WHITE PLAINS, NEW YORK, U.S. — Weak margins and slow farmer selling in South America weighed on results in the company’s Agribusiness segment, dragging down overall earnings at Bunge Ltd. in the second quarter of fiscal 2017. Net income in the second quarter ended June 30 was $72 million, equal to 51¢ per share on the common stock, down 34% from $109 million, or 78¢ per share, in the same period a year ago. Net sales, meanwhile, increased 10% to $11.645 billion from $10.541 billion.


Soren Schroder CEO
Soren W. Schroder, chief executive officer.

“The second quarter was profitable across all segments with good performance in Foods and Sugar, but overall, below expectation as Agribusiness lagged well behind its historical range,” Soren W. Schroder, chief executive officer, said during an Aug. 2 conference call with analysts. “Oils did well globally with important customer wins and growth in added value. We’re building a leading platform in B2B globally, a market segment that continues to grow at (3%) per annum, and with increasing opportunities for Bunge to differentiate in the eyes of customers and consumers. Milling offsets some of the gains in Food & Ingredients, as significantly lower flour demand combined with increased competition from the unusually large domestic wheat crop in Brazil, weighed on both volumes and margins.”

EBIT in the Agribusiness segment totaled $18 million in the second quarter, down sharply from $168 million in the same period a year ago. The decline reflected a $54 million decrease in oilseeds and a $108 million decrease in grains.

Net sales increased 10% to $8.298 billion, while volumes moved up 6.5% to 36.173 million tonnes.

“Global crush volumes were slightly higher than in the comparable quarter for the prior year, but the increase was more than offset by the weaker margins,” Thomas Michael Boehlert, chief financial officer and executive vice-president, noted in an Aug. 2 conference call with analysts. “Margins were negatively impacted by slow farmer selling in South America and ample supplies of soy meal. Results were also negatively impacted by $11 million of mark-to-market hedging losses in the quarter compared to a mark-to-market gain of $40 million in the same period a year ago. Softseed volumes were slightly higher than a comparable quarter last year, but the increase was more than offset by weaker margins. Higher volumes reflected an increase in our crush capacity in the Ukraine. Margins were lower because of tightness of seed supply in Canada and Europe, weaker oil demand in Russia and lower imports into China.

“The decrease in grains was primarily the result of weaker results in origination and distribution. While volume increased primarily in the U.S., margins remained under pressure in South America and in destinations with customers only covering short-term needs. Overall, Agribusiness results were lower than a comparable period last year primarily as weaker margins and negative mark-to-market impacts were only partially offset by higher volumes and improved risk management results.”

Segment EBIT for Milling Products totaled $16 million, down 52% from $33 million in the same period a year ago. Net sales also were lower, easing to $390 million from $422 million, while volumes slipped to 1.099 million tonnes from 1.136 million.

“The decrease in Milling EBIT was primarily the result of lower volumes and margins in Brazil and lower margins in Mexico,” Boehlert said. “Brazil has been impacted by lower consumption and competition from smaller original mills and margins in Mexico were lower than in the prior quarter due to softer market demand resulting from economic pressures.”

In the questions-and-answers portion of the conference call, Schroder expanded on Bunge’s milling operations.

“In Brazil, which is really where the biggest change has been, we are seeing signs both in terms of unemployment and also retail sales that the economy in all likelihood has bottomed out, so the impacts, the consumer end should be positive going forward,” he said. “But in the meantime, we have seen a fairly dramatic cut in consumption of flour-based products, whether it is through food processor sales or whether it’s through food service or even household consumption, and that will take some time to recover. Thirteen percent unemployment rate is not small, so I think it’ll be with a lag that we see the improvement in flour consumption in Brazil and probably don’t expect any real impact until early next year.

“The thing that has weighed on Brazilian milling margins as much as this decrease in overall consumption has been the size of the domestic crop. We had a very large and high-quality domestic crop this past year, which we don’t think will repeat itself and that allowed many of the smaller and very fragmented mills in the southern part of Brazil to compete in market flour into the central part of Brazil and even to the north. That pressured margins in our business, which is mostly based on imported wheat. We think that will change as we run out of all crop wheat stocks toward the end of this year. So, I think the real impact on improvement in Brazil is probably not to be seen until the first quarter next year, although we do expect sequential improvement from the first half into the second half, but getting back to more normal run rate of earnings, we’re probably talking 2018.

“In Mexico, it’s not so much a matter of per capita consumption as it has been difficulties in translating the higher wheat prices and the wheat currency into higher flour prices in the domestic market. That’s taking longer than we expected, but I would think that by the fourth quarter, we’ll be back to the normal run rate so Mexico should be back to where it was, where it should be by the first quarter of next year. So, the second half will be better than the first half in Milling, but it won’t be back to the historical run rate. We will have to wait until the first quarter of 2018 for that.”

Edible Oil Products EBIT in the second quarter increased to $28 million from $2 million, while sales moved up to $1.970 billion from $1.705 billion and volumes increased to 1.947 million tonnes from 1.742 million tonnes.

Boehlert said Bunge invested $342 million in capital expenditures in the first half of fiscal 2017, of which $103 million related to the sugar business primarily for sugarcane planting and productivity improvements. The company invested $394 million in acquisitions, with the most significant of the acquisitions being two European oilseed processing plants in the first quarter. He added that Bunge repaid $850 million of notes that mature in the second quarter and expects to close on the Minsa transaction later this year.