Bunge Limited (NYSE:BG) Q1 2023 Earnings Call Transcript May 3, 2023

Bunge Limited beats earnings expectations. Reported EPS is $3.26, expectations were $3.24.

Operator: Good morning and welcome to the Bunge Limited First Quarter 2023 Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ruth Ann Wisener. Please go ahead.

Ruth Ann Wisener: Thank you, operator and thank you for joining us this morning for our first quarter earnings call. Before we get started, I want to let you know that we have slides to accompany our discussion. These can be found in the Investors section of our website at bunge.com under Events and Presentations. Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are posted on our website as well. I’d like to direct you to Slide 2 and remind you that today’s presentation includes forward-looking statements that reflect Bunge’s current view with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties.

Bunge has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and we encourage you to review these factors. On the call this morning are Greg Heckman, Bunge’s Chief Executive Officer; and John Neppl, Chief Financial Officer. I’ll now turn the call over to Greg.

Greg Heckman: Thank you, Ruth Ann and good morning, everyone. I want to start by thanking the team for their continued focus and strong execution. While the volatility in the quarter was less than we experienced last year, we’re still in a highly dynamic operating environment. The resiliency of our team are deep partnerships with customers across the value chain and our global platform enabled us to deliver another quarter of strong results. Our focus is on continuing to invest in strengthening our business so that we can provide customers from farmers to end consumers with solutions to some of the most pressing challenges facing them not only today but as we look ahead. The work we have done to improve and integrate our operational, commercial and risk management approach has enabled us to effectively manage through supply disruptions, severe weather impacts the lingering effects of the pandemic and the volatility in financial markets.

When we execute and capitalize on the options our global footprint provides us along with our team’s commitment to quality, service and innovation, we create value for all of our stakeholders. In short, we continue to demonstrate that our team and our diverse platform give us the ability to succeed in any operating environment and help our customers do the same. Turning to the first quarter; while many of the factors that drove extreme volatility this time last year are still in place, markets have stabilized somewhat. Our numbers this quarter reflect performance that was among the best in first quarters in Bunge’s history, although down from prior year’s record results which reflected those major market dislocations. Adjusted core segment EBIT in the first quarter benefited from a record performance in Refined & Specialty oils, offset by lower results in the remaining core segments.

This is an industry that requires a long-term view and we’re managing our business to maximize our earnings power over long periods of time. Our EPS over the last 4 years demonstrates the impact of the team’s hard work to drive operational performance, optimize our portfolio and strengthen our financial discipline. Looking ahead and based on what we see in the market and the forward curves today, we are reaffirming our guidance for full year adjusted EPS to be at least $11. I’ll hand the call over to John now to walk through financial results in detail and we’ll then close with some additional thoughts on the remainder of the year. John?

John Neppl: Thanks, Greg and good morning, everyone. Let’s turn to the earnings highlights on Slide 5. Our reported first quarter earnings per share was $4.15 compared to $4.48 in the first quarter of 2022. Our reported results included a positive mark-to-market timing difference of $0.84 per share and a positive impact of $0.05 per share related to onetime items. Adjusted EPS was $3.26 in the quarter versus $426 in the prior year. Adjusted core segment earnings before interest and taxes, or EBIT, was $756 million in the quarter versus $858 million last year. Agribusiness started the year off well. However, results were down from last year’s particularly strong performance. In processing, lower results in the quarter were primarily driven by soy crush.

Improved performances in North America and Brazil which benefited from strong protein and oil demand and reduced Argentine exports were more than offset by lower results in Argentina, Europe and Asia. In merchandising, results were lower in the quarter as margins declined from last year’s levels which were impacted by market disruptions due to tight supplies and the war in Ukraine. Refined and specialty oils also started the year off on a strong note. All regions performed well with notable year-over-year improvements in North America and South America, both of which benefited from strong food and renewable fuel demand as well as effective utilization of our distribution network. In Milling, lower results were driven by South America where the small Argentine wheat crop negatively impacted our local upstream merchandising.

This was partially offset by stronger structural margins in our milling operations in Brazil. Results in the U.S. were down slightly. Segment results in the prior year benefited from very strong South American origination margins during a period of high market volatility. The increase in corporate expenses in the quarter was largely driven by growth-related initiatives, offset in part by an increase in other results primarily related to Bunge Ventures. Lower results in our noncore sugar and bioenergy joint venture were primarily driven by lower Brazilian ethanol prices and higher costs. Adjusting for notable items, net interest expense of $69 million in the quarter was up compared to last year, primarily due to higher variable interest rates, partially offset by higher investments in interest-bearing cash instruments and lower average debt levels.

For the quarter, reported income tax expense was $183 million compared to $108 million in the prior year. The increase was primarily due to a change in geographic earnings mix as well as higher tax benefits in 2022 from releases of valuation allowances in Europe and Asia. Let’s turn to Slide 6, where you can see our adjusted EPS and EBIT trends over the past 4 years, along with the trailing 12 months. This performance trend not only reflects the strength and resiliency of our global network of integrated assets and capabilities but also demonstrates the outstanding performance and agility of our team to adjust to the changing market conditions. Slide 7 details our capital allocation of the $625 million of adjusted funds from operations that we generated in the first quarter.

After allocating $86 million of sustaining CapEx which includes maintenance, environmental health and safety. We had approximately $540 million of discretionary cash flow available. Of this amount, we paid $94 million in common dividends and invested $87 million in growth in productivity CapEx, leaving approximately $360 million of retained cash flow. During the first quarter, we did not repurchase shares. As we have discussed previously, we have a balanced approach to capital allocation and share repurchases are absolutely a component of that mix. However, they have been on hold over the last 2 quarters as we’ve been actively engaged in a variety of discussions to expand our global platform, scale and core capabilities. As we have been in the past, we will be disciplined and make the right decisions as quickly as possible.

We believe our stock is undervalued and look forward to getting back in the market to continue our share repurchase program as soon as possible. As shown on Slide 8, at quarter end, readily marketable inventories, or RMI, exceeded our net debt by approximately $4.5 billion. This reflects our use of retained cash flow and proceeds from portfolio actions to fund working capital while reducing debt. Slide 9 highlights our liquidity position. At quarter end, all $5.7 billion of our committed credit facilities was unused and available, providing us ample liquidity to manage our ongoing capital needs. Please turn to Slide 10. For the trailing 12 months, adjusted ROIC was 19.8%, well above our RMI adjusted weighted average cost of capital of 7.7%.

ROIC was 14.4%, also well above our weighted average cost of capital of 7%. At the end of the quarter, we had an unusually large cash balance of approximately $3 billion most of which is expected to be used toward repayment of upcoming debt maturities and increased working capital during the second quarter. When adjusting for this, the trailing 12-month ROIC and adjusted ROIC for the quarter were more in line with the previous 12-month period. Note that we increased both our WACC and adjusted WACC from 6% and 6.6%, respectively, to 7% to 7.7%, respectively, reflecting the current higher interest rate environment. Moving to Slide 11. For the trailing 12 months, we produced discretionary cash flow of over $1.9 billion and a cash flow yield of 18.2%.

Similarly, we increased our cost of equity from 7% to 8.2%, reflecting the more recent market environment. Please turn to Slide 12 and our 2023 outlook. As Greg mentioned in his remarks, taking into account first quarter results and the current margin environment of forward curves. We continue to expect full year 2023 adjusted EPS of at least $11 per share. In Agribusiness, full year results are forecasted to be down from last year with slightly higher results in processing but more than offset by lower results in merchandising. However, depending on how market conditions evolve over the remainder of the year, there could be upside to our segment outlook. In Refined specialty oils, based on our stronger-than-expected first quarter performance, full year results are expected to be up from our prior outlook but still below last year’s record performance.

In Milling, full year results are now expected to be down from our prior forecast, reflecting a more challenging than expected first quarter. In Corporate and Other, results are expected to be in line with last year. In noncore, full year results in our Sugar & Bioenergy joint venture are expected to be in line with last year. Additionally, the company expects the following for 2023: an adjusted annual effective tax rate in the range of 20% to 24%; net interest expense in the range of $360 million to $390 million which is down from our previous expectation; capital expenditures in the range of $800 million to $1 billion and depreciation; and amortization of approximately $415 million. With that, I’ll turn things back over to Greg for some closing comments.

Greg Heckman: Thanks, John. Before turning to Q&A, I want to offer a few closing thoughts. Looking ahead, we’re focused on investing to grow the business so we can increase our ability to serve our farmers and consumers regardless of the environment we’re operating in. In the first quarter, we made strategic investments in our growth areas, including focusing on core origination and crush operations, expanding our innovative refined and specialty oil products and solutions and increasing our participation in renewable feedstocks and plant-based proteins. As part of our culture of continuous improvement, investments we made in our origination and crush operations are already showing results. Improvements in maintenance and reliability processes reduced overall unplanned downtime to a record low for the company.

Our energy reduction projects are showing strong results and we put through record volumes in our ports in Brazil by adjusting our product mix to improve efficiency. Within Refined & specialty oils, in April, we announced the acquisition of Fuji Oil’s newly constructed port-based refinery in Louisiana. This is part of our long-term strategy to expand our specialty oils business, by increasing our ability to serve our food customers with a variety of feedstocks. The team did a fantastic job of onboarding our new colleagues and we’ve already started serving food customers from that facility. Investing in innovation and technologies that support low-carbon initiatives are also a key part of our strategy. We’ve increased our participation in renewable feedstocks announcing a collaboration with Chevron and Cortiva AgroSciences to introduce proprietary winter canola hybrids to produce plant-based oils with lower carbon profiles.

This creates new revenue opportunities for farmers with a sustainable crop rotation. Our goal is to increase the availability of vegetable oil feedstocks serving the growing demand for the domestic renewable fuels market. It is also another step in our commitment to creating clear paths to support decarbonization. We also announced a multiyear collaboration with Corteva to develop and commercialize soybean varieties that create new value for soybean farmers and feed customers. The protein meal from these varieties is expected to reduce the use of synthetic additives, lower costs and shrink their carbon footprint. This is another example of how our role as the global leader in oilseed processing uniquely positions us to leverage upstream and downstream partnerships with leading and innovative industry players to unlock value for our customers along the value chain.

Executing our growth strategy will enable us to deliver on our purpose of connecting farmers to consumers to deliver sustainable and essential food, feed and fuel to the world. Many of the investments and partnerships we’ve announced, along with others in our pipeline, offer new tools and solutions to connect farmers with markets that value sustainable operations and production. And with that, we’ll turn to the Q&A.

Q&A Session

Operator: [Operator Instructions] The first question comes from Ben Bienvenu with Stephens.

Operator: Our next question comes from Ben Theurer with Barclays.

Operator: Our next question comes from Salvator Tiano with Bank of America.

Operator: Our next question is from the line of Steven Haynes with Morgan Stanley.

Operator: Our next question comes from Manav Gupta with UBS.

Operator: Our next question is from Thomas Palmer with JPMorgan.

Operator: Our next question is from the line of Andrew Strelzik with BMO.

Operator: Our next question is from Adam Samuelson with Goldman Sachs.

Operator: Our next question is from the line of Salvator Tiano with Bank of America.

Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Greg Heckman for closing remarks. Thank you.

Greg Heckman: We’d just like to thank everybody for joining us today. Thank you for your interest in Bunge and we look forward to speaking with you again soon. Have a great day.

Operator: Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.