Q3 2019 Earnings Call
Good morning, everyone and welcome to the <unk> third quarter 2019 earnings Conference call.
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So I'd like to turn the conference call over to based <unk>, Vice President of Investor Relations Ma'am. Please go ahead.
Thank you operator, and thank you for joining us this morning for our third quarter earnings call before we get started I wouldn't let you know that we have slides to accompany our discussion. These can be found in the investor section of our website at <unk> Dot com under Investor 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 bogeys current view with respect to future events financial performance and industry conditions. These forward looking statements are subject to various risks and uncertainties, but he has provided additional information and its reports on file with the FCC.
See 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, our Greg Hackman, Buggies, Chief Executive Officer, and John No Chief Financial Officer, I'll now turn the call over to Greg.
Thank you were exam and good morning, everyone.
Let's start things off on slide three with the agenda for todays call.
Today I'll provide a high level overview of our quarterly results and then cover the progress we're making against our key priorities.
Which is expected resulted in a bit of noise in our reported results.
I will then give you an overview of our outlook for the rest of the year before handing it over to John who will give you more detail around the financials.
Well then open up the line for your questions.
Let's turn to slide four.
[noise], excluding notable items, which were largely the accounting charges related to portfolio restructuring and our headquarters move.
Our core business performed ahead of our expectations for the quarter. Despite the uncertain in deteriorating market conditions impacting our industry.
In agribusiness crush margins declined during the quarter, especially near the end of the period and our grain business was impacted by ongoing trade issues in a delayed U.S. harvests.
Nevertheless, our team did a great job in mitigating those challenges and our results were positively impacted by a risk management actions.
Results in edible oils were strong reflecting favorable industry dynamics and good execution.
As I noted.
What are the noise in our results this quarter was connected to the strategic actions we're taking.
In July we announced our agreement with BP to contribute our Brazilian sugar and bio energy business to a new 50 50 joint venture.
As a result of this we've reclassified that business as held for sale and taking the expected 1.6 billion dollar charge, we discussed on our last call.
We remain very excited about the transaction and our new partnership with BP.
[laughter].
In check the boxes across all of our strategic criteria.
Reducing our exposure to Brazilian sugar and bio energy.
Allowing us to strengthen our balance sheet and importantly, enabling us to increase our focus on our core businesses.
We're on track to close the transaction before year end as planned.
Also in the third quarter, we took a big step forward in our work to streamline our global business structure with the amount announcement that we're moving our global headquarters to St. Louis where North American headquarters is already located.
This move will allow us to better align with our commercial teams.
And drive additional efficiencies with cost reductions as an additional output.
Although we were happy with our execution in third quarter underlying market conditions and forward curves continued to be very challenging and we expect the fourth quarter to reflect those weaker conditions.
Consistent with how we've been talking about flat earnings year over year, which excludes notable items the impact of our investment beyond meat.
And the benefit of approximately $70 million of lower sugar depreciation we now expect the gap versus 2018, I between 15, and 20 cents a share.
The markets are being driven largely by the macro factors that we discussed on our past calls.
Fabric in swine fever continues to impact demand for soy meal.
And along with the U.S. trying to trade situation.
So typical trade flows and producer marketing patterns have been to continue to be distorted.
Well continue to monitor these factors and as we did in our third quarter utilize our global footprint to navigate the environment in the best possible manner, well also implementing our internal changes.
I'll now turn the call over to John go through the numbers in greater detail.
Thanks, Greg Good morning, everyone, let's turn to the earnings highlights on slide six.
Our reported third quarter earnings per share from continuing operations was a loss of $10.57 compared to a gain of $2.39 in the third quarter 2018.
Adjusted EPS was $1.41 in Q3 versus $2.52 in the prior year.
Our reported results included approximately $1.7 billion in charges related to portfolio initiatives, primarily consisting of approximately $1.6 billion of impairment and other charges related to our Brazilian sugarcane milling business.
As shown on the next slide as a result of this impairment total shareholders equity has been temporarily reduced by approximately $1.5 billion, reflecting the impairment loss recorded in the period.
When the transaction closes later this year the related $1.5 billion of cumulative translation adjustment balance will be released effectively increasing shareholders' equity by that amount.
In addition to the sugar impairment, we incurred $137 million of other charges in the quarter, primarily related to impairments and severance and our other segments as part of a broader portfolio review.
Total segment EBIT was a loss of $1.44 billion in the quarter versus EBIT of $535 million in the prior year.
On an adjusted basis, which excludes notables total segment EBIT was $304 million in the quarter versus $573 million in the prior year.
Agribusiness adjusted EBIT was $153 million compared to $485 million last year.
In Oilseeds average global soy crush margins were significantly lower than in 2018, driven by a combination of farmer retention soybeans in anticipation of higher prices and soft export demand for soy meal.
Results were negatively impacted by approximately $70 million of mark to market reversals on soy crush contracts, which favorably impacted Q2.
However, a decrease in Fourq is soy crush margins during the third quarter resulted a new mark to market gains of approximately $95 million benefiting our result.
As we execute on these contracts mainly in the fourth quarter, we expect these gains to reverse.
Last year strong performance in Oilseeds includes a net mark to market gain of approximately $250 million, adding two already stronger margins.
So, let's see processing results in the quarter were higher than last year led by Canada in China as will result in trading and distribution and biodiesel.
In grains results were lower in both North and South America, primarily due to soft export demand farmer retention related to the U.S., China trade dispute and the delayed harvest in the U.S.
Results in Ocean freight and trading and distribution were lower than last year.
Food and ingredients adjusted EBIT was $86 million compared to $62 million in Q3 2018.
Oil edible oils results were up $39 million from last year, driven largely by better results in North America, and Brazil, benefiting from better supply demand balances oil as well as improved execution.
Funky loaders Crooklyn also contributed to the increased results.
Weaker milling results were driven by lower margins in the U.S. and lower volumes and margins in Mexico results in Brazil were comparable to last year.
Hi results and sugar and bio energy were largely due to $32 million of lower depreciation, resulting from the reclassification of the Brazilian sugarcane milling business to held for sale as well as increase came crush volumes and higher ethanol prices, which more than offset lower sugar prices.
Fertilizer results were in line with the prior year.
We reported the tax benefit of $28 million in the third quarter, which included $30 million a favorable resolution of uncertain tax positions.
Based on our current outlook, we expect our effective tax rate to be in the range of 20% to 24% for the full year when excluding notable items.
Let's turn to slide eight.
Our trailing 12 month adjusted funds from operations were approximately $1 billion.
And as you can see on slide nine our debt largely finance is our inventories approximately 70% of our net debt was used to finance readily marketable inventories at the end of the quarter.
Turning to slide 10, we have committed credit facilities and approximately $5 billion of which 4.1 billion was available at the end of the quarter and we had a cash balance of $291 million.
Let's turn to slide 11 in our year to date summary of capital allocation.
Year to date, we generated adjusted funds from operations at $854 million.
I'll Miss total Capex spending was $378 million in the first nine months of 2019 compared to $318 million in the first nine months at 2018.
Based on our year to date spend full year, capex will likely be $520 million to $540 million. It should be noted that about 105 million of our year to date and 115 million of our forecast Capex spending this year relate to the sugarcane milling business, which we are contributing to the JV would be.
We paid $79 million in dividends to shareholders. In Q3, this left us with approximately $240 million that we allocated towards debt reduction.
Let's turn to slide 12 in our return on invested capital.
Our trailing four quarter average return on invested capital in our core agribusiness and food ingredients segment was equal to our cost of capital 7%.
Taller target is 9%, which is 200 basis points above our whack.
The decline in the trailing four quarter ROI see from Q2 reflects the unusually strong Q3 in the prior year Bennett from benefited from the large mark to market gain and the higher soy crush margins.
With that I'll turn things back over to Greg for some closing comments.
Thanks, John .
As you can see the third quarter demonstrates what's so important we take the steps to execute our strategic priorities.
Driving operational performance optimizing our portfolio and doing it all with more financial discipline.
Increased accountability speed of decision, making cost discipline, and making sure we're leveraging our global platform to stay close to our customers and adapt to changing market dynamics are critical in this uncertain environment.
And a core part of our focus on delivering growth and increased returns to shareholders.
Before closing I want to say I'm, especially proud of the team here a bogey.
They executed very well during this volatile quarter.
While successfully managing significant changes in our business.
The additional work we have underway to evolve our operating model and the move to St. Louis.
We're making great progress, but we still got a lot of work to do and I look forward to sharing more with you as we continue to execute.
With that we'll open the call questions.
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Our first question today comes from Ben <unk> from Stephens. Please go ahead with your question.
Hey, good morning, Thanks for taking my questions.
Hi, good morning.
Ask you noted that you're making progress and strengthening the business.
If conditions do you think we need to see in the market to see evidence of your progress.
Obviously this quarter's fundamentals were challenging for fourq who's going to be challenging.
If you could offer us any sort of commentary on important milestones that you're thinking about or rough timeline as you think about moving forward in the turnaround process would be helpful.
Thanks Ben.
I think one example is just even this quarter.
I don't know that we could see a much more difficult environment environment than we've seen.
You can stack NSF.
The on again off again trade war.
The.
Late harvest in the U.S.
And then the Argentinian elections.
And I couldn't really be more pleased with the amount of change we're driving through the organization and that the team continued.
Continued to execute very very well.
The other.
You know key thing that we'll be seeing it of course is continuing to.
Put those changes in place as we move towards 2020.
And as we begin to talk about what to expect there at the end of next quarter.
Okay, Thanks and.
Tacking onto that you mentioned.
Briefly so could you provide any updated thoughts if you have any on asset and you mentioned in the release softer export demand.
For soy meal is that comment in relation to Africans five year any elaboration you can offer there would be helpful.
Okay.
On a itself.
I think the.
The view publicly continues to be about 40% of the Chinese heard liquidated.
I believe we spoke to that affecting being demand.
Oh versus export demand.
And then of course, we've seen the really the rebalancing.
Right around the World is demand is.
So if you meal demand is moving as things are starting to.
Moved to figure out how to fill that hole in the in the protein demand in China, but we still continue to be.
Thinking that we're not going to see the pining positive tailwinds that until the second half of 2020 and beyond.
Our next question comes from Rob Moskow from Credit Suisse. Please go ahead with your question.
Hi, Greg I think Youve already answered my question about.
What to think about China, but just just so I understand the guidance.
Last year agribusiness profits were only 55 million.
The guidance, assuming here that you'd probably be below that level and fourth quarter.
Let me.
Let me take a quick cut what we're trying to do when we gave the guidance for the full year, we talked about being flat versus prior year and then we had reaffirmed that on our last two calls so.
When we when we gave that flat year over year, originally and then confirmed it.
We had planned on the positive benefit that we're going to enjoy from beyond and we hadn't planned on the positive benefit that we're going to.
Enjoy from the change in depreciation on the sugar deal, so rather than count those and declare victory and being higher year over year. We're trying to stay on the same basis and say on the operating basis of where we called it to be flat.
Taking beyond doubt and taking out the benefit of the depreciation.
We're saying we're going to be off on the full year 15 to 20 cents.
On an EPS on how we've been talking to you all year now that being said.
We got two months to go.
As you know grim as the forward curves look today.
We're not.
We're not giving up the teams going to make.
All we can as we continue to execute here for the balance of the year and do all we can to close that that 15% to 20% gap and that ex the benefit of beyond and the benefit of the depreciation.
And can I, just trying to EPS basis or that the two things that you're calling out here is it about 90 cents. The depreciate the 90 to the beyond and the depreciation.
For sure.
Yes, yes.
The the sugar depreciation is around 50 cents.
This way was.
Yeah, and then beyond because beyond is a lot of that gain is not taxable.
Well that game releases index, what almost all that go straight through so we're looking at roughly 60 set potential impact EPS excluding that.
And those items are excluded.
From from their numbers.
Dollar 10 altogether.
Yes.
Okay Alright, great.
Okay, I'll get back into queue. Thanks.
Our next question comes from Ken Zaslow from Bank of Montreal. Please go ahead with your question.
Hi, good morning, everyone.
Aren't yet and again I just wanted to clarify just following up on the on the chain doing is really changing is is a little bit of the operating environment is slightly worse than you expected your risk management youre edible oils are all exceeding your expectations. So ill take that 15 to 20 cents is.
40.
Not that many it's $40 million of operating profit is that kind of what I'm, just making sure I'm understanding it's not a huge change in terms of like for like.
But I agree yet it is the it is the change in the environment and the things we can't control. So it's primarily changing crush margins. What we originally expected the oh the things that we can't control been been very pleased.
With the team on the execution around.
Around how we're running our facilities.
Year over year on how we're managing the risk throughout the global network.
And even on on some of the gains were making.
Key customers and some of the focus parts of our portfolio. So.
Happy with execution on the on the things we can control.
Just continuing on the execution, just making sure what has changed on the execution of the oilseed operations because again it didnt seem like there was any operational issues and the next part of that is.
The risk management again seems like Thats coming in.
Inline with expectations and my last part is edible oils is that sustainable.
Yeah, Let me, let me start with edible oils. They start for the last part first yeah, we believe that the supply demand balance on on edible oils has.
Improved and kind of expect that to continue to.
To improvement, especially in soft oils as we go into 2020, I mean, some of that's bio diesel.
Some of that's just a a little bit better demand and a little better supply demand balances with these these margins we've definitely seen crush slow in some areas.
And then also the team has done a really good job managing.
The balance between our B to C and our B to B business.
Balancing our refineries in very good execution as well as on our palm supply chain.
And the sustainability of risk management.
Yeah were.
Very pleased with was how the brands that kind of the commercial team.
Is working closely with rubber Wagner and the risk control team, we continue to improve.
Systems processes visibility stress testing.
And we'll never be done that's a system a continuous improvement we're not a we're not we're never going to be happy, but we continue to make progress.
And very pleased tell the teams working together to manage the earnings at risk.
In our and our installed asset base here.
While managing it helping our customers at both ends of the supply chain manage their risk.
Keeping in mind, what the probably amount of risk for bogey is based on our earnings power and based on the environment that we're operating in.
Right I appreciate it thank you.
Thank you.
Our next question comes from Vincent Andrews from Morgan Stanley . Please go with your question.
Hi, Thank you and good morning, everyone I just want to follow up on the edible oils, just because it was an.
Impressive result in the quarter at $71 million I have.
My model the best you've ever done in a quarter was 60 million in the third quarter of 2010. So I I. Appreciate your common your comment I just want to make sure should we be annualizing, the 70 or or is that the high end of the range. You think you can do on a go forward.
Basis, what should we be thinking about.
[noise] yeah.
We're sure going to try to to maintain all of the the improvements that we've made on on execution I can't.
You know predict the environment and the margin environment that we're going to see.
But I I am.
Hi, I'm pleased with the with the progress we've made on how we're organizing.
The business the changes we've made in leadership, how it's working across what used to be multiple piano line's been able to to make decisions faster.
And work more quickly with the focus on a bogey overall and on one bogey BNL.
So we're going to hang onto a all the improvement we can Oh, we're where we can you control things.
That being said the marketplace will open Mutli drive.
Industry margins, what we want to do is performed better than the rest.
Okay interest on that sort of 2020 plus.
Sort of plan.
It sounds like Am I, correct that Fourq, you, you're going to kind of lay out sort of a broader.
Pass forward to getting the return on capital to that 9% goal or or do we need to wait until all the started trade in Argentina, and other sort of new developments sort of settle out before you can do that.
Well look with who we.
Our in the process currently of putting our 2020 business plan together and you know we can only plan with the world as it is.
So we'll provide as much clarity as we can as we get the Q4, but I think youve.
You've called out.
All the flags right, you've got a SF and we'd like to think that will start to see some demand we've talked in the second half.
We've got the the trade war, which is starting to show some signs of working toward a resolution, which would bring a lot of clarity.
For not only the farmers in north and South America, but the consumers as well we talked about the oil less days of look good and we've got some stronger biodiesel demand coming on which should support that so that looks.
That looks like the positive going into into 20, and then I think the thing we feel.
Best about around the things we can control as we're getting our business organized right with people in the in the right places in our priorities right and so we will.
Step into 20, running a a better portfolio and organized.
In a better manner.
And feel good about being able to take advantage of what opportunity.
Okay. Thank you very much.
Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question.
I asked thank you good morning, everyone.
Oh, sorry, what was first hoping they get a little bit.
More color on on on crush market dynamics in your major geographies and.
The weakness that we've seen.
Recently in board crush that simply a function of U.S. beans, rallying on an entre deal hope or talk about.
Kind of meal demand prospects and how you see the Atlanta on the crushed car side for the next three or six months.
Yes since since the last time, we were together we've seen the soy crush margins.
Down double digits, so really everywhere soft crushes as remained okay, but of course, that's a smaller part of the portfolio.
That's a.
Has been driven as you say by the.
The trade war kind of on again off again, which if you want to be optimistic as a producer you're going to wait.
For for what you think past that.
It has to happen to get you the best prices and so that has definitely slowed producer marketing in both hemispheres as well as we talked about add on the uncertainty that Argentinian producer.
Has been dealing with the with the changes in leadership there.
The get them on again on a good if only get off again, a a trade wars kind of been the worst of of both worlds with the market.
Starting to adjust as if the trade wars over when it's not over so it's been about as it confusing environment as a as we could see and I think that's as we look towards 20, it would be hard to imagine.
Probably a more challenging are confusing environment than than we've seen the the last 30 days and are less than 60, plus days and kind of what we are predicting that have to manage through here in Q4, but we believe that will begin to sort itself out in 2020.
Okay. That's helpful. And then just on Argentina can you maybe elaborate a little bit on how you're thinking about policy changes under under the New administration, there I mean thinking back to the prior kirschner regime and some of the export taxes that were in place and what that did the farmer selling and.
The utilization of crush assets, just help us think about some of the different moving pieces is that the macro changes in Argentina.
Yeah.
Hey, there's.
No specifics announced yet I think what we know from from history.
There'll be some capital controls that are going to be disruptive and they will.
Impact not only farmer selling but then went back the crush industry and of course that.
Argentinian crush can have a big impact on the global crush. So we're we're watching that very closely I guess the good the good news. If there is that buggy has decades of experience. There. We've got a very experienced team that has.
Seen this more than once and we'll do the the best job.
Managing through that for our customers and our shareholders.
And our on it and analyzing prepared to do that.
Okay I appreciate the color I'll pass it on thanks. Thank you.
Our next question comes from Tom Salmon stats from JP Morgan. Please your with your question.
Good morning.
I'm, just saying I think most of my questions have probably been offset but maybe you could expand on we committing volumes and margins in Mexico.
Okay.
Yeah, we've had a.
It was a little bit overcapacity in that marketplace. We've seen some some customers switching and that is a led us to to lower volumes.
And.
With the lower volume, we've got some higher fixed cost we've made a number changes are down there were making changes in how we're operating their footprint.
And leadership and to a to address that.
So we expect to see some some improvements in 20, but.
As it has hurt us this year.
Okay, and just came about so question around a slight pharma selling makes it a U.S. Following this had record on farm stocks of soybeans.
On September fast when you when do you think they'll have to sell those crops and how this and pipe in the coming quarters.
I think the.
Markets flu [laughter] proven with the amount of a.
Commercial storage.
I don't have on farm storage in.
The ingenuity and some of the temporary storage and now exist no one has to sell.
Anything but.
If you believe that histories is any guide as that crop.
Continues to come in and is known and then we get some clarity around the the trade war, we've got to bleed, though they'll be more marketing I mean harvest is about 20% little over 20% behind the five year average. So that's that's definitely weighed into that when you add that and the the trade.
More uncertainty.
Definitely pushed things back.
And just one last question on soy crush margins you guys had a challenging forecasts the how much of a Q4 and Q on crush capacity has developed in at this point.
Not a.
Not not a lot but enough that you saw a we chewed through the 70 million a positive mark to market from last period.
Oh from last quarter.
And then had at new Mark to market on what we had hedged of roughly 95, and so we were able to offset the 70 and have 25 million of a positive mark to market in the quarter. So.
That being said when the markets given us a the opportunity to to.
Headroom margins, we've done that and we'll continue to do that globally.
Thank you.
Thank you.
Once again, if he would like to ask a question. Please press star and then another one.
Our next question comes from Heather Jones from Heather Jones Research because your with your question.
Good morning. Thank you for the question second question.
Good morning.
So I want to take another stab at.
The guidance, so just to make sure I understand correctly.
Last year, you were to 71.
Take down that's 15 20 cents, we're looking at 251 to 256, excluding any benefit from the lower.
Depreciation for sugar in Q3, Q4, and excluding any mark to market gains on the beyond stake my understanding that correctly.
Yes, that's correct.
Okay, and excluding the mark to market lost them beyond this quarter I think you're like about 40 849. So.
Year to date.
Well I'd like to 49 on adjusted basis. So we're looking at just [noise].
I don't know call. It five to 10 cents of earnings for Q4 based upon what you foresee at this time.
Well the the dollar 41, we only had about $10 million of impact to be on in Q3.
On an EBIT basis. So we marked the book out Mark.
That's I got Mark down from a dollar $160 a share at the end of Q2 to $140 a share.
We did realize a small amount during Q3, so that's only about a 10 million dollar items.
So I think a little less on the EPS impact.
A little less okay. Okay.
Nelson.
Industry trend questions.
We've been reading like over the last two to three weeks that there had been picked up and farmer selling significant pickup in farmer selling in Brazil.
Did you guys see that and and whatever what do you see in a more recent days given the rally on the currency.
Yes, we've seen some pick up there as we talk to some of the slower selling it was probably more more focused on U.S.
U.S. in Argentina.
Okay.
And then on the crush side, so margins at I mean, it softened considerably in the U.S. and they've been pretty.
Pretty bad and South America, particularly.
In Brazil and so.
I guess, they get the reasons, but what are your thoughts on how crushers.
Bond I mean have you seen any meaningful slowing do you expect meaningful slowing our people just grinded dissolved expected improvement next year.
Well I think that's orders in some of the tightness in oil as things have slowed up its tighten things up in oil so no I believe.
The one thing I, probably seen in my 35, plus years is the the economics of work the market will eventually work, sometimes it takes longer than.
Then it should.
But.
We're getting all the signals.
Okay. Oh final question that is there a.
Significant delta between export crush margins and Brazil versus anterior or are they all week all they all materially week.
I'd say, neither are where we'd like where we'd like them to be.
Okay perfect. Thank you so much.
Thank you.
And ladies and gentlemen at this time in showing no additional questions. We'll conclude today's question and answer session I'd like to turn the conference call back over to Miss why isn't there for any closing remarks.
Thank you for joining us today and your interest in our company. If you have further questions I'm happy to follow up have a good day.
Ladies and gentlemen, with that will conclude today's conference call. What do you. Thank you for joining today's presentation. You may now disconnect your rights.
[noise].