Sluggish Agribusiness results bog down Bunge earnings

by Eric Schroeder
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Bunge
Company's milling margins and volumes challenged in Mexico and Brazil.
 

WHITE PLAINS, N.Y. — Weaker results in the company’s Agribusiness segment weighed on quarterly results at Bunge Ltd. Net income in the first quarter ended March 31 was $39 million, equal to 27c per share on the common stock, down 82% from $222 million, or $1.54 per share, in the same period a year ago. Net sales, meanwhile, increased 25% to $11,121 million from $8,916 million.

“The slow pace of farmer selling in South America compressed margins in Agribusiness and led to a lower-than-expected first quarter,” said Soren Schroder, chief executive officer. “Our teams managed risks, logistics and industrial operations well. Despite this difficult start, we continue to expect 2017 to be a year of solid year-over-year earnings growth, although below our prior expectations.

Soren Schroder, Bunge
Soren Schroder, c.e.o. of Bunge

“Farmers in South America are in the process of harvesting record soybean crops and are on track for record corn production, over 70% of which has yet to be commercialized. We expect the pace of selling to increase in the second quarter in front of the prospects of large crops in the Northern Hemisphere, and these sales, combined with lower commodity prices, should lead to improved soy crushing margins.

“In Food & Ingredients, volumes in Edible Oils increased, while margins in Milling reflected increased competition and softer demand in both Brazil and Mexico. Our market shares remain strong, and we expect margins to expand as we continue to execute on our value-added programs and capture additional performance improvement benefits. In Sugar & Bioenergy, we are confident in a strong year with most of our sugar hedged at higher prices and continued benefits in sugarcane yields from operational improvements.”

EBIT in the Agribusiness segment totaled $109 million in the first quarter, down 61% from $282 million in the same period a year ago. The decline resulted primarily from a decrease of $127 million in grains and $46 million in oilseeds.

Net sales increased 24% to $7,819 million, while volumes moved up 7% to 35,023,000 tonnes.

“Global soy crush volumes were slightly higher than the comparable quarter in the prior year,” Thomas Michael Boehlert, chief financial officer and executive vice-president, noted in a May 3 conference call with analysts. “But the increase was more than offset by weaker margin. Cost increased as a result of the appreciation of the Brazilian real, inflation in Argentina and the charges related to the acquisition of the soy crush plant in Europe. Outside of China, soy crush margins were lower than year-ago levels. Demand has been good, but margins were negatively impacted by slow farmer selling in South America and ample supplies of soy meal. Softseed results improved compared to a year ago. Higher volumes and margins reflected an increase in our crush capacity in the Ukraine, larger canola crops in Canada and sunseed crop in Europe and the Black Sea and improved vegetable demand.

“The decrease in grains was primarily driven by weaker results in origination and distribution. While volumes increased primarily in the U.S., structural margins remained pressured by destination customers only covering short-term need and by slow farmer selling in South America. Risk management activities in oilseeds and grains produced less income this quarter compared to a very strong result a year ago.”

Segment EBIT for Milling Products totaled $9 million, down 59% from $22 million in the same period a year ago. Net sales also were lower, easing to $382 million from $391 million, while volumes slipped to 1,074,000 tonnes from 1,106,000.

“In Milling, margins and volumes were challenging in both Mexico and Brazil,” Mr. Schroder said during the conference call. “Both regions experienced slow demand in the face of consumer uncertainty. And we are working diligently to secure key customer requirements and to optimize cost further. In recent years, we’ve developed a unique regional milling footprint in Brazil and Mexico, which will shine when the economy stabilizes and growth returns to the region. We’re not standing still and waiting for markets and margins to improve. We expect that a very competitive environment will remain across all segments. And therefore, we are focused on driving cost and productivity initiatives globally. With high inflation and stronger local currencies in most emerging markets, this is especially important.”

Expanding on Bunge’s milling operations, Mr. Schroder said the first quarter was the weakest quarter the company has ever had in Mexico.

“It was all really on the back of failing consumer demand,” he said. “Consumer confidence in Mexico, if you look at some of the indicators, sort of hit a recent low in, I guess, late January, early February. And the result was a reduction in overall volume of about 15% for the market. Our volumes were down a little bit as well. The combination of both, though, puts tremendous pressure on margins. So we believe that will stabilize as the … year progresses. It feels like it was a first-quarter shock, a lot of uncertainty politically and people just staying close to the vest, so to speak. And this will change as the year goes on. So we think the second quarter will show improvement, and we’ll be nicely profitable, and then we’ll gain momentum into the third and fourth quarter. But year-over-year, we expect milling results in Mexico to be slightly weaker than the prior year.”

Edible Oil Products EBIT in the first quarter increased 20% to $36 million from $30 million, while sales moved up to $1,880 million from $1,526 million and volumes increased to 1,789,000 tonnes from 1,602,000 tonnes.

Mr. Schroder said Bunge’s industrial and commercial improvement programs delivered $22 million in the first quarter and are on track to deliver $100 million for the full year. The company also managed to reduce capital expenditures by $50 million, he said.

“We’ll continue to be very focused on managing working capital tightly to ensure our returns remain well above cost of capital,” he explained. “In recent years, we have invested in global technology to help us transact in a more standardized and efficient manner. We see this as an important building block to improve our overall cost position.”
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