Agribusiness unit loss leads to tumble in Bunge profits

by Josh Sosland
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WHITE PLAINS, N.Y. — Market losses on hedged commodity inventories sharply reduced first-quarter earnings at Bunge Ltd. Net income in the quarter ended March 31 was $14 million, equal to 5c per share on the common stock, down 90% from $58 million, or 48c per share, in the first quarter of 2006.

Net sales during the period were $8,189 million, up 46% from the first quarter last year, while Bunge’s volume was 30.6 million tonnes, up 23%.

While well beneath profits during the first quarter last year, results were slightly better than the "near breakeven" warning issued April 3 by the company, when it first indicated its Agribusiness segment was performing below expectations.

"Agribusiness had a disappointing quarter due primarily to unrealized mark-to-market losses that caused Bunge’s overall results to fall below expectations," said Alberto Weisser, chairman and chief executive officer. "However, our fertilizer business performed strongly, driven by high prices and robust sales for Brazilian winter plantings. Edible oils and milling segments performed in line with expectations. We remain confident that full-year 2007 results will meet our original expectations."

For the full year, Bunge has projected net income of $590 million to $610 million, or $4.56 to $4.71 per share. The forecast includes a projection of a $30 million gain from the sale of assets.

Divergence between the performance of futures market, where Bunge hedges its inventories, and cash prices, where it sell its physical holdings, was cited by the company as the principal cause of the poor operating results in Agribusiness. The divergence was attributed to a speculative surge in futures attributed to mounting interest in ethanol, coupled with unusually aggressive farmer selling.

"Large crops, high agricultural commodity prices and farmers eager to sell resulted in physical cash prices not mirroring prices in the futures markets, which were driven higher by anticipated biofuel demand and an influx of investment from non-commercial market participants," Bunge said. "Oilseed processing was solid in North America and slightly down in Europe. Higher S.G.&A. (selling, general and administrative expense) stemmed primarily from increased personnel costs to support growth in new product lines, such as sugar, and the impact of the stronger real. Interest costs increased due to higher average working capital. First-quarter 2006 results included $18 million of impairment charges related to the closure of three oilseed processing plants in Brazil and $2 million of cash restructuring charges."

In the first quarter, Agribusiness sustained a $66 million operating loss, compared with a $1 million profit in the first quarter last year.

In other Bunge operating segments, results were checkered. Milling results declined slightly in the first quarter from the same period last year due to volume and margin declines in corn milling offsetting good margins in wheat milling.

Milling operating profit in the quarter was $13 million, down 13% from $15 million in the first quarter of 2006.

Results also were mixed in Edible Oils. The benefits of higher volumes and margins in Brazil were countered by rising personnel costs associated to the growth of Bunge’s business in Asia and Eastern Europe and the impact of foreign currency translation. Results in the first quarter of 2006 included a $2 million impairment charge. Operating profits in the first quarter of 2007 totaled $7 million, unchanged from last year.

The strongest segment performance was in Fertilizer, driven by higher volumes "as farmer demand increased in connection with the winter corn crop and improved farm economics," Bunge said. Rising prices worldwide bolstered margins.

Fertilizer operating profit was $65 million, up 110% from $31 million last year.

Mr. Weisser said the first-quarter setbacks will not lead Bunge to shift its strategic course.

"We continue to follow our strategy of building a larger, more efficient asset network that links the world’s leading agricultural commodity production and consumption markets," he said. "A larger network enables us to originate, process and transport more products for more customers throughout the year. Last week, we announced the purchase of a majority stake in a Chinese soybean processing plant. The plant, which we plan to expand, is our third in that country. In addition, we recently agreed to acquire a sunseed processing and refining plant and two popular bottled oil brands in Romania. These facilities represent the latest additions to a global asset network that includes approximately fifty oilseed processing facilities."

Credit Suisse, which has an "outperform" rating for Bunge, said the commentary that accompanied the first quarter results "reinforces our positive outlook and assuages some of our concerns."

"Bunge reiterated e.p.s. guidance for the year of $4.56 to $4.71, indicating that stronger-than-expected fertilizer demand should make up the hedging losses it experienced in Agribusiness," said Robert Moskow, an analyst with Credit Suisse. "Overall market fundamentals are solid with large crops and strong world demand for protein meal and vegetable oil. The company has not seen a negative impact in soybean meal demand from cutbacks in North American livestock production. Oilseed processing results remain solid in North America despite tough comparisons."

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