Bunge wheat milling
Recently acquired wheat milling businesses of Bunge Ltd. are performing well and are poised to contribute significantly to profitability going forward.

WHITE PLAINS, N.Y. — Recently acquired wheat milling businesses of Bunge Ltd. are performing well and are poised to contribute significantly to profitability going forward, the company’s top executives said.

Bunge has expanded in wheat milling assets in recent years with the acquisition of Grupo Altex in Mexico and Moinho Pacifico in Brazil.

Soren Schroder, Bunge
Soren Schroder, c.e.o. of Bunge

“The Altex acquisition in Mexico, which we concluded a year-and-a-half ago, is fully integrated, working well,” Soren Schroder, chief executive officer, said in a Nov. 2 conference call. “Pacifico, which we bought exactly a year ago, has now fully integrated, and you’re seeing the impact on our run rate already now. It’s about a $10 million contribution to this year’s milling number. Next year is another step up.”

Milling segment earnings before interest and taxes (EBIT) were $52 million in the third quarter ended Sept. 30, up 63% from $32 million in the same period in 2015. Sales were $430 million, up 15%.

Profitability of milling operations in Mexico was pressured in the quarter by stepped-up competition and the devaluation of the peso, Mr. Schroder said. The Brazilian business benefited from market share gains, improved margins, improved efficiencies and better product mix. He said margins and volumes have rebounded to 2014 levels, before the country’s economic crisis.

“The integration of the recently acquired Pacifico Mill has gone well,” Mr. Schroder said. “And our new mill in Rio de Janeiro has recently started production.”

He said larger wheat production in Argentina also will benefit the company’s milling business, as well as export and origination activities.

“That (Argentina’s larger wheat crop) is a complete tie-in to our wheat milling operations in Brazil,” Mr. Schroder said. “And in fact the Pacifico wheat mill was acquired for one of those reasons. It was the most efficient port-based mill in Brazil.”

Drew Burke, chief financial officer, projected Pacifico, when it “hits full run rates,” will contribute about $30 million per year in EBIT to the Bunge Milling business.

Drew Burke, Bunge
Drew Burke, c.f.o. of Bunge

“Again, they are already contributing significantly this year,” he said.

Bunge net income in the third quarter was $118 million, equal to 79c per share on the common stock, down 51% from $239 million, or $1.42 per share, in the third quarter of 2015.

While earnings were under pressure, the company significantly raised its earnings guidance for the fourth quarter and was upbeat about 2017. The improved guidance reflected the arrival of the 2016 harvests in the Northern Hemisphere and was viewed by management and investors as a positive sign for the start of 2017 as well. In trading Nov. 2 on the New York Stock Exchange, shares of Bunge rose $6.23 to $68.81, a 10% gain from the Nov. 1 close of $62.58.

In comments about the weaker results for the third quarter, Mr. Schroder highlighted stepped-up feed wheat demand.

“Margins globally were impacted by softer-than-anticipated meal demand, as low-quality, low-price wheat replaced corn and soy meal in feed formulations,” he said. “Underlying protein demand remains strong. And we expect soy meal inclusion rates to return to more normal levels as the U.S. harvest starts coming to market. Mark-to-market movements did not have a significant impact on results in the quarter.”

Longer-term prospects for wheat feeding are less positive, he said.

“The wheat market is in a steep carry,” he said. “And the market will pay for wheat to be carried. And that means that as you go out six months from now, wheat prices are significantly more expensive than they are in the spot. I think that will most likely mean that wheat will have a hard time finding its way back into feed.”