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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 Fourth Quarter and Full Year 2018 Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.
I would now like to turn the conference over to Mark Haden, Investor Relations Officer. 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 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 Kathy Hyle, Bunge's Non-Executive Board Chair; Greg Heckman, the company's Acting CEO; and Tom Boehlert, Bunge's Chief Financial Officer.
I'll now turn the call over to Kathy.
Thank you, Mark, and good morning. As you know, I was appointed Bunge's Non-Executive Board Chair in December of last year, having served on the Board since 2012. Before we get started, I'd like to briefly review today's agenda. I will first make some general comments about our strategic review process and the ongoing CEO search. I will then turn the call over to Greg Heckman, a Board Member who became Bunge's Acting Chief Executive Officer a month ago.
Greg will discuss our results, actions he has taken since becoming acting CEO and our key strategic priorities. Following Greg's remarks, Tom will review our results in detail and provide our 2019 outlook. We will then take your questions.
Over the last several months, we've made a number of positive and significant changes to reposition the company for sustainable future growth. But let me start by saying that we are not satisfied with our Q4 results. We have the global footprint, assets and the team to perform better. And to that end, I'd like to outline three areas, where we're taking action.
First, we have moved quickly to address the critical issue of leadership. In December, we announced that Soren Schroder would step down as CEO. At that time, we hired an executive search firm and began a comprehensive global process to find our next CEO and that work continues.
We recognize the importance of completing this process in a timely manner. In the interim, it is important that we continue to move forward as we work to reposition the company and realize our earnings potential. And that is why we appointed Board Member Greg Heckman as our Acting CEO.
Greg brings 30 years of experience in agribusiness, and food and Ingredients. He also brings a fresh perspective. He has instilled a new level of accountability, speed and execution which is driving our progress. And his strong leadership skills have already had a significant impact. I am delighted that Greg has stepped up to the position of Acting CEO.
Additionally, in the last few months, we refreshed our executive ranks by appointing a new head of Agribusiness, and creating and filling the new position of Head of Global Risk Management. Second, through the Strategic Review Committee of the Board that was formed in November, we have initiated a comprehensive and detailed review of each of Bunge's individual businesses, as well as the company's capital allocation priorities.
Greg will have more to say about this shortly, but we are moving quickly to focus on our core portfolio and ensure that we are investing in the businesses that yield the strongest returns. Third, we have made substantial enhancements to our Board, adding four new Directors and refreshing the Chairs of most committees.
We are a highly engaged Board that is fully aligned and dedicated to enhancing shareholder value. We are working together with the leadership team with a new sense of urgency. And while there are some challenges facing the company and the industry more generally, we are taking the necessary steps to position the business for future growth and long-term success.
Our strong global footprint, talented people, global supply chain, and network of relationships and customers give us a solid foundation on which to build and that is why I am proud to be associated with this company.
With that, I will turn the call over to Greg.
Thank you, Kathy. And thanks everyone for joining us today. I'm very pleased to have been asked to take on the role of Acting CEO. During my 30-plus-years in the food and agricultural industries, I've come to know the products, customers and key players well. I was also very familiar with Bunge, a truly first class company.
Even in my short time leading the company, I can see many strengths. We're the world's largest producer and exporter of soy products. Our extensive global footprint, which would be extremely difficult to replicate includes 32 port terminals, 52 oilseed processing plants, over a 160 grain silos, and 117 food and ingredient production facilities, connecting almost 100,000 farmers with consumers in more than 60 countries.
We have a team of talented people with deep institutional, industry and customer knowledge, who are entrepreneurial and passionate about driving the success of Bunge. I've had the opportunity to meet many of them over the past month and I've been very impressed.
Additionally, our commitment to safety, sustainability and corporate responsibility are core tenets of our culture. These attributes, along with the solid long-term market fundamentals provide the basis for my confidence in the earnings power and growth potential of Bunge.
In 2018, there were many things we did well and which we can be proud. For example, we capitalized on the significant rebound in global soy crush margins, which included securing a portion of our first half 2019 crush capacity before market conditions weakened. This allowed us to capture approximately $100 million of incremental EBIT, which contributed to our 2018 results.
We're also successfully integrating Loders Croklaan with our existing B2B oils business, setting us up to demonstrate the value of this powerful combination going forward. We're already seeing the power of the additional innovation and customer capabilities this combined platform provides.
We are ahead of schedule on cost savings from our Global Competitiveness Program. With approximately $200 million captured over the past 18 months with more to come in 2019, as this becomes a part of Bunge's ongoing continuous improvement in simplification work.
However, 2018 was also a year in which operational and risk management missteps negatively impacted results. And as Kathy mentioned, we're not satisfied with our performance. We had crush plant downtime as well as startup delays that caused us to miss volumes and profits in markets that we're enjoying robust demand.
And while risk management results were profitable for the full year, they were well below typical levels. Combined with the challenging conditions in Sugar & Bioenergy, 2018 could have, and frankly, should have been a much better year.
So clearly, we're not satisfied with this outcome. We know that Bunge can and must do better. And we are working aggressively to address the root causes of these issues. As we enter 2019, we will emphasize 4 key priorities: first, driving operational performance; second, optimizing the portfolio; third, implementing a more rigorous approach to our capital allocation framework; and fourth, improving our financial discipline, making us more nimble, so we can adapt to changing markets and support our customers as their businesses in the industry continue to evolve.
Driving operational performance means a number of things, such as streamlined decision making to be more responsive to market forces, increasing accountability, getting closer to customers to expand our opportunities and sharing best practices across geographies.
Optimizing the portfolio which involves identifying and focusing on the businesses where we can compete and win, it's fundamental to increasing shareholder value, which is our ultimate goal.
As Kathy mentioned, the strategic review committee has been looking closely at Bunge's assets and operations from a fact-based outside-in perspective. We're taking a holistic approach and nothing is off limit as we continue our work.
While the committee's analysis is ongoing that work is already helping our leadership team, assess and prioritize portfolio changes and capital allocation decisions. Given the confidential nature of this work I can't offer more details at this time we're working to crystallize our plans and we will provide additional information as appropriate.
A more disciplined capital allocation process will incorporate learnings from our past investments and prioritize our use of working capital. This along with optimizing the portfolio will help us maintain a strong balance sheet, which is imperative for operating in our industry.
And of course, a continued focus on financial discipline is critical we've demonstrated that we can successfully reduce costs as shown by the $200 million of savings delivered so far through our Global Competitiveness Program, now we'll apply what we've learned across the business as we look for other ways to improve productivity.
And of course, we'll always do this without impacting the quality and safety standards that are hallmarks at Bunge.
And finally, a few words around risk management. This is and will continue to be a core capability for Bunge that's why we're very pleased that Brian Zachman rejoin us in his new role as head of global risk management.
Brian is working to reinforce our decision making and risk management framework across the company. He will help us respond better to the involving environment that defines today's agricultural and food markets.
So to sum up, our priorities are improved operational performance, portfolio optimization, a more rigorous approach to capital allocation and a continued focus on financial discipline. In pursuit of these goals, Bunge will be more performance-focused and strategic with an emphasis on world-class execution. And before I turn the call over to Tom, I'll speak to our guidance.
As you know, we operate in dynamic markets that can change rapidly, making it very difficult to accurately forecast margins volumes. We recognize that trying to predict future earnings based on inputs that are market driven is not useful to investors. And as a result we are changing how we provide guidance.
Instead of providing individual segment EBIT ranges as we have in the past, we will provide directional guidance for the company as a whole based on what the market is telling us at the time. So looking ahead with this framework in mind, we expect 2019 to be a transitional year for Bunge as we continue to evaluate our businesses with fresh eyes, exit some businesses and implement required changes to create a stronger company positioned for sustainable growth.
Given current market conditions, we would expect full year 2019 results to be similar to 2018. Improvements in Food & Ingredients and Sugar & Bioenergy and incremental savings from our cost programs would be largely offset by lower soy crush margins, which are presently well below last year.
Agribusiness market conditions could change and most likely will, but as we mentioned earlier we're not going to try to predict the future, but rather will base our expectations on the current market environment.
Tom will go through the outlook in greater detail shortly. So in summary, I am excited about our future and the opportunities that lie ahead. We have a tremendous global network of assets and people. We are committed to a new level of urgency, accountability and focus on execution.
Bunge's fundamental earnings power remain strong, I am confident that we are focusing on the areas that will ultimately deliver greater value to shareholders.
I'll now turn the call over to Tom to go through the numbers and provide greater detail on our 2019 outlook.
Thank you, Greg. Good morning everybody. Let's turn to the earnings highlights on Page 6. Reported fourth quarter earnings per share from continuing operations was a loss of $0.51 compared to a loss of $0.48 in the fourth quarter of 2017.
Adjusted earnings per share was $0.08 in the fourth quarter versus $0.67 in the prior year. Pretax notable charges totaled $37 million during the quarter, primarily related to the Global Competitiveness Program, the early extinguishment of debt and impairment charge and acquisition related integration costs.
Total segment EBIT in the quarter was $70 million compared to $55 million in the prior year. On an adjusted basis, total segment EBIT was $107 million compared to $155 million in the prior year.
And Agribusiness adjusted EBIT was $55 million, $23 million less than the prior year, which was primarily due to the reduction in the value of the company's Brazilian soybean ownership as factors related to China trade and demand caused Brazilian prices to converge with U.S. and Brazilian new crop bean prices.
The approximately $125 million loss associated with this reduction impacted results in both grains and oil seeds. In oil seeds, structural soy crush margins were higher in all regions due to more favorable market conditions with the exception of Argentina where margins were lower due to tight bean supplies resulting from the drought and farmer retention.
Total soy crush volumes were similar to last year as higher volumes in the U.S. and Europe were offset by lower volumes in South America. Results in softseed processing were higher than last year as improved structural margins in Europe more than offset lower margins in Canada.
Oilseeds trading and distribution results were negatively impacted by the reduction in the value of our Brazilian soybean ownership as described earlier. There was no significant impact from mark-to-market in the quarter as gains were offset by losses consumed from prior periods and other timing differences.
For the full year 2018, we recorded approximately $100 million of mark-to-market benefit relating to 2019 forward crush commitments.
Moving to Grains. Lower results in the quarter were primarily driven by the Brazilian soybean impact. Origination results in Brazil were also pressured by very little farmer selling of old and new crop beans due to tight supplies and a drop in local prices.
Results in North America declined due to lower structural margins and volumes, which were primarily impacted by decreased soybean demand from China. And results in grain trading and distribution were comparable to last year.
For the full year, while Agribusiness did not close the year as expected, the segment showed significant year-over-year improvement, generating $709 million of adjusted EBIT, compared to $332 million in 2017, an increase of 114%, driven by strong soy and softseed crush margins.
Food & Ingredients adjusted EBIT was $73 million, compared to $70 million in the fourth quarter 2017. Edible oils adjusted results of $56 million were $6 million higher than last year, driven by the contribution from Bunge's Loders Croklaan and improved performance in Europe, which benefited from higher volumes and lower unit costs.
Results in Argentina were also improved on higher volumes and margins. Results in North America and Brazil were lower than last year.
For the full year, edible oils adjusted results of $142 million were $10 million lower compared to last year, primarily driven by lower margins in refined oil. The strong soy crush environment during the year increased soy oil stock pressuring margins, particularly in Brazil and North America.
Loders Croklaan has performed well since we acquired our 70% interest in March. The integration is proceeding. We've achieved $10 million in synergies consistent with the investment case and the company is within a few percentage points of the investment case EBITDA after adjusting for temporary acquisition related amortization and commodity price timing variances.
Milling adjusted results of $17 million decreased by $3 million as compared to the fourth quarter of last year. Higher margins and volumes in Brazil were more than offset by lower margins and volumes in Mexico. Results in the U.S. were similar to last year.
Sugar & Bioenergy, quarterly adjusted EBIT was a loss of $48 million, compared to a loss of $8 million in the prior year. Results were significantly below our expectations, primarily due to the combination of sustained rain during the quarter negatively impacting sales and unit costs and lower than expected ethanol prices, which were unfavorably impacted by the decrease in retail gasoline prices in Brazil.
Compared to last year, lower results were primarily driven by lower sugar prices and weather-related reduction in sugarcane crush volume and yields, which was only partially offset by higher average ethanol prices. Fertilizer adjusted EBIT was $27 million compared to $15 million in the prior year.
Higher results in the quarter were driven by our Argentine operation were lower costs related to prior restructuring actions more than offset lower volumes and margins. Additionally, fourth quarter results included the remaining $6 million recovery of foreign exchange losses recorded in the second quarter.
Adjusting income taxes for notable items, the effective tax rate for the year was 26%. The higher than expected rate was primarily due to earnings mix and the loss in Sugar & Bioenergy, which added an incremental 4 percentage points to the rate.
Let's turn to Slide 7, the cash flow highlights. In 2018, we generated approximately $1.1 billion of adjusted funds from operations, an increase of 23% from the prior year. The cash flow generation enabled us to fund CapEx, increase our common dividend and begin to pay down debt used to acquire Loders Croklaan in March.
Turning to the highlights of our balance sheet on Slide 8. While net debt of approximately $5 billion increased as compared to 2017 due to higher inventories and the acquisition of Loders Croklaan, it was significantly lower than the $7 billion balance at the end of the third quarter.
It's important to note that our debt largely finances our inventories. As the chart shows on the slide, more than 90% of our net debt was used to finance readily marketable inventories at the end of 2018.
Let's turn to Slide 9 and the capital allocation process. We remain committed to our financial policy targeting a BBB credit rating and to maintaining access to committed liquidity, sufficient to comfortably support our Agribusiness flows.
We're rated BBB by S&P and the equivalent of BBB minus by Moody's and Fitch.
We ended the year with committed credit facilities of approximately $5 billion, of which $4.5 billion was undrawn and available. During the fourth quarter, we extended $1.7 billion of committed bank facilities maturing in 2019 through 2023 and earlier this week, we increased and extended our $800 million securitization facility.
With our 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 in capital spending investing $493 million in CapEx in 2018 compared to $662 million in 2017. We've invested $981 million in acquisitions, the most significant of which was the acquisition of Loders Croklaan and we've paid $305 million of dividends to shareholders.
Let's turn to Slide 10 and our return on invested capital. Our trailing four-quarter average return on invested capital was 5% overall and 6.5% for our core Agribusiness and Food businesses, 50 basis points below our 7% cost of capital. Our goal is to earn 200 basis points above our cost of capital on those segments. And as Greg laid out earlier, increasing our returns and simplifying our business is a top priority.
Let's turn to Slide 11. We announced the Global Competitiveness Program a year and a half ago. The program is focused on reducing our cost base and simplifying our organizational structure to drive efficiency, help us scale the company and realize significant additional value from our global platform. When we announced the program, our goal was to achieve a reduction in SG&A costs of $250 million by 2020, as compared to our 2017 addressable SG&A baseline of $1.35 billion.
Initially, we expected cumulative savings of $100 million in 2018 and a $180 million in 2019. In 2018, we've achieved actual total savings of $200 million as compared to the baseline, double the initial target.
The cost reduction can be tracked directly to our SG&A expense line and our financial statements as shown on the slide. The improvement comes from our ability to meet our stretch indirect spend targets, while maintaining momentum in organizational efficiency. Cost reduction is roughly equally split between indirect spend and employee costs.
Moving to 2019, we expect to realize an additional $50 million of savings as we consolidate the next phase of work into shared service centers. As I said at the outset of the program, some of the $250 million of SG&A savings will be reinvested in new technologies and capabilities. I expect we'll see some of this reinvestment in 2019, as we transition and reposition the company.
In addition to the Competitiveness Program, we achieved approximately $90 million of industrial cost savings and efficiencies in 2018 through our ongoing programs, which roughly offset the impact of inflation on our cost.
Let's turn to the 2019 outlook on Slide 12, given current market conditions, we would expect full year 2019 results to be similar to 2018, but with a change in the mix. In Agribusiness, given the current soy crush margin environment, where margins are materially lower than last year and historical averages, results in oilseeds would be lower compared to 2018.
Actual crush margins over the course of the year are likely to evolve based on U.S./China trade relations, crop sizes and the pace of farmer selling among other things. Based on the softseed crush margin environment, the outlook would be slightly improved compared to 2018. Actual margins will largely be impacted by the size of the softseed crops, which will be harvested later in the year.
Improvements in risk management and how we operate should support higher results in grains versus last year.
In Food & Ingredients, full year results will benefit from 12 months of ownership of Loders Croklaan and increased synergies from the integration with our B2B business. And favorable milling and operating environments in Brazil and the U.S. will be partially offset by more challenging conditions in Mexico.
Turning to Slide 13, Sugar & Bioenergy, based on normal weather patterns and the current forward sugar and ethanol price curves, we would expect full year 2019 results to be approximately breakeven compared to a loss of $105 million in 2018. And we'd expect to crush approximately 19 million tons of cane. With approximately 60% of our sugar hedged for the year, the primary drivers in profitability will be the impact of weather on the sugarcane crop and Brazilian ethanol market prices.
The international sugar trading and distribution business that we sold in 2018 generated losses of approximately $25 million that year. Those losses will not reoccur.
And as in past years, results will be seasonally weighted to the second half of the year with an expected loss in the first quarter. In Fertilizer, based on current market conditions, full year results would be lower than last year.
We expect 2019 CapEx of approximately $550 million, DD&A of approximately $650 million, net interest expense to be in the range of $290 million to $310 million, and the full year effective tax rate to be in the range of 22% to 26% based on the anticipated mix of earnings.
With regard to the first quarter, we expect Agribusiness to be soft with a slow start to the year, while Food & Ingredients results should be solid. And we would expect seasonal losses in Sugar & Bioenergy and Fertilizer.
I'll now turn the call back over to Greg.
Thanks, Tom. Thanks again for joining us today. I hope you come away with a better sense of our priorities and how we're positioning Bunge for the future. We have a solid foundation and the entire management team is committed to realizing Bunge's full potential. This will take some time, but we're establishing a clear direction. And I am confident we can better leverage Bunge's strengths with increased focus and improved execution.
While the work of the Strategic Review Committee is pivotal, it is already helping us to make operational changes to improve performance and to make decisions about where we should and should not focus our resources and deploy our capital.
We remain a laser focused on creating value for our investors and all our stakeholders. And we understand the urgency of the situation. We'll update the market as soon as we have additional progress to report.
Thank you. Operator, we're now - please, open the line for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from David Driscoll of Citi. Please go ahead.
Great. Thank you and good morning.
Good morning.
Good morning.
Okay. So I had two questions and I'll pass it along after. The first one just relates to the guidance on the year. So if the - it looks to me like return on invested capital excluding Sugar is projected to be below the 6.5% that you achieved in 2018. Crush margins are well above historical norms. So while I appreciate that they're down year-over-year, they're still externally strong.
You've got cost savings, and you've got the Loders' synergies coming in. Can you just explain like if you have $0.90 crush margins, this isn't enough to get you to a return on invested capital at 7% or better from those businesses? And I think a lot of us probably just like to hear your thoughts, Greg, as to why. And then I have a follow-up, please.
Okay. Let me start and if I miss anything Tom will fill in. While we look at - you mentioned historical numbers, while we look at the history, what we're doing now is - what we're looking is what the current market is giving us. And we're not saying that we are smarter than what the current market is. And based on that, and while the U.S. and Europe look better right now than history, South America both Brazil and Argentina are definitely both below cost right now.
So that's what went into our outlook. There are definitely a lot of drivers that can affect that as we go forward. When the farmer commercializes his crop in each of these markets, of course, the outcome of U.S./China trade discussions, the ultimate size of the soybean crops, the biodiesel demand where that shakes out, and then of course, ultimately livestock margins and demand.
So there's no doubt we've got a number of moving pieces. And what we're trying to make sure is that we have the company in agile and nimble position that as things develop that we're able to maximize our margins and capture all that that we can. But what I don't want to start out here is making a lot of promises on a marketplace that doesn't exist today.
Okay, and then, my follow-up would just be, you said in your script, Greg, that the earnings power story is - or the earnings power is strong for the company. But 2017 numbers wouldn't agree with that, 2018 numbers wouldn't agree with that, and 2019 numbers wouldn't agree with that. Why do you think the earnings power is strong and what is this earnings power?
It's been a tough number of years. And risk management, you called it out, but from our point of view, it's been lacking significantly at the company. What is the earnings power and what gives you confidence that you can achieve it in any reasonable timeframe?
Well, the work that we've done at the Strategic Risk Committee, part of that's been looking very granularly at individual units and the historical earnings power. It's also given us the ability to look at past returns on capital, projects not only M&A, but internal and organic.
It's - as you said, risk management is a core tenet. It's a core capability of this company. And it's something that we believe we can strengthen and improve. There are huge physical flows that move through this origination platform, and through this processing, the food and commodity processing. And we've got to manage our risk and the customers' risk.
We've got to do a better job of that and make sure that we're nimble and agile for the environment that we're in. And based on my history, and some of the other folks that have been here and some that have joined recently, as we look at that, we believe that that earning power is here. And then, through the portfolio rationalization, look, we've got a great global footprint. We've got a leading position in a number of these businesses.
And what we've got to do is we've got to drive those businesses. We've got to make sure they get the lion's share of our resources. And those are the businesses that are meeting our growth and return standards that have a strong market position that are in a position to compete and win and relevant to the customers.
And then, we're going to fix those businesses that we believe can be in that category, but are not today. But we are going to have very specific plans to fix those and to fix them on a very defined timeline. And then, we're going to exit those businesses that we don't believe can get there on the right timeline. And those are businesses, where maybe we're not the best owner. And as we've said similar to the public position on Sugar, we'll - where Sugar we'll list or sell or JV it when the time is right. But we'll own it like we're going to own it forever.
In the meantime, that on these other businesses we'll sell or JV or partner them if we think we're not the best owners. And that's why I believe that the earnings power of this platform exists.
All right, well, thank you for the comments and we'll look forward to further updates. I'll pass it along.
The next question comes from Heather Jones of The Vertical Group. Please go ahead.
Good morning.
Hi, Heather.
Hi. Going to your portfolio optimization comments, do you think we are going to see anything substantive on that front in 2019?
As you can imagine, there is a lot of work that - not only that the SRC has done a great job, giving us an outside-in look, and now is the leadership team in the company, we're working to activate plans and do further analysis on some additional pieces. It's confidential and sensitive in nature to ensure that we maximize the value for shareholders. And what we will promise is that we will give you updates absolutely as soon as we can.
Okay. And then my second question, I get what you're saying about the current environment in Brazil and Argentina and all. I'm just trying to get a sense of when you all are looking at the full year, what is figuring into your thoughts on soy crush. So I was just wondering what assumptions are you making with regards to African swine fever that has basically reached seemingly epidemic levels in China. It's now in Vietnam.
What assumptions are you all making as far as demand et cetera on that front, for your outlook, full year outlook on soy crush?
Yeah. We are like everyone trying to get every bit of public information that is available and trying to assess this. But what we've rolled up is it definitely could affect demand slightly. But demand, between meal demand and what crush has been at it, it's been pretty much in balance.
And we think that will continue. And then as we look at the forward margins in the marketplace, we're saying that the market is taking those factors into effect. And that's what we've used for our outlook.
Okay, thank you so much.
The next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.
Thank you, and good morning. Would love to get your philosophical view on risk management past, present and future, and I guess what I'm asking is - can you define what you mean by - in other words, do you mean that that the company should be taking more proprietary positions to make money when it thinks it knows something that the market doesn't understand? Or do you mean that you want to have a more hedged operating book to try to take out some of the volatility in results, and even if that means earning less money, but having a less volatile and more predictable stream of earnings, what is the thought process going forward?
I think our thought process is that - it's our job to manage the risk, to help our customers, which are in both ends of the supply chain when there's a distribution business or Food & Ingredient businesses. You don't manage their risks and we have to manage the risks of the inputs and outputs in our business.
And as you know that's a lot of difference in timing from when things are produced and when they're consumed. It's a lot of risk in geography from where things are produced and consumed and all the - the transportation, it goes along with that so when I say it has to be a core capability, it's our job to manage that risk that many times is put on us as we're working with our customers. And our job is of course to, to get that risk back into the market places as quickly as possible and locking our margins.
I mean, at the end of the day, we want to provide the highest return with the lowest volatility of earnings and that is our ultimate goal, so as we continue to make investments in our network of assets that make us relevant with customers in our systems, in our processes and in our people, it's all about driving the ultimate earnings, the returns and driving it with less volatility.
And there's a follow up on Food & Ingredients and capital allocation strategy. And would you support further acquisitions like Loders or do you think that the company used to sort of concentrate on the core Agribusiness part of the portfolio. Is there really a place to be so far downstream and you think their stock can get appropriately valued for those types of investments?
Food & Ingredients is one of our core platforms, Loders is a fantastic property that not only on its own, but how it fits in with us and we're already seeing that that is helping us meet many of our goals and the customers that we want to grow with and the ability to innovate around our oils platform. And we're also now starting to really focus on the protein platform, working with outside parties and working on how we innovate and value up that stream as well. So as far as acquisitions it will be - and growth it will be at the right time and the numbers have to make sense and we will be pressure testing and stress testing any returns to ensure that they enhance ultimately shareholder value.
It sounds like you are satisfied with that Loders investment, is that correct? And then I'll pass it along.
Yeah, it's on track, I mean, Tom, if you want to touch on that real quick?
Yeah, I mean, when we announced the transaction, year ago September, we talked about what the results would be for this year and what our three-year targets were and we are tracking to that. So this will be a transition year for Loders as we ramp up the integration with our B2B business and get synergies from cross-selling and logistics supply chain as well as operational synergies, but we are - it's tracking well to the investment case.
All right, thank you very much.
The next question comes from in Ann Duignan of J.P. Morgan. Please go ahead.
Yeah, hi, good morning. I do commend you for not trying to give guidance in this year of heightened uncertainty. As I look across your businesses though, in my mind Argentina might be the biggest swing factor, given that it's likely to grow something around 55 million metric tons of beans. And I'm not quite sure whether they're going to crush and export more meal/oil or whether they're going to export beans and what that could do once again to the whole supply side of the equation. So could you just tell us what your thoughts are on Argentina? If you think it is also one of the bigger wildcards going into 2019 and what your outlook is?
I think you've framed it well. We do believe it's one of the larger wildcards and yes they do have a very large crop, so I think everyone expects the industry to crush more year-over-year. I think we look at 2017, which is a pretty painful year for the industry. So our view is everyone staying much more spot, much more nimble as they see what the farmers are going to do and when he's going to commercialize his crops. It looks like with what's going on there from a macro standpoint, if history is any judge, he'll market his corn and wheat and he'll probably hold his beans as a hedged inflation and the FX exposure. So it is a wild card and it's one that we're watching. And I think the key word is nimble, we're not going to try to outsmart that.
Okay, I appreciate that. I guess as harvest starts well, we'll get some sense of what's going on there. And my follow up and it's just - I think back to the United States, I mean, the USDA is forecasting U.S. soybeans to be down only I think about 12% for the full marketing year versus they're down almost 40% year-to-date and the lion share of the exports happened before the end of January. Can you talk about what you're hearing out there in the marketplace and what's your expectation or do you think that the USDA has gotten it wrong or do you think that China is going to suddenly turn around to buy significantly more U.S. beans at the expense of fat American beans, I'm kind of confused by the USDA's outlook currently. And I'll leave it there. Thanks.
Okay. Thank you. Well to stay with our theme of not trying to predict the future, I don't think I want to touch that one. As you said, it's confusing, the markets trying to assess it and we're again trying to stay very nimble as this develops.
Okay, I appreciate that. I'll take it offline. Thanks.
The next question comes from Robert Moskow of Credit Suisse. Please go ahead.
Hi, thank you. Greg, you mentioned that you're going to be evaluating a lot of Bunge's businesses for potential divestitures. Can you give us a sense of how many businesses there are within Bunge, I mean, I see the divisions within Agribusiness and Food & Ingredients, but frankly if you told me there's 20 businesses within those businesses, I wouldn't be surprised. There's a lot of regionality to the business and there's been a lot of acquisitions over the years. So can you just give us a sense of, like, how many different assets are kind of being evaluated separately? And then secondly, is there any effort to think about the business overall geographically as you're thinking about asset sales, can you hive off different geographic regions or does it all have to be part of a global network? Thanks.
Yeah, and let me correct. I think what I said is we're evaluating not on the assets, but the businesses. So of course, we're cutting that analysis several different ways from the top down regionally, along value chains, by individual asset within the value chain. And I don't believe if I did, I'll correct myself that it will be exiting several business, I said we may exit some businesses as part of our analysis. So I won't comment on anything specific right now, but we definitely look forward as we make progress to report it and to help you understand our thought process and why we're doing, what we're doing.
Maybe I could ask a quick follow up. When you say individual assets within the value chain, is that also a way to think about potential divestitures, like, an asset within the value chain might be subject to a sale?
Yes, we said everything is on the table. Everything is on the table to improve our returns, which the markets have been very clear to us and they are not where we want them to be and we understand what the market is telling us. And that's up with the right network to be really relevant with customers and be able to drive growth at the right returns.
All right, thank you.
You bet.
The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes. Thank you, good morning everyone.
Good morning.
Maybe taking the question on divestitures and just portfolio overview and that is totally different light. Just trying to think about kind of, the spread between the asset values and replacement cost of the physical infrastructure that you have - the level of working capital inventory investment you made in the businesses and what the equity market is telling you, the company is worth.
And I'm hoping you could just talk about where you think the bigger disconnects are on that maybe whether it's by region business line, where you think the bigger disconnects are and I guess that in part comes from the earnings generated from those assets relative to what the physical book value is and I'm just trying to hone in on where you see the biggest opportunities for value uplift across the company?
Yeah, if I understand your question correctly, I think it's been - it's about us operating this platform, is getting the platform right and operating it with more consistent earnings at higher returns, but also doing a better job of making sure that you understand how we made our money and how we performed versus the opportunity that we had. And that is another - another really important thing is being understood. And we're going to work on both of those, better performance and being better understood on what the power of the platform is and how we're operating versus the environment that we have.
So maybe just to be clear, is it your view that the issues on the earnings performance and the disappointment that's been generated from earnings and the lack of returns on capital is more a function of the operational execution and risk management as opposed to a question on physical asset investment itself, whether that's fixed assets or working capital - it's more of a question of the earnings as opposed to the invested capital.
Let me jump in here as well to give a perspective. I think it's a combination of those things. There's the risk piece, there's the operations. There's the underlying cost base that we're working on. But this portfolio piece of that is a very important component because we have got capital tied up and things that are not producing returns and are not integral to our platform or our value chain and we can free up that capitals, both working capital and PP&E. And so the combination of freeing up capital in the areas where it's not earning a return for us, it's not important to our business and is diverting attention of management and making our business more complicated. Combined with those other factors that you mentioned provides a - back to the earnings power question, provides some powerful growth to the business.
Okay, and just on this process, I mean, I know you kind of updated as available, but is there any expectation you want to set on, if we didn't hear something by midyear, end of year, like, how should we measure kind of the ability to have a plan in place and when that can be communicated?
I mean, I think we'll - the next time you'll likely hear from us is when we announce a transaction or the next quarterly call and we're moving through this process as quickly as we can. And prioritizing particular areas of the work and will report back to you when we have progress.
All right, I appreciate the color. I will pass along. Thanks.
The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, guys.
Good morning.
So a couple questions, one is how much was the effect on risk management in 2018 relative to historical levels?
Well, we just talked about $125 million in Q4. The…
Yeah, but you said it was higher year-over-year in 2018 versus 2017, but yet it was lower than typical. So I kind of try to figure out what the magnitude of the shortfall was in 2018.
Yeah, so it was higher - the whole activity was better and higher in 2017 than it was in 2018. We were profitable on 2018. We just talked about the $125 million shortfall. And we could have done - so there was that gap plus we could have done better. And so, looking forward, and normalizing for that it's $125 million plus, which was the gap.
So, plus $75 million or $200 million more? What…
I mean, it depends on the year really and how it interacts with the rest of the - or the structural business, but…
Well, let me say like, so you're bringing back a risk - you're bringing back a risk manager who hasn't been there for 5 years. Who - prior to the 5 years, Bunge would have some risk management issues, but generally would be once every 4 to 5 quarters, not every quarter, right? So if I go back 5 years and I kind of normalize that, what is the shortfall in 2018 relative to 5, 6 years back?
And then on top of that, what was the operational missteps as well with lost volumes and lost profitability? Some sort of magnitude of that would be very helpful. And I'm not - I know everybody is asking about what's the change of risk management. I'm just asking what is the factual side of the difference.
Yeah, I understand what you're asking, Ken. But, I guess, what I want you to think about, it's the framework of how we're going to operate going forward, which is continuing to drive all of the profitability possible, by managing the - that it is structural profitability, that the risk we're taking is appropriate to drive our risk adjusted returns, which is the risk of running a big global physical business and trying to manage that in a way to bring our volatility down.
So it's a process I would be - it would not be right after a short period here to say we have every answer. But we know philosophically where we're going. And we've seen - we manage risk with this team and a lot of different food processing, commodity processing, animal processing industries. And, boy, we know how to do that.
Okay. I guess, what - okay, I'll drop, but my point is, look, Brian is coming back. He did something 5, 6 years ago, that was pretty stable, created a risk management system that actually worked. I'm assuming, he's going to reapply that. Therefore, there is a structural decline relative to 5 years ago. But there is a misstep relative to last year that you should recoup.
So I was just trying to get that systematic in structural earnings change - but okay, it sounds like we will take it offline. And then, the second question is, again, on the portfolio optimization, I get that you don't want to tell us anything going forward. But what is the criteria to which you are using?
Yeah, it's a little bit what I was talking about earlier. We have to be in a leading position in the market, which is really around a - it's really a top-3, which makes us relevant with customers. It has to meet our growth and return standards. And it has to fit in with where we are seeing the macros, the drivers in the marketplace. It's just where the long-term growth is going as well. And if it doesn't fit in there, we have to believe we can get there in a very short defined path and time period.
So it's - so just to think about it, it is the market position and seeing if you can get into the market position, not return on capital or any other criteria, it's just the - if you are number one, two or three and if you can get there, is that the best way to…?
No, no, no, I said - no, I said also return on investment and the growth profile.
Okay.
Yeah. No, no, no, it's got to meet those. But a big part of meeting those is being in a market position, where you're relevant to customers and you've got the network to manage your risk and to serve customers and be in position to grow. And those are the businesses that will get the majority of our resources for growth.
Okay. And then, sorry, I asked the other question before. But just how much operational issues impeded your numbers in 2018 and that would likely recoup in 2019? I think you mentioned that you guys had some startup delays and something else with minimizing volumes.
Yeah, I mean, that would amount to about $50 million of lost opportunity in 2018.
Is that a typical year or is that atypical?
Well, I think it's atypical. We had some startup issues. And a lot of crush facilities are running flat out, given the environment last year.
Okay, I appreciate that.
It would be atypical, which is why we called it out.
Okay, great. I appreciate it, guys.
You bet.
And we have a follow up from Heather Jones of The Vertical Group. Please go ahead.
Thanks for taking the follow-up. And I just - Greg, I know you haven't been in that role long, and so - but I just - I think people are trying to get a sense of how you view capital allocation in your thinking. And going back to Vincent's question about Loders, I guess, I get what you're saying that it fits strategically.
But at the time, it was a nearly 13 multiple acquisition. And I guess - I think that's a bigger question is do you think - not that it fits strategically, but do you think paying that kind of multiple given where Bunge is trading, would you have deemed that a prudent use of capital?
I'm not going to rule on the past. What I'm going to tell you is it is a fantastic platform and the one thing is we are creating a lot of urgency and focus around ensuring that we get all the value out of that platform as soon as possible. And that is an important part of our growth and improving our returns profile.
Okay. Thank you so much.
And we have a follow-up from David Driscoll of Citi. Please go ahead.
Great. Thanks guys for taking the follow-up. Greg, I had a question on just cost competitiveness and focusing on the Agribusiness. One of your competitors has the biggest cost savings program in that company's history going on. And they are really driving cost out of the business. When you look at Agribusiness right now, do you think Bunge is a low-cost leader or do you think that there is significant work that needs to be done to further reduce cost in that segment?
I just generally believe in these cyclical and seasonal businesses that reducing cost is a never-ending challenge. The marketplace continues to evolve, our customers, our suppliers, our competitors. And you have to build these businesses with a cost profile for the bottom of the cycles. And so, that you are the one that is in the best position at the bottom of the cycle which puts you in a really good place on the average cycle and the top of the cycle.
So we have done a great job with the Global Competitiveness Program. The company has developed some muscles and capabilities that we'll be able to continue to lean into. So, it is part of the DNA that is developing and we'll continue to drive that forward.
And then, I had a follow-up on the risk management issues in the fourth quarter. There's something I just don't understand is, and so the company took a very significant bean position. I think it was historically the largest bean position Bunge has ever had in its Brazilian operations. That started in the second quarter and those inventories carry into Q4. The situation goes wrong and those bean inventories turn out to be a big problem.
The question is, from your view, what goes wrong on risk management here? How do you protect the business from a hit like we've taken in the fourth quarter? Was it something when you say, hey, look, they did a good job, the situation goes against them, it is what it is? Or can you really do a better job in risk management, so that we're not facing these kinds of issues in future quarters? It's a big hit in the fourth quarter and I think it needs some explanation.
Let me say that, the first thing without playing Monday morning quarterback, having kind of just arrived on the scene, my history and philosophy has been about risk is that you really have to run these businesses with a focus on that the risk matches the earnings power. And so it's a risk adjusted approach and that's how we want to drive the business going forward.
Okay. I'll leave it there. Thanks so much.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Haden for any closing remarks.
I appreciate it, Andrew. Everyone, please feel free to reach out to me today if you have any further questions. And thank you again for joining the call this morning.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.