolio, and congratulations on getting the U.S. grain elevator announcement done. How much is left? I mean, it's $300 million of proceeds on that transaction. Is that the invested capital you have net, or is there additional working capital release that comes upon closing? And then just how much is left in terms of portfolio actions from where we are today?

And then I'll expand on the numbers. In terms of the green assets and how to think about it best, the capital, as you can imagine, we held these elevators for quite a long period of time. So the book value, the carrying value of those is really quite low, pretty small percentage of the total proceeds. So we will be reporting a gain on the sale, but probably as importantly, we didn't carry a lot of working capital in these elevators. Between farmer payables, deferred margin, farmer payables on average, and the fact that they basically sourced products for our pipeline, we didn't carry a lot of working capital there. They were really flow-through elevators for us primarily. So we don't expect a significant impact on invested capital. The real benefit is taking the proceeds and paying off debt initially and taking some of the costs now.

Got it. That's a helpful color. I'll pass it on. Thank you.

Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead with your question.

Thanks, and good morning, everyone. I'm just curious if you could speak to the different hedges. You clearly use the word majority in terms of recouping in the balance of the year. Could you kind of put some parameters around majority and then just help us understand what risk is associated with the recovery of those hedges?

Sure. Let me walk through the pieces, Vince, because it is pretty comprehensive. So overall, we had, as I mentioned, about $385 million in the Agribusiness, a total of $410 million altogether across the business. The $100 million that we mentioned associated with our soy processing and oilseed processing, that really will largely execute over the balance of this year. It was representative of coming into the quarter, into Q1, largely covered, and then we had mentioned at the end of the year, I think on our year-end call, that we came into the first quarter fairly heavily covered. And so as the market moved at the end of the quarter, we recorded that $100 million and that'll largely unwind, really a big chunk of it in Q2, as you think about where we were booked out, and then beyond, most all of that is expected to come through here in the fiscal year. $195 million associated with hedging our oil pipeline, our veggie oil pipeline into our downstream edible oil customers, a little bit longer time period does that flow through, but again, it's the majority of that to execute during the year. Really not necessarily any real risk in whether or not those execute, it's just timing. And then the other $20 million, we had mentioned the $90 million on Ocean Freight, again, vast majority of that will clear out this year as we execute on the underlying contracts. And then we had mentioned on the remaining $20 on Edible Oils, $13 of that was really a carryover of income we took last year, so we have a small $6 million carryout. So we really expect that to roll out, again, a vast majority by the end of the year. But with the market moves we saw in April, a big chunk of our mark-to-market that we recognized in March, as you can imagine, has been affected already just given the decline in processing margins in April. But we feel confident that it's just execution to get most of this cleared off by the end of the year.

Okay, very good. And if I could just ask on the Loders Croklaan business, have you had time to go back and see how that business performed in a recession? As I suspect, even if COVID subsides later this year, we're still going to be in recessionary conditions well into next year.

Okay, very good. Thanks very much.

Our next question comes from Ben Bienvenue from Stifel. Please go ahead with your question.

Yep, thanks. Good morning, everybody. Only one, I wanted to ask on Sugar and Bioenergy. It sounded like Greg, your commentary was that things were good, and then John, that you could be a little bit worse than Q1, recognizing you probably have somewhat limited visibility and it's dependent on the recovery of demand. How representative of the year do you think the first half looks, and then what can you do operationally with BP to mitigate these losses?

And then specifically, a couple things. One is, as we mentioned in the remarks, we're reporting on a one-month lag, so we have pretty good visibility into March, what happened in March, and that's the basis for our comments regarding Q2. As we saw continued appreciation, in fact most of the real appreciation in Q1 occurred in March, and so that's going to be reflective of Q2. And a big part of that will be additional impact on the translation losses on the U.S. dollar-denominated debt. This business is a combination of USD and real-denominated business. The team was working on hedging that U.S. dollar debt. It's just been a difficult market environment, as you can imagine, to get something like that done in Brazil. But they're continuing to work on that. We believe it probably makes sense to hedge part of that debt, just given the fact that part of the business is based on the underlying real and part of it's USD. So that's going to be partly a headwind. And I think just some of the carryover kind of in Q1 and Q2, but I would say largely I don't necessarily think that's indicative of the full year.

Okay, great. I wanted to ask on the mark-to-market impacts. In respect to the rating agencies, how do the rating agencies account for that? Do they pull out those mark-to-market impacts when assessing your ratings?

Yes, they do have a good understanding of those. And so we take the time to explain those, and I would say that our feedback this week from the rating agencies, as we talked to them ahead of time, they understood that impact based on what has happened with the market and the volatility and the crush margins and veggie oil markets. So they understand it. They're used to that conversation with us, and they understand it's just timing and not necessarily cash-related.

Okay, great. That's good.

Our next question comes from Tom Simonetti from JP Morgan. Please go ahead with your question.

Thanks. Good morning. Could you expand on what is sustaining the Agribusiness outlook given where forward crush margins are today?

That's helpful. Thank you. And could you maybe just provide some more color on the foodservice exposure by region, and maybe just some more detail on why Brazil was so weak in the first quarter?

That's great. Thank you.

Our next question comes from Heather Jones from Heather James Research. Please go ahead with your question.

Good morning. Thanks for taking the questions. So I wanted to ask just a real quick detail question. Did the elevators you sold, did they generate any meaningful positive EBIT?

Not really, no. Just minimal.

Okay. And then just going into Edible Oils, and I fully appreciate the lack of visibility, but just to give us some sense of, I mean, you mentioned at the end of April it was about as dark as could be, and now you're seeing green shoots. Could you give us a sense of, I mean, are we looking at Edible Oils going back to Q2 2018 levels when it made roughly $10 million? I mean, could it be a loss? If you could just give us a sense of the range of outcomes for Q2.

Yeah, I would just say, though, I don't think we're anticipating any kind of a negative result out of Oils in Q2.

Okay, perfect. Then I want to talk about animal protein production around the world. So there are signs, not just anecdotes, but the data showing that there's some liquidation efforts underway in broilers, and a lot of anecdotes say the same thing that's going on on the hog side. And it seems like fortunes for the protein producers in South America have started to get much more difficult. So I wonder if you could walk us through what your anticipation is for meal demand in the early part of the year and then how you see that evolving in late 2020 going into 2021. I hope that question makes sense.

And how would you characterize the industry in Brazil? So with the decline they're seeing in demand there because of COVID, if protein producers need to scale back, I know the U.S. is the most rational, but is the industry down there relatively rational? Would we see a pullback in crush there, do you think?

Thank you so much.

Once again, if you would like to ask a question, please press star one. Our next question comes from Robert Moskow from Credit Suisse. Please go ahead with your question.

All my questions have been answered, but one follow-up on the debt for the Sugar JV. You said it was complex or difficult to fully hedge the currency out of it. Can you explain a little bit why? If you just had a futures contract that was short the real, wouldn't that have hedged out that currency exposure, or has it just not worked that way?

Well, yeah, the team was working on this really kind of methodically after the close of the transaction, and they had it on the slate to actually hedge out about half of the debt. And frankly, they just got caught with COVID. They were working with a number of banks down there to do the hedge transaction. It just got cost prohibitive, really, is the issue. The banks, the markets down there were probably, I'll say, more reactive than they were here in terms of the impact of COVID and the financial markets down there. They were in a bit more disarray, and it just became cost prohibitive and difficult to get it done. So they're continuing to work on it. I think we're optimistic we'll get it done. Timing hasn't been great, but the team is focused on it as well as executing the underlying business. So we do expect to be able to get something done here, hopefully this quarter.

Okay. So then maybe, and maybe you've mentioned this already, but just in terms of FX exposure, how should I look at it from a forecasting perspective for the segment? Is it if the currency stays the same, what kind of a hit should I expect in Q2?

Well, if the currency stays the same now, I think you'll see a similar impact in Q2 as we saw in Q1. Again, we closed March around 5.2, I think, on the real, and that was a comparable uptick to what we saw in January and February. So I would expect a similar impact on the debt side, on the translation loss. In terms of the underlying business, it's going to depend on a lot of things because it is the ethanol-sugar portion that is dollar business, and so that's going to depend on a number of other factors, not just the currency exchange rate. But on the translation side, I think for Q2, I would expect something similar, absent a big change from here. Q3, really no way to predict that at this point.

So this is a big swing versus expectations at the start of the year. You also feel that overall EPS, you expect to be lower than what you thought at the start of the year. To what extent can we say that that's related to the sugar business versus the core business?

Yeah, I would say probably the biggest delta we've had from our initial forecast is sugar. Greg mentioned a little bit of weakness on the edible oil side. We feel good about agribusiness. But sugar is the biggest delta for sure. And we're supporting the team down there to try to see what we can do. But we've got a good team down there. It's just a tough environment right now for that business. BP is committed, we're committed to it. We're having a lot of dialogue with the team and feel confident we've got the right team running it. It's just a tough environment. But that is definitely the biggest move right now.

Okay, thank you.

And ladies and gentlemen, at this time, showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.

Thank you very much for joining the call today. I'm happy to assist with any follow-up questions you have. And with that, ladies and gentlemen, we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.