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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Bunge Limited First Quarter 2018 Earnings and Conference Call. All participants will be in listen-only mode. Please note this event is being recorded.
I would now like to turn the conference over to Mark Haden, Vice President of Investor Relations. Please go ahead.
Thank you, operator, 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 Investors 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 Investors 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 encourages you to review these factors.
Participating on the call this morning are Soren Schroder, Chief Executive Officer; and Thom Boehlert, Chief Financial Officer.
I'll now turn the call over to Soren.
Thank you, Mark. I'm turning to slide number 3. First quarter results came in stronger than expected when excluding mark-to-market on committed crush and signal an awaited transition into a period of much improved margins and performance especially in soy crush. Our teams took advantage of a quickly changing environment and we have positioned the company for very strong performance in the balance of the year.
The combination of much reduced soybean availability in Argentina and strong underlying consumption of both protein and oils has increased demand for and therefore margins of soy crush capacity in other regions, especially the United States and in Europe.
Shifting trade flows of both soybeans and soy products as well as corn are putting a premium on our logistics assets and distribution capabilities and more dynamic markets have widened margins across the value chains.
Our global footprint is built for this type of environment. We can effectively direct capacity and trade flows between origins to serve our global customer base during times of rapid market shifts and volatility. As a result of these improved market conditions and our capabilities, we're confident of a significant growth in Agribusiness performance in 2018 and beyond.
In Foods, results were higher in all regions except for our Edible Oils business in South America where ample oil supplies from a strong crushing environment have pressured retail prices. Performances in our Edible Oils businesses in North America, Europe and Asia were solid and we are successfully growing share with key accounts.
The Milling business in Brazil is showing signs of turning and margins are expected to improve sequentially as the smaller domestic wheat crop is consumed and the economy continues to grow.
Our acquisition of Loders Croklaan closed in early March. We welcome the talented colleagues of Loders Croklaan to Bunge and look forward to working together. This is a new and exciting chapter for Bunge's Edible Oil business and will bring the share of added value contribution closer to our target of 35%.
In addition, we continue to progress towards the separation of our Brazilian sugarcane milling business. We have committed debt financing for the business and are now in a position where we could operate on a stand-alone basis. To progress with the separation process, we expect to be in a position to make an initial filing in Brazil to explore the possibility of an IPO as soon as later this month. While current sugar prices are depressed, we believe the ethanol market outlook is positive and we are well positioned both operationally and financially to perform profitably. Whether we proceed with the transaction will depend upon our view of market conditions and valuation expectations at that time.
The Global Competitiveness Program is progressing well and on track towards a $100 million target for this year, which is in addition to the $80 million of savings from industrial supply chain initiatives. While this transformation has been challenging, a lot of positive energy is being created within Bunge by a sharper focus on markets and customers, and our industrial and supply chain programs continue to deliver strong savings with a particular focus on energy and staffing efficiencies. We remain focused on disciplined capital allocation and driving returns back above cost of capital as the year progresses.
These rapid shifts in industry dynamics is a reminder of how little it takes to shift the delicate balance of supply and demand for both capacity and raw materials. We are uniquely equipped to leverage these dynamics. We also know there's more we can do to unlock value from our global footprint, which we'll continue to pursue whether through regional or more global partnerships to strengthen our market positions and improve operating efficiencies.
So, after a tough period, 2018 has started off better than we expected. We are ready and well prepared to deliver a strong performance this year and are accordingly raising our full year outlook, as Thom will now discuss with you.
Thank you very much, Soren, and good morning, everybody. Let's turn to the earnings highlights on page 4. Reported first quarter loss per share from continuing operations was $0.20 compared to earnings per share of $0.31 in the first quarter of 2017. Adjusted earnings per share was a loss of $0.06 in the first quarter versus $0.35 in the prior year. Pre-tax notable charges totaled $24 million during the quarter, primarily resulting from costs relating to the Global Competitiveness Program.
Total segment EBIT in the quarter was $61 million versus $133 million in the prior year. On an adjusted basis, segment EBIT was $85 million, which included $120 million of mark-to-market losses on our forward oilseed crushing contracts. Excluding the amount, adjusted EBIT would have been approximately $200 million.
Agribusiness adjusted results decreased in the first quarter with EBIT of $52 million compared to $109 million in the first quarter of 2017, primarily as a result of the mark-to-market impact. Higher results in Grains were more than offset by lower results in Oilseeds. In Oilseeds, soy crush margins expanded significantly over the course of the quarter as compared to 2017's depressed levels, driven by a combination of strong soymeal demand and crush capacity constraints resulting from the drought in Argentina.
The expansion in margins had two primary impacts. First, contracts that we had entered into related to future crushing capacity commitments had a negative mark-to-market value of $120 million at the end of the quarter. This loss was incorporated in our Q1 results. And second, our full year EBIT outlook has improved by $250 million to $300 million. Excluding the mark-to-market impact, Oilseeds in the first quarter adjusted EBIT would have been $86 million. In Grains, higher results were primarily driven by global trading and distribution which benefited from increased margins and effective risk management.
Origination results were comparable to last year as improved performance in Brazil, where farmers benefited from higher local prices, offset lower results in North America and Argentina. The first quarter marked a transition period in the Agribusiness from an oversupplied, very weak market trough environment to one of tightening markets and strengthening margins. Results increased by more than 50% as compared to the first quarter of last year when adjusted for the mark-to-market on future business.
Food & Ingredients adjusted EBIT was $54 million compared to $45 million in the first quarter of 2017, which was higher than expected. Edible Oils adjusted results of $35 million were $1 million lower than last year primarily due to weaker results in Brazil where an abundant supply of soy oil from the strong crushing environment pressured retail prices. Results in all other major regions were higher year-over-year.
In Europe, improved performance was driven by higher volumes and margins reflecting increased value-added sales from recent acquisitions as well as increased demand for margarine. In North America, improved results reflected higher margins and lower costs, where the business is seeing the positive effects of its cost and efficiency improvement initiatives. And in Asia, results benefited from higher volumes and lower costs both in India and China.
Milling adjusted results increased by $10 million compared to the first quarter of last year. Results were better in all regions with the biggest improvement seen in North America. In Mexico, results benefited from double-digit volume growth and lower costs, improved results in the U.S. were due to higher margins. And results in Brazil were slightly higher than last year as higher volume and lower costs more than offset lower margins. We're starting to see signs of improvement in Brazil as the market transitions to a smaller wheat crop and the economic environment slowly improves.
Sugar & Bioenergy quarterly adjusted EBIT was a loss of $20 million compared to a loss of $11 million in the prior year period. While results were better than expected, the effect of higher average ethanol prices was more than offset by lower volumes and lower sugar prices as compared to last year. Volumes were negatively impacted by low beginning inventory levels.
Trading and distribution results in the quarter were better than last year. And in addition to Soren's comments regarding our plans for the sugar milling business, we also signed a share purchase agreement to sell our interest in our renewable oils joint venture, and we're in the process of exiting our sugar trading operation.
Fertilizer adjusted EBIT was a loss of $1 million compared to a loss of $4 million last year. Our tax expense for the quarter was $19 million. The effective rate was unusually high as a result of low pre-tax income in the quarter and losses in certain entities for which we cannot record a tax benefit.
Let's turn to page 5 and our cash flow highlights. Our trailing 12-month adjusted funds from operations were $811 million, which was slightly lower than for the period ended 12/31/2017, primarily due to the mark-to-market impacts. Based on our outlook of the business, we expect this metric to strengthen going forward.
I'll take a minute to point out that as a result of a change in GAAP, we have changed the presentation of cash flows related to our trade receivables securitization program. Particularly impacted are the cash receipts from payments on the deferred purchase-price component of the program which are now classified as cash flows from investing activities, whereas previously, they were classified as inflows from operating activities. This does not impact our funds from operations metric but does reduce cash flow from operating activities.
Let's turn to slide 6 and our capital allocation process. Our top priorities are to maintain both a BBB credit rating, as well as access to committed liquidity sufficient to comfortably support our Agribusiness flows. We are rated BBB by all three rating agencies, and we had $3.3 billion of undrawn available committed credit and $287 million in cash at the end of the first quarter. Within that capital structure and liquidity framework, we allocate capital to CapEx, portfolio optimization and shareholders in a manner that provides the most long-term value to shareholders.
We have continued to maintain strict discipline on CapEx spending, investing $105 million in CapEx in the first quarter. Approximately a third of this amount related to sugarcane planting, and a third to other Agri segment investments. We have invested $968 million in acquisitions, the most significant of which was the acquisition of Loders Croklaan. And we've paid $73 million in dividends to shareholders.
Let's turn to slide 7 in our return on invested capital. Our trailing fourth quarter average return on invested capital was 3.8% overall and 4.4% for our core Agri and Foods businesses, 2.6 percentage points below our cost of capital. Our goal is to earn 2 percentage points above our cost to capital on the Agri and Foods businesses and we expect to exceed our cost of capital for the full year of 2018.
Let's turn to slide 8. We're on track with the Global Competitiveness Program, which is focused on reducing our cost base and simplifying our organizational structure to drive efficiency, enhance our ability to scale the company, and realize significant additional value from our global platform. We plan to achieve an annual run rate reduction in costs of $250 million by the end of 2019. $100 million of that savings will be achieved this year as compared to our 2017 addressable baseline of $1.35 billion. As compared to the first quarter of last year, addressable SG&A was $41 million lower this quarter on an apples-to-apples basis. We incurred $16 million (sic) [$14 million] (15:14) of program-related costs in the first quarter.
Now, let's turn to the outlook on slide 9. Starting with Agribusiness, underlying demand for soymeal remained strong which even at higher prices has not priced itself out of formulations remaining competitive with other proteins such as DDGs and feed wheat. Argentina crushers have been and are expected to continue to crush in alignment with farmer selling which has improved margins in Argentina significantly as compared to last year. There are ample soybean supplies in Brazil and the U.S. which should allow our crush plants in these regions, as well as, in Europe to run at higher capacity levels through the year, and we believe others entered the year with reduced logistics commitments, allowing us to better adapt to the pattern of farmer selling.
Based on these factors, which have caused forward soy crush margins to expand significantly since the beginning of the year, we are increasing our Agribusiness full year 2018 outlook from $550 million to $700 million to $800 million to $1 billion. And we've increased our Food & Ingredients full year outlook of $260 million to $280 million to $290 million to $310 million. This increase primarily relates to the addition of our 70% interest in Loders Croklaan for the 10-month period. The resulting $25 million EBIT contribution is based on $105 million of full year EBITDA; $15 million of year one synergies, $8 million of which are in the 10-month period of 2018; full year DD&A of $71 million which is higher than our initial estimate by $8 million primarily because customer relationships and IP have a greater value than initially estimated; and tangible assets, therefore, increased, and goodwill has decreased.
We continue to expect the transaction to be accretive on a GAAP basis by the year 2020, and the company is performing as expected. Quarterly Food & Ingredients segment results are expected to improve over the course of the year.
Turning to slide 10, in Sugar & Bioenergy, we expect 2018 EBIT to be $40 million to $60 million, down from $50 million to $70 million based primarily on a lower sugar price outlook. Results are expected to be seasonally weak in the first half of the year and improve in the second half of the year.
We expect full year Fertilizer EBIT to be approximately $25 million and adjusting for the Loders acquisition, we now expect CapEx to total approximately $700 million; depreciation, depletion, and amortization of approximately $690 million. And we expect net interest expense to be in the range of $255 million to $275 million and our full year tax rate to remain in the range of 18% to 22%, which incorporates the effects of U.S. tax reform.
I'll now turn the call back over to Soren.
Thank you, Thom, and I am on slide number 11. As you've heard from Thom, the outlook for this year is very good for Bunge because underlying demand for agricultural products is so strong, it only takes very small changes in supply or demand to have significant impact. In 6 of the last 10 years, we've had some kind of events which changed trade flows and made our markets more dynamic. And after a couple of years of lackluster markets, this year, the event is that we do soybean crop in Argentina and the resulting increase in demand for soy crush capacity in Brazil, United States, and Europe. The improvement in crushing margins and shift in trade flows are significant and play to our strength.
Many factors converged in 2017 to create the challenging conditions we faced. We believe the improved market conditions of this year combined with our global footprint and the benefits from the actions we've taken to be leaner and more efficient put us in a position to approach and even exceed prior peak performance and earnings power over the medium term.
We therefore remain steadfast in our strategy of strengthening and leveraging our global footprint, connecting the integrated value chains in Grains and Oilseeds while growing the share of added value in our portfolio and driving significant efficiencies and simplicity in our operations. We have a clear sense of urgency to grow earnings and cash flows and getting our returns back above cost of capital.
And with that, I will turn it back over to the operator for your questions.
We will now begin the question-and-answer session. The first question is from David Driscoll of Citi. Please go ahead.
Great. Thank you and good morning.
Good morning, David.
Hi, David.
A couple of questions here. So, first, in the $800 million to $1 billion in expected Agribusiness profitability, what is the level of crush margin that's assumed in there at the low end or high end?
Okay. We are assuming from the, let's say, the prior guidance that we gave in February, where we took margins from say an average of roughly $25 to $30 another step from $30 to $40. And that is a weighted average of our crush margins in South America, U.S., Europe, and China, so about a $10 step-up to an average of about $40.
That's terrific. And then on the mark-to-market of $120 million, can you give us a sense on how much of this would reverse out in the second quarter? Is it all of it or is it just about half?
It is the majority that we'll benefit from in the second quarter, so maybe two-thirds.
Right.
All right. That's great. One more question on the crush. So, Bunge has significant crush assets in Argentina, and of course, this is the area that was impacted by the short crop. Can you talk about the impact on those assets and then integrate that with the offsets that occur from your assets in other geographies?
Yeah. I mean the net effect is obviously a significant positive. In fact, most of the increase in the guidance comes from the impact of the global rise in crush margins outside of Argentina. But even in Argentina, margins are better now than they were last year by quite a bit. And that has more to do, I think, with the industry running at disciplined rates considering the size of the crop and not getting ahead of commitments over and above what we're actually able to price from farmers.
So, in Argentina, despite the lower crop, we believe we will have a decent year, but the impact of course in Brazil, in the U.S., and Europe – U.S. and Europe in particular, will be significantly positive.
And then to build on that one question, and this is my last point and I'll pass it on. But in Brazil, last year, there were lots and lots of problems. It wasn't just a crush margin problem. It was just everything related to getting the crop out of there, take-or-pay contracts, pace of farmer selling. Can you talk to us about how the Brazil situation presents itself at this juncture here in early May and how different 2018 will be from 2017? And Soren, I'm trying to not make this a crush margin question but more about the specifics that happened in Brazil last year and really just trying to ask you how much better is the situation in Brazil today?
I would say it's significantly better. Couple of areas, the benefit in crush margins. This whole dislocation is obviously accruing partly to Brazil, but the other thing is that the industry and ourselves included are not on the wrong side of things. We are not chasing neither the farmer nor logistics to fulfill commitments this year as we were last year where everything just started out in the wrong way.
We did what we said, build in a lot more flexibility in our logistics and our approach to the market and sort of let it play out. And that's obviously been the right decision to make. On top of that, the combination of a weaker real and some volatility but upward trending prices in Chicago has given the farmer a good reason to sell.
So the selling pace in Brazil compared to same time last year is probably a good 10% ahead. So we created lot more liquidity at the farm level in Brazil combined with a lot more flexibility in our system and the result is a better outlook for sure.
Very exciting stuff. Thank you for the answers and I'll pass it along.
Okay. Thank you.
The next question is from Ann Duignan of JPMorgan. Please go ahead.
Hi. Good morning. Thanks.
Hi, (25:03).
Soren, just building on your comments about $40 a ton in crush margins, can you talk a little bit about at what price level do we begin to see margin – do we begin to see demand destruction and at what price would DDGs become more attractive or substitute in favor of cheaper feed?
Yeah. I think that is more a question of the absolute level of flat price of soybean meal than it is necessarily a matter of the crush margin. And so far, although meal has taken most of the – made most of the margin increase, it is still not at the level where we feel that we are seeing any demand disruption or shifts to other proteins. In fact, the global marketplace is well supplied with soybeans. So, there's no real reason for the absolute level of flat prices to escalate. It's more really a matter of how the meal situation plays out. So far, we feel we're in good shape, but it is clearly one of those we have to keep watching as the year develops. There is a point, but it is not yet where competing proteins will eat into soybean meal demand. But I think we are still quite a ways from that point.
Yeah, and that's a fair point. I appreciate that. And taking that into consideration and the fact that Argentina will be – probably be back producing normal levels going into next season, Soren, can you talk about is 2018 as good as it gets, and you got to make hay while the going's good?
Well, we definitely have to do that, and we are. But the underlying belief we have in the global soy crush business is that it is a good one for the long haul. Capacity utilization will continue to increase even this year on a global basis, and we think that will continue for a number of years to come. And reality is that outside of China, we need roughly between 4 million and 5 million tons of additional soybean meal every year. And eventually, as the gap of excess capacity closes, we need to create margins that encourage expansion.
You can say that's certainly the case at the moment, but it has to last. So, we believe that the soy crushing business will be a good one beyond 2018. Maybe there will be an adjustment down in margins that would be normal as Argentina comes back next year, but it will still be healthy levels and certainly much, much above what we experienced in 2007 (sic) [2017] (27:40), plus we'll have a full year of benefit instead of what really is three quarters this year.
So, we feel very good about that. I mean, I think Agribusiness is back in a big way, and it's not just crush; it's the entire chain and the value of our footprint. And on top of that, we've got a lot of exciting things going on in Foods, as you know, and Competitiveness Program and so forth. So, there's certainly more to look forward to beyond 2018.
Okay. I appreciate that. I'll get back in queue in the interest of time. Thank you.
Yeah.
The next question is from Robert Moskow of Credit Suisse. Please go ahead.
Hey, thank you, Soren. Obviously, things changed very quickly over the past three months for your outlook for Agribusiness, and I think you even said in your prepared remarks that it only takes very small changes in supply and demand balance to kind of alter the outlook for Agribusiness processors. And I guess that kind of raises a question. If we fast forward 12 months from now, and let's say Argentina has like a really strong crop again, do you think that the industry is better prepared to adjust for that outcome than it was before, or is it a situation where a very small change once again sends prospects the other way? Thanks.
Yeah. I think last year was a big lesson for everybody, and we aren't going to get into the same situation one more time. In fact, utilization rates in Argentina and across all of South America last year and the U.S. in crush were quite significant and should have resulted in much, much better margins than we actually realized. And we talked about a little bit earlier how the whole industry got on the wrong side of the farmer and the market, really had a ripple effect throughout the entire year. I think we know how to operate differently now. So, the underlying health of the crushing business is absolutely there beyond this year, as I just said. And we feel that 2019 in crush should be a very good year and beyond. So, yeah, I think we know how to anticipate this a little bit better and the flexibility we've talked about earlier is absolutely key.
And can I ask a question about that flexibility? I guess, there's no more take-or-pay contracts. What's the risk of separating yourself from that process? Is it that you're more vulnerable to the volatility in rail rates or freight rates in Brazil or what's the downside?
Yeah. Right. Well, first of all, it's not like there are none. They still exist. We've reduced quite significantly. So, it's more a matter of sizing it and finding that correct balance between risk and reward. The risk of not having it all covered and the reward of having the flexibility. And every year, that's an exercise that we go through. We struck the right balance this year.
And certainly, the thing that is clear is not just business as usual. This is something that you really have to evaluate carefully every year. It's one of the biggest commercial decisions you make ahead of a campaign. And I think we, as I said, we learned – we, in the industry, learned a lesson from 2017. And I think we are better equipped now to make the right judgments. But it's not like there are no take-or-pay. There are definitely and there will remain. It's just about how big they are and what is the benefit of going beyond the midpoint. So, it's a process.
Okay. And just so I'm clear, these are commitments and contracts that you have with the rail lines in Brazil and...
Yeah, for travel. Yes. Okay.
And it's just a matter of how much you lock in in advance.
It's just a – a much – matter of how much you commit to in advance.
Okay. All right. Thank you.
All right.
Your next question is from Heather Jones of Vertical Group. Please go ahead.
Good morning.
Good morning, Heather.
Heather.
Hi. So, was hoping you could help us understand a lot of – you read a lot in the media and we're hearing from some that there's concerns about the staying power of the improvement in margins and basically it seems to be a perception that it's all driven by Argentine weather. So I was wondering if you could walk us through some of the other fundamentals that are driving because it seems that the margins were improving well before the Argentine drought. So I was wondering if you could walk us through what are the dynamics that are driving this, that helps you have confidence into 2019.
Yes, of course. I mean the underlying belief in the crushing business is really all about crush capacity utilization driven by strong demand for meal and oil. And we've laid that out on a couple of occasions and it hasn't really changed. Every year, there is additional demand outside of China for roughly 5 million tons of soybean meal that will have to be fulfilled either by eating into the excess capacity that exists, and when that is depleted, additional capacity that has to come on-stream. So, historically, margins have responded to levels of capacity utilization. And once you get above the 80% level on average, interesting things happen. So as you correctly say, we were on the path for improving margins anyways before the Argentine crop development. And I believe that this year would have been a very good year for soy crushing irrespective of the Argentine situation. That only accelerated it and has put a little fuel on the fire, so to speak, for this year.
But as we settle back into a more normal environment next year, we believe it will be at solid margins, significantly above what we saw in 2017. And then, we will, over this ensuing years, again, have to re-approach levels where encourage (33:56) expansion. So, it's really a – it's a story of capacity utilization, evolution over the medium-term, driven by strong underlying demand of protein and oils and, of course, in almost all regions in the world except for Argentina, ample supply of soybeans. So, it's kind of as simple as that.
And hasn't there been a change and even before the drought, a change in Argentine behavior because of the loss to the U.S. market...
Yes.
...and also there's just carry now built into the market because of the export tax regime?
Yeah. That is correct. We saw that starting to play out in this – in the last quarter of last year where the industry as a whole determined the risk reward of crushing unpriced beans was not a good one. In fact, in light of the changing export duty or tax, it was a very bad decision. And so, as we got into the latter part of 2017 and the beginning of this year, the crush rates adjusted quickly to about 60%, which was in line with what we could actually commercialize from farmers. And that led to a rather quick adjustment in crush margins.
In addition to that, I should say, we and probably others took some actions back last August-September by curtailing crush. Part of it was in Argentina, part of it was in Europe, part of it was in Brazil to stem the over crushing that had taken place in Argentina during the period of last summer and that clearly had an impact as this whole situation evolved.
So, there are things we can do and there are things we did to help ourselves adjust capacity and crush levels. And as you mentioned, the crushing in pace with farmer selling was probably the single most important thing that happened as we got into the fourth quarter.
Okay. Two quick final questions, first, how much do you have built into your guidance for improvement in the Grains business? And secondly, how long should we expect that port to be impacted by the ship crashing into it and – the T6 port in Argentina?
We have been relatively conservative on the outlook for the grain origination for the balance of the year, and that's – I would say conservative is a good way to put it both in Brazil and the U.S. In the U.S., the picture for the second half of the year certainly September through December is significantly better than a year ago and that could present an upside. And in Brazil, farmer selling and the whole setup could lead to better margins. So, it's conservative. There's upside in that, which we'll hopefully realize as the year goes along.
And regarding the port in Argentina, thanks goodness nobody got hurt. It was a pretty serious collision. One of the ship loaders got taken out, but it's one of two that served that facility. So, the facility is still operating, but at reduced capacity. And we believe we can channel the flows that otherwise would have gone through the second berth through some of our other installations upriver and it's kind of the advantage of having multiple sites.
So, it shouldn't mean significant – we haven't taken that into account as a negative in our guidance, and we think we'll be able to work our way through, but the ship loader is likely out for several months and maybe until next year, next season.
Okay, but it sounds like you don't expect a meaningful impact on export capacity.
No.
Okay. All right. Thank you so much.
Okay.
Your next question is from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes. Thanks. Good morning, everyone.
Hi.
Hi, Adam.
Maybe a quick follow-up on, I guess, Heather's question on the guidance. So, the increase to Agribusiness, you upped the range about $275 million at midpoint. To be clear, that's entirely on Oilseed crush. There was no – you did not take up the Grains outlook at all with the guidance increase today?
Yes. That's right. That's right. Thom?
Okay.
Yeah. Exactly right.
Okay. And so, and remind – and so for the Grain, so why the conservatism on Grains given the farmer selling environment in Brazil? I mean, we have the soybean harvest in hand at this point there. I guess I understand that there is some uncertainty on the exact size of the safrinha corn crop, but help me frame kind of what would drive – make you still conservative here given where we are with the crop and the commercialization?
Yeah. It's just a matter of seeing how the next month or two plays out. Most of the beans we bought in Brazil, so far, have been allocated to crush because that's where margins were better. And as you said, the safrinha crop at the moment is still – it's definitely lower than a year ago. How much? We don't know yet. It's still early. So, we've just built in a little conservatism on that side. It certainly represents some upside for the year.
Okay. And then, I guess, maybe switching gears on sugar, the plans on creating a stand-alone business and potentially IPO-ing it. I mean, how is – walk us through the process there and alternatives that kind of maybe were explored. Why now, especially given the sugar price environment which has deteriorated in the last few months. And help us think about how you would go about running that stand-alone or what kind of equity stake would you be looking to divest there?
Yeah, I think – I can take the first part. Maybe Thom can take the second. This – a little history or context is probably important. This will be the fourth year in our Milling business where we will be profitable. We spent the last three, three-and-a-half years making significant improvements to that business from a cost perspective, how we run it, how we manage risk around it. And we now have a track record, a lot of improvements, good work has been done. Free cash flow positive, EBIT positive. It's a business now that we feel can stand on its own feet despite the fact that it's been a challenging environment.
On the sugar side, yes, prices are low but we have a fair amount of it hedged for this year and next but we feel equally strong that ethanol will be a good surprise this year. Fuel demand in Brazil is strong. Weaker real combined with higher global fuel prices should price ethanol at a premium and certainly higher than it did last year compensating for a lot of the weakness in sugar. So that combined with the operational improvements means that we still feel this year will be a profitable one.
And from that perspective, what we are now exploring is whether or not that can be translated into successful market acceptance of a business like that. And it is the end of a piece of work that we started a little over a year ago and we now have that option available to us, one that we will exercise if we feel the price is right and value is fair, but not one that we have to move on. But the business can take a market environment like that which would be encouraging to any future investor. But as for the process from here, I'll let Thom describe what you're up against.
Sure. Hi, Adam. Hi, Adam. Yeah, the objective, as Soren mentioned, was to position ourselves to have the options available and be able to execute on them at the right time, based on our judgment of valuation. So, the process of preparing to potentially do an IPO started many months ago, as you can imagine. And of course, the sugar price environment changes over time. So, where we are is – and again, I don't want to say too much about the outlook or valuation or anything like that because we may be making a filing for a public transaction in the near future.
But where we are is we've got a business that is – that can operate on its own, its own management, its own governance, its own risk processes, its own customer relationships. We just executed a financing, so it could – so it'll be – have the opportunity to finance itself on a nonrecourse basis. And we're in a position to move forward with either that public option or a trade sale if that happens to surface at a reasonable value.
So, whether or not we actually pull the trigger will be a function of valuations, whether we think it makes sense at the time. Ethanol is a big piece of the picture here, and if we were to do a public transaction, we would be selling a minority interest. So we would continue to participate in the market dynamics for a period of time going forward. And so all those factors will come into our judgment at the time, but we – the objective was to put ourselves in a position where we had the options.
Okay. I appreciate all the color. I'll pass it on. Thanks.
Okay.
The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.
Thank you. Good morning, everybody. Soren maybe just to ask you on 2019, if we think back when you originally gave guidance, we weren't really talking about Argentina, we weren't talking about Chinese tariffs, but we were talking about a lot of the stuff that you've mentioned in terms of improvement in the underlying operating environment that it's, obviously, pleasing to see is playing out.
But then we were talking about a $550 million to $700 million EBIT range. So, if we think about next year, and I know you don't want to give guidance but if we just sort of at a high level, should we be thinking a bit about what we were talking about before, about that $550 million to $700 million range, or what do you think?
No. I think that it will be higher than that. And again I don't want to put a number on it. It's too early, but it would probably be similar to the range we currently are discussing, knowing that it is still very early, and I don't really want to get into putting numbers on it but better than the initial look. That's for sure.
Okay. And then you put your return slide up, but obviously there's a lot of noise in there because you've got three quarters of, I'll call it, the old environment. And you got a working capital build and you got mark-to-market and all that other stuff. So, where do you think the run rate, return on invested capital is? And based on your guidance for this year, where do you think your returns will wind up ballpark for 2018?
Well, we'll be above cost of capital which is at 7%. How much? I really don't want to put a number on it. A lot of it depends on inventory evolution at the balance of the year. But as you mentioned, one of the big things that's hurting the ROIC at the moment is the fact that we deliberately build up significant inventories, particularly in South America, in anticipation of this good environment. So, that's hurting us now. That should reverse as the year progresses. But by how much, it's hard to tell.
The whole trade situation with China plays into this. But it'll be above the 7% and it should be a significant recovery from where we are now. This is a low point for sure. And so, as we replace a good Q2 with not a good Q of last year, you'll see that bump up fairly significantly starting already next quarter, all else equal. So, I think in terms of guidance, specifically, I think we just leave it at above 7% and then see how it plays out.
Okay. And then lastly, you talked about some optimism on ethanol and I guess there are a couple of moving parts to that that I can think of that maybe you're referencing as well. There's obviously all these trade concerns between the U.S. and China right now. The one that gets center stage is obviously over what they might do with soybeans. But I think it's also plausible that they're going to buy less ethanol from us this year, in which case they probably buy more from Brazil. So, I guess, one, how much of that is a factor in your calculus?
And then two, do you have any views as you think about separating the sugar business? China has made mention about wanting to go to a 10% ethanol blend and so forth and the different ways they could get there, whether it's they do it themselves or they import. But how does all that fit into your view of the ethanol outlook and your decision of what to do with the business?
We have not taken into account in our forecast for the year in the segment any impact on trade with China. The optimism we have around ethanol in Brazil is really just about the domestic equation and competitiveness between ethanol and gasoline. And, as you know, Petrobras is now adjusting prices on a regular basis. And so, the entire increase in global gasoline plus the weaker currency is being translated into better ethanol prices at the pump as the year progresses. So that's really all that's in the outlook, but it is a positive outlook.
I don't know whether or not China would take any additional ethanol from Brazil or not. If that was the case it would be an additional upside. On the other hand, that might then open up the window for U.S. ethanol to go to Brazil. So that's a lot of moving parts that are difficult to put a number on. But the upside in ethanol, whether it is in the current market environment or whether it is through the encouraging signs of the biofuels policy that's under development in Brazil, those are definitely all positives for our business.
In Brazil, 60% of what we produce is ethanol so we are skewed towards ethanol in our Milling business which is a good thing. And a future investor and ourselves as a significant remaining investor should look at that as a positive. So, I would think it supports a good valuation.
Okay. I'll leave it there and congratulations on the better results and outlook.
Thank you.
The next question is from Farha Aslam of Stephens. Please go ahead.
Hi. Good morning.
Good morning, Farha.
Good morning.
Following on Vincent's question about the out year and outlook, could you share with us kind of drivers and growth rates you'd anticipate in the Milling and Edible Oils business?
Yes, we can. Loders, we believe, will be around 6% per annum going into next year. Our own Oils business should be – maybe a little bit less than that, 5%. Milling volumes have started to recover particularly in Brazil. It's hard to put a number on what it might be for next year because it is still so linked to the economic recovery. And so there's no straight line, but I would certainly hope that we would have an increase in our milling volumes in Brazil, this versus last, and then going into 2019 of probably 10%. So, that's about the growth rate we're talking about.
In the Milling business, it's probably more about margins than it is volumes. And in the Oils business, I think the drive that we have towards higher margin added-value products is probably as important of a driver as volumes as well, and we feel pretty confident about being successful on that front, so, good strong growth in both margin and volumes in both Milling and Oils going into next year.
Perfect. And the numbers you just gave us here, those are volume numbers or (50:31)?
Yeah. Those are volume numbers. Yeah. Volume numbers.
And should we put higher margins on those volume numbers going – so would you expect...
Yeah. I would say – in oils, I would say yes. In Milling, it is still in the making. We would like to have another quarter or two in Brazil to reaffirm that. The things from a margin perspective really are getting better. So, hold back on that one a little.
That's helpful. And then just following on – when you think about Agribusiness going into next year, you expressed confidence about keeping earnings flat to next year despite Argentina coming back online. Is it because you expect your Grains business to perform better or your cost savings? What will allow you to offset the increased crush in Argentina so that we could keep earnings flat going into the next year?
Yeah. Well, there are many aspects that I would say are more certain than not. One is the remaining $150 million of the Global Competitiveness Program that will come into play between 2019 and 2020. It is the reversion to some more normal market environment and margins in our Milling business, probably another $50 million. It is a step-up in our organic Oils business, as we just talked about, volumes and margins are favorable. And then it is Loders. Loders, as Thom mentioned, is a $35 million EBIT at the moment on a full year basis and that includes that step-up in depreciation. But on top of that comes business growth plus the remaining $65 million of synergies that we have plugged in for the next couple of years. So between all those factors, and not even talking about Agri business, there should be plenty of headroom for earnings growth next year and beyond.
And in Agri business, as we just talked about earlier, we really have not dialed in a lot in terms of upside in grain origination for this year. We've been pretty conservative. And the same thing goes for distribution and freight and logistics. We've got a big business outside of – out of crush, including soft seed crush which we've also been reasonably conservative on for this year. A lot of this – a lot of the soft seed profitability depends on the crop size, which is still in the making. We're just planting the crops in Canada and in Eastern Europe, but that represents some upside as well. So, there are other things in soy crush that will make up for even a reversion back to something a bit more normal next year. So, we feel good about the total and the ability to grow from wherever we end up this year.
That's helpful. Thank you.
The next question is from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey. Good morning, guys.
Good morning, Ken.
Ken.
Let me just ask the question a little differently. In your prepared comments, you said that you expect to be able to exceed because of your actions, you could expect to exceed prior peak numbers. Can we just explore for a second and say, all right, how much of the raise this year is actually because of corporate actions and how much is just because of the improvement in the operating environment? And then, can you quantify, is it either 2019 or 2020 of what you think that your earnings power has increased because of your corporate actions?
Well, from a commercial perspective this year is, in my view, a return to more normal than last year was for sure. Yes, the Argentine situation has accelerated things a bit, but people would have seen a nice step-up in earnings anyways. Insofar as corporate actions are concerned, we've got many of them. The biggest one is the Competitiveness Program. Thom, you can talk about that in some more detail, but between this year and last year, it's $100 million. And as I just mentioned, there's another $150 million coming. We feel very good about that.
Yeah. Exactly. I mean, we've talked about that on these calls before, and we're tracking to plan. And as you can see, the slide we put in the deck is kind of a directional comparison to first quarter of last year. So, that's a significant driver of earnings.
You can add to that, Ken, the continued focus we have in all the industrial and supply chain efficiencies. Maybe not every single dollar of that goes to the bottom line but, this year, its $80 million. And we've come off several years of having really improved the efficiency of our global footprint. We have more in store. So, that's another big chunk.
And in terms of corporate actions, I would say that includes also investing in things that make sense. Loders is one of those. The crushing capacity we bought in Europe last year which, okay, admittedly, last year didn't feel so good, but it certainly feels really good right now. The Minsa – masa mills we bought earlier this year in the U.S., I mean, those were all – those are all corporate actions or decisions that will boost earnings over the next period.
So, I don't know exactly how you want to add all that up. But there is structural improvement both from a cost and a strategic perspective that will flow into the P&L, part of it we see this year and part of it will come next year and in 2020.
So, you add that all up and is it fair to say you think that, again, you called 2020, it sounds like it's almost at least $500 million, if I was just jotting down stuff. Is any of that probably only call it 75% to 80% will actually flow through to the bottom line. Is that how to think about it? I'm just trying to conceptualize. I asked the same question yesterday to a similar competitor...
Yeah.
...and I was just curious to see the difference, but it almost sounds like you think that more of your investments will get to the bottom line?
I think we do feel that way and the order of magnitude that you just described is about right and I think actually matches up fairly well with the ranges that we gave at Investor Day a year and something ago. We don't feel any of that has changed really. So, you go back to that and you'll see both Agribusiness and Food & Ingredients playing out in those ranges, so yes.
And just my final question is on the potential sale the sugar business, I don't know if you could comment on this, but have you gotten greater interest from Chinese entities given the expansion of the ethanol program in China? Is that because – in the U.S., we had a poor company get bought by a Chinese company, do you think there is a similar propensity for a Chinese company who want to take a Brazilian ethanol company?
I don't think we have a strong view on that at the moment.
Okay. Thank you very much.
So, no comment on it. Yeah. Sorry about that.
No worries. Thanks.
The next question is a follow-up from David Driscoll of Citi. Please go ahead.
Great. Thank you. On the mark-for-market, Thom, I think you said that it all reverses in the second quarter. So, that makes me think that Bunge does not have very much hedged in crush in Q3 and Q4. Is that the right takeaway? And if so, Soren, why would that be the right position at this point in what looks like an incredibly strong crush market?
Yeah. So, what I said is about two-thirds would – we would benefit from in Q2 and the rest for the balance of the year. And in terms of how we put capacity on and sell it over time, it's a dynamic process. We clearly would typically have more for capacity sold in the nearer term and less going out further. And that's all a function of our view on markets and risk return, as well as liquidity in the market to actually transact. And so depending on what's available from a financial perspective or a customer perspective, we layer in these sales over time through a portfolio of contracts and that's what gets mark-to-market.
So, I would say we are – we have a relatively balanced portfolio of future capacity that we have begun to sell going forward. It's heavier in the near-term and lighter in the second half of the year.
You gave a bunch of numbers, but can you just pull it together for me? What's the accretion dilution effect of Loders for the partial year here in 2018?
So, yeah. Let me just maybe just back up to the starting point, which was the original investment piece, time back to the call we had on this which was the first year $105 million of EBITDA, $15 million of synergies and DD&A of about $63 million with the step-up that we had at that point in time. And that would have resulted in on a GAAP basis, dilution of $0.06 or so in the first year.
And that's basically where we are. We're consolidating 10 months for the first year and you could call it probably $0.06 or so of dilution. And we also said that it would be accretive by year 2020 and as a percentage of our overall EPS in that year. That, of course, depends on what the EPS for the rest of the company is. But on the call we had at that time, we sort of landed on $0.30 in 2020 of accretion. And so, assuming the investment case plays out as we had anticipated, and we have no reason to believe it won't, you can kind of extrapolate what a 2019 would look like, maybe slightly accretive on a GAAP basis.
Appreciate the color. Thank you.
There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mark Haden for closing remarks.
Great. Thanks, Kate, and thank you, everyone, for joining us this morning. Really appreciate it.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.