Bunge considers sale of sugar unit after tough quarter

by Eric Schroeder
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WHITE PLAINS, N.Y. — Weak results in the company’s sugar business have Bunge Ltd. considering “all alternatives” for the unit, including a potential sale. Softness in sugar was a primary factor cited by the company in announcing a loss of $137 million in the third quarter ended Sept. 30. The loss compared with net income of $289 million, equal to $1.91 per share, in the same period a year ago.

Results in the most recent quarter included after-tax net charges of $415 million that reduced net income from continuing operations by $547 million and increased net income from discontinued operations by $132 million.

Net sales during the third quarter of fiscal 2013 were $14,701 million, down 11% from $16,543 million in the third quarter of fiscal 2012.

Bunge sustained a loss of $19 million in its Sugar and Bioenergy business in the third quarter of fiscal 2013, which compared with a loss of $8 million in the same period a year ago. The company said a loss in its Brazilian sugarcane milling business drove lower results.

“Lower unit costs from higher crushing volume and productivity improvements were more than offset by lower sugar prices, as well as costs related to land we will not harvest or plant this year due to wet weather,” Bunge said. “Compared to our earlier expectations, third-quarter milling results were substantially below target, primarily due to lower sucrose content in the cane (ATR) across all of our mills resulting from wet weather and frost, lower sugarcane crushing volume due to excessive rain and the impact of mark-to-market losses in forward sugar hedges as sugar futures rallied in late September. Our global trading and merchandising business performed well, continuing to grow in volume and market share. Results in U.S. biofuels were higher primarily due to improved margins in our ethanol joint venture.”

In commentary accompanying the release of its results, Soren Schroder, chief executive officer, said Bunge plans to manage its sugarcane milling business to be free cash flow positive in 2014, with reinvestment dedicated to agricultural and industrial maintenance and efficiency projects.

“These efforts are an essential part of continuing to improve our performance,” he said. “Bunge’s overall success, however, has to be defined by consistent value creation for shareholders. Given the challenges facing the Brazilian industry, we have commenced a comprehensive process to explore all alternatives to optimize the value of this business.”

Results also were lower in Bunge’s Agribusiness unit, where adjusted EBIT totaled $335 million, down 17% from $406 million in the same period a year ago. Sales fell 11% to $10,718 million from $11,993 million. Despite the lower results, Bunge said the unit “performed well” during the quarter.

“Strong margins and volumes in our Brazilian processing and merchandising operations were the primary driver of results in the quarter,” Bunge said. “In Argentina, oilseed processing results improved with a larger soybean crop and a pick-up in farmer selling, but did not fully offset lower earnings in grain merchandising, which was negatively impacted by the poor wheat crop. Results in Europe and Asia were similar to last year. Oilseed processing capacity utilization in North America was low for both soybeans and canola, impacted by last year’s drought, which reduced available raw material.  U.S. grain exports were also low, reflecting the impact of last summer’s extreme drought on corn production and the delay to this year’s harvests caused by late planting. Our teams managed global supply lines and market volatility well in a challenging environment.  Results in the third quarter included an $8 million gain related to the sale of our investment in a U.S. biofuels company.”

The company’s Food and Ingredients segment, which includes Edible Oil Products and Milling Products, posted adjusted EBIT of $73 million in the third quarter, up 24% from $59 million in the same period a year ago. Combined sales of Edible Oil Products and Milling Products were $2,712 million in the period, which compared with $2,880 million in the same period a year ago.

Bunge said improved performance in its Brazilian and Mexican wheat milling operations more than offset lower results in corn milling which, after a strong first half of the year, experienced softer volumes as some customers delayed purchases until the arrival of new crop.

“Contributing to the improved wheat milling results were a combination of lower industrial costs and higher margins,” Bunge said. “In Brazil, margins also benefitted from good raw material procurement strategies in a market of tight wheat supplies and high flour prices. Rice milling results were similar to last year.”

Bunge on Oct. 23 announced the acquisition of the wheat milling business of Grupo Altex S.A. de C.V. Mexico City-based Grupo Altex operates six mills with annual processing capacity of approximately 17,636,800 cwts. The company makes products from many varieties of wheat. The products include bread flour, prepared flours for baked goods, tortillas and pizza, and semolina for pasta. In addition to the mills, Bunge is acquiring Grupo Altex’s product brands and its innovation center.

Mr. Schroder said the acquisition of Grupo Altex expands Bunge’s profitable North American milling business in a compelling growth market and complements its earlier acquisition of La Espiga.

“The Altex mills provide a strong national market presence and customer base that we look forward to serving and expanding,” Mr. Schroder said. “This acquisition is another in a long line of strategic investments through which we have built strong global positions in agribusiness and food and ingredients.”

Looking ahead to the remainder of the year, Drew Burke, chief financial officer, said Bunge expects Agribusiness to have a strong fourth quarter.

“Oilseed processing margins in North America, Europe and China are very good, driven by the combination of large oilseed harvests, lean customer inventories and improving livestock production margins,” he said. “North America and the Black Sea should see strong grain exports, as the world restocks inventories after an extended period of tight supplies.”

He said he also expects momentum to continue in the Food and Ingredients unit.

“Edible oils should benefit from the seasonal growth in oils, margarines and bakery ingredients consumption,” he said. “Tight wheat supplies in Brazil should continue to support high domestic flour prices, and corn milling volumes and margins should increase with the arrival of new crop corn in the U.S.”

Challenges are expected to persist in sugarcane milling, he said, noting Bunge has achieved its target of aligning cane supply with industrial capacity through higher yields and the expansion of our cane area, but due to the above average number of crushing days lost to rain, the company is reducing its cane crushing expectations to 19 million tonnes versus its capacity of 21 million tonnes.

“The cane that we will not crush will remain in the fields to be crushed early next year,” he said. “Considering the lower ATR and reduced crush volume, we expect fourth quarter EBIT in the segment to be a loss.”

Capital expenditures for 2013 have been reduced to $1 billion from a previous target of $1.2 billion, Mr. Burke said, and the company is planning a 2014 capital expenditure budget of $900 million with a focus on growth and productivity projects with shorter paybacks.
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