In this file:
· Bunge raises outlook as agribusiness profits beat Wall Street estimates
· Bunge Ltd (BG) Q2 2020 Earnings Call Transcript
Bunge raises outlook as agribusiness profits beat Wall Street estimates
By Shradha Singh, Karl Plume, GFM Network News
via Canadian Cattlemen - July 29, 2020
Reuters – Agricultural commodities trader Bunge Ltd on Wednesday raised its full-year outlook after its second-quarter profit handily beat Wall Street estimates, sending shares up more than 5 percent in premarket trading.
Despite a worsening coronavirus pandemic that has rattled global markets, strong soy processing margins in South America, Europe and Asia and accelerated crop sales by farmers in Brazil and the United States helped lift earnings.
“These results would be strong in any environment, let alone a pandemic,” Chief Executive Greg Heckman said in a statement.
Bunge’s strong second quarter, following a surprise loss in the first, highlighted the disruption the agribusiness industry has faced during the pandemic.
Shuttered restaurants and food service companies, both major customers for Bunge’s cooking oils, have shifted demand to more at-home dining, while travel restrictions hammered biofuel production margins.
Bunge said its facilities worldwide continue to operate at or near-normal levels despite the pandemic. Operations at an Argentine port facility were suspended this week after a worker tested positive for COVID-19, prompting Bunge to shift soybean deliveries to its other locations.
Operating earnings in Bunge’s agribusiness segment, its largest unit in terms of revenues and volumes, grew four-fold in the second quarter, triggering the improved 2020 outlook. Edible oils, milling and fertilizer units also posted gains, while sugar and bioenergy turned in a quarterly loss.
The oils segment, however...
Bunge Ltd (BG) Q2 2020 Earnings Call Transcript
BG earnings call for the period ending June 30, 2020.
Motley Fool Transcribers
Jul 29, 2020 at 5:30PM
Bunge Ltd (NYSE:BG)
Q2 2020 Earnings Call
Jul 29, 2020, 8:00 a.m. ET
Questions and Answers
Good day, and welcome to the Bunge Limited Second Quarter 2020 Earnings Release and Conference Call. [Operator Instructions]
I would now like to turn the conference over to Ruth Ann Wisener. Please go ahead.
Ruth Ann Wisener -- Investor Relations
Thank you, operator, and thank you for joining us this morning. 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 two 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 Chief Executive Officer, Greg Heckman; and Chief Financial Officer, John Neppl.
I'll now turn the call over to Greg.
Gregory A. Heckman -- Chief Executive Officer And Board of Director
Thank you, Ruth Ann, and good morning, everyone. Turning to slide three, you can see the agenda for today's call. I'll start with an overview of the second quarter and then hand it over to John who will go into more detail on our performance. I'll share how we're thinking about the second half of the year and close with some remarks on the second quarter and how that fits in with what we discussed during our business update last month before opening line up for your questions. I want to start by wishing you all well and hope your families and colleagues are safe and healthy. This is a relentless challenge we're all facing. I'd also like to very pointedly thank our team for their hard work, resilience and focus. Our results in the first half of 2020 are a testament to their dedication to getting the job done, and I couldn't be prouder. Last, I'd like to thank all of you who joined us for a virtual business update meeting last month. We appreciate the positive feedback we've received, and we look forward to continuing the dialogue.
With that, let's turn to the quarter, starting with slide four. Bunge delivered a very strong second quarter, with operations reflecting the way we intend to run the business going forward and demonstrating the benefit of our new operating model, leadership team and mindset. Performance across all of our core businesses was excellent. Our strong execution in committed crush capacity, exceptional coordination of trade flows and great risk management allowed us to capture above-average margins and deliver solid top and bottom line results. Across the platform, we hit record capacity utilization in crushing, reduced unplanned downtime about 20% year-over-year and had the lowest operating quarter costs for soy crush in the last three years.
We realized the benefit from the risk management decisions we made in the first half of the year, and we earned new business with our focus on innovation and a collaborative approach with customers. We generated strong free cash flow while still being disciplined with capital allocation and continue to execute on our key priorities, including refining the portfolio and gaining momentum on reducing costs. Agribusiness had outstanding performance this quarter, with improved performance in essentially every part of the business. In oilseed, as we expected, prior period timing losses were reversed as gains. Average global replacement soy crush margins across the quarter were $27. But because of our active risk management and effective use of working capital to capture market opportunities, we were able to execute at an average of $40 per metric ton. In grains, performance in Brazil was exceptional as we benefited from increased farmer selling as local prices increased with the devaluation of the Brazilian real. Food & Ingredients continues to gain traction and demonstrated our nimbleness and flexibility in the current environment.
Even as food service demand fell off as a result of lockdowns around the world, our growing strength with CPG food processors and renewable diesel producers, including new customer wins in those areas, offset the COVID-related impacts in foodservice. As COVID continues to present challenges for our customers, they are increasingly turning to Bunge because the resilience of our value chain model can provide innovative solutions that will continue to benefit our relationships going forward. With the backdrop of great commercial execution, we continue to focus on optimizing our portfolio and recently entered into an agreement to sell the asset to the small noncore food business in Brazil that produces tomato sauces. We've also officially closed our White Plains office and are well-adjusted to our St. Louis headquarters and interim remote working situation. In short, we're very pleased with the results this quarter and very pleased with our overall momentum. Given the strong Q2, our outlook for the full year is now higher.
I'll now turn it over to John who'll walk you through the financials and some of the puts and takes related to our outlook.
John W. Neppl -- Chief Financial Officer
Thanks, Greg, and good morning, everyone. You may have noticed that we updated the format of our earnings press release. We did this for a couple of reasons: one, we wanted to more clearly differentiate our core businesses from our noncore businesses; and secondly, we wanted to provide a cleaner format for detailing individual segment performance. We hope you find these changes beneficial. Now let's turn to the earnings highlights on slide five. Our reported second quarter earnings per share was $3.47 compared to $1.43 in the second quarter of 2019. Adjusted EPS was $3.88 in the second quarter versus $1.52 in the prior year. Our results include a net $0.41 charge primarily related to a provision against an aged receivable dating back to 2015 that is now deemed uncollectible as part of an anticipated legal settlement. Adjusted core segment earnings before interest and taxes, or EBIT, was $943 million in the second quarter, adjusted EBIT of $287 million in the prior year primarily driven by results in Agribusiness where EBIT was $843 million compared to $211 million last year.
As Greg noted, higher Agribusiness results in the quarter reflected strong execution throughout the value chains particularly in managing risk, committed crush capacity and global trade flows. Results also benefited from approximately $380 million of timing differences related to expected Q1 reversals and new mark-to-market gains. In oilseeds, strong soy processing results were driven by higher margins in South America, Europe and Asia, largely reflecting the actions we took in the first quarter to lock in capacity. This was partially offset by lower margins in North America. China soy processing results were higher in all regions. You may recall we carried into the second quarter a mark-to-market balance of approximately $295 million of previously reported timing losses related to open forward oilseed processing contracts and hedges against sales to our downstream edible oils customers. As anticipated, approximately $155 million of these timing losses reversed in the second quarter upon executing a portion of these contracts.
In addition, as a result of a decrease in global crush margins and the recovery in vegetable oil prices during the quarter, we recorded new mark-to-market gains of approximately $145 million on open contracts at the end of the quarter. This reduced our carryforward balance on open oilseed contracts to a net gain of less than $10 million, which will reverse in the coming quarters. Results in grains improved driven by most areas of the business. Origination benefited from increased farmer selling in Brazil with the rise in local prices caused by the devaluation of Brazilian real. North America origination also showed improvement compared to a challenging year ago period. Higher results in trading and distribution were driven by improved margins and favorable positioning. Ocean Freight also had a strong quarter driven by excellent execution as well as approximately $75 million of gains from the reversal of mark-to-market timing primarily related to bunker fuel hedges that negatively impacted the first quarter.
In Edible Oils, we observed a steep drop in foodservice and biofuel demand due to COVID-19-related restrictions at the beginning of the second quarter, as discussed on our first quarter earnings call. However, as the quarter developed, refinery margins improved driven by increased demand for food from food processors and retail channel, along with partial recovery in biofuel demand. This margin improvement, combined with growth in new customers as well as lower costs, resulted in higher earnings in all regions. In Milling, higher results in Brazil, primarily driven by increased food processor and consumer demand as well as decreased costs, more than offset lower results in North America, which were negatively impacted by business mix. In Fertilizer, higher segment results reflect improved performance in our Argentine operation, which benefited from higher margins and volumes as farmers accelerated purchases in anticipation of higher local prices. In Corporate and Other, total adjusted segment EBIT included expenses of $56 million from corporate and income of $2 million from Bunge ventures and other.
This compared to expenses of $60 million from corporate and a gain of $146 million from Bunge ventures and other for the prior year period primarily reflecting our investment in Beyond Meat. In our noncore segment, Sugar & Bioenergy results for this quarter, which are noncash, reflect our share of the results of the 50-50 joint venture with BP. By contrast, second quarter 2019 reflected our 100% ownership of the Brazilian Sugar & Bioenergy operations that we contributed to the joint venture in December 2019. Additionally, results of the joint venture are reported on a one-month lag. Lower results in the quarter were primarily driven by approximately $70 million of foreign exchange translation losses on U.S. dollar-denominated debt of the joint venture due to depreciation of Brazilian real. Also contributing to the decline in earnings were lower Brazilian ethanol prices driven by the drop in global oil prices. For the quarter ended June 30, 2020, income tax expense was $168 million. Net interest expense of $56 million was in line with our expectations. Let's turn to slide six. This slide compares our Q2 SG&A to the prior year.
Adjusted SG&A excludes notable items. For Q2, our adjusted SG&A was $28 million lower than last year, of which $20 million reflects our organizational redesign actions and increased focus on managing costs. The additional $8 million reflects the net impact of such items as inflation, foreign currency fluctuations, changes in our perimeter and performance-based compensation, essentially, adjustments to enable an apples-to-apples assessment of our actions to manage costs. We recognize a portion of our savings is due to COVID-19-related restrictions such as reduced travel, some of which may be a temporary impact. However, we strongly believe we won't return to pre-pandemic levels as we have all learned to operate differently. Moving to slide seven, cash flow highlights. For the trailing 12-month period, our cash generation was strong at $1.3 billion of adjusted funds from operations. The cash flow generation enabled us to comfortably fund our capex and dividend and to meaningfully reduce debt. As you can see on slide eight, we continue to strengthen our balance sheet.
At the end of the second quarter, nearly 85% of our debt was used to finance readily marketable inventories compared to about 70% for the same time a year ago. Turning to slide nine. We have committed credit facilities of approximately $4.3 billion, with $3.6 billion available at the end of the quarter, and we had a cash balance of $277 million. Moving to slide 10 and our summary of capital allocation. Year-to-date, adjusted funds from operations was $817 million after allocating $85 million to sustaining capex, which includes maintenance, environmental, health and safety and $17 million to preferred dividends. We had $715 million of discretionary cash flow available. Of this amount, we paid $142 million in common dividends to shareholders, invested $42 million in growth and productivity capex and bought back $100 million of our stock. The retained cash flow of $431 million was used to pay down debt. Please turn to slide 11. On our business update last month, we introduced two complementary return metrics that we believe better reflect the performance of our business. One of those metrics was AROIC, which recognizes merchandising RMI as a tool to generate incremental profit. For the trailing 12 months, AROIC was 11.7%, 5.1 percentage points over our RMI adjusted weighted average cost of capital of 6.6%. ROIC was 9.6%, 3.6 percentage points over our weighted average cost of capital of 6%.
Detailed calculations of these metrics are in the appendix of this presentation. Moving to slide 12. The second complementary metric we introduced was cash flow yield, which is a ratio of discretionary cash flow to the adjusted book equity. This measure emphasizes cash generation and complements earnings and return metrics. Here, you can see cash flow yield over the past five years as well as for the trailing 12 months ending Q2 measured against our cost of equity of 7%. For the trailing 12-month period ending June 30, after adjusting the book value for CTA changes, we produced a cash flow yield of just over 19%. Please turn to slide 13 and our 2020 outlook. As Greg mentioned in his remarks, we are increasing our 2020 EPS outlook based on our stronger-than-expected second quarter. In Agribusiness, based on first half results, the current market environment and forward curves, we expect our full year results to be approximately $100 million higher than last year's results and the second half results weighted toward the fourth quarter.
In Edible Oils, we expect modest improvement compared to our previous outlook. Despite a stronger-than-expected second quarter, the business will likely continue to face headwinds from COVID-19 in the second half. Expected results in Milling continue to be in line with last year. We also expect an adjusted annual effective tax rate in the upper end of the 19% to 23% range, net interest expense of approximately $230 million and capital expenditures in the range of $375 million to $400 million and depreciation and amortization of approximately $400 million. The outlook of the Sugar & Bioenergy joint venture has declined from the previous forecast to reflect the impact of foreign exchange volatility in the first half of the year.
With that, I'll turn things back over to Greg for some closing comments.
Gregory A. Heckman -- Chief Executive Officer And Board of Director
Thanks, John. As we wrap up, it's clear that we're managing the business to maximize economic results and value creation for the long term, not any one calendar quarter. Accounting requirements can create timing differences that smooth out over time. The mark-to-market losses we recorded in the first quarter that reversed this quarter, as expected, are a good example of this. During our business update meeting last month, we forecasted a strong second quarter, which ended up being even stronger than expected. We highlighted our new leadership team and our new approach to risk management, and you can see our execution this quarter. We emphasized that progress is our key priorities of improving financial discipline, optimizing our portfolio and changing our operating model to drive excellent performance. We've continued to execute on each of those areas. We stress greater transparency and accountability, and you're seeing that in our reporting today.
And finally, we told you that we're taking actions that have set us up to get to an earnings baseline of $5 per share with additional upside. While there's more work to be done, we're moving in the right direction, we're operating better than we have in many years, and we're making progress every day.
And with that, we'll open the line for your questions.
Questions and Answers: